The 2006 Preliminary Results 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.
• New business contribution before tax up 521% to £205m (2005: £33m).
• IFRS underlying profit before tax up 272% to £540m (2005: £145m).
• Heritage With-Profits Fund Residual Estate increased to £1.3bn (2005: £0.5bn).
• Continuous improvement initiatives to deliver additional cost benefits of £100m per annum by 2009.
Financial Highlights 2006 2005 Change New business PVNBP £14,263m £9,675m 47% New business APE £1,734m £1,249m 39% New business contribution £205m £33m 521% PVNBP margin 1.4% 0.4% +1.0% points
EEV operating profit before tax £614m £395m 55% EEV profit before tax £1,022m £770m 33% Diluted EEV operating EPS 20.7p 13.9p 49% EEV £5,608m £5,048m 11% ROEV 8.9% 7.4% +1.5% points
IFRS underlying profit before tax £540m £145m 272% Diluted IFRS underlying EPS 21.8p 5.8p 276% Dividend per share in respect of period since IPO 5.4p - - IFRS profit attributable to shareholders in respect of period since IPO £283m - -
EEV pro forma operating profit for the year ended 31 December
New business contribution In-force business expected return 392 328 experience variance 122 60 assumption changes (58) 37 Other covered (45) (4)
Investment management 38 24 Banking 38 15 Healthcare and general insurance 16 7 Group corporate centre costs (89) (58) Other (5) (47)
UK life and pensions benefited from a substantial increase in new business contribution of 519% to £167m (2005: £27m). This reflects margin improvement in every product group and the significant growth in PVNBP new business volumes of 69% to £11,400m (2005: £6,763m) driven by the success of SIPP, Capital Investment Bonds and TIP, and the impact of A-day on customer activity. EEV operating profit before tax increased by 37% to £372m despite changes in long term assumptions and provisions for lapses of £207m. Although UK life and pensions product lapses continued at levels in excess of long-term trends, net fund flows remained strongly positive and amounted to £3.2bn during 2006. We anticipate the continuation of strong underlying sales momentum in 2007, underpinned by our market-leading service and innovative product offerings coupled with our impressive track record in investment performance.
In our Canadian life and pensions business the focus on margin over volume and the repricing of certain Universal Life products resulted in a turnaround in new business contribution from a loss of £2m in 2005 to a profit of £28m in 2006, which helped EEV operating profit before tax increase 24% to £163m. While we expect market conditions to remain challenging this year, our continued efforts on cost control and the product initiatives undertaken in the second half of 2006 will support steady profitable growth in 2007.
The EEV operating profit before tax from European businesses decreased 15% to £45m reflecting the further investment in product development in Germany and Ireland. Following successful product launches in both countries, we expect to build on the sales momentum we achieved in the second half of 2006.
The Asian life and pensions EEV operating loss increased to £8m (2005: £2m loss) due to the continued expansion of the operations in India and China. These businesses are expected to achieve improved sales in 2007, driven by new product launches, wider distribution and market growth.
Through a disciplined approach to business Standard Life Healthcare more than doubled 2005 IFRS underlying profit before tax. Standard Life Healthcare’s new policy administration system coupled with the launch of a new product proposition is expected to increase sales and reduce operating costs in 2007. The integration of FirstAssist continues to plan with the full benefits being realised in 2008 and thereafter.
EEV increased to £5,608m, equivalent to 258p per share (diluted), driven by the strong operating performance for the year and positive investment return variances. EEV cash generation increased to a £262m inflow (2005: £17m outflow) due to a reduction in new business strain, improved contribution from in-force life business and greater non life profits.
We are recommending the payment of our first dividend of 5.4p a share on 31 May 2007, as indicated at flotation, based on a record date of 30 March 2007. This dividend represents around half of the total dividend that we would have expected to pay if Standard Life plc had been listed throughout the year. Our intention is to pay a progressive dividend which will take account of the long-term earnings and cash flow potential of the Group.
We aim to reduce underlying costs by a further £100m per annum by 2009. It is expected that the phasing of savings will be achieved as follows: in the second half of 2007 £15m, in 2008 a further £70m, and in 2009 an additional £15m. Through efficiency and productivity we can achieve a reduction in the underlying headcount requirement to service our existing levels of business by around 1,000 by 2009. We expect growth and natural turnover to keep involuntary job losses to a minimum. The one-off costs of implementing these savings are expected to be no greater than the annual savings achieved by 2009.
The cost savings are expected to be achieved roughly equally between covered and non-covered businesses. Within the covered business, we expect at least £20m would be capitalised into the EEV in long term maintenance unit cost savings by end 2009 after allowing for approximately 10% of the savings attributable to the with-profits policyholders.
We continue to drive our business forward and have exciting product and market opportunities both in the UK and overseas. Customers’ needs will remain at the forefront of our thinking. Growth will continue to be driven by our strategy of concentrating on higher margin and less capital intensive products delivered with best in class customer service levels and through leadingedge platforms and efficient systems.
We remain on track to meet our 2007 target for return on embedded value of 9-10%, and increasing thereafter.
A presentation to investors and analysts will take place at 9.30am at Merrill Lynch, 100 Newgate Street, London EC1A 1HQ. A
live webcast of the presentation and the presentation slides will be available on the Group’s website, www.standardlife.com. In addition a replay will be available on this website later today.
There will be a conference call for US and Canadian investors and analysts at 3:00pm (UK) hosted by Sandy Crombie, Group
1.1 European Embedded Value (EEV) – Group Summary EEV pro forma income statement
5 Return on embedded value is based on operating profit after tax including notional interest on IPO proceeds where appropriate (notional interest £21m H1, £nil H2, £31m FY 2005), divided by the opening embedded value including the IPO proceeds.
New business contribution increased by 521% to £205m (2005: £33m), consistent with the Group’s focus on improving product margins – see section 1.4.2.2 and the strong growth in sales – see section 1.3.1.
The 2006 closing free surplus is the sum of the actual free surplus attributed to shareholders in respect of life and pensions on demutualisation, the IPO proceeds that were injected into the life and pensions business and the free surplus generated since demutualisation. The 2005 free surplus position reflected the expected free surplus on demutualisation, excluding the IPO proceeds.
Required capital has increased by £13m and the cost of holding this capital remained in line with the previous year. The total required capital still largely relates to Canada (£526m), where all required capital is met by the shareholder. Required capital in the UK and Europe only relates to business written outside the Heritage With-Profits Fund (HWPF). Required capital for relevant pre-demutualisation in-force business continues to be met by the HWPF.
The net assets of the non-covered business are shown on an IFRS basis. The increase in the net asset positions of £659m is largely driven by the IPO proceeds of £567m held centrally. The balance is derived from pre-demutualisation capital transfers from the HWPF, as dictated by the Scheme of Demutualisation, and the results of the 2006 operations.
The pension scheme deficit in 2005 related to both covered and non-covered business. For 2006 the portion of this deficit relating to schemes in Ireland, Germany and Canada, exclusively covering life and pensions staff, has been reallocated to covered business. The remaining deficit shown within ‘Other’ relates to the whole of the UK pension scheme as this covers employees of all the UK operations, not only life and pensions staff.
The UK mark to market of the subordinated debt is no longer disclosed separately and has been reallocated to UK covered business as part of the demutualisation adjustments.
Expected cash flows from existing business increased by £112m to £451m, reflecting the increase in the opening PVIF.
Fee and commission income increased by 45% as fees from investment contracts reflected robust new business sales of investment products and the strong growth in third party funds under management.
Total expenses were down by 18% primarily due to the reduced net change in policyholder liabilities. This was partly offset by an increase in claims paid.
Administrative expenses increased by £41m, up 2% on 2005 because of demutualisation expenses and strong sales growth in the first half of the year. Following demutualisation, a greater portion of new business expenses can be capitalised.
Liabilities Non-participating contract liabilities 71,133 62,087 Participating contract liabilities 39,996 41,008 Third party interest in consolidated funds 961 358
The increase in assets and liabilities was primarily attributable to strong new business flows and positive investment returns. The UK life and pensions insured business had net inflows of £2.3bn (2005: £2.0bn) driven by strong growth in Self Invested Personal Pension (SIPP), Capital Investment Bond (CIB) and Trustee Investment Plan (TIP) products. Together with strong property and equity markets, these contributed to the £9.0bn increase in non-participating investment contract liabilities and related assets.
Other liabilities include £220m (2005: £386m) relating to the Group’s pension obligations. The decrease was the result of additional contributions of £60m and the inclusion of £110m of assets that were previously classed as ‘non-transferable’ financial instruments. The Group is currently implementing a number of steps to manage its pension liability, including additional contributions of £10m every six months.
Asia Pacific life and pensions2 206 101 172% 29 24 55% Discontinued operations – 9 N/A – 2 N/A
1 The 2005 figures have been restated to reflect the inclusion of the non-insured element of SIPP, which has been included in the 2006 figures. The impact was: PVNBP 2006 – £1,218m (2005: £308m); APE 2006 – £129m (2005: £31m). The relevant mutual fund element of the non-insured SIPP new business is also included within the gross and net inflows for investment management new business – see section 1.3.2.
Our strategy of focusing on product innovation has driven 2006 new business sales. We experienced strong sales performance with worldwide PVNBP up 47% and APE up 39%.
The UK had a particularly strong year, driven by single premium business and external factors such as A-Day. Canadian sales were down compared to 2005, as it focused on profitability. Europe experienced a decrease in sales compared to 2005 because of changes in tax legislation in Germany, which inflated sales in 2004 and the early part of 2005. This more than offset the positive increase in Ireland’s APE sales, which were up 35%. Our Asian operations continued to experience strong growth with PVNBP increasing by 172% and APE up by 55%.
We anticipate that our continued focus on strengthening our distribution network, evolving our product offering and building strong customer relationships should provide a recipe for future growth.
* 2006 and 2005 sales include the non-insured element of SIPP see table in section 1.3.1.
Sales of individual pensions fell by 7% to £126m (2005: £135m) as many customers opted for our innovative SIPP offering. Another contributory factor was our decision to close our Executive Pension Plan (EPP) and Individual Buy-out Plan (IBOP) to new business following A-Day.
Strong investment performance, coupled with the availability of an additional 57 external fund links, helped drive investment bond sales and delivered sales growth of 66% to £185m (2005: £112m).
Protection sales volumes have been flat during 2006. We were disappointed by the reversal of the government’s position in respect of pension term assurance (PTA).
1 Total SIPP sales included £129m APE in respect of non-insured SIPP (2005: £31m). Prior year comparatives have been restated accordingly. 2 Trustee Investment Plan (TIP) is designed to meet the needs of trustees of exempt approved occupational pension schemes. This product is sold by Standard Life
We anticipate that market conditions will remain challenging in 2007. Our key focus will be to grow profitability and this aim will be supported by the product and business developments we have undertaken in the second half of 2006.
The decrease in German life and pensions sales was due to changes in domestic tax legislation, which resulted in exceptional new business in the first quarter of 2005. Sales growth improved in the second half of 2006, primarily driven by the success of the employee benefit and smoothed managed fund business. The launch of the new unit-linked product in October was also well received. As the improved product range is sold through a wider group of independent intermediaries, sales in Germany are expected to grow in 2007.
• PVNBP sales decreased by 5% to £1,791m • APE sales decreased by 10% to £166m
Continued investment outperformance drove further mandate wins to record levels and, together with improving equity markets, resulted in Standard Life Investments’ (SLI) third party funds under management increasing by 32% to £38.5bn (2005: £29.1bn) and total funds under management increasing to £132.1bn at the end of 2006 (2005: £118.8bn). Total property funds under management exceeded £13bn, assisted by the Select Property Fund, which was the fastest growing mutual fund in the UK in 2006.
Investment performance was strong, with 87% of pooled pension funds outperforming their respective peer groups over the year. The range of open-ended investment companies (OEICs) and unit trusts enjoyed another very good year with over 70% of the 23 actively managed funds producing above average returns and 52% of them delivering upper quartile performance. Eight out of the 23 OEIC funds obtained a top ten ranking.
Savings balances grew by £34m primarily driven by growth in SIPP cash deposits which increased to £246m (2005: £82m).
1 The percentage change figures quoted are based on the new business of the underlying joint ventures to avoid distortion due to changes in the Group’s shareholding.
• Mortgages under management decreased by 2% to £10.4bn • Gross lending of £3bn down 3% (2005: £3.1bn)
• PVNBP sales increased by 172% to £206m • APE sales increased by 55% to £29m
Standard Life Healthcare’s (SLH) ongoing strategy of writing profitable business in a competitive market resulted in stable sales during 2006. In particular, overall levels of new small and medium size enterprise (SME) business were lower as we concentrated on profitable segments of that market. This was compensated for by an increase in individual business sales, which grew by 27% to £7m (2005: £6m), partly due to the successful launch of the EspritHealth product, aimed at meeting the specific needs of the over 55s age group.
The H1 2006 column contains the results that were published in the Half Year Report 2006, plus those transactions that affected the shareholder results in the period before demutualisation on 10 July 2006, plus any adjustments considered appropriate to arrive at the opening shareholder position on 10 July 2006. Note that the FY 2005 EEV results were calculated assuming that the demutualisation took place on 31 December 2005, but the H1 2006 results assumed that demutualisation took place on 30 June 2006. As a result, previously reported EEV results for 2005 were not directly comparable with the H1 2006 EEV results. To take account of this, a number of adjustments were made to the H1 2006 opening balances.
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 used 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 standard rate of corporation tax appropriate to each territory. While for some territories this rate does not equate to the actual effective rate of tax used in the calculation of after tax profits, it provides a consistent grossing-up basis on 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.
Expected return on free surplus (17) (d) (3) (20) 13 Life and pensions operating profit 287 329 616 454
Non-life and pensions operating profits/(losses) (19) (e) 17 (2) (59) Operating profit before tax 268 346 614 395
Other non-operating items Investment return and tax variances 23 (f) 229 252 187* Effect of economic assumption changes (109) (g) 140 31 232 Mark to market of subordinated debt 107 (h) – 107 (63) Movement in pension scheme deficit – (i) – – 19 Impairment of intangibles (9) (4) (13) –
Volatility arising on different asset and liability valuation bases 19 29 48 –
A number of adjustments were required to arrive at the post demutualisation 10 July 2006 opening position and to ensure consistency of presentation between the periods shown. An explanation of the adjustments made is given in Notes (a) to (j).
(e) This excludes the cost of carry of the subordinated debt charge of £12m transferred to covered business (see note (d)).
(f) A number of adjustments totalling negative £41m were applied prior to 10 July 2006 including the effects of the final Scheme.
(g) Economic assumption changes of £2m relating to the period before 10 July 2006.
Total profit before tax increased by 33% to £1,022m (2005: £770m). The main contributor to this increase was operating profit before tax, which increased by £219m (55%) to £614m. Non-operating profit before tax increased by £33m (9%) to £408m. The latter reflects investment gains in TVOG and higher positive mark to market adjustments in respect of the subordinated debt in H1, offset by smaller changes in economic assumptions.
The attributed tax rate in 2006 was 27% compared to 31% in 2005. This reflects the different mix in profits arising from different territories and business with different tax rates.
Profit after tax increased by 40% to £748m (2005: £535m). This rise is largely driven by the increase in total profit before tax and the reduction in the attributed tax rate as explained above.
Expected return on in-force business is £392m, which is £64m higher than 2005. This increase is attributable to the increase in the opening embedded value at 1 January 2006 compared to 1 January 2005, which offsets the impact of lower risk discount rates over the same period.
Offsetting these positives were short-term lapse provisions and assumption changes of £260m, mainly comprising £49m from Canada and £207m from UK, which includes the £100m increase in provisions for short-term lapse activity that was announced in 30 June 2006 results.
This fell from a positive £13m in 2005 to a negative £20m in 2006. This decrease was due in part to the transfer of £19m for the 2006 full year cost of carry of the subordinated debt from non-covered to covered business.
Non-life operating losses have decreased to £2m (2005: loss £59m). The main drivers of the improvement are higher operating profits from SLB, SLI and SLH, coupled with the transfer of the subordinated debt and its related cost of carry to covered business, and the recognition of non-insured SIPP on an EEV basis rather than an IFRS basis.
Non-operating profit after tax for 2006 increased by 20% to £319m (2005: £265m).
14 Standard Life 1.4.3 Segmental analysis of EEV pro forma operating profit
Pre-tax operating profit increased by 55% to £614m (2005: £395m). The main life and pensions businesses account for £162m of this increase, with UK operating profit increasing by £100m, management of the HWPF TVOG exposure contributing £44m (2005: £nil) and Canada improving its operating profit by £32m. The non-life entities showed an increase of £57m, as a result of moving the cost of carry of the subordinated debt to covered business for 2006, which in 2005 totalled £28m, together with significant increases in the IFRS underlying profits of the main operating subsidiaries – SLI, SLB and SLH, compared to 2005.
Development costs (17) – – – – (17) Expected return on free surplus 11 3 1 (2) – 13 1.4.3.1 UK life and pensions
Experience variances were £90m in 2006 compared with £48m in 2005. The 2006 figure includes mortality profits, mainly arising from annuities, the extension of retirement ages from 50 to 55 as a result of A-Day, as well as enhancements to data and model points as reported at the half year.
NBC in Canada of £28m is £30m higher than 2005. This improvement is largely due to the repricing of some products, a shift to sales of higher margin products and the impact of expense reductions from management actions taken during 2006. It was achieved despite sales of life and pensions products decreasing by 10% (15% in constant currency) to £166m APE (2005: £184m). NBC in 2005 was adversely affected by certain individual life insurance products which generated a loss of £36m, these have now been repriced. There were £5m residual losses related to these products in H1 2006 and no losses for H2 2006.
The increase in the new business margin from 0.9% to 1.2% arises from an improvement in the profitability of Ireland new business, which was assisted by the launch of the Synergy proposition.
Asia Pacific operating losses were higher due to continued expansion in India and China.
There was no impact on operating profit in respect of TVOG in 2005. The £44m arising in 2006 includes £28m, being the net impact of management actions taken to hedge guarantees, offset by increases in the equity backing ratios for with-profits business in the HWPF. A total of £13m arises due to model improvements bringing in the effects of the dynamic guarantee deduction framework, the operation of which was finalised as part of the Scheme of Demutualisation. In addition, the TVOG benefited by £3m from the increases in lapse assumptions.
Operating profit before tax in respect of the Investment management, Banking, Healthcare and general insurance businesses is consistent with the IFRS pro forma underlying profit before tax except that Investment management profits exclude profits from managing the life and pensions business, which are included in the life and pensions operating profit. Section 1.5 provides an analysis of IFRS underlying profit for these entities.
Group corporate centre costs increased by 53% to £89m (2005: £58m) – see section 1.5.2.7.
Before demutualisation on 10 July 2006, the Standard Life Group was a mutual organisation operated for the benefit of its with-profits policyholders. The statutory accounts of the Group recorded neither a profit nor a loss on the operations of its long-term business because, under the mutual structure, all surpluses from the business accrued to the benefit of with-profits policyholders through bonuses declared or through transfers to the unallocated divisible surplus.
It should be noted that this information is unaudited and is prepared for illustrative purposes only and, because of its nature, addresses a hypothetical situation. It does not represent the Group’s actual financial position or results. The methodology used to derive the pro forma profit figure is consistent with that used in the Company’s Prospectus issued in June 2006 and is derived by first calculating a Historical Financial Information (HFI) result and then adjusting for certain items. The basis of preparation of the HFI and pro forma results is discussed in more detail – see section 1.5.3.
In comparing the actual results for the period after demutualisation to that of the pro forma results for the periods before demutualisation, it is important to consider that the pro forma results include certain assumptions and estimations which may differ from the actual results arising in the post demutualisation environment. The main areas of difference relate to the fund structure in which new business is written after demutualisation, the treatment of immediate annuities in the UK and Ireland and the method used to calculate profit on German business. These are described in more detail in the basis of preparation – see section 1.5.3.
Life and pensions: Total life and pensions 243 254 497 175
Profit attributable to minority interest 52 60 112 83 Underlying profit before tax attributable to equity holders and adjusted items 302 350 652 228 Adjustments for the following items: Volatility arising on different asset and liability valuation bases (43) 68 25 59 Impairment of intangibles (9) (5) (14) –
Tax attributable to: Profit for the period 236 343 579 248 Basic earnings per share (EPS)2 10.6p 11.9p 22.5p 6.0p 1 The figures which were reported in the Half-Year Report 2006 have been adjusted to reflect the trading period from 1 July to 10 July 2006 and to reclassify items which we previously classed as non-covered in ‘Other’ to UK life and pensions. This treatment is consistent with the pro forma reconciliation of group underlying profit to profit for the period in section 3.
UK life and pensions IFRS pro forma underlying profit before tax has increased to £230m for 2006 (2005: £16m).
The IFRS underlying profit from life and pensions is determined mainly by the Recourse Cash Flow (RCF), i.e. the amount that can be transferred from the HWPF to the shareholder fund based on regulatory cash flows determined by rules of the Scheme of Demutualisation, and to a lesser extent by the strain of writing new business, adjusted for Deferred Acquisition Costs (DAC) and Deferred Income Reserve (DIR).
IFRS underlying profit before tax of £110m for the period 10 July to 31 December 2006 includes £23m relating to a one-off reserve release in respect of deferred annuities.
The IFRS pro forma underlying profit excludes the impact of volatility, which arises as a result of the subordinated liabilities being measured at amortised cost, while the assets are measured at fair value.
Pro forma underlying profit excludes the impact of volatility arising in Canada on non-linked investment contracts. The volatility arises because policyholder liabilities, associated with a portfolio of assets measured at fair value, are measured at amortised cost.
IFRS pro forma underlying profit before tax generated by the Europe life and pensions branches was £108m (2005: £73m). This represents an increase of 48%. The German branch contributed £105m (2005: £80m) while the Ireland branch achieved an overall profit of £3m (2005: loss £7m).
IFRS underlying profit before tax of £51m for the period 10 July to 31 December 2006 compares to £57m for the pre-demutualisation period.
IFRS pro forma underlying profit before tax increased by 50% to £66m (2005: £44m). The increase was driven by fee and commission income due to the growth of funds under management (FUM).
3 Sum of net investment management revenue and net investment return excluding interest received of £5m (2005: £5m)/average monthly funds under management.
Excluding the volatility in respect of non-qualifying economic hedges, IFRS pro forma underlying profit before tax increased by 58% to £38m (2005: £24m).
Cost to income ratio2 61% 71% Interest margin3 74bps 63bps 1 Net interest income measures the difference between total interest income earned and the cost of funding. 2 Cost to income ratio is the measure SLB uses to determine the success of its cost savings initiatives and is calculated on an underlying basis as the ratio of total costs to total income for the year expressed as a percentage.
3 Interest margin measures the amount of interest margin being generated by SLB’s assets and is calculated as a percentage of average total interest bearing assets during the year and quoted in basis points (bps) – 1/100ths of 1%.
Group corporate centre (GCC) costs increased by 53% to £89m (2005: £58m). This was due to the significant additional costs associated with the transition to a public listed company. One of the key targets of the Group in 2007 is to maintain GCC costs at 2005 levels – offsetting the increase in additional costs that resulted from the move to being a listed company.
‘Other’ increased to £12m (2005: loss of £47m) due to the 2005 figure including non-covered business as detailed in 1.4.3. For 2006 this has been included within the life and pensions underlying profit figures. In addition the period from 10 July to 31 December 2006 includes income of £18m in relation to assets held by the Group’s holding company, Standard Life plc.
Basis of preparation – Pro forma period 1 January 2006 to 10 July 2006 and FY 2005
The pro forma results for the period from 1 January 2006 to 10 July 2006 and FY 2005 have been prepared on a consistent basis. Due to the nature of the adjustments made to the IFRS mutual figures, pro forma profit figures are not directly comparable and may differ from the actual results had the Group demutualised at the beginning of those periods.
22 Standard Life 1.5.3 Derivation of pro forma underlying profit and additional basis of preparation information (continued)
To provide shareholders with some level of comparison of the performance of the Group, the IFRS mutual results have been restated as if the Group had been headed by a proprietary company during the above periods. This restatement process was first carried out for the Standard Life plc Prospectus issued in June 2006 which provided financial information on a Historical Financial Information (HFI) basis and on the pro forma basis.
The income statement in the HFI results has been prepared to show those proportions of the transfers made to the unallocated divisible surplus which would have been attributable to shareholders and with-profits policyholders had the Group been owned by shareholders under the terms of the Scheme during the two accounting periods.
The profit/(loss) attributable to shareholders comprises five components: (a) The transfer of assets between shareholders and policyholders that would have arisen under the Scheme in respect of the UK and Irish unitised with-profits and non-participating business, i.e. the resource cash flows.
(c) The profits attributable to the operating subsidiaries which, under the Scheme, transfer to SLAL’s Shareholder Fund or the Proprietary Business Fund through the RCF.
(e) In relation to annuities, the amount attributable to shareholders represents the profit or loss resulting from the difference between actual mortality experience and the mortality reserving assumptions used to determine the reinsurance premium received by Standard Life Investment Funds Limited (SLIF) from the HWPF.
It should be noted that in relation to immediate annuities post-demutualisation, the profit that is attributable to shareholders results from the difference between actual mortality experience and the mortality reserving assumptions used to determine the reinsurance premium paid to SLIF by the HWPF. For the purposes of the pro forma results prior to demutualisation, the result of the annuity business was allocated between policyholders and shareholders according to a basis that was similar to that used for other conventional non-insurance business, with allowances made for the different actual and assumed administration expenses and the movements in mathematical reserves held in respect of future administration expenses.
An element of the IPO proceeds is used to support the capital adequacy of the Group. An amount of £750m of the proceeds was assumed to be used within the Group for capital adequacy purposes (after the payment of £50m to the UK Standard Life Staff Pension Scheme). The pro forma income statement includes additional investment income to reflect a return achieved on gilts during the period. The return on the remaining estimated IPO proceeds of £500m is not shown in the pro forma income statement and has been estimated to be £11m before tax based on the rate of return on gilts (4.40%). Post-demutualisation, investment return on the full £1.3bn IPO proceeds is recognised.
The reserving strain arising from new unitised with-profits business (excluding increments) has changed post-demutualisation. This business is written in the Proprietary Business Fund (and the with-profits element is transferred to a new with-profits fund), and therefore is attributable to shareholders.
The Financial Groups Directive defines the Group as a financial conglomerate. Capital resources and requirements are consolidated within the Group on this basis with the dual aims of maintaining confidence in the business through regulatory strength and creating shareholder value.
At the end of 2006, the ratio of the Group’s capital to its regulatory capital requirements stood at approximately 175%.
Other non-operating items Long-term investment return and tax variances 229 Effect of economic assumption changes 140 Impairment of acquired intangible assets (4) Restructuring expenses (12) Volatility arising on different asset and liability valuation bases 29 Profit before tax 728
EEV consolidated income statement For the period 10 July 2006 to 31 December 2006 26 Standard Life
EEV operating profit after tax attributable to equity holders of Standard Life plc (£m) 248
Diluted EPS (pence) 11.4 Weighted average number of ordinary shares on a diluted basis (millions)* 2,173 * Includes the full dilutive effect of bonus shares committed to at the time of the demutualisation of The Standard Life Assurance Company and the flotation of Standard Life plc and share awards and share options.
EEV consolidated statement of recognised income and expense For the period 10 July 2006 to 31 December 2006
EEV earnings per share For the period 10 July 2006 to 31 December 2006 27Standard Life
Present value of in-force 3,480 3,163 Cost of required capital (263) (282) Total embedded value of covered business 2.2(c) 4,499 4,183
Healthcare and general insurance 119 120 Group corporate centre 553 371
UK pension scheme deficit (140) (197) Total net assets of non-covered business 1,109 812
Equity Share capital 210 202 Share premium reserve 799 615 Other reserves 1,869 1,650 EEV reserves 2,730 2,528 Total equity* 5,608 4,995 * Embedded value equity per share is 258p as at 31 December 2006 compared to 239p as at 10 July 2006 based on diluted share totals of 2,177m as at 31 December 2006 and 2,094m as at 10 July 2006.
2.1 Basis of preparation The European Embedded Value (EEV) basis results have been prepared in accordance with the EEV Principles and Guidance issued in May 2004 by the CFO Forum of European Insurance Companies and the Additional Guidance issued in October 2005. EEV reports the value of business in-force based on a set of best estimate assumptions, allowing for the impact of uncertainty inherent in future assumptions, the cost of holding required capital and the value of free surplus. The total profit recognised over the lifetime of a policy is the same as under International Financial Reporting Standards (IFRS), but the timing of recognition of profits is different.
The EEV results have been calculated on the basis that demutualisation took place before the start of the period, and therefore the net capital raised from the flotation has been reflected. The post-demutualisation structure is in place for the period.
EEV includes the net assets of the businesses that are owned by shareholders 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 shareholders under the Scheme of Demutualisation (the Scheme) or from sales of new business since 10 July 2006.
A detailed description of EEV methodology is provided in note 2.15.
• Those elements of Wrap business that are contained within a long-term product wrapper i.e. bonds, SIPPs and mutual funds.
Investment return and tax variances 142 6 55 – 26 229 Effect of economic assumption changes 159 14 (36) – 3 140
An analysis of profit after tax by territory is provided in note 2.10.
The principal effect of determining the pre-tax results using the standard rate of tax compared to the actual effective rate is to increase the Effect of economic assumption changes by £46m (UK £45m, Europe £1m), arising from the impact of investment related increases in the value of the tax effects that have been assumed to arise as a result of funding HWPF transfers out of unallocated surplus.
Capital injections/(dividends) 7 (7) – – – – Transfers (to)/from non-covered business (73) – – 2 – (71)
Transfers (to)/from non-covered business from UK life and pensions include £60m transferred to the UK pension scheme, and £13m transferred to Standard Life Savings, the mutual funds and Wrap company.
UK Europe Canada Other HWPF TVOG Total £m £m £m £m £m £m
The opening EEV at 10 July 2006 has been determined in accordance with the provisions of the Scheme and reflects that part of the net proceeds raised as part of the Initial Public Offering (IPO) which has been allocated to covered business. This amount was £737m and is included within UK life and pensions.
2.3 Analysis of new business contribution The following table sets out the premium volumes and contribution from new business written by the life and related businesses, consistent with the definition of new business set out in note 2.15.
New business contribution is shown after the effect of required capital.
10 July 2006 to 31 December 2006 New Business Contribution New Business Sales PVNBP Margin Post Cost of Capital PVNBP APE Post Cost of Capital £m £m £m %
2.4 Experience variances 10 July 2006 to 31 December 2006 UK Europe Canada HWPF TVOG Total £m £m £m £m £m
Other UK variances represent a number of different variances, including reinvestment of demutualisation benefits on pension policies and the impact of legislative changes.
Negative experiences in Europe were due to lapses in Ireland and other small negative variances.
Other Canada variances mainly arise from modelling variances within group savings and retirement products.
2.5 Operating assumption changes 10 July 2006 to 31 December 2006 UK Europe Canada HWPF TVOG Total £m £m £m £m £m
In Canada, changes in lapse rates mainly applied to group savings and retirement products. In addition there was £35m from improvements in mortality and morbidity, primarily in relation to individual and group insurance products. Other assumption changes include the release of annuity provisions offset by modelling changes for group insurance.
2.7 Non-covered business Non-covered business includes various non-life and pension companies, including mutual fund companies, on an IFRS basis together with income on assets held in the Group’s holding company, Standard Life plc.
2.8 EEV – reconciliation of movements in consolidated balance sheet 10 July 2006 to £m
Total recognised income and expenses for the period 406 Capital injections/(dividends) 192 Reserves credit for employee share-based payment schemes 15 Closing EEV 5,608
The capital injection mainly represents the proceeds from the sale of additional shares in Standard Life plc above the original share allocation.
2.9 Reconciliation of EEV net assets to IFRS net assets £m
Expected return on existing business – – – 95 95 Expected return transfer to net worth 172 – 172 (172) –
Transfers (to)/from non-covered business 2 – 2 – 2 Foreign exchange rate movements (2) – (2) (8) (10) Transfer back of surplus to SLI – – – – – Actuarial gains/(losses) on defined benefit pension schemes 1 – 1 – 1
Expected return on existing business – 12 12 21 33 Expected return transfer to net worth 41 (20) 21 (21) –
Development costs – – – – – Expected return on free surplus (2) – (2) – (2)
2.12 Principal economic assumptions – deterministic calculations – life and pensions (a) Gross investment returns and expense inflation ˆ 31 December 2006 UK Europe Canada
2.12 Principal economic assumptions – deterministic calculations – life and pensions (continued) 10 July 2006 UK Europe Canada
** 2.14% in 2006 decreasing by 0.10% per year to 1.64% in 2011 and later years.
Risk discount rates – in-force business 10 July 2006 UK Europe shareholder shareholder
The reduction in the UK and Europe risk margins in shareholder owned funds reflect finalisation of the terms of the Scheme. The PVIF of this business was less than £100m at 10 July 2006.
The impact of these 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 UK (£112m positive), Europe (£18m positive) and Canada (£77m positive).
Cost of capital adjustment – (0.10) – (0.10) (0.95) Risk margin after cost of capital adjustment 2.40 2.80 2.40 2.80 2.70
• Ten year swap swaption implied volatility for option terms out to 30 years increased to allow for a proportion of the fixed interest portfolio being invested in credit risky bonds.
The parameters required to specify the Vasicek model are determined by optimisation to achieve a satisfactory fit to the Bank of England Index-Linked Gilt real spot-rate term structure (25 year term structure extrapolated to 40 years using a constant forward rate assumption) adjusted to maintain the market nominal yield/real yield gap. The volatility of the process is controlled with best estimate parameters.
The calibration implied volatilities were supplied by investment banks based on FTSE 100 price return options. The calibration data included options with a range of terms and strike prices.
The sensitivities tested were: • One percentage point increase and decrease in the risk discount rates; • Interest rates 1% higher and lower than base case, with consequential changes in fixed interest asset values, reserving assumptions, risk discount rates and investment returns on equities and properties; • 10% fall in market value of equity and property assets (not applicable for new business contribution); • 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.); • 5% decrease in both mortality and morbidity rates for annuitant and non-annuitant policies; • EEV results assuming only prescribed minimum capital (where economic capital has been used in the EEV calculations).
Prescribed minimum capital – – 61 – – 61 10 July 2006 to 31 December 2006 UK Europe Canada Other HWPF TVOG Total £m £m £m £m £m £m
Non-annuitant mortality -5% 1 – – – – 1 Prescribed minimum capital – – 1 – – 1
Sensitivities to higher and lower assumed equity and property risk premiums in future investment earnings have not been calculated, as the effect of the risk premium is removed in setting the market risk margin in the risk discount rate.
The free surplus is the market value of any assets allocated to, but not required to support, the in-force covered business at the valuation date. In the UK, this comprises the market value of the assets in the shareholders’ fund, plus the value of the shareholders’ interest in the surplus of the long-term fund, after appropriate allowance for tax, less the required capital supporting the covered business.
2.15 European embedded value methodology (continued) Where market value is not the normal basis for accounting, as in Canada, the free surplus is restated to market value, adjusted as required to allow for the present value of any tax which would become payable if the assets were realised.
Under the EEV methodology, a risk discount rate is required to calculate the present value of expected future distributable profits as a single value at a particular date. The risk discount rate comprises a risk-free rate which reflects the time value of money and a risk margin allowing for the risk that experience in future years may differ from that assumed. In particular, a risk margin is added to allow for the risk that expected additional returns on certain asset classes are not achieved.
The values of the risk discount rates used for this reporting period are provided in note 2.12.
The levels of required capital in the current EEV calculations are therefore as follows: • UK and Europe (business in HWPF) – no capital requirement in excess of statutory reserves or asset shares is valued in the EEV.
The TVOG represents the potential additional cost to shareholders where a financial option exists which affects policyholder benefits and is exercisable at the option of the policyholder.
The main source of TVOG in the Group EEV arises from the HWPF. Under the terms of the Scheme, this type of option for the UK, Germany and Ireland arises only when the HWPF has insufficient assets to pay guaranteed policy benefits and the shareholders must therefore forgo receipt of expected shareholder cash flows from the HWPF. 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.
• each projection allows for the gradual release of the residual estate over time to policyholders where there are sufficient funds to do so.
Shareholder assets are at risk if the resources of these with-profits funds are insufficient to pay the guaranteed benefits. The level of the TVOG has been calculated using stochastic techniques. The TVOG has reduced both the new business contribution (NBC) as well as the closing present value of in-force (PVIF) for Europe.
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.
The assumed investment returns reflect the Group’s estimates of expected returns on principal asset classes and are, in general, based on market conditions at the date of calculation of the EEV.
Details of the assumptions used for this reporting period are provided in note 2.12.
Costs related to demutualisation and restructuring have been excluded from the EEV results where it has been agreed that these costs are to be met by the HWPF and therefore would not form part of the surplus cash flows.
Investment management expenses are also allowed for, and the assumptions for these reflect the actual investment expenses of Standard Life Investments in providing investment management services to the life and pensions business rather than the investment fees actually charged.
Pension scheme deficits have been included in accordance with International Accounting Standard (IAS) 19 Employee Benefits.
Assumptions are made in respect of future levels of mortality, morbidity, premium terminations, option take-up, surrenders and withdrawals. The assumptions reflect the Directors’ best estimates of the likely future experience, and are based on recent experience and relevant industry data, where available.
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.
• Department of Work and Pensions (DWP) rebates are deemed to be new single premiums.
• Increases to premium indexation, i.e. increases to premium above those assumed at policy inception.
Consistent with this categorisation of new business, the new business contribution for Germany is calculated assuming a specific level of future premium indexation. Similarly, it is assumed that premiums on ‘Low Start’ policies increase at the end of the low start period.
For Ireland, new business comprises: • New contracts written during the period.
• Pensions vesting under other group contracts and individual pensions are included as new business.
The contribution generated by new business written during the period is the present value of the projected stream of after-tax distributable profit from that business. NBC before tax is calculated by grossing up the contribution after tax at the full corporation tax rate for UK business and at other equivalent rates of tax for other countries.
The economic assumptions used are those at the start of the reporting period, and the non-economic assumptions are those at the end of the reporting period. An exception to this policy is annuity business in the UK, where to ensure consistency between the economic assumptions used in the new business contribution and those used in pricing the business and in the calculation of mathematical reserves, the economic assumptions used are updated at the beginning of each quarter during the reporting period.
Transfers to shareholders from the HWPF will, in the first instance, be funded from unallocated surplus transferred from The Standard Life Assurance Company (SLAC) on demutualisation. The profit after tax result is stated after allowing for this and takes into account the risk of markets moving adversely in the future which would reduce the amount that can be transferred to shareholders from the unallocated surplus. These transfers can be made without shareholder tax arising for a number of years. Over time the actual effective tax rate on these transfers will move toward the standard rate of corporation tax.
Period 1 January Period 2006 to 10 July 2006 to 10 July 31 December
Expenses Net insurance benefits and claims 2,251 4,346 6,597 4,136 Net change in policyholder liabilities 1,385 4,253 5,638 11,354
Change in liability for third party interest in consolidated funds 33 83 116 43
Share of profits from associates and joint ventures 63 54 117 99
Prior to the demutualisation of The Standard Life Assurance Company on 10 July 2006, the parent company of the Group was a mutual insurer and the results of the Group were attributable to participating policyholders. The format of the consolidated income statement has been revised from that reported for the year ended 31 December 2005, to align the presentation more closely with that of an equity holder owned company. Certain items are presented on lines different to those reported in the consolidated income statement for the year ended 31 December 2005. The presentation of the condensed consolidated income statement is explained in notes 3.1(b) and 3.2(b).
The parent company of the Group did not issue shares or have equity holders prior to the demutualisation of The Standard Life Assurance Company and therefore there are no amounts attributable to equity holders or earnings per share for the period from 1 January to 10 July 2006 or for the year ended 31 December 2005.
IFRS Condensed consolidated income statement For the year ended 31 December 2006 46 Standard Life
Underlying profit before tax attributable to equity holders of Standard Life plc Life and pensions
Total life and pensions 254 Investment management 37 Banking 21 Healthcare and general insurance 13 Other (35) Underlying profit before tax attributable to equity holders of Standard Life plc and adjusted items 290 Profit attributable to minority interest 60 Underlying profit before tax attributable to equity holders and adjusted items 350 Adjusted for the following items: Volatility arising on different asset and liability valuation bases 68 Impairment of intangibles (5) Restructuring expenses (12)
Prior to the demutualisation of The Standard Life Assurance Company on 10 July 2006 the results of the Group were attributable to participating policyholders and the parent company of the Group did not have equity holders. Therefore, the pro forma reconciliation of Group underlying profit to profit for the period is only presented for the period from 10 July to 31 December 2006.
Deferred income 257 238 Income tax liabilities 883 799 Customer accounts related to banking activities and deposits by banks 5,071 5,134 Other liabilities 2,765 2,185 Total liabilities 129,406 119,920
IFRS Condensed consolidated balance sheet As at 31 December 2006 48 Standard Life
Fair value gains/(losses) on cash flow hedges 14 5 19 (4) Actuarial (losses)/gains on defined benefit
The consolidated statement of recognised income and expense presentation has been revised as described in notes 3.1(b) and 3.2(b). For the period from 1 January to 10 July 2006 and for the year ended 31 December 2005, the net (expense)/income not recognised in the income statement is transferred to the unallocated divisible surplus. For those reporting periods, the ‘Total recognised income for the period’ represents the sum of the net (expense)/income not recognised in the condensed consolidated income statement and the increase in net assets attributable to minority interest.
Prior to the demutualisation of The Standard Life Assurance Company, the parent company of the Group did not have equity holders and therefore there are no amounts attributable to equity holders for the period from 1 January to 10 July 2006 or for the year ended 31 December 2005.
Recognised prior to 10 July 2006 260 Change in the period from 10 July to 31 December 2006 (13)
Cash flows from financing activities Proceeds from subordinated liabilities, net of transaction costs – 263 Proceeds from other borrowings 119 11 Repayment of other borrowings (131) (2) Proceeds from issue of ordinary share capital, net of transaction costs 3.8, 3.9 1,363 – Consideration paid to eligible members in non-permitted countries (59) – Capital contributions from minority interest 329 18 Interest paid (134) (107) Distributions paid to minority interest (14) (7) Net cash flows from financing activities 1,473 176
Net (decrease)/increase in cash and cash equivalents (589) 1,575 Cash and cash equivalents at the beginning of the year 4,346 2,696 Effects of exchange rate changes on cash and cash equivalents (37) 75 Cash and cash equivalents at the end of the year 3,720 4,346
IFRS Condensed consolidated cash flow statement For the year ended 31 December 2006 50 Standard Life
3.1 Accounting policies (a) Basis of preparation The preliminary announcement has been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations issued by the International Accounting Standards Board (IASB) as endorsed by the European Union (EU) and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS.
• ‘Increase in net assets attributable to minority interest’ was included below the ‘Result before tax’ for the year ended 31 December 2005 and for the period 1 January to 10 July 2006. In the revised income statement presentation, the amounts included in this line are reported in ‘Profit before tax attributable to equity holders’ which appears above the ‘Profit for the period’.
For the period from 10 July to 31 December 2006, the amount reported in ‘Profit before tax’ includes equity holder profit in respect of this period in addition to tax expense and the increase in net assets attributable to minority interest.
3.1 Accounting policies (continued) (b) Presentation of the Primary Statements (continued) The consolidated cash flow statement has been revised in line with the consolidated income statement, showing ‘Profit before tax’ and adjusting for the transfers to/from unallocated divisible surplus for the period from 1 January to 10 July 2006 and the year ended 31 December 2005 through the ‘Change in unallocated divisible surplus’ in the reconciliation to ‘Net cash flows from operating activities’.
Other than the inclusion of equity, presented as at 31 December 2006 only, there have been no revisions to the presentation of the consolidated balance sheet and therefore comparative balances for the year ended 31 December 2005 are as originally reported.
(c) Preliminary Announcement The preliminary announcement for the year ended 31 December 2006 does not constitute statutory accounts as defined in section 240 of the UK Companies Act 1985. PricewaterhouseCoopers LLP have audited the consolidated statutory accounts for the Group for the years ended 31 December 2005 and 31 December 2006 and their reports were unqualified and did not contain a statement under section 237(2) or (3) of the UK Companies Act 1985. The Group’s consolidated statutory accounts for the year ended 31 December 2005 have been filed with the Registrar of Companies. The Group’s Annual Report and Accounts for the year ended 31 December 2006 will be available from 19 April 2007.
3.2 The Demutualisation of The Standard Life Assurance Company and the Company’s Initial Public Offering
(a) Impact of demutualisation transaction and Initial Public Offering On 10 July 2006, The Standard Life Assurance Company (SLAC) demutualised and the shares of a new holding company for the Standard Life Group, Standard Life plc (the Company), were listed on the London Stock Exchange.
The demutualisation of SLAC was governed by its Scheme of Demutualisation (the Scheme). Under the Scheme substantially all of the assets and liabilities of SLAC were transferred to Standard Life Assurance Limited (SLAL), which is a wholly owned direct subsidiary of the Company. SLAL established six long term insurance funds, the Heritage With-Profits Fund (HWPF), the Proprietary Business Fund, UK Smoothed Managed With-Profits Fund, Irish Smoothed Managed With-Profits Fund, German Smoothed Managed With-Profits Fund and German With-Profits Fund. The assets and liabilities transferred were allocated to the HWPF unless, under the Scheme, they were specifically allocated to SLAL’s Shareholder Fund or Proprietary Business Fund. The details of the Scheme were set out in the proposal for the demutualisation of SLAC issued to members in April 2006 and in the prospectus issued in June 2006 in relation to the offer of shares in the Company. In summary: (a) SLAC’s liabilities under existing UK business, Irish branch business and German branch business were transferred to SLAL’s HWPF with the exception of liabilities under Pension Contribution Insurance policies, Income Protection Plan policies and certain Self Invested Personal Pension policies which were transferred to the Proprietary Business Fund along with appropriate backing assets.
The Scheme provides that certain recourse cash flows arising in the 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 of Standard Life plc (referred to as ‘recourse cash flows’). Under the Scheme such transfers are subject to constraints 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 the negative amount. The residual estate of the HWPF exists primarily to meet amounts which may be charged to the HWPF under the Scheme. However, to the extent that the Board of SLAL is satisfied that there is an excess residual estate, it shall be distributed over time as an enhancement to final bonuses payable on the remaining policies invested in the HWPF. The Scheme also provides for additional expenses to be charged by the Proprietary Business Fund to the HWPF in respect of the German branch business.
In consideration for the transfer of the assets and liabilities from SLAC, SLAL issued shares to the Company. As compensation for the loss of their membership rights, eligible members of SLAC received shares in the Company.
Immediately after demutualisation certain subsidiaries that had been transferred to SLAL’s Shareholder Fund were distributed, as a dividend in specie, to the Company.
Transfer of assets Impact of outside Heritage Scheme on With-Profits measurement
Fund and issue of participating Before of shares to contract After
Note 1 Note 2 Note 3 £m £m £m £m £m £m £m
Note 2 The future operation of the HWPF is determined by the Scheme. Applying the FSA realistic measurement basis to the HWPF led to some differences in the measurement of participating contract liabilities (such as the inclusion in participating contract liabilities of planned enhancements to with-profits contracts) and in the measurement of the present value of future profits (PVFP) arising from non-participating contracts (such as the elimination of PVFP on contracts not transferred to the HWPF or the increase in PVFP as a result of Group corporate expenses not being charged to the HWPF).
The impact of the transaction on the financial position of the Group is reflected throughout the consolidated financial statements for the year ended 31 December 2006. To assist users, this note summarises the key information on the transaction that is provided in the notes to the consolidated financial statements.
(a) Impact of demutualisation transaction and Initial Public Offering (continued) • There is no requirement to provide a consolidated balance sheet as at 10 July 2006. Except for equity line items, all balance sheet line items are directly comparable with the comparative period irrespective of the change in legal structure of the Group.
• The Scheme governs the calculation of amounts attributable to equity holders transferred from business written prior to demutualisation. Notes to the segmental income statement (note 3.3) provide further detail on the source of profit for life and pensions business for the period since 10 July 2006.
• Other notes detail the impact of specific aspects of the transaction as applicable, for example note 3.15 sets out the changes to subordinated liabilities arising from requirements set out in the Scheme.
• ‘Increase in net assets attributable to minority interest’ was included below the ‘Result before tax’ in the mutual accounting model. In the revised income statement presentation, the amounts included in this line for the year ended 31 December 2005 are reported in ‘Profit before tax attributable to equity holders’ which appears above the ‘Profit for the period’.
3.2 The Demutualisation of The Standard Life Assurance Company and the Company’s Initial Public Offering (continued)
(b) Presentation of the consolidated income statement (continued) The following table combines the presentation of the 2005 year end consolidated income statement with the revised format presented. It shows summary financial information for the year ended 31 December 2005 in the format presented in the consolidated income statement reported for the year ended 31 December 2005 and the reallocations made between line items to derive the comparative consolidated income statement for the purposes of the 2006 consolidated financial statements. The table illustrates the differences in presentation by shading those areas which are not relevant to the accounting model being applied, for the purposes of this note, to each of the periods presented.
Total net revenue 18,406 (18,307) – – (99) Total expenses (including finance costs) 16,891 (16,891) – – – Result before tax 1,515 (1,416) – – (99) Tax expense 531 (531) – – – Transfer to unallocated divisible surplus 901 – (901) – – Increase in net assets attributable to minority interest 83 – – (83) – Balance on income statement – – – – –
Share of profits from associates and joint ventures – – – 99 99
Tax expense attributable to policyholders’ returns 531 – – – 531 Profit before tax attributable to equity holders – – 83 – 83 Total tax expense 531 – – – 531 Less: tax attributable to policyholders’ returns (531) – – – (531) Tax expense attributable to equity holders’ profits – – – – – Profit for the year – – – – 83 3.3 Segmental analysis (a) Primary reporting format – Business segments The Group is managed and organised into five (2005: four) reportable business segments: Life and pensions Life and pensions offers a broad range of pension, protection, savings and investment products to individual and corporate customers. Within these product classes are executive and group pension products, pooled pension funds and income protection products.
Healthcare and general insurance Healthcare and general insurance primarily provides insurance cover to customers for medical expenses, accident and sickness.
Other Other comprises the Group corporate centre and shared service centre in 2006. Prior to 10 July 2006, these costs were borne by the life and pensions segment.
Healthcare 12 months to 31 December 2006 Life and and general Investment pensions insurance management Banking Other Elimination Total £m £m £m £m £m £m £m
Other items included in the income statement are: Impairment losses reversed (11) – – – – – (11) Amortisation of intangible assets 6 – – – – – 6 Amortisation of deferred acquisition costs 50 31 2 – – – 83 Depreciation of property, plant and equipment 3 – – – 12 – 15
3.3 Segmental analysis (continued) (a) Primary reporting format – Business segments (continued) (i) Segmental income statement (continued)
The expected future value of the recourse cash flows on UK and Irish unitised with-profits contracts is recognised as a reduction in the measurement of participating contract liabilities or in the unallocated divisible surplus. As these recourse cash flows arise they are no longer included in the measurement of participating contract liabilities or the unallocated divisible surplus and thus contribute to equity holder profit.
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 shareholders. This adjustment is excluded from the IFRS valuation. As these recourse cash flows arise they contribute to equity holder profit.
The expected future value of the additional expenses to be charged on German unitised with-profits contracts is recognised as a liability within the unallocated divisible surplus. As these additional expenses are charged they are no longer included in the measurement of the unallocated divisible surplus and thus contribute to equity holder profit.
In the period from 10 July 2006 to 31 December 2006 the recourse cash flows resulted in a positive amount, the transfer of which out of the HWPF was not subject to any constraint.
Profits arising from life and pensions business held outside the HWPF are shown before deduction of tax attributable to policyholders’ returns. Further details of the results of the life and pensions segment for the period from 10 July to 31 December 2006 are shown in the pro forma reconciliation of Group underlying profit to profits for the period.
Share of profits from associates and joint ventures 92 5 2 – – 99
3.3 Segmental analysis (continued) (a) Primary reporting format – Business segments (continued) (ii) Segmental balance sheet
Capital expenditure incurred during the year on: Notes to IFRS financial information 60 Standard Life
Healthcare At 31 December 2005 Life and and general Investment pensions insurance management Banking Elimination Total £m £m £m £m £m £m
Investments in associates and joint ventures 2,470 117 21 – – 2,608
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.
Restructuring and demutualisation expenses include £80m (2005: £68m) in association with work undertaken preparing for the demutualisation and flotation in 2006 and £13m (2005: £nil) relate to restructuring costs incurred by Standard Life Healthcare following its acquisition of the private medical insurance business of FirstAssist. The remaining costs were incurred as part of the implementation of the 2004 Strategic Review and relate mainly to redundancy costs and lease expiry costs.
Prior to demutualisation, SLAC incurred costs associated with the Initial Public Offering of the Company’s shares. Under the Scheme these costs were transferred to the Heritage With Profits Fund (HWPF). At the time of the listing of its shares on the London Stock Exchange, costs amounting to £31m were recharged to the Company by the HWPF. Expenses directly related to the Company’s listing have been charged to share premium resulting in a reduction to the overall cost of demutualisation shown in the income statement. In total, £53m of expenses incurred in 2006 that were attributable to the listing of the Company’s shares on the London Stock Exchange have been set off against the share premium account (note 3.9).
Interest expense includes interest payable on customer accounts and other funding instruments within the banking operations of the Group. Interest relating to other Group borrowings is included within finance costs.
Profit attributable to equity holders of Standard Life plc (£m) 283 Weighted average number of ordinary shares in issue (millions) 2,102 Basic earnings per share (pence per share) 13.5
Profit attributable to equity holders of Standard Life plc (£m) 283 Weighted average number of ordinary shares for diluted earnings per share (millions) 2,173 Diluted earnings per share (pence per share) 13.0
The dilutive effect of the bonus shares included in the weighted average number of ordinary shares above was 69m. The dilutive effect of share awards and options included in the weighted average number of ordinary shares above was 2m. The effect of these dilutive potential ordinary shares does not impact the profit attributable to equity holders of Standard Life plc.
Period 10 July 2006 Period 10 July 2006 to 31 December 2006 to 31 December 2006 £m Per share p
Underlying profit before tax attributable to equity holders 350 16.7 Volatility arising on different asset and liability valuation bases 68 3.2 Impairment of intangibles (5) (0.2) Restructuring expenses (12) (0.6) Profit before tax attributable to equity holders 401 19.1
At 31 December Cost 930 692 Accumulated amortisation and impairment (485) (402) Closing net book amount 445 290
Included in deferred acquisition costs above are costs deferred on investment contracts (known as deferred origination costs) amounting to £389m (2005: £278m).
Insurance and investment contracts sold by The Standard Life Assurance Company prior to demutualisation were written in its with-profits fund. Acquisition costs for participating contracts were not deferred explicitly as they were taken into account in the measurement of the liabilities for these contracts. Acquisition costs for non-participating insurance contracts were not
On 10 May 2006, the Company amended its authorised share capital to 10,000 ordinary shares of £0.10 each and 50,000 £1 redeemable preference shares. A further amendment was made to the authorised share capital on 30 May 2006. This revised the authorised ordinary share capital to 3,000,000,000 ordinary shares of £0.10 each and 50,000 £1 redeemable preference shares.
The authorised share capital of the Company at 31 December 2006 was: Number £m
On 10 May 2006 the Company issued 50,000 £1 redeemable preference shares at par for cash to meet the share capital requirements of a public listed company. The preference shares were redeemable on 31 August 2007, but the Company had the option to redeem the shares prior to this date at its own discretion. The Company exercised this right on 13 July 2006. The preference shareholders were entitled to a dividend of 1% on the nominal value of the shares. However, the preference shareholders waived their right to this dividend.
At 1 January – Shares issued for cash on Initial Public Offering 1,168 Shares issued in respect of the over-allotment provision 184 Share premium reduction (500) Transaction costs directly attributable to the issue of shares (53) At 31 December 799
At 1 January – Profit for the period attributable to equity holders 283 Retained earnings arising at demutualisation 3.2(a) 17 Transfer from equity compensation reserve for vested employee share-based payments 4 Actuarial losses on defined benefit pension schemes (2) Aggregate tax items recognised in equity (4)
At 1 January 2006 – – – – – – – – Transfer to equity holders’ funds at
Fair value gains on cash flow hedges – 5 – – – – – 5 Revaluation of land and buildings 22 – – – – – – 22 Exchange differences on translating foreign operations – – (113) – – – – (113) Merger relief on issue of demutualisation
Merger relief on ordinary shares acquired in operating subsidiaries following dividend in specie – – – 1,872 – – – 1,872 Share premium reduction – – – – – 500 – 500 Reserves credit for employee share-based payment schemes – – – – 15 – – 15 Transfer to retained earnings for vested employee share-based payments – – – – (4) – – (4) Difference between the fair value and book value of the Group at demutualisation – – – – – – (2,065) (2,065) With-profits fund: associated UDS movement not recognised in income statement prior to demutualisation (71) (10) (26) – – – – (107) With-profits fund: associated UDS movement recognised in equity (22) – 23 – – – – 1 Aggregate deferred tax items recognised in equity – (4) – – – – – (4)
Total with-profits fund adjustment (93) (10) (3) – – – – (106)
The ‘with-profits adjustment’ represents the cumulative amounts transferred to the unallocated divisible surplus as they represent movements attributable to participating policyholders, which would otherwise have been included in other reserves.
In 2005, reserves were recognised as part of the unallocated divisible surplus as the parent company of the Group was a mutual insurer.
Merger Reserve: On demutualisation of The Standard Life Assurance Company, the demutualisation shares issued by the Company qualified for merger relief under section 131 of the UK Companies Act 1985. Merger relief permits, where shares are issued at a premium, the difference arising between the issue value and nominal value of the shares issued to be transferred to a reserve other than the share premium account. The difference between the issue value and nominal value of the demutualisation shares was transferred to the merger reserve following the dividend in specie discussed in Note 3.2(a). £1,872m of merger reserves attached to the demutualisation shares was replaced with merger relief on the ordinary shares of the operating subsidiaries acquired by the Company.
Reserve arising on Group reconstruction: On demutualisation of The Standard Life Assurance Company, the value of the demutualisation shares issued was equal to the fair value of the assets and liabilities of the Group. As detailed in Note 3.2(a), merger accounting principles have been applied to the demutualisation transaction and, therefore, all assets and liabilities were transferred at their book value at the time of demutualisation in the consolidated financial statements. The reserve arising on group reconstruction represents the difference between the fair value and book value of the assets and liabilities of the Group at the time of demutualisation of The Standard Life Assurance Company on 10 July 2006.
Note 3.2(a) describes the establishment of the Heritage With-Profits Fund (HWPF) as part of the demutualisation transaction on 10 July 2006. Under the Scheme certain non-participating contracts were transferred to the HWPF. The present value of future profits (PVFP) on these non-participating contracts can be apportioned between the component related to contracts whose future cash flows under the Scheme are expected to be transferred out of the HWPF to equity holders and the component related to contracts whose future cash flows will remain in the HWPF to be applied either to meet amounts that may be charged to the HWPF under the Scheme or distributed over time as enhancements to final bonuses payable on the remaining policies invested in the fund.
These components are deducted in arriving at the amount of participating contract liabilities and unallocated divisible surplus as follows: £m
Participating insurance contracts 20,225 Participating investment contracts 18,563 Participating contract liabilities after apportionment 38,788
The movement in insurance contract liabilities, participating investment contract liabilities and reinsurance assets during 2006 was as follows: Non- Total Reinsurers’ Participating participating Participating insurance share of insurance insurance investment and liabilities contract contract contract participating (reinsurance Net liabilities liabilities liabilities contracts asset) 2006 £m £m £m £m £m £m
Effect of changes in: Effect of: Total change in contract liabilities 7 (624) 165 (452) (28) (480)
Effect of changes in: Effect of: Total change in contract liabilities 244 318 9 571 12 583
Change in Unearned Premium Reserve – (31) – (31) – (31)
The impact of economic assumptions in the period from 1 January to 10 July 2006 primarily reflects changes in fixed interest yields leading to lower valuation rates on non-participating business.
Economic experience changes in the period from 10 July to 31 December 2006 reflect higher than anticipated investment returns during that period.
The movement in insurance contract liabilities, participating investment contracts and reinsurance assets during 2005 was as follows: Non- Total Reinsurers Participating participating Participating insurance share of insurance insurance investment and liabilities contract contract contract participating (reinsurance Net liabilities liabilities liabilities contracts asset) 2005 £m £m £m £m £m £m
Expected change, including unwind of discount (43) Methodology/modelling changes 77 Effect of changes in economic and non-economic assumptions (15) Effect of economic and non-economic experience (4) New business 165 At 10 July 2006 – before demutualisation 1,708
3.12 Insurance contract liabilities, non-participating investment contract liabilities, participating investment contract liabilities and reinsurance assets (continued)
Revaluation of land and buildings 44 – – – 44 – 44 Exchange differences on translating foreign
Aggregate tax effect of items not recognised in the income statement – – – 4 4 – 4
Income/(expense) not recognised in the income statement during the period 44 14 (78) (2) (22) – (22) Transfer to unallocated divisible surplus – – – – – 391 391 Foreign exchange adjustments – – – (23) (23) – (23)
UDS at 10 July 2006 – after demutualisation – – – 1,310 1,310
Change in unallocated divisible surplus: Recognised in the income statement (105) Not recognised in the income statement (1)
Where items of income and expense were required not to be recognised in the income statement the transfer to/from the UDS was correspondingly affected. The movement in UDS in the period therefore comprised both the transfer to/from the UDS recognised in the income statement and the impact of items of income or expense not included in the income statement. The accumulated amount of these items of income or expense was recorded as a separate component of UDS.
3.13 Movement in components of unallocated divisible surplus (UDS) (continued) On demutualisation, as explained in Note 3.2(a), certain assets and liabilities were transferred out of the with-profits fund with a corresponding reduction in the UDS. The Scheme of Demutualisation (the Scheme) of The Standard Life Assurance Company affected the measurement of the participating contract liabilities resulting in a further adjustment to the UDS. The accumulated amount of income and expenses not reflected in the income statement and the associated accumulated movement in UDS not recognised in the income statement were transferred to equity holders reserves.
Revaluation of land and buildings 11 – – – 11 – 11 Exchange differences on translating
The carrying amounts disclosed above reasonably approximate the fair values as at the year-end.
3.14 Borrowings (continued) (b) Securitisations – mortgage backed floating notes Loans are issued by the Group, which are subject to securitisations. Under this arrangement, the beneficial interest in these mortgages is transferred to special purpose entities. The issue of mortgage backed floating rate notes by the special purpose entities funded the purchase of the mortgages. Standard Life plc and its subsidiaries are not obliged to support any losses suffered by the note holders and do not intend to provide such support. The notes were issued on the basis that note holders are only entitled to obtain payment, of both principal and interest, to the extent that the available resources of the respective special purpose entities, including funds due from customers in respect of the securitised mortgages, are sufficient and that note holders have no recourse to the Company or its subsidiaries. This has been clearly stated in the legal agreements with note holders.
The mortgage backed floating rate notes at year-end are as follows: Average interest rates Carrying amount
Subordinated liabilities are considered current if the contractual repricing or maturity dates are within one year. As detailed in Note 3.2(a), on 10 July 2006 the Company was substituted as the new issuer of the subordinated guaranteed bonds and Mutual Assurance Capital Securities and the instruments were re-listed on the London Stock Exchange.
The classification of amounts due under the subordinated loan arrangements is determined by the interaction of these arrangements with the internal subordinated loan note issued by Standard Life Assurance Limited (SLAL) to Standard Life plc as set out below.
The subordinated guaranteed bonds were issued on 12 July 2002. The payment of principal and interest in respect of the bonds has been irrevocably and unconditionally guaranteed by SLAL. The claims of the bondholders to payment under the guarantee will rank below the claims of all senior creditors of SLAL including policyholders. This guarantee is considered a financial guarantee under revised IAS 39 Financial Instruments: Recognition and Measurement effective from 1 January 2006 and is initially recognised at fair value. The fair value at 31 December 2006 is nil (2005: £nil).
The sterling denominated bonds are perpetual securities and as such have no fixed redemption date. However, the bonds are redeemable at par at the option of the Company on 12 July 2027 and on every fifth anniversary thereafter. If the sterling bonds are not redeemed on 12 July 2027, the interest rate payable will be reset to 2.85% over the gross redemption yield on the appropriate five year benchmark gilt on the reset date. The Company can elect to defer the payment of interest on the sterling bonds. Interest will accrue on any interest deferred at the then current rate of interest on the bonds. Any interest deferred becomes immediately due and payable on: the date of any declaration or payment of dividends, interest or other payment in respect of any pari passu ranking securities or securities that rank junior to the sterling bonds; or the date any of these securities are purchased by the Company, SLAL or a subsidiary of the Company; the date fixed for any payment under a guarantee that ranks junior to the sterling bonds; and the date of any redemption or purchase of sterling bonds, or the commencement of winding up the Company or SLAL. There was no such right to defer payment under the terms of the bonds in the prior year.
On 29 June 2005, Standard Life Funding B.V. (SLFBV), a wholly owned subsidiary of Standard Life Bank Limited (SLB), issued £265m of undated subordinated notes (the subordinated notes). In the terms of a Subordinated Deed of Guarantee, SLB guarantees the payment of all sums payable by SLFBV under the subordinated notes. The rights and claims of all subordinated note holders are subordinated to the claims of all senior creditors of both SLFBV and SLB.
During the year, there have been no changes to the terms and conditions of the subordinated guaranteed notes.
The Mutual Assurance Capital Securities (MACS) were issued on 4 November 2004. The payment of principal and interest in respect of the MACS is irrevocably and unconditionally guaranteed by SLAL. The claims of the holders of the MACS to payment under the guarantee will rank below the claims of all the senior creditors of SLAL including policyholders.
The sterling denominated MACS started accruing interest from 4 November 2004 and bear interest at a rate of 6.546% per annum payable annually in arrears on 6 January each year, commencing on 6 January 2006. From and including 6 January 2020 and every fifth anniversary thereafter, these MACS will bear interest annually in arrears based on the aggregate of a margin plus the gross redemption yield of specific gilts.
The euro denominated MACS started accruing interest from 4 November 2004 and bear interest at a rate of 5.314% per annum payable annually in arrears on 6 January, commencing on 6 January 2006. From and including 6 January 2015, these MACS will bear interest quarterly in arrears, commencing 6 April 2015, at a floating rate of interest to be calculated quarterly based on the aggregate of a margin plus the rate for three month Euro deposits.
During the year, there have been no changes to the key terms and conditions of the MACS.
The Group is subject to insurance solvency regulations in all the territories in which it issues insurance and investment contracts, and it has complied with all the local solvency regulations. Therefore there are no contingencies in respect of these regulations.
(d) Issued share capital The Scheme sets a ten year time limit for those eligible members of The Standard Life Assurance Company who were not allocated shares at the date of demutualisation to claim their entitlement. As future issues of these shares are dependent upon the actions of eligible members, it is not practical to estimate the financial effect of this potential obligation.
3.18 Commitments (a) Capital commitments The Group’s capital commitments as at the year-end are: £m £m
The future aggregate minimum lease payments under non-cancellable operating leases are as follows: £m £m
Due to the nature of this event, it is non-adjusting. No estimate of its financial effect has been made for this financial information.
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 2006 (unless otherwise indicated).