Stan d ard Life p lc Prelim in ary R esu lts 2008
• Group Embedded Value per share of 286p (2007: 285p) stable in the face of challenging markets
• Annual efficiency target of £100m cost savings achieved one year early, and a further target of £75m set
Group Chief Executive Sir Sandy Crombie said: “Standard Life has delivered a solid performance in 2008, against a backdrop of the challenging economic conditions in which we have been operating.
“We have announced good profits, healthy capital and cash generation, and have achieved efficiency improvements a year ahead of target. Our capital position is among the strongest in the industry and is relatively resilient in the event of further deterioration in market conditions.
Unless otherwise stated, all comparisons are in Sterling and are with the twelve months ended 31 December 2007.
Asia Pacific (35) (12) HWPF TVOG 11 42 Covered business operating profit 917 840
Group Corporate Centre costs (50) (57) Other non-covered business (19) 5 Operating profit before tax 933 881 Tax on operating profit (284) (264) Operating profit after tax 649 617 (Loss)/profit after tax (134) 587 Diluted EEV operating EPS 29.8p 28.3p
Asia Pacific (35) (12) Total life and pensions underlying profit 112 614 Investment management 42 83
Total underlying profit before tax 154 714 Tax on underlying profit 100 11 Underlying profit after tax 254 725 Profit attributable to equity holders after tax 100 465 Diluted IFRS underlying EPS 11.7p 33.3p
For more information please refer to the Basis of preparation in Section 1.9 and the IFRS pro forma reconciliation of Group underlying profit to profit for the period in Section 3 of the Preliminary Results 2008.
At the end of December 2008 the Group had total assets under administration of £156.8bn (2007: £169.0bn). Positive net flows of £2.4bn across the Group included life and pensions net inflows of £2.4bn and third party investment management net inflows of £3.4bn. Consolidation adjustments1 amounted to £1.8bn. We have managed our gross mortgage exposure within our banking operation during the current period of difficult credit market conditions, with gross mortgages under management reducing from £11.3bn to £9.7bn, a net outflow of £1.6bn during the course of the year.
Falling equity, property and fixed interest security values have reduced assets under administration by £14.6bn during 2008. This equates to 9% of opening assets under administration and compares favourably with the reduction in financial markets over the same period.
EEV operating profit before tax, excluding the impact of the cash injection into the Pension Sterling Fund announced on 11 February 2009, increased by 18% to £1,041m (2007: £881m), delivering a return on embedded value (RoEV) of 12.3% (2007: 11.5%). This is ahead of the guidance given in our Q4 new business results announcement on 28 January 2009. Including the impact of the cash injection into the Pension Sterling Fund, EEV operating profit before tax increased by 6% to £933m, delivering an RoEV of 10.9%.
Core return comprises new business contribution, expected return, development costs for covered business2 and normalised IFRS underlying profit for non-covered business3,4.
Efficiency comprises covered business maintenance expense variances and assumption changes. In 2008 efficiency savings contributed 0.8% to our RoEV (2007: 1.5%).
In March 2007 we announced the Continuous Improvement Programme to reduce underlying costs by £100m by the end of 2009. During 2008 we have built on the strong performance achieved in 2007, with the continued integration of UK financial services. This has enabled us to deliver the full £100m of efficiency savings one year early. The efficiency savings achieved in 2008 have been reflected in a £64m benefit to embedded value operating profit (2007: £109m).
Following the early delivery of the Continuous Improvement Programme benefits we are announcing today the next phase of efficiency savings. This has a target of achieving a further £75m of annual efficiency savings over the next two years through operational excellence.
As announced on 11 February 2009, we have made a cash injection into the Pension Sterling Fund to reverse a 4.8% valuation adjustment relating to 2008 mark to market movements that was made to the fund earlier in 2009. This injection, which has been reflected as a £108m6 charge within “other” experience variances, was made in light of feedback from customers and key business partners and our own review of the fund information we provided, and is consistent with our ongoing commitment to treat customers fairly.
Core capital and cash generation was 9% lower at £303m (2007: £334m). Capital and cash generation from new business and the expected return from existing covered business have remained largely unchanged at £322m (2007: £324m), despite the tough economic environment and the cash impact of accelerated reserve releases in 2007. This demonstrates the resilience of our capital-lite approach to writing new business, with capital and cash generated from existing business comfortably covering new business strain by more than two times. The impact of these factors has been offset by increased development expenses in respect of our covered businesses and lower returns from cash held by Group.
Capital and cash generated from efficiency savings amounted to £7m (2007: £20m). Capital and cash generated from back book management amounted to £113m (2007: £209m). This principally reflects the reinsurance of UK immediate annuity liabilities in February 2008 and a reserve release in respect of UK deferred annuities. These positive factors have been partly offset by the £78m post tax impact of the cash injection into the Pension Sterling Fund that we announced in February 2009.
After allowing for adverse investment variances and other non-operating items in the period, total EEV capital and cash generation was £336m (2007: £600m).
The Board proposes a final dividend of 7.70p per share, making a total of 11.77p for 2008, an increase of 2.3%. This reflects the solid progress made during the year. Looking forward the Group will continue to apply its existing progressive dividend policy taking account of market conditions and the Group's financial performance.
IFRS underlying profit before tax of £154m (2007: £714m) is after a number of one-off items which are not included in the normalised underlying profit figure. In 2007 these included reserve releases of £138m in respect of PS06/14 and £143m in respect of deferred annuities as well as a strengthening of mortality reserves amounting to £137m. In 2008 these included a £105m benefit arising from the reinsurance of UK immediate annuity liabilities, the impact of which was more than offset by the £102m cash injection into the Pension Sterling Fund and total charges of £124m arising from the restructure of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc and subsequent mark to market movements in associated asset backed securities7.
Despite falling financial markets Group Embedded Value has increased marginally to £6,245m (31 December 2007: £6,211m), representing an embedded value per share of 286p (31 December 2007: 285p). IFRS equity excluding intangible assets and minority interests has increased to £3,295m (31 December 2007: £3,213m), representing 151p per share (31 December 2007: 148p).
as a result of a number of securities reaching maturity and also due to market movements. The Group has continued actively to manage its exposure to asset backed securities and the portfolio remains a high quality credit portfolio with no direct exposures to the US mortgage market, minimal exposure to leveraged structures, no current direct exposure to Monolines and very modest exposure to credit within a Monoline wrapper. Following the restructure of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc, shareholder funds have a total exposure of £83m (31 December 2007: £27m) to assets within a Monoline wrapper or leveraged structures, representing 0.3% (31 December 2007: 0.1%) of shareholder financial assets.
The economic environment continues to be very challenging and the outlook for markets remains uncertain.
While market conditions mean that the outlook for retail savings is likely to remain subdued, we continue to see opportunities in the profitable markets in which we operate, including group pensions and fixed income investment mandates.
As an asset managing business our revenues will inevitably be impacted by lower financial market levels. Our ongoing focus on efficiency will help mitigate the impact of this on profitability. In 2009 the Group will benefit from expense efficiencies achieved during the last year and will make a start on the next phase of delivering operational excellence, targeting a total of £75m of annual efficiency savings by 2010.
A presentation to investors and analysts will take place at 9.30am at Merrill Lynch Financial Centre, 2 King Edward Street, London. A live webcast of the presentation and the presentation slides will be available on the Group’s website. In addition a replay will be available on this website later today.
There will also be a live listen only teleconference to the investor and analyst presentation at 9.30am. Investors in the UK should dial 0844 493674, and overseas investors should call +44 (0)145 256 2717. Callers should quote Standard Life Preliminary Results 2008. The conference ID number is 86267817. A replay facility will be available until 25 March 2009. UK investors should call 0800 953 1533, and overseas investors should dial +44 1452 55 00 00. The pass code is 86267817#.
Full year dividend per share 11.77p 11.50p 2.3% 1 2007 net flows and present value of new business premiums (PVNBP) have been restated to reflect the inclusion of Sigma mutual funds. The 2008 net outflow impact is £217m (2007: £250m outflow). The 2008 PVNBP impact is £88m (2007: £116m).
Worldwide life and pensions net flows for 2008 were £2,440m (2007: £2,769m), with the strong growth in our international operations partly offsetting the impact of continued difficult market conditions in the UK. Total Group assets under administration (AUA) reduced by 7% to £156.8bn (2007: £169.0bn). This reduction compares favourably with the fall in financial markets over the same period.
Our recently announced cash injection to the Pension Sterling Fund of approximately £100m has impacted profits in 2008. We strongly believe that the action we have taken was the right thing to do, and it reflects the importance that we attach to the long-term relationships we have with customers and business partners.
The Group capital surplus remained broadly unchanged at £3.5bn, compared to £3.6bn at 31 December 2007, despite the adverse market conditions. This demonstrates the robustness of our capital position and its relatively low sensitivity to market volatility. The insensitivity of the capital surplus reflects the structure of the Group post-demutualisation and the strategy for managing the risks of the Heritage With Profits Fund (HWPF). The strength of our capital position is further highlighted by Standard & Poor’s upgrading the credit rating for Standard Life Assurance Limited to A/Positive from A/Stable in May 2008 and then raising it again in February 2009 to A+/Stable.
We have remained focused on achieving operational excellence and efficiency during a time of economic uncertainty. We announced our Continuous Improvement Programme in 2007 and promised to deliver £100m of efficiencies by the end of 2009. In 2008 we met the £100m target one year earlier than planned, and exceeded it by £3m. An analysis of our operating cost base and efficiency savings compared with our cost saving commitments over the past two years is included in Section 4.3. Following the successful completion of this programme we have now launched the next phase of efficiency savings. This has a target of achieving a further £75m of efficiency savings over the next two years. In addition, in 2008 we achieved a further £7m reduction in Group Corporate Centre costs.
Outlook The economic environment continues to be very challenging and the outlook for the markets remains uncertain.
14 www.standardlife.com 1.2 New business sales and profitability New business highlights
New business sales The Group’s new business performance has delivered a 5% decrease in life and pensions PVNBP sales to £15,679m (2007: £16,539m).
UK life and pensions sales at £11,928m were 11% lower than the prior year (2007: £13,440m) with sales impacted by negative market movements on incoming transfer values and lower consumer confidence. Gross lending in our banking business reduced to £1.1bn (2007: £3.7bn). This was driven by a number of strategic measures to manage liquidity and is in line with many of our competitors. Our healthcare sales rose by 14% to £25m (2007: £22m).
The core element of our operating profit decreased by 13% to £685m (2007: £791m). The fall primarily reflected the adverse impact of market conditions on NBC which decreased by £81m. Expected return from the Group’s in-force business increased by 7% to £431m (2007: £401m). £16m of this increase was due to favourable exchange rate movements.
There were losses in our Asia Pacific business of £35m (2007: £12m) on an IFRS basis reflecting the continuing increase in operational activity. The operating profits of our investment management and healthcare businesses remained resilient in the face of tough market conditions. However, banking profits were impacted and fell by £6m compared to 2007, predominantly due to lower interest margins.
NBC is covered in detail in Section 1.2 – New business sales and profitability, while non-covered business is analysed in the segmental analysis of EEV operating profit and is discussed in greater detail in the relevant business segment sections of this report.
NBC Expected return and development costs Non-life £264m £400m £21m £345m £395m £51m
Back book management EEV operating profit before tax from back book management has increased significantly from a loss of £19m in 2007 to a profit of £184m for 2008.
Total variances from lapse experience and assumption changes were negative £39m, an improvement of £210m compared to 2007, which reflected increased lapse activity following A-day. In our UK business, a £17m loss from lapses was primarily due to a strengthening of paid up assumptions across our UK pension business, as customers postponed payments into their pension scheme during the current volatile market conditions. Lapse experience for onshore bonds was in line with long-term assumptions and was favourable compared to our short-term provision for unit linked onshore bonds established at the end of 2007. In Canada, assumptions were strengthened to reflect overall deteriorating economic conditions.
As reported in our 2008 Interim results, during the year we reinsured £6.7bn of pre-demutualisation UK immediate annuity liabilities. This represents a significant step in reducing shareholders’ exposure to annuitant mortality risk and contributed £119m towards the EEV operating profit before tax. The additional profit arose mainly due to the impact of lower risk discount rates arising from the reduction in longevity risk.
HWPF TVOG produced an £11m increase in back book operating profits, which was predominantly due to the benefit arising from reinsurance of UK immediate annuities.
The operating profit from our non-life and pensions operations was £16m (2007: £41m). This result reflects resilient operating results from our investment management and healthcare businesses despite the adverse market conditions. Operating profit for the investment management business excludes the non-operating loss related to the restructuring of a subfund of Standard Life Investments (Global Liquidity Funds) plc. Our banking business operating profits fell by £6m, which predominantly reflected lower interest margins. Other non-covered business includes operating losses which reflect lower investment returns in money market funds in Standard Life plc.
Further comments on the operating profits of each of the businesses noted above are provided in Section 1.5 – Business segment performance.
EEV operating profit after tax EEV operating profit after tax increased by 5% to £649m (2007: £617m). The attributable tax rate was 30% in 2008 (2007: 30%).
EEV non-operating loss Total non-operating loss was £1,091m in 2008 (2007: loss £43m), an increase of £1,048m from 2007, primarily reflecting lower than expected investment returns arising from the volatile markets during the year. Our life and pensions businesses produced a non-operating loss of £839m (2007: profit £4m). This included long-term investment variances of negative £849m (2007: negative £17m) and economic assumption changes of positive £48m (2007: positive £27m).
Included within restructuring and corporate transactions costs is £45m incurred under our Continuous Improvement Programme. Volatility arising on different asset and liability valuation bases includes unrealised fair value losses on derivatives of £94m (2007: loss £39m) in respect of non-qualifying economic hedges in our banking business.
12 months to 31 December 2008 Free surplus £m Required capital £m Net worth £m
Group embedded value Overall, our Group embedded value remained broadly unchanged at £6,245m. Before taking into account dividends paid to shareholders, other non-trading movements and the adjustment to opening EEV, Group embedded value decreased by £134m, of which positive £423m was from operating capital and cash generation and negative £87m was from non-operating capital and cash generation. Core capital and cash generation of £303m represents a £31m decrease from 2007 under tough market conditions. Efficiency capital and cash generation contributed £7m. Capital and cash generation from back book management of £113m was largely as a result of the reinsurance of UK immediate annuities and release of provisions in relation to UK deferred annuities, offset by a charge for the Pension Sterling Fund.
This is discussed in more detail in Section 1.7 – Capital and cash generation.
The HWPF is discussed in more detail in Section 1.7 – Capital and cash generation.
The net worth of our Group has increased from £2,884m to £3,192m due to resilient operating capital and cash generation. PVIF net of cost of capital has decreased from £3,327m to £3,053m, largely due to the impact of adverse market movements, giving a small increase in Group EEV from £6,211m to £6,245m.
Dividend cover 2 1.0 times 2.9 times (66%) 1 Diluted IFRS underlying EPS is based on 2,180m shares (2007: 2,177m shares) and the IFRS underlying profit after tax of Standard Life plc of £254m (2007: £725m). 2 Dividend cover is calculated as IFRS underlying profit after tax and minority interest for the year divided by the full year dividend.
IFRS profit IFRS profit for the year was £17m (2007: £576m). This comprises profit after tax attributable to equity holders of £100m (2007: £465m) and losses attributable to minority interest of £83m (2007: profit £111m). The IFRS result included a 78% decrease in underlying profit before tax from £714m to £154m as well as the impact of a number of volatile items not included within the underlying profit. The decrease in underlying profit before tax was due to a lower value of one-off items benefiting the result in 2008 compared to 2007 and the impact of volatile markets in the period, and is explained in more detail below.
IFRS underlying profit before tax Our IFRS statutory income statement, which shows IFRS profit after tax attributable to equity holders and the reconciliation to underlying profit is shown in the Group IFRS financial statements section of this report. We believe that the IFRS profit before tax adjusted for non-operating items provides a more meaningful analysis of the underlying business performance.
Movement in IFRS underlying profit Underlying profit has been adversely impacted by the unprecedented market conditions and includes certain items which are one-off in nature. In 2007 these items increased underlying profit by £238m and included a reserving change on deferred annuities, additional mortality reserves on annuity business, a release of reserves relating to the adoption of the FSA’s Policy Statement PS06/14 and other assumption/modelling changes.
Change in accounting estimate of a reinsurance treaty FY 2008 underlying profit
Total life and pensions Total life and pensions underlying profit before tax decreased by 82% to £112m (2007: £614m). UK life and pensions underlying profit before tax fell by 53% to £184m (2007: £395m). Excluding one-offs in both periods, profit increased by £34m to £156m (2007: £122m). Canada recorded an underlying loss of £102m driven by investment losses and reserve increases resulting from rising bond yields and equity market volatility. Europe underlying profit increased by 3% to £65m (2007: £63m). The life and pensions result also included a £35m underlying loss for the Asia Pacific business as we continue to invest in its development.
Non-life business Profits from our non-life businesses fell by 38% to £79m (2007: £128m). The decrease was primarily due to the £51m fair value adjustment related to the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc, which impacted the results of the investment management business. Excluding this impact and despite the market turbulence, the normalised IFRS underlying result for the investment management business increased by 12% to £93m (2007: £83m) due to solid revenue growth and tight cost control.
Like many of our competitors, the profitability of our banking business was affected by the significant level of dislocation in financial markets. Underlying profit within our banking business reduced by 19% to £26m (2007: £32m). The underlying result excludes unrealised fair value losses on derivatives of £94m (2007: loss £39m) in respect of non-qualifying economic hedges.
Life and pensions UK life and pensions is one of the largest pension, long-term savings and investment providers in the UK with £96bn of assets under administration. The UK business offers a broad range of insurance and investment wrappers, with particular strength in the accumulation market. In 2008, further developments were made to the existing Wrap platform and self invested personal pension (SIPP) product range, including increasing on-line functionality for customers. Further developments will continue to be made to the award-winning products and innovative propositions to ensure that they remain relevant to customers’ lives and their changing financial needs.
IFRS underlying profit before tax £184m £395m (53%) 1 The 2008 figures include Sigma mutual funds. The 2007 figures have been restated to reflect the inclusion of Sigma mutual funds. The 2008 impact is: PVNBP of £88m, APE of £9m and net outflows of £217m. The 2007 impact is: PVNBP of £116m, APE of £12m and net outflows of £252m. 2 The new business PVNBP sales are different from those previously published in the full year new business press release issued on 28 January 2009 as they incorporate year end non-economic assumption changes.
Net flows Net flows for the year were 32% lower at £1,480m (2007: £2,182m). Insured and non-insured pension flows were 8% lower. Institutional trustee investment plan (TIP) net inflows fell by £407m to £616m in 2008 (2007: £1,023m). Savings and investments net outflows of £663m were £161m higher than last year (2007: £502m), mainly due to lower investment bond inflows following the capital gains tax (CGT) changes introduced earlier in the year, and the impact of market uncertainty. This was partially offset by strong offshore bond inflows which increased by £345m to £632m compared to 2007.
Throughout 2008, we continued to focus on profitable areas of the market where our brand and customer service give us sustainable competitive advantage. New business contribution (NBC) decreased to £212m (2007: £282m), with a new business margin of 1.8% (2007: 2.1%), which was mainly driven by lower sales during the year. Overall the internal rate of return (IRR) reduced to 18% (2007: 20%) and the discounted payback period was marginally extended to eight years (2007: seven years). New business profitability by product is analysed as follows: Individual pensions (SIPPs and increments on existing policies): NBC fell to £56m (2007: £123m), while the PVNBP margin decreased from 2.3% to 1.3%. This was due to lower SIPP sales during the year particularly as a result of lower transfer values. The overall IRR on individual pensions reduced to 16% (2007: 29%), and the discounted payback period extended to eight years (2007: five years).
24 www.standardlife.com 1.5 Business segment performance continued 1.5.1 UK financial services continued Group pensions: NBC fell to £55m (2007: £60m) while PVNBP margin remained stable at 2.1% (2007: 2.1%) with payback remaining in line with 2007 at 12 years and IRR falling marginally to 13% (2007: 14%).
Institutional pensions: NBC increased to £20m (2007: £17m) and the margin increased to 1.1% (2007: 0.8%). This was due to improved modelling of the margin, including looking through to the margins earned by our investment management business. As the capital requirements of this business are small, the IRR is very high at over 40% (2007: >40%) and the payback period is less than three years (2007: <three years).
Business development One of our driving strengths in becoming a leading asset managing business has been our ability to react to changing UK market dynamics through our customer propositions. In the current market conditions consumers are seeking solutions that will provide financial security both before and after retirement.
Our strength in the corporate pensions market is demonstrated by several recent large scheme wins. We recently announced that we were successful in securing the British Telecom plc scheme. This involves the transition of 20,000 employees currently in a trust based defined contribution scheme to a tailored Corporate self invested personal pension plan (CSIPP). We believe this scheme sets a new benchmark for group contract based schemes, and demonstrates the strength of our offering within the corporate pension marketplace.
Performance Capital efficiency As reported in our 2008 Interim Results, we reinsured £6.7bn of immediate annuity liabilities, more than half of the total annuity book of £12bn. The transaction substantially reduces longevity risk, while providing a significant increase to embedded value. It also generated a release of cash, creating a release of capital, which allows us to keep investing in profitable growth. We anticipate further improvement in our capital position in the medium term as we continue to move towards less capital-intensive products such as non-guaranteed unit linked business.
The results exclude the impact of volatility, which arises due to the accounting mismatch of subordinated liabilities being measured at amortised cost, while the associated assets are measured at fair value, and restructuring costs relating to the Continuous Improvement Programme.
UK EEV operating profit before tax £636m (2007: £624m, 2006: £395m)
26 www.standardlife.com 1.5 Business segment performance continued 1.5.1 UK financial services continued
Cost income ratio1 58% 60% 2% points 1 Cost income ratio calculated as total operating expenses (excluding impairment provisions) divided by total underlying income.
New business Savings balances increased by 9% to £5.0bn (2007: £4.6bn) with SIPP and Wrap balances growing to £1.5bn (2007: £0.6bn). Our savings business benefited from the uncertain stock markets, as customers choosing to hold cash over other assets took advantage of our competitive products.
We continue to look to diversify our funding base, launching a 5bn Euro covered bond programme on 9 July 2008. To date £2.1bn of covered bonds have been issued, all bonds being retained on the balance sheet for use as collateral in funding operations. Subsequent to the year end we received approval as an eligible institution under the UK Government 2008 Credit Guarantee Scheme which provides for HM Treasury to guarantee specific debt instruments issued by banks and building societies. In February 2009, we launched our Euro Medium Term Note programme and issued £500m of AAA rated debt covered by the Credit Guarantee Scheme.
Performance Our savings and mortgage business produced a resilient performance in a year of adverse market conditions, with the priority being to manage profitability whilst ensuring liquidity requirements were met. IFRS underlying profit before tax (excluding volatility in respect of non-qualifying economic hedges) decreased by 19% to £26m (2007: £32m). Return on equity in 2008 was 6.1% (2007: 6.6%), with our ability to achieve our 15% target continuing to be impacted by the effects of the credit crisis.
£32m £26m * 2005 and 2006 results are shown on a pro forma basis.
In line with many of our competitors, adverse funding conditions have reduced interest margins, which fell to 54 basis points in 2008 (2007: 60 basis points), although careful balance sheet management helped mitigate this impact. Cost income ratio improved in 2008 to 58% (2007: 60%) due to efficiency gains which led to reductions in operational expenses.
Despite deteriorating economic conditions, characterised by reduced consumer confidence, rising unemployment and falling house prices, we continue to maintain a high quality mortgage portfolio, with arrears figures low in comparison to the CML average. Only 0.40% of total mortgages were three or more months in arrears or in repossession at the end of 2008, less than a fifth of the CML industry average of 2.09%. Although impairment charges increased to £4.5m in 2008 (2007: £0.1m credit), net write-offs for 2008 were only £0.7m (2007: £0.2m), further testament to the high quality of our mortgage portfolio.
Healthcare The healthcare business offers a range of private medical insurance (PMI) and other health and well-being solutions to individuals, families, small businesses and companies, and is the fourth largest PMI provider in the UK.
Performance IFRS underlying profit before tax was £11m (2007: £13m), before taking into account one-off costs relating to integration of the PMI business acquired from FirstAssist in 2006, and project costs associated with the development of a new computer system. The £2m fall in IFRS underlying profit for the year was due to poor investment returns, where abnormal market conditions in the second half of the year led to reductions in the market value of investments in money market funds.
UK financial services looking ahead In the year ahead our customers are likely to be affected by tough economic conditions, while financial market volatility will continue to impact transfer values for customers consolidating their existing assets into our individual SIPP and group pension schemes. We expect the UK savings and mortgages market to continue to be impacted by reduced mortgage funding liquidity, and the healthcare market to continue to be impacted by tough economic conditions.
However, our market leading proposition within the group pensions marketplace, and our award-winning individual SIPP, combined with our Wrap platform, will allow us to take advantage when markets and the wider economy recovers. We will continue to focus on writing profitable business across UKFS and on providing first class customer service while maximising the opportunities from having a combined operating model. This will allow us to generate profitable returns in the markets in which we operate.
£12m* £13m £11m * 2005 and 2006 results are shown on a pro forma basis.
28 www.standardlife.com 1.5 Business segment performance continued 1.5.2 Canada Standard Life Canada demonstrated a continued resilience in the face of challenging market conditions, keeping the emphasis on growth across its range of savings, retirement and insurance products. A commitment to operational and capital efficiency remained a key feature in achieving these results within the context of the distressed capital markets in the second half of 2008. Standard Life Canada currently has £18bn of assets under administration. In 2008, Canada held a series of events to commemorate the 175th anniversary of the business and to further strengthen the brand.
New business profitability New business contribution (NBC) decreased to £34m (2007: £37m) and PVNBP margins were 1.5%, down from 2.3% in 2007. This is consistent with our strategy to price products more competitively where we are still able to attain an attractive internal rate of return (IRR). The large defined benefit mandate mentioned previously was secured at a low margin with an IRR of 23%. Overall IRR reduced to 17% (2007: 23%) and the payback period extended to eight years (2007: five years), due largely to higher acquisition expenses incurred as a result of our efforts to improve market visibility and re-start growth.
Performance EEV operating profit before tax EEV operating profit before tax amounted to £215m (2007: £178m). In constant currency, EEV operating profit before tax increased by 10%, with increases in all operating profit elements. The core element accounted for £146m compared to £126m in 2007, an increase of 6% in constant currency. This was driven by an improvement in total expected return of £22m to £113m (2007: £91m). This increase was offset by a £3m decrease in NBC to £34m (2007: £37m). The efficiency result amounted to a gain of £31m (2007: £25m). The back book management operating result was a gain of £38m (2007: £27m). Positive changes from tax management of £38m and modelling and assumption changes in group insurance of £27m were offset by a £25m charge to operating assumptions to prudently safeguard against overall deteriorating economic conditions.
Back book management £146m £126m £118m £31m £25m £53m £27m £38m
Looking ahead Investment was made in 2008 to enhance our corporate visibility and position ourselves as a leader in the retirement market. While we expect all our product lines to be impacted by the weakening economy, our numerous product improvements in group savings and retirement and continued strong push into the disability segment in group insurance provides a stronger position for growth. We maintain an active pipeline and the business recently secured a large defined contribution mandate expected to transition in the second quarter of 2009. In group insurance, our disability risk management differentiated value proposition is recognised by the industry and will position us favourably to win market share with plan sponsors as they seek to contain employee costs in the current economic context. Retail markets are expected to remain challenging for the foreseeable future.
In Germany, PVNBP sales of £602m (2007: £722m) were 28% lower than 2007 in constant currency. The German market was adversely impacted by customer uncertainty in the face of market volatility and exacerbated by changes in insurance contract regulations at the beginning of 2008 and the mid-year introduction of transparency rules. This has resulted in poor market sentiment and a lower than normal peak in sales volumes at year end.
New business profitability New business contribution in Europe fell in 2008. However, overall internal rate of return (IRR) and discounted payback period remained in line with 2007. In Germany, the IRR remained stable with stronger underlying profitability compensating for reduced sales volumes. The IRR in Ireland has increased reflecting improved capital efficiency.
£26m £18m * 2005 and 2006 results are shown on a pro forma basis.
In Ireland, the continued development of our self investment Synergy product range, particularly our extensive deposit options, has now positioned our platform as the most comprehensive in this space.
IFRS underlying profit before tax IFRS underlying profit before tax decreased by 11% in constant currency to £65m (2007: £63m) with Germany contributing £62m (2007: £56m) and Ireland contributing £3m (2007: £7m). The small constant currency reduction in Germany was primarily due to the pre-determined decreasing transfer of profit to shareholders from the Heritage With Profits Fund being largely offset by increased profits emerging from the post-demutualisation business. In Ireland, the IFRS result benefited from lower strain as a result of lower new business sales but was also impacted by reduced revenue due to investment market performance.
£26m £69m * 2005 and 2006 results are shown on a pro forma basis.
www.standardlife.com 33 1.5.4 Asia Pacific Standard Life has a growing position in the Asia Pacific life and pensions market with joint venture companies in India and China and a wholly owned subsidiary in Hong Kong all showing good levels of sales growth.
Standard Life Insurance Company Limited as a whole to avoid distortion due to changes in the Group’s shareholding in the joint venture during 2007.
In China, Heng An Standard Life Insurance Company Limited (HASL) performed well with PVNBP up by 69% in constant currency terms compared to 2007. This reflects strong growth in group products, bank distribution and continued business expansion in major cities within existing provinces. HASL is now in 25 cities, across 7 provinces, after establishing a presence in a further 11 cities during the year.
Performance Asia Pacific IFRS underlying loss at £35m (2007: £12m) was higher than the prior year as we continued to invest in developing and expanding operations in this region. We expect our investment in strategic growth to have a continued impact on the IFRS underlying result.
Growth in our Hong Kong business will be driven by strong relationships with key brokers and strong product and marketing support.
34 www.standardlife.com 1.5 Business segment performance continued 1.5.5 Investment management The focus at Standard Life Investments is to deliver superior investment performance, supported by an exceptional client experience. Standard Life Investments operates as a global team, with its investment process underpinned by its ‘focus on change’ philosophy which has proved itself to be robust and repeatable in both good and bad market conditions. Over the past 10 years since its inception, Standard Life Investments has delivered a strong track record of profitable organic growth, a trend which continued in 2008 despite the very difficult market conditions.
Funds) plc, including £51m within the Group’s IFRS underlying profit statement in the Group IFRS financial statements section of this report.
Standard Life Investments delivered a strong underlying performance in 2008, against a background of extremely volatile and dislocated markets. The sales momentum of past years continued in 2008 with solid net sales of third party business largely offsetting the very substantial fall in market values. Revenue grew by 7%, the average revenue yield continued to strengthen and costs were held flat against 2007. EBIT grew by 9% to £82m and a strong EBIT margin of 30% was maintained. We have focused throughout the year on maintaining high levels of customer service and protecting existing relationships while managing our current revenue streams and cost base very tightly. We have also continued to invest in building our capabilities, particularly in global equities, global fixed income, global property and global absolute return strategies, in order to build future revenue streams and emerge stronger from the current downturn. Our IFRS profit before tax was impacted by a one-off decision to restructure a sub-fund of Standard Life Investments (Global Liquidity Funds) plc at a total cost of £90m. The business broke even at the pre-tax level after this charge.
As a result, total assets managed by Standard Life Investments decreased by 14% to £123.8bn (2007: £143.4bn).
Looking ahead We expect 2009 to be challenging for all players in the industry, including Standard Life Investments. Equity markets are down substantially year on year, and unless there is a marked and rapid recovery, this will impact our revenue streams during 2009. On the other hand, we continue to see a good volume of requests for proposals and our pipeline of confirmed third party new business is strong, driven substantially by institutional funds with opportunities skewed towards fixed interest and liability driven investment mandates, due to the current market conditions.
We remain confident in the solid underlying performance of the business.
Analysis of Group AUA For the year ended 31 December 2008
Total worldwide life and pensions 131.1 16.4 (14.0) 2.4 (11.9) 121.6
Other third party managers 10.8 18.3 1 The opening balance has been restated to reflect the inclusion of Sigma mutual funds. 2 In order to be consistent with the presentation of new business information certain products are included in both life and pensions AUA and investment operations. Therefore, at a Group level an elimination adjustment is required to remove any duplication, in addition to other necessary consolidation adjustments.
www.standardlife.com 37 1.7 Capital and cash generation Capital and cash generation highlights
IFRS equity attributable to equity holders of Standard Life plc £3,407m £3,282m 4% 1 Net of tax. 2 Based on draft regulatory returns.
Covered business capital and cash generation from new business and expected return 280 42 322 289 35 324
Non-covered business core, capital and cash generation 8 - 8 26 - 26
Operating profit capital and cash generation 377 46 423 521 42 563
38 www.standardlife.com 1.7 Capital and cash generation continued The analysis on the previous page highlights the most significant influences on free surplus and shareholders’ net worth, including investment of shareholder capital in new business, or new business strain (NBS) and the amount of capital and cash emerging from existing business. Our covered business capital and cash flows from new business and expected return have remained stable during a year of economic volatility at £322m (2007: £324m). NBS is covered two times by capital and cash flow from existing business. In overall terms, our operating profit capital and cash generation decreased from £563m to £423m.
We also analyse capital and cash generation by three components that reflect the focus of our business effort – core, efficiency and back book management. Core and back book management were the main contributors to our capital and cash generation during the year. The core capital and cash flows of £303m, primarily reflect robust capital and cash generation from new business and expected return, and after-tax profits from nonlife operations, partially offset by development expenses. The back book management capital and cash flows of £113m largely arise from the impact of the UK immediate annuities reinsurance and profits from the release of provisions in relation to UK deferred annuities, partially offset by the charge in relation to the Pension Sterling Fund. Capital and cash generation from efficiency of £7m represent ongoing cost control and efficiencies.
Holding company capital and cash flows In addition to the movement in capital and cash on an EEV basis, the following summary has been provided to show an analysis of holding company cash flows and capital, in relation to the Group’s holding company, Standard Life plc. The capital position is based on the Company balance sheet, excluding its investments in operating subsidiaries.
Standard Life plc’s ability to pay dividends to shareholders is determined by the distributable reserves of the Company which broadly comprise its retained earnings and special reserve. The Board must also consider the Group’s future business plans, market conditions and regulatory solvency when determining the level of dividends.
sales for 2005 have not been restated to include mutual funds sales as covered business. 2007 new business strain margin has not been restated to include Sigma mutual funds.
Nonoperating items £303m £334m £121m £7m £20m £13m £113m £209m £72m
£37m £56m * 2006 results are shown on a pro forma basis.
Objectives and measures of Group capital The process of capital and risk management is aligned within the Group to support the strategic objective of driving sustainable, high quality returns for shareholders. The different measures of capital reflect the regulatory environment in which we operate and the bases that we consider effective for the management of the business.
The Group is classified as a ‘financial conglomerate’ as defined by the Financial Groups Directive (FGD). The FGD surplus has only decreased by £0.1bn during the year, reflecting the insensitivity to equity market movements which suffered global falls in 2008. This insensitivity of the FGD surplus reflects the structure of the Group post-demutualisation and the strategy for managing the risks of the Heritage With Profits Fund (HWPF). Group capital resources decreased mainly because of ongoing investment in the business and negative market movements during the year which reduced the capital resources of the HWPF. However, this was offset by a corresponding reduction to the capital resource requirements of the HWPF. As the Group capital resource requirement has decreased by a greater relative percentage than the change in capital resources, the overall Group solvency cover has increased from 166% at 31 December 2007 to approximately 218%. After allowing for payment of the final dividend of £168m (2007: £168m), our year end FGD surplus would be £3.3bn (2007: £3.4bn).
• Robust embedded value underpins the financial strength of the Group
40 www.standardlife.com 1.7 Capital and cash generation continued Analysis of movement in Group capital surplus The following table illustrates the key movements in the regulatory capital surplus for the year ended 31 December 2008: 2008 £bn 2007 £bn
Movement in capital resource requirements of long-term business funds 2.7 (0.8)
Net movement in capital surplus of long-term business funds - -
Ongoing investment of shareholder capital in the business through writing new business offset by the recourse cash flows • emerging from pre-demutualisation business
Profits earned by the non-life operations included within other factors above•
The largest regulated entity within the Group is Standard Life Assurance Limited (SLAL), and its regulatory position reflects capital resources including long-term business funds. While SLAL’s capital resources have decreased, the solvency cover has increased to approximately 274% from 190% due to a relative decrease in the capital requirements of the HWPF, as explained previously.
The capital resources of SLAL include the residual estate of approximately £0.5bn (31 December 2007: £1.5bn). The reduction in the estate over the year largely reflects both the direct and indirect effects of movements in corporate debt, property and equity markets, the impact of which has been exaggerated by technical changes in the way that realistic liabilities are calculated. The impact on the residual estate of further falls in equity markets continues to be mitigated by the hedges we have in place. The impact of most other adverse asset movements would, in the first instance, be met by policyholders with indirect impacts on shareholders via higher guarantee costs, and hence higher burnthrough cost. Shareholder exposure is also limited by the structure of the capital support mechanism set up at demutualisation, with shareholder support being obtained by withholding the furthest out cash transfers from the HWPF to shareholders.
Reconciliation of key capital measures The following diagram illustrates the key differences between the regulatory, IFRS and EEV capital measures at 31 December 2008: £6.5bn
Capital arising from the subordinated debt issued by the Group, amounting to £2.2bn at 31 December 2008, which is used • to provide capital support to SLAL and Standard Life Bank
A restricted amount of policyholder capital (£1.7bn at 31 December 2008), which matches the capital resource • requirements of that business, and includes the HWPF
While these latter two elements provide capital support for the Group, they do not form part of the shareholders’ regulatory capital. Shareholder capital can be measured under each of the Group’s reporting bases – regulatory, IFRS equity and EEV net worth. Each of these is a comparable measure of the net assets attributable to equity holders of the Group. In some cases, the regulatory rules for valuing assets and liabilities differ from IFRS accounting rules, resulting in a valuation adjustment of £0.8bn. Similarly, the EEV balance sheet recognises certain valuation adjustments to give the EEV net worth, resulting in an equivalent adjustment of £0.2bn to IFRS equity holder funds. The total EEV of the Group relates to the net worth adjusted for the cost of capital of £0.3bn and increased by the value of the present value of in-force business (PVIF) of £3.3bn to give the total EEV of £6.2bn at 31 December 2008.
Capital management policy Matters related to management of the Group’s capital are reserved for the Board of Standard Life plc. The scope of the liquidity and capital management policy is wide ranging and forms one pillar of the Group’s overall management framework. It operates alongside and complements the Group’s other policies and processes, in particular its risk policies and strategic planning process, and provides a framework for the effective and consistent management of capital. The Group continues to develop its Enterprise Risk Management (ERM) framework to link robustly the processes of capital allocation, value creation and risk management.
42 www.standardlife.com 1.7 Capital and cash generation continued Debt, facilities and liquidity The Group’s capital structure has been developed to provide an efficient capital base by using a combination of equity holders’ funds, subordinated debt and capital within the HWPF.
The Group uses subordinated debt to provide capital to our life assurance and banking businesses •
Note 3.12 – Capital statement shows the external subordinated debt and internal loans made across life and • other operations
Following the second maturity from the Lothian securitisation programme on 24 October 2008, there are no securitisation maturities until 2011. Our banking operation remains well capitalised with a very high quality mortgage book, has access to a range of funding sources and has actively reduced its funding requirements during the year.
Shareholder asset exposures At 31 December 2008, shareholders had direct exposure to equity, debt securities and investment property of £9.6bn. This included exposure to equity securities of £0.4bn. The exposure to debt securities was £8.3bn and consisted of government debt securities of £3.7bn, corporate bonds of £4.3bn and other debt securities including supranationals of £0.3bn. The exposure to investment property amounted to £0.9bn.
The total shareholder exposure to equity securities, debt securities and investment property of £9.6bn includes £6.6bn of assets held by non-segregated funds in Canada. The effective exposure of shareholders to the assets of the non-segregated funds in Canada was significantly lower than £6.6bn because changes in the value of assets are typically offset by a change in the value of the 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.
The strength of the Group’s framework was recognised by Standard & Poor’s in April 2008 when we received an 'adequate with positive trend’ rating from the agency.
Demographic and expense The risk that arises from the inherent uncertainties as to the occurrence, amount and timing of future cash flows due to demographic and expense experience differing from that expected, which for the purpose of risk management includes liabilities of insurance and investment contracts.
Credit The risk of exposure to loss if a counterparty fails to perform its financial obligations, including failure to perform those obligations in a timely manner. It also includes the risk of a reduction in the value of corporate bonds due to a widening of corporate bond spreads.
Market The risk that arises from the Group’s exposure to market movements which could result in the value of income, or value of financial assets and liabilities, or cash flows relating to these, fluctuating by differing amounts.
Liquidity The risk that businesses are unable to realise investments and other assets in order to settle their financial obligations when they fall due, or can do so only at excessive costs.
Diversification of funding sources• Quality of funding sources• Depth and liquidity of • particular markets
Businesses maintain contingency funding plans • which operate on a continuous basis and are fully documented Regular monitoring against forecast data, • accompanied by cash flow scenarios Regular monitoring of exposure to liquidity risk to • ensure they remain within agreed tolerances
Operational The risk of loss, or adverse consequences for the Group’s business, resulting from inadequate or failed internal processes, people or systems, or from external events.
Volatility arising on different asset and liability valuation bases (109) (39)
2 Refer to IFRS financial information Note 3.8 – Restructuring and corporate transaction expenses. 3 This adjustment reflects the removal of accounting differences for the Canadian subordinated liability as explained in Note 2.1 – Basis of preparation.
Weighted average number of ordinary shares on a diluted basis (millions)2 2,180 2,177 1 EEV operating profit before tax of £933m (2007: £881m) less attributed tax on operating profit of £284m (2007: £264m). 2 Includes the full dilutive effect of bonus shares committed to at the time of the demutualisation of The Standard Life Assurance Company (SLAC) and the flotation of Standard Life plc and share awards and share options.
EEV consolidated statement of recognised income and expense For the year ended 31 December 2008
Aggregate tax effect of items not recognised in income statement1 (42) (1)
Total recognised income for the period attributable to equity holders 2.7 250 774 1 Consistent with the IFRS consolidated statement of recognised income and expense for the year ended 31 December 2008. 2 Exchange differences primari ly relate to Canada: £154m and Europe: £110m.
2 This adjustment reflects the removal of accounting differences for the Canadian subordinated liability as explained in Note 2.1 – Basis of preparation.
EEV includes the net assets of the businesses that are owned by equity holders of Standard Life plc plus the present value of future profits expected to arise from in-force long-term insurance policies (PVIF) where these future profits are attributable to equity holders under the Scheme of Demutualisation (the Scheme) or from sales of new business since 10 July 2006.
The opening and closing EEV numbers, and therefore the profit arising in the period, for the covered business are determined on an after tax basis. The tax assumptions are based upon the best estimate of the actual tax expected to arise. Profit before tax is derived by grossing up profit after tax at the long-term rate of corporation tax appropriate to each territory. While for some territories this rate does not equate to the actual effective rate of tax used in the calculation of after tax profits, it provides a consistent grossing up basis upon which to compare results from one year to another and is in line with the Group’s expectation of the rate of tax applicable to business sold after demutualisation.
A detailed description of EEV covered business is provided within the EEV methodology in Note 2.16.
In March 2007, we announced our aim to reduce underlying costs by a further £100m by 2009. This cost efficiency target has now been achieved one year early. In 2008, £45m (2007: £9m) of costs associated with progressing this initiative have been incurred in restructuring and corporate transactions.
Notes to the EEV financial information continued 2.1 Basis of preparation continued Pension Sterling Fund
There is no restatement of the results for the 12 months to 31 December 2007.
Expected return on free surplus 33 4 3 (35) - 5
Operating profit before tax for covered business is calculated using the expected long-term investment return. Investment variances, the effect of economic assumption changes and other non-operating items are excluded from the operating profit for the period and are reported as part of the total EEV profit.
HWPF TVOG represents the time value of financial options and guarantees (TVOG) arising from the Heritage With Profits Fund (HWPF). Although this fund includes business written by the UK, Germany and Ireland, it is managed at a combined level by the UK financial services business and is shown separately in this analysis. The results for Canada include the cost of the Canadian TVOG, and the results for Europe include the cost of TVOG arising on business written outside of the HWPF in Germany.
The principal effect of determining the pre-tax results using the long-term rate of tax compared to the actual effective rate is to decrease the effect of economic assumption changes by £71m – UK: £69m, Europe: £2m (2007: £67m – UK: £65m, Europe: £2m), arising from the impact of investment related changes in the value of the tax effects that have been assumed to arise as a result of funding HWPF transfers out of unallocated surplus.
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 2.10.
Notes to the EEV financial information continued 2.2 Segmental analysis – covered business continued (b) Segmental analysis of movements in EEV
Actuarial gains on defined benefit pension schemes - 12 (10) - - 2
Transfer back of mutual funds net worth 15 (4) - - - 11
1 The PVNBP new business sales are different from those in the full year new business press release issued on 28 January 2009 as they incorporate year end non-economic assumption changes.
2 PVNBP margins are calculated as the ratio of the value of new business to the present value of new business premiums and are based on the underlying unrounded numbers.
3 The PVNBP multiplier is calculated as the total of PVNBP less single premiums divided by annualised regular premiums. 4 Single premiums and PVNBP for UK savings and investments for the 12 months to 31 December 2008 include £88m attributable to the inclusion of
Lapse variances in the UK of £18m include the impact of favourable experience of onshore bonds compared to the short-term provision established at the end of 2007.
Lapse variances in Europe mainly arise from favourable experience in pension business in Ireland.
The adverse expense variance in the UK relates to certain newer products where product volumes are expected to grow rapidly. Expense overrun provisions have been set up as explained in Note 2.5 – Operating assumption changes.
‘Other’ UK variances include the benefit from the release of the provision held on the deferred annuity book, and the impact of the cash injection into the Pension Sterling Fund. The deferred annuity release has produced an EEV operating profit before tax of £96m, consisting of an increase to free surplus due to reserve releases of £98m, and PVIF and cost of capital decreases of £2m. The cash injection into the Pension Sterling Fund has resulted in an EEV operating loss of £108m (equivalent to a post-tax EEV operating loss of £78m), which reflects the cost of the cash injection plus associated tax impacts.
All territories have made significant profits from expense assumption changes, reflecting the impact of expense savings related to CIP and other initiatives. UK and Europe expenses include productivity gains which have been anticipated and include expense overruns of £16m for UK and £4m for Europe to reflect expected growth in volume of certain newer products.
Most of the ‘Other’ assumption changes in Canada relate to modelling and assumption changes for group insurance business.
(a) Segmental analysis – non-covered business 12 months to 31 December 2008
Transfer back of net worth from covered business 33 - - (16) - 17
Transfer back of net worth from covered business 25 - - (11) - 14
Opening adjustments relate to the elimination of £13m of opening deferred acquisition costs in respect of those UK financial services (UKFS) and Canada mutual funds transferred to covered business in 2007.
Notes to the EEV financial information continued 2.6 Non-covered business continued (b) Investment management EEV profits before tax
12 months to 31 December 2008 £m 12 months to 31 December 2007 £m
Third party related life and pensions losses before tax (20) (13)
Total EEV profit before tax - 100 1 Included within life and pensions look through profits before tax is £14m of profits in relation to some Sigma mutual funds business, which is now sold and administered through our UKFS Standard Life Savings business and which has been included for the first time as covered business within the 2008 UK life and pensions EEV. Previously, this Sigma mutual funds business was non-covered business and was sold and administered through our Investment business.
2 The £93m non-operating loss item for the 12 months to 31 December 2008 includes a loss of £90m from the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc as described in Note3.8 of the IFRS financial information. This consists of a loss of £51m, relating to the fair value movements of assets brought directly on to the balance sheet, which is included within IFRS underlying profit but which has been excluded from IFRS normalised underlying profit, and a loss of £39m which has been excluded from IFRS underlying profit. £3m relates to CIP.
Opening adjustments relate to the transfer of mutual funds from non-covered to covered business. These adjustments impacted the opening PVIF in covered business by £32m (2007: £32m) and the opening net assets in non-covered business by £nil (2007: (£13m)).
2.8 Reconciliation of EEV net assets to IFRS net assets 12 months to 31 December 2008 £m 12 months to 31 December 2007 £m
Net assets on an IFRS basis 3,407 3,282 1 This adjustment reflects the removal of accounting differences for the Canadian subordinated liability as explained in Note 2.1 – Basis of preparation.
Contribution from in-force business: Expected return on existing business (1) 33 32 280 312
Transfer back of surplus to Standard Life Investments (33) - (33) - (33)
www.standardlife.com 63 12 months to 31 December 2007 Free surplus £m
Contribution from in-force business: Expected return on existing business - 26 26 262 288
Expected return transfer to net worth 552 (38) 514 (514) -
Transfer back of surplus to Standard Life Investments (25) - (25) - (25)
Transfer back of mutual funds net worth 11 - 11 - 11
Contribution from in-force business: Expected return on existing business (1) 3 2 207 209
Expected return transfer to net worth 383 (1) 382 (382) -
www.standardlife.com 65 12 months to 31 December 2007 Free surplus £m
Expected return transfer to net worth 392 (1) 391 (391) -
Contribution from in-force business: Expected return on existing business - 30 30 50 80
Transfer back of surplus to Standard Life Investments (3) - (3) - (3)
Contribution from in-force business: Expected return on existing business - 25 25 38 63
Expected return transfer to net worth 93 (35) 58 (58) -
Actuarial gains on defined benefit pension schemes 14 - 14 - 14
Notes to the EEV financial information continued 2.9 Analysis of covered business EEV PVIF and net worth movements (net of tax) continued
(d) Europe and Asia Pacific 12 months to 31 December 2008 Free surplus £m
Contribution from in-force business: Expected return on existing business - - - 18 18
Expected return transfer to net worth 67 (2) 65 (65) -
2 1.64% in 2007. The rate in subsequent years is based on a moving 30 year bond yield less a variable deduction. 3 Excludes corporate bond returns on annuities. For annuities in UK equity holder funds, the overall investment return, after allowing for assumed defaults, is 5.53% for annuities that are level or subject to fixed escalations and 4.58% for annuities where escalations are linked to a price index.
Risk discount rates – in-force business 1 Using the value of in-force business as weights, the weighted average risk margins for the UK and Europe were 3.4% and 3.2% respectively.
Notes to the EEV financial information continued 2.12 Principal economic assumptions – deterministic calculations – covered business continued
Apart from the reduction arising from the reinsurance of UK annuity liabilities, the impact of the other changes in risk discount rates has been included in the effect of economic assumption changes shown in Note 2.2(a). The amounts within these totals that relate to the changes in risk discount rates are for UK: profit £172m, for Europe: profit £31m and for Canada: profit £74m.
(c) Risk discount rates – new business 12 months to 31 December 2008
Risk discount rates – new business 1 As the new business contribution is calculated using start of period economic assumptions, the risk free rates shown here represent market yields at 31 December 2007. 2 Using the value of in-force business as weights, the weighted average risk margins for the UK and Europe were 2.8% and 2.9% respectively.
Notes to the EEV financial information continued 2.13 Principal economic assumptions – stochastic calculations The level of the TVOG is generally calculated by an economic scenario generator (ESG) which projects the relevant fund under a large number of different future economic scenarios. A detailed description of the methodology applied in the relevant funds is provided in Note 2.16.
Inflation This variable is calibrated using the yields obtained on inflation swaps.
The principal correlations in the ESG are between equity, bond and property returns. These correlations are targeted to be of the following order: Equity/property = 0.2•
Average to 31 December 2.15 Sensitivity analysis – economic and non-economic assumptions The tables below show the sensitivity of the embedded value and the NBC to different scenarios.
The sensitivities tested were: 1% increase and decrease in the risk discount rates•
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.)•
EEV results assuming only prescribed minimum capital (where economic capital has been used in the EEV calculations)•
New business contribution: 12 months to 31 December 2008 UK £m
Those elements of Wrap business that are contained within a long-term product wrapper i.e. Bonds, SIPPs and mutual funds•
Asia Pacific covered business consists of: The Group’s share of results in the joint venture, HDFC Standard Life Insurance Company Limited (during 2008: 26%; • 2007: started the year at 17.4% and ended the year at 26% shareholding)
The Group’s share of results in the joint venture, Heng An Standard Life Insurance Company Limited (during 2008: 50%; • during 2007: 50% shareholding)
Notes to the EEV financial information continued 2.16 EEV methodology continued Risk discount rates continued
Canada – the level of required capital is taken as 150% of minimum continuing capital and surplus requirements (MCCSR)•
UK and Europe – HWPF The main source of TVOG in the Group EEV arises from the HWPF. Under the terms of the Scheme, equity holder cash flows from the HWPF are held back if required to cover HWPF liabilities on the Financial Services Authority realistic or regulatory basis. This option for the UK, Germany and Ireland results in the loss of cash flows when the HWPF has insufficient assets to pay guaranteed policy benefits. The main options and guarantees within the HWPF in respect of UK and European business relate to with profits business and include minimum guaranteed rates of return.
The value of the TVOG arising from the HWPF at any point in time will be sensitive to: The level of the residual estate (working capital in the HWPF)•
The investment profile of the assets backing the applicable policies, the residual estate and non profit business in the fund • at the time the TVOG is calculated
Changes in management actions, including the dynamic guarantee deductions, are allowed for according to the particular • economic scenario, such actions being expected to be consistent with the way that the HWPF will be managed in future as described in the Scheme and in the Principles and Practices of Financial Management (PPFM)
Canada The main options and guarantees within the Canadian business are in respect of minimum investment returns, guaranteed maturity and death benefits, and vested bonuses, which apply to certain investment and insurance contracts.
Details of the assumptions used for this reporting period are provided in Note 2.12.
In determining future expenses in relation to covered business, no allowance has been made in the EEV or the NBC for any allocation of Group Corporate Centre costs.
Pension scheme deficits have been included in accordance with International Accounting Standard (IAS) 19 Employee Benefits. IFRIC 14, IAS 19 The limit on a defined benefit asset, minimum funding requirements and their interaction was adopted by the Group from 1 January 2008. The interpretation provides guidance on assessing the limit in IAS 19, Employee benefits on the amount of the surplus that can be recognised as an asset and explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. The interpretation has been taken into consideration in determining the treatment of the surplus arising in respect of the UK defined benefit plan.
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
Pensions vesting under other group contracts and individual pensions are included as new business•
Present value of new business premiums (PVNBP) New business sales are expressed as the PVNBP. The PVNBP calculation is equal to total single premium sales received in the period plus the discounted value of regular premiums expected to be received over the term of the new contracts, and is expressed at the point of sale. The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate NBC, except that the PVNBP is discounted using the relevant opening risk free rate rather than the risk discount rate.
The liabilities in respect of the UK subordinated guaranteed bonds and Mutual Assurance Capital Securities plus the subordinated debt issued by the Canadian companies form part of covered business and have been deducted at market value within the EEV. The Canadian subordinated liability is owned by a non-covered subsidiary of the Group, where the asset is valued on an amortised cost basis. Total Group EEV has been adjusted to exclude the difference between the market value and the amortised cost value of the Canadian subordinated liability.
Change in liability for third party interest in consolidated funds (598) (78)
Underlying profit before tax attributable to equity holders of Standard Life plc
Underlying profit before tax attributable to equity holders and adjusted items 71 825
Tax credit attributable to: Total tax credit attributable to equity holders’ profits 159 67
Underlying profit is calculated by adjusting the profit for the period for volatility that arises from different International Financial Reporting Standards (IFRS) measurement bases for liabilities and backing assets, volatility arising from derivatives that are part of economic hedges but do not qualify as hedge relationships under IFRS, restructuring costs, significant corporate transaction expenses, impairment of intangible assets and profit or loss arising on the disposal of a subsidiary, joint venture or associate. The Directors believe that, by eliminating this volatility from equity holder profit, they are presenting a more meaningful indication of the underlying business performance of the Group.
Capital and reserves attributable to equity holders of Standard Life plc 3,407 3,282
Summary IFRS consolidated statement of recognised income and expense For the year ended 31 December 2008 £m £m
Equity movements attributable to third party interest in consolidated funds 22 -
Aggregate equity holder tax effect of items not recognised in income statement (42) -
Cash and cash equivalents at the end of the year 9,951 9,120
Summary IFRS consolidated cash flow statement For the year ended 31 December 2008
Healthcare Healthcare primarily provides insurance cover to customers for medical expenses, accident and sickness.
Banking Banking offers a range of retail mortgage and deposit products via online and telephone operations.
Other Other includes primarily the Group Corporate Centre and the Shared Service Centre.
Depreciation of property, plant and equipment 4 - - - 6 - 10
Total revenue from external customers 8,943 267 185 706 12 - 10,113
Share of profits from associates and joint ventures 161 10 6 - 4 - 181
The Scheme of Demutualisation of The Standard Life Assurance Company (the Scheme) provides that certain recourse cash flows arising in the Heritage With Profits Fund (HWPF) on specified blocks of UK and Irish business may be transferred out of that fund and thus accrue to the ultimate benefit of equity holders in the Company. Under the Scheme such transfers are subject to certain constraints in order to protect policyholders. If the recourse cash flows result in a negative amount, then the shareholder fund will make a transfer to the HWPF of at least that negative amount. The Scheme also provides for additional expenses to be charged by the Proprietary Business Fund (PBF) to the HWPF in respect of German branch business.
The expected future value of the recourse cash flows on UK and Irish non-participating contracts is not recognised either in the measurement of non-participating liabilities or in the unallocated divisible surplus. For regulatory reporting purposes the realistic valuation includes an adjustment to reflect the expected future value of cash flows due to equity holders. This is excluded from the International Financial Reporting Standards (IFRS) valuation. As these defined cash flows arise they contribute to equity holder profit.
The life and pensions segment profit comprises the following: £m £m
Recourse cash flows arising on UK and Irish non-unitised contracts 124 296
Additional expenses charged on German unitised with profits contracts 39 59
The life and pensions segment result is shown before deduction of tax attributable to policyholders’ returns of (£334m) (2007: £111m).
Investments in associates and joint ventures 2,895 3 15 - 185 - 3,098
Investments in associates and joint ventures 3,740 106 45 - 255 - 4,146
Capital expenditure incurred during the year on: Notes to the IFRS financial information continued
Revenues are allocated based on the country in which the contracts are issued or products are sold. Total assets and capital expenditure are allocated based on where the contracts or products to which they relate are issued or sold.
Capital expenditure on intangible assets, deferred acquisition costs and property, plant and equipment £m
Restructuring costs incurred during the year of £73m (2007: £31m) include £24m of costs associated with the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc (see below). In addition, restructuring costs include £46m of expenses in relation to the Group’s Continuous Improvement Programme (CIP), mainly in relation to consultancy costs and process improvement projects (2007: £9m) and other restructuring costs of £3m (2007: £4m). The restructuring cost for the year ended 31 December 2007 also includes £18m relating to the proposed acquisition of Resolution plc.
Other administrative expenses include £102m (2007: £nil) related to an expense incurred in respect of a unit linked fund, the Pension Sterling Fund. In January 2009 the value of units in that fund was reduced to reflect reductions in the market value of certain instruments held by the fund. In February 2009, in order to put customers invested in that fund back into the position they would have been before the valuation adjustment, the Group injected cash into the fund. As the circumstances that led to the cash injection had been in existence prior to the year end, the cost has been accrued within other administrative expenses for the year ended 31 December 2008.
96 www.standardlife.com 3.4 Tax (credit)/expense The tax (credit)/expense is attributed as follows: £m £m
The share of tax of associates and joint ventures is £3m (2007: £4m) and is included above the line ‘(Loss)/profit before tax’ in the consolidated income statement in ‘Share of profits from associates and joint ventures’.
Adjustment to tax credit in respect of prior years (21) (3)
Deferred tax: Deferred tax credit arising from the current period (743) (229)
Profit attributable to equity holders of Standard Life plc (£m) 100 465
Weighted average number of ordinary shares for diluted earnings per share (millions) 2,180 2,177
Underlying profit before tax attributable to equity holders 71 3.3 825 38.6
Tax credit attributable to: Loss/(profit) attributable to minority interest 83 3.8 (111) (5.2)
Profit attributable to equity holders of Standard Life plc 100 4.6 465 21.7 3.7 Dividends The Company paid a final dividend of 7.70 pence per share (final 2006: 5.4 pence) totalling £168m in respect of the year ended 31 December 2007 on 30 May 2008 (final 2006: £114m) and an interim dividend of 4.07 pence per share (interim 2007: 3.80 pence) totalling £89m (interim 2007: £83m) in respect of the year ended 31 December 2008 on 28 November 2008.
These components are apportioned in arriving at the amount of participating contract liabilities and unallocated divisible surplus as follows: £m £m
(a) Insurance contract liabilities, participating investment contracts and reinsurance assets continued
Due to a change in the estimate of the amount required to compensate the HWPF for tax payable on certain income items participating contract liabilities reduced by £75m, which is reflected within the change in non-economic assumptions above. There was a related increase of £14m in the tax expense attributable to equity holders’ profits.
Economic experience changes in the year reflect lower than anticipated investment returns during the year.
Effect of changes in: Effect of: Total change in contract liabilities (1,090) (85) (1,161) (2,336) 311 (2,025)
3.9 Annuity reinsurance On 14 February 2008 Standard Life Assurance Limited (SLAL), a wholly owned subsidiary of the Company, reinsured a portfolio of annuity contracts held within its Heritage With Profits Fund (HWPF) with Canada Life International Re (the reinsurer), a reinsurer not related to the Company.
Prior to this SLAL had transferred the longevity risk in respect of these contracts to Standard Life Investment Funds (SLIF), a wholly owned subsidiary of SLAL, by a reinsurance agreement. SLIF had in turn retroceded certain of its obligations under this reinsurance agreement back to SLAL’s Proprietary Business Fund (PBF) by a separate reinsurance agreement. On 14 February 2008 SLAL recaptured from SLIF its obligations in respect of the annuity contracts which were then reinsured to the reinsurer. The amount payable by SLIF to the HWPF related to this recapture was determined such that the economic benefits arising from entering into the reinsurance agreement with the reinsurer were shared equally between the HWPF and the Company.
In order to limit counterparty credit exposure, the reinsurer was required to deposit back an amount equal to the reinsurance premium of £6.3bn (referred to as ‘the deposit’). Interest is payable on the deposit at a floating rate. The liability to repay the deposit is presented in ‘Deposits received from reinsurers’. In respect of this arrangement SLAL holds a ring fenced pool of assets. These assets are presented in the relevant balance sheet line items. The value of these assets is periodically compared to the amount of the required reserves for the reinsured liabilities. Any excess or shortfall in the value of the assets is then paid to or made up by the reinsurer by way of repayment of deposit or the making of a further deposit when required under the reinsurance treaty. The treaty also contains the requirement for the payment or receipt of Premium Adjustments, a term defined in the treaty, to ensure that the investment risk on the ring fenced pool of assets falls on the reinsurer. They are calculated periodically under the treaty as the difference between the value of the ring fenced assets and the deposit amount. If the Premium Adjustment is payable to the reinsurer, the reinsurer is required to deposit a corresponding amount into the deposit. If the Premium Adjustment is payable to SLAL a corresponding amount is repaid from the deposit. A floating charge over the ring fenced pool of assets has been granted to the reinsurer.
The impact of this transaction at the transaction date was to increase profit before tax by £105m, being the release of the component of the liability for reinsured contracts held outside the HWPF offset by the payment to the HWPF from SLIF under the recapture arrangements.
The Group has issued certificates of deposit through its subsidiary Standard Life Bank plc (Standard Life Bank). The Group has also issued commercial paper and medium term notes through Standard Life Funding B.V. a wholly owned subsidiary of Standard Life Bank. Standard Life Bank has guaranteed the liabilities of its subsidiary in relation to the issuance of this debt. The guarantee is in respect of notes issued and is for a maximum of US$2bn and €4bn in relation to the US commercial paper and Euro commercial paper programmes respectively, and €4bn in respect of the medium term note programme. This guarantee is internal to the Group and is considered a financial guarantee contract under IAS 39 Financial Instruments: Recognition and Measurement .
Standard Life Bank certificates of deposit – GBP 4.13% 6.28% 228 989
Standard Life Funding B.V. commercial paper – GBP 6.20% 6.61% 144 240
Standard Life Funding B.V. commercial paper – USD - 5.51% - 139
Standard Life Funding B.V. commercial paper – EUR 5.26% 4.99% 84 313
Standard Life Funding B.V. medium term notes – GBP - 6.38% - 4
Standard Life Funding B.V. medium term notes – EUR 4.10% 5.03% 117 89
Lothian Mortgages No. 2 plc – GBP – Maturity 2038 - 6.69% - 202
Lothian Mortgages No. 2 plc – USD – Maturity 2038 - 5.53% - 34
Lothian Mortgages No. 4 plc – GBP – Maturity 2040 6.25% 6.56% 571 571
Lothian Mortgages Master Issuer plc – USD – Maturity 2028 0.61% 5.05% 59 122
Lothian Mortgages Master Issuer plc – GBP – Maturity 2050 6.25% 6.58% 381 381
In the ordinary course of business, Standard Life Trust Company enters into agreements, which contain guarantee (i) provisions for clearing system arrangements related to investment activities. Under such arrangements, the company, together with other participants in the clearing systems, may be required to guarantee certain obligations of a defaulting member. The guarantee provisions and amounts vary based upon the agreement. The company cannot estimate the amount, if any, that may be payable upon default. To facilitate its participation in the clearing system Standard Life Trust Company has provided as security a bank credit facility to a maximum of Canadian $84m.
Under the Financial Services Compensation Scheme (FSCS), which covers business conducted by firms authorised by the (ii) Financial Services Authority, consumers can claim compensation where a firm is unable to pay claims against it. These costs are levied on the industry by the FSCS with each firm’s contribution calculated based on the tariff base of the relevant sub class of financial activities it undertakes. Each sub class meets the claims in their class up to an annual threshold. During 2008, FSCS involvement was triggered to protect deposits in several firms and maintain market confidence. At 31 December 2008, a provision is recognised in respect of Standard Life Bank in relation to potential compensation levies due under the FSCS based on FSA guidance issued to the British Bankers Association on 31 December 2008 and subsequently updated on 4 February 2009. This provision is intended to cover the management expense levies for 2008/09 and 2009/10 in relation to interest and other costs incurred on the loans taken out by the FSCS to recompense savers with banks which defaulted during 2008. Uncertainty exists over the total market FSCS levies and therefore the Standard Life Bank proportion to provide for, which will be dependent on the period of recovery, FSCS funding costs and potential capital write-offs.
Capital can be measured on a number of different bases, which are set out in the Business review Section 1.7– Capital and cash generation. The capital statement shows capital based on definitions used for regulatory reporting purposes.
The capital management policy forms one pillar of the Group’s overall management framework. Most notably, it operates alongside, and complements, the strategic investment policy and the Group risk policy. By integrating policies in this way, the Group is working towards a capital management framework that robustly links the process of capital allocation, value creation and risk management.
The FSA requires all insurance companies and financial conglomerates to maintain capital resources in excess of their capital resources requirement (CRR). Capital resources include the assets in excess of liabilities, valued on a regulatory basis, and certain other components of capital. Certain items that are classified as liabilities under IAS 32 Financial Instruments: Disclosure and Presentation are treated as capital under the regulatory basis. For the Group this applies to its subordinated guaranteed bonds, subordinated notes and mutual assurance capital securities. The CRR represents the total of the individual capital resources requirements (ICRR) of each regulated company in the Group.
Any surplus within the PBF is attributable to equity holders. Capital within the PBF may be made available to meet requirements elsewhere in the Group subject to meeting the regulatory requirements of the fund and any further restrictions imposed by the Scheme.
Held outside life assurance funds - - 1,034 1,034 1,075 2,109 652 2,761
Held within life assurance funds - 646 - 646 - 646 - 646
Equity attributable to ordinary equity holders of Standard Life plc - 646 1,034 1,680 1,075 2,755 652 3,407
Total other non-participating liabilities 10,568 2,015 - 12,583 7,054 19,637 163 19,800 * Capital resources amounting to £2m (2007: £1m) in respect of other with profits funds are disclosed within the Heritage With Profits fund column shown above.
Changes to the valuation of contract liabilities 5,228 39 - 5,267 (99) 5,168 - 5,168
Exclusion of deferred acquisition costs and other inadmissible assets (180) (432) (275) (887) (56) (943) (21) (964)
Total available capital resources to meet regulatory requirement 6,158 54 3,047 9,259 1,149 10,408 555 10,963
Participating contract liabilities amounting to £238m (2007: £115m) relating to the new with profits funds created at demutualisation are disclosed within the Heritage With Profits Fund column.
Notes to the IFRS financial information continued 3.12 Capital statement continued
SLAL’s regulatory solvency position is determined using the FSA’s ‘twin peaks’ approach, which requires liabilities to be valued on both a realistic and a regulatory basis. The realistic basis removes some of the margins for prudence included in calculations under the regulatory basis. However, it requires discretionary benefits that are not considered under the regulatory basis, such as final bonuses, to be valued. The extent to which the realistic peak is more onerous than the regulatory peak, increases the amount of the CRR.
Based on draft regulatory returns at 31 December 2008, SLAL had available capital resources of £6.0bn (2007: £9.3bn) and a CRR of £2.2bn (2007: £4.9bn). The capital resources shown in the capital statement are based on the value of assets and liabilities valued on a regulatory basis, however, the CRR reflects the higher value required as a result of the application of the realistic peak.
Capital subject to constraints for the UK regulated life business of £3.6bn at 31 December 2008 (2007: £6.6bn) represents capital resources held within long-term business funds, or, in relation to other regulated entities, the amount of the CRR.
Standard Life Bank is owned by SLAL and therefore its capital resources are included within life business shareholders’ funds. Standard Life Bank’s capital resources of £541m (2007: £489m) exceed its CRR of £358m (2007: £363m) by £183m (2007: £126m), and the excess can therefore be used to meet the requirements of the life assurance business.
At 31 December 2008, capital resources of £558m (2007: £555m) and capital subject to constraints of £134m (2007: £116m) relate to the Group’s healthcare, investment management businesses and Group Corporate Centre activities.
The Group must also calculate a group solvency position under the Financial Groups Directive (FGD). The FGD calculation is a very prudent aggregate value for the Group’s capital resources, because capital held within the long-term business funds of approximately £3.2bn (2007: £6.2bn) is restricted to the level of the CRR of those funds of approximately £1.7bn (2007: £4.4bn). Therefore, the Group recognises no net surplus in respect of capital within the long-term business funds.
Change in assumptions used to measure life assurance contract liabilities and experience differences 81 26 - 107 (55) 52 - 52
Change in assumptions used to measure life assurance contract liabilities and experience differences 331 (88) - 243 2 245 - 245
Shareholder/inter-fund transfers include the transfer of £367m (2007: £674m) from the HWPF to the Shareholder Fund in respect of the recourse cash flows for UK and Ireland and £39m (2007: £59m) to the PBF in relation to additional expenses charged on German unitised with profits business. In addition, £338m (2007: £209m) was transferred from the Shareholder Fund to the PBF.
110 www.standardlife.com 3.13 Event after the balance sheet date On 13 October 2008 the UK Government announced the details of the 2008 Credit Guarantee Scheme for UK incorporated banks and building societies debt issuance. The Credit Guarantee Scheme forms part of the Government’s measures to ensure the stability of the financial system. The Credit Guarantee Scheme provides for HM Treasury to guarantee specific bank and building society debt instruments issued during the period beginning from the announcement of the Credit Guarantee Scheme and ending on 31 December 2009. Debt instruments which are guaranteed under the Credit Guarantee Scheme are required to have a maturity not exceeding three years. Standard Life Bank has applied and become an eligible institution under the Credit Guarantee Scheme. On 11 February 2009 Standard Life Bank launched its Euro Medium Term Note programme under which it can issue debt, including debt covered by the Credit Guarantee Scheme. On 18 February 2009 the Group issued £500m of debt under the Credit Guarantee Scheme, maturing on 25 February 2011, for use in ongoing funding and liquidity management.
www.standardlife.com 113 4.2 Fair value hierarchy of financial instruments To provide further information on the approach used to determine the fair value of financial assets and derivative financial liabilities measured at fair value on the Group’s IFRS balance sheet, the fair value of these financial instruments has been categorised below on an indicative basis to reflect the following fair value hierarchy.
Level 1: fair values measured using quoted prices in active markets for the same instrument (i.e. without modification or repackaging)
Level 1 financial instruments principally include equity instruments listed on a recognised exchange, government and certain supranational institution bonds and exchange traded futures and options.
Level 3 financial instruments principally include unlisted equity instruments, being predominantly interests in private equity funds, listed corporate bonds for which prices are not available from third party pricing providers or where such prices are considered to be stale (including some asset backed securities), unquoted bonds where credit spreads, being a significant input to the valuation technique, are obtained from a broker or estimated internally and credit default swaps.
Supplementary information continued 4.2 Fair value hierarchy of financial instruments continued
www.standardlife.com 115 4.3 Total expenses and operating cost base £m £m
Less one-off costs incurred in 2008 in respect of previous years (6) -
Total opening operating cost base 2006 562 2 years inflation1 34
3 Difference between the growth in the cost base implied by the organic growth calculation and the actual change that has taken place plus realised savings from cost initiatives and other reductions.
4 Movements in the operating cost base which are specifically identifiable and relate to investing for growth or the impact of acquisitions.
The Preliminary Results 2008 are published on the Group’s website at www.standardlife.com The Directors are responsible for the maintenance and integrity of the financial information published on the website in accordance with UK legislation governing the dissemination of financial statements. Access to the website is available outside the UK, where comparable information may be different.
Please remember that the value of shares can go down as well as up and you may not get back the full amount invested or any income from it. All figures and share price information have been calculated as at 31 December 2008 (unless otherwise indicated).