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 2010 (unless otherwise indicated).
The Preliminary Results 2010 are published on the Group’s website at www.standardlife.com
• Net adjusted inflows across the Group up 46% to £8.3bn
• Standard Life Investments third party assets under management (AUM) 26% higher at a record level of £71.6bn
• 16% increase in fee based revenues to over £1.1bn reflecting strong net inflows and asset growth
• IFRS operating profit before tax from continuing operations up 7% to £425m
• EEV core capital and cash generation after tax from continuing operations 6% lower at £289m, reflecting growth investment
Commenting on the key aspects of the results, Chief Executive David Nish said: “Standard Life had a good year in 2010. Our financial performance has been strong, with higher net flows and markets increasing the value of assets and revenues and leading to growth in profits. We’ve also made significant operational progress to drive efficiencies and are on track to meet our target of £100m of margin improvement by 2012. We’ve refocused our portfolio and the acquisitions of threesixty, Focus Solutions and Aida Capital have strengthened our capabilities and accelerated the delivery of our strategy.
“Overall, there remains a great deal to be done but I am even more confident that our clear strategy and our customer and performance focused approach will continue to deliver profitable growth, supporting our progressive dividend policy.”
We had a record year for UK corporate pension sales securing 182 new schemes, representing 72,000 employees in total. Our Vebnet business has also implemented 32 new clients with approximately 108,000 employees. Outside of the UK, our performance has also been strong, with our market share of Canadian corporate pensions sales more than doubling to 21%.
Focusing on the savings and investment needs of customers in our chosen segments
We have one of the fastest-growing Wrap platforms in the UK, with assets under administration recently passing the £7bn milestone. Our acquisition of threesixty gives additional depth to the support we provide to intermediaries. The acquisition of Focus Solutions brings a leading provider of software and consultancy to the Group and allows us to accelerate our multi-channel distribution strategy by offering end-to-end solutions to IFAs, bank distribution partners, and end customers.
In September we launched MyFolio, a proposition designed to help customers find the right investment solution for them. Since its launch MyFolio has quickly secured over £100m of AUM, with higher than expected investment into actively managed funds at Standard Life Investments. In February of this year we launched a new online ISA and a complete refresh of Adviserzone, our market-leading adviser platform.
We’ve made a number of significant organisational changes, with a ‘Take to Market’ focus established in each of our markets. This brings together distribution and marketing functions, allowing us to respond more effectively to changing customer needs and to develop new propositions faster. We’ve also continued to drive further efficiencies. In September, we announced a net reduction of 500 jobs in the UK, phasing out 600 existing roles while creating 100 new ones, by the end of 2011. Many of these moves have now happened, helping us to deliver the margin improvement we are targeting by 2012.
Outlook Although the economic background remains uncertain we strongly believe that the underlying demographic and regulatory trends in our key markets continue to support our future growth potential.
There are very large individual and employer markets available to us in the UK and Canada and we believe we have the products and propositions to capitalise on these. In the UK, there is a growing demand for platform-based wealth management solutions in the run up to the Retail Distribution Review and we are the market leader in this space. We are accelerating our plans over the next eighteen months to grow from our leadership position. Similarly, we are very well placed to benefit from the changes arising from auto enrolment in the corporate market, with our recently launched Lifelens proposition significantly strengthening our offering to this market. We welcome the pension reform measures that were recently announced by the UK Government, as well as the end of compulsory annuitisation, as these should encourage more people to save for the long term. Sales in the UK are strongly up in the first two months of this year and the pipeline for our pensions business is very good.
• Strengthening our alternatives capabilities in areas such as private equity and European property
These developments, combined with our ongoing drive to achieve productivity improvements, will provide us with a springboard to step up further our operational and financial performance.
Demand for our innovative products and services has continued to be strong and has led to good growth in customers and net inflows across the Group. Excluding volatile and lower revenue yield UK money market funds and India cash funds, total net inflows across the Group were very strong, increasing by 46% to £8.3bn (2009: £5.7bn).
In total, net flows were 11% higher at £7.2bn. This, and positive market movements, have led to 16% growth in the total assets we administer and invest for our customers. At the end of 2010 assets under administration (AUA) amounted to £196.8bn. The growth in AUA has been driven by a significant increase in fee business AUA both in the long-term savings and third party investment management businesses.
Total AUA backing products (£bn) 98.6 13.7 (10.7) 3.0 10.4 112.0
UK fee business AUA is 15% higher at £98.6bn due to positive market movements and net inflows, which have more than doubled to £3.6bn. Net inflows into institutional pensions, mutual funds and SIPP have been strong. The average revenue yield on fee business has strengthened to 77bps (2009: 75bps)
Customer numbers in our core propositions continue to rise. Individual SIPP customers are up 28% to 107,100 (31 December 2009: 83,900). Customers on our Wrap platform are up 80% to 57,000 (31 December 2009: 31,600). The number of IFA firms using the platform increased by 41% to 820 (31 December 2009: 583). Our corporate business continues to perform well, with 182 new schemes won (2009: 168), the average value of which was much higher than last year. This included the 5,000 member Logica scheme in the second quarter.
The average revenue yield across International was lower at 212bps (2009: 248bps). This was expected and reflects the continued shift away from premium based charges in Germany.
Net flows in the India and China joint venture businesses increased by 20%. In India, the growth and increased market share reflect our success in the bancassurance channel.
Global investment management Third party inflows Redemptions Net inflows Market and other
Excl. UK money market and India cash funds (£bn) 50.8 13.5 (6.2) 7.3 8.1 66.2
IFRS operating profit before tax from continuing operations was 7% higher at £425m after expensing a significant increase in growth investment spend as we pursue our strategy for profitable growth. The IFRS operating result in 2010 includes a £59m benefit arising from a change in the basis of future pension increases in the UK staff pension scheme and a £5m benefit from reserve releases in respect of UK deferred annuities. In 2009, the IFRS operating result similarly benefited from £63m of reserve releases in respect of deferred annuities. Excluding these items and the increase in investment spend, IFRS operating profit was 20% higher at £404m (2009: £336m) due to the higher inflows in our fee business, as well as positive market movements, which have pushed up assets and revenues. Total income was 5% higher at £1,501m. IFRS profit after tax attributable to equity holders more than doubled to £432m.
Revenues from our fee business were 16% higher at £1,131m and now make up 75% of our total income (2009: 68%). The remaining 25% (2009: 32%) of total income is a margin on our spread/risk business. Lower annuity volumes, coupled with a reduction in reserve releases that benefited the result in 2009 has led to this margin being 20% lower at £370m.
Acquisition expenses are the costs we incur in writing new business. These were up 11% at £267m with higher costs in all geographies due to the strong growth in sales levels across the business, with costs expressed as a proportion of sales falling from 171bps in 2009 to 149bps. Maintenance expenses are the ongoing costs we incur in servicing and administering customer policies. These were higher at £673m, partly due to foreign exchange movements in respect of our overseas operations. Similar to acquisition expenses, maintenance expenses were lower at 42bps (2009: 47bps) when expressed as a proportion of average customer assets over the year. Both expense trends demonstrate the scalability of our business.
Core operating capital and cash generation after tax from continuing operations was 6% lower at £289m, reflecting a significant increase in the investment we have made in our business during 2010. The benefits of this investment will contribute to cash flow in 2011. Before this increase in growth investment, core operating capital and cash generation was 7% higher at £330m (2009: £307m). Within this, capital and cash from existing business was 11% higher at £604m and comfortably covered the cost of writing new business (new business strain) by almost three times (2009: three times).
Core EEV operating profit was 24% higher at £629m. Within this, new business contribution was 45% higher at £308m, with increased sales and strengthened margins leading to a higher contribution from all regions. The expected return on existing business has also strengthened. Offsetting this, core EEV profits within our non-covered business, including our Global investment management business, were lower, mainly due to increased growth investment spend.
Efficiency contributed £132m to profit (2009: negative contribution of £14m), driven by the ongoing reduction in the cost of managing our business and the growth in business volumes.
Our balance sheet has strengthened on both an embedded value and IFRS basis. Our embedded value of £7,321m (31 December 2009: £6,435m), represents an embedded value per share of 322p (31 December 2009: 288p). IFRS equity excluding intangible assets and non-controlling interests was £3,768m (31 December 2009: £3,351m), representing 166p per share (31 December 2009: 150p). The increase in Group embedded value and IFRS equity primarily reflect profit for the year and favourable foreign exchange rate movements as well as a significant improvement in the net position of the UK staff pension scheme, partly offset by dividend payments made in 2010.
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Adjustments: Reserve releases for UK deferred annuities included in spread/risk margin (5) (63)
Profit including increased growth investment spend 361 336 5 Core elements comprise new business contribution (NBC), expected return on in-force business, non-covered business profits and development costs for covered business other than those directly related to back book. Core EEV capital and cash generation reflects the after tax net worth impact of the core EEV result attributable to shareholders.
6 In the UK, the 77bps revenue yield is calculated based on revenue and average assets excluding conventional with profits (CWP) and institutional pensions. The AUA for this business was £76.2bn at 31 December 2010 (31 December 2009: £66.6bn).
7 A SICAV (société d'investissement à capital variable) is an open-ended collective investment scheme common in Western Europe. SICAVs can be cross-border marketed in the EU under the UCITS directive.
9 Source: Standard Life Investments and the Investment Management Association (IMA).
10 The 2010 Preliminary Results are available on the Financial Results page of the Standard Life website at www.standardlife.com www.standardlife.com 9
EEV notes 75 4 Supplementary information 109 4.1 Analysis of IFRS profit by segment 110 4.2 EEV and EEV operating profit 111 4.3 Reconciliation of IFRS operating profit to EEV capital and cash generation 112 4.4 Group assets under administration and net flows 113 4.5 Analysis of new business 119 4.6 Exposure to investment property and financial assets 124 4.7 Fair value hierarchy of financial instruments 127 4.8 Total expenses and operating cost base 128 4.9 Growth investment spend 129 www.standardlife.com 11
Source: Office for National Statistics. Crown Copyright material is reproduced with the permission of the Office of Public Sector Information (OPSI).
April 2011. Simplification of pension tax relief rules makes it easier for advisers and individuals to plan effectively for their retirement. This is more important than ever given the size of the pension savings gap. The Government also announced the end of compulsory annuitisation from April 2011. The move is intended to provide individuals with more flexibility over the use of their pension savings and may encourage more people to save for the long term.
In Canada, the Federal Government announced its intention to create the legal environment for a new type of pension plan called the Pooled Registered Pension Plan (PRPP). This aims to make it easier and more affordable for small employers to offer pension plans and for self-employed individuals to participate. This new plan would be administered by the private sector and is expected to be in place in 2012 at the earliest. However, for this to happen, there will need to be provincial legislative changes. This initiative could increase the size of the pension plan market by improving accessibility to pension plans.
The UK currently has a significant pension savings gap. This gap is the difference between the income an individual needs for a comfortable retirement and the actual pension that they are on target to receive. The UK Government is making changes to increase the proportion of the population saving for retirement, including auto enrolment and the introduction of the National Employment Savings Trust (NEST). We believe that these steps will increase contributions to private pensions and that we are well placed to benefit from these changes.
The changes above, combined with improved technology and automation, are altering the way customers approach their finances. Our customers are increasingly self-reliant and willing to take a greater role in managing their savings. We have increased our growth investment in the business over 2010, including a significant investment in technology. Together with our recent acquisition of Focus Solutions, this will allow us to capitalise on the growing consumer demand for technology-enabled long-term savings and investment solutions.
The RDR will bring a major change to the distribution landscape in the UK. While every significant change brings some inherent disruption and uncertainty, we believe that our customer-centric, capital-efficient approach means that we are particularly well placed to meet the proposed changes to the market in terms of removal of commission, increased transparency and professionalism.
We have focused on building relationships with the new model advisers, who do not rely on commission to fund their business model and have the level of professionalism needed for a post-RDR world. We do not rely on paying commission to promote our propositions. Therefore, the ban on commission that will come as part of the RDR will effectively double the size of our accessible market.
However, it is believed that the shift from ‘opting in’ to ‘opting out’ will increase the level of participation in corporate schemes from 50% to 80%.
As a provider of quality corporate pensions schemes, we welcome the introduction of auto enrolment in 2012. Millions of people in the UK are not saving enough to provide adequately for their retirement. Auto enrolment is an important step in improving the situation.
Employers who do not want to set up their own pension scheme or join an existing commercial scheme have the option to enrol their employees into a low-cost pension scheme called National Employment Savings Trust (NEST). Individuals will however, still have the choice of opting out. Implementation will be phased in over four years from 2012. Larger employers will have their duties imposed first, smaller employers last.
Solvency 2 is a major European regulatory change initiative which is currently due to be implemented on 1 January 2013, although firms will be required to be ready well in advance of this date.
Solvency 2 will affect risk and capital management, external reporting, supervision and business strategies of the European insurance industry.
We currently use gender as a risk factor in calculating premiums and benefits for a number of our products. Following this ruling, we will not be making any immediate change to gender based rates used in our products. Looking ahead, we will ensure that the appropriate changes are implemented in accordance with the ruling but do not currently anticipate a significant impact on our results.
We’ve made significant progress in transforming how we operate to deliver our strategic priorities. In corporate, we recently launched the employee benefits platform, Lifelens. Lifelens is the only proposition in the market that offers a single, fully flexible savings and benefit solution for employers and employees. The strength of this proposition allows us to work across the Group to look at opportunities to distribute Lifelens internationally. We have also recently developed a new online ISA and re-launched our Adviserzone platform.
In retail, our flexible UK Active Money Personal Pension provides an entry-level retirement savings proposition. Our new strategic alliance with Chuo Mitsui Asset Trust and Banking Company assists us in expanding the global reach of our investment management business. The joint venture businesses in Asia continue to develop.
In February 2011, we took another important step on our transformation journey when we launched our brand repositioning and new visual identity. A key part of our brand repositioning is to deliver even clearer communications to our customers to help them plan for their financial future.
These changes will make our business more efficient, faster to market and improve our customers’ experiences. We believe this will make us more profitable and generate more cash.
Profit from continuing operations excludes Standard Life Bank plc and Standard Life Healthcare Limited, which were sold on 1 January 2010 and 31 July 2010 respectively.
IFRS profit for the year was £493m (2009: £180m). This comprised profit after tax attributable to equity holders of £432m (2009: £213m) and profit attributable to non-controlling interests of £61m (2009: loss £33m). The IFRS result included a 7% increase in operating profit before tax from continuing operations from £399m to £425m. Non-operating profits were £85m (2009: loss £255m).
The key movements in IFRS operating profit before tax from continuing operations were: • Increased fee revenue of £159m from higher asset levels and the strong level of net inflows
• Reduced spread/risk margin of £91m, impacted by reduced annuity volumes and the £5m (2009: £63m) deferred annuity reserves release
• Other expenses increased by £72m due to the less than proportionate rise in the cost of writing new business and higher costs associated with maintaining a larger book of business. Acquisition expenses expressed as a proportion of sales fell from 171bps in 2009 to 149bps and maintenance expenses as a proportion of average customer assets reduced from 47bps in 2009 to 42bps
Spread/risk margin includes net earned premiums, claims and benefits paid, net investment return using long-term assumptions and reserving changes. Spread/risk margin reduced due to lower annuity volumes resulting from changes in our pricing due to market conditions and changes in operating assumptions in the UK. The 2010 result also included a £5m (2009: £63m) release of reserves following the review of UK deferred annuity data.
We have continued to invest for future growth in the business. This led to growth investment spend included in IFRS operating profit before tax increasing in 2010 to £149m, with a number of customer propositions launched during the year. The total amount invested in 2010 was £201m (2009: £128m). This includes additional investment in our joint ventures in Asia and also capitalised investment spend that does not impact profitability in 2010.
Maintenance expenses mainly relate to the ongoing costs that we incur to service and administer customer policies. These costs increased to £673m. Maintenance expenses expressed as a proportion of average AUA improved to 42bps (2009: 47bps).
The improvement in both of the expense trends demonstrates the scalability of our business. Growth in new business and customer assets has led to greater levels of efficiency.
In 2010 we achieved a margin improvement of £61m. This includes £34m in the second half of the year relating to our 2012 target. We are on track to meet our target of a further £100m margin improvement by 2012. The previous target of £75m was achieved six months earlier than our original target.
UK IFRS operating profit before tax from continuing operations increased to £234m. The average revenue yield on fee business increased to 77bps (2009: 75bps). The average revenue yield is a measure of fee business revenue expressed as a proportion of average fee based AUA in the year. Profitability was boosted by an increase in revenue from our existing fee based business and a £59m benefit from the change in the UK pension scheme.
The 2008 result included several one-off items that contributed £101m to profitability.
IFRS operating profit before tax of the wholly owned International businesses decreased to £38m (2009: £50m). This was mainly due to the decreasing transfer of profit to shareholders from the Heritage With Profits Fund (HWPF) in Germany. The average revenue yield on fee business was lower at 212bps (2009: 248bps), reflecting the continued shift away from premium based charges in Germany. This contributed to a fall in profitability in Germany to £42m (2009: £55m).
Global investment management IFRS operating profit before tax increased to £103m. This was mainly due to a rise in revenue of 29% as a result of higher average market values and increased third party new business flows. Third party average revenue yield on fee business increased to 35bps (2009: 34bps) with strong sales in higher margin products including GARS.
Group corporate centre costs increased to £54m (2009: £50m) due to increased investment in the business, including growth investment spend of £4m. Other income remained broadly unchanged at £17m (2009: £18m).
IFRS non-operating profit was £85m compared with a loss of £255m in 2009. The increase primarily relates to short-term fluctuations in investment return and economic assumptions which produced non-operating gains of £127m in 2010 compared with losses of £214m in 2009. Non-operating restructuring and corporate transaction expenses increased to £71m (2009: £52m).
Closing EEV per share before dividends 322p 334p 1.3 EEV – Group EEV measures shareholders’ value of net assets and expected future profits on the existing book of business. The EEV results reflect our continuing focus on building a leading long-term savings and investments business by managing our existing book of business effectively and writing profitable new business.
EEV highlights 1 Continuing operations exclude Standard Life Bank plc and Standard Life Healthcare Limited, which were sold on 1 January 2010 and 31 July 2010 respectively.
Find out more in Section 1.5 – Capital and cash generation on the movements in EEV shareholder net assets (net worth).
There’s more detail about EEV operating profit and non-operating profits in the following sections.
Profit from efficiency gains was mainly due to £130m in positive expense assumption changes across all of our long-term savings businesses, but particularly in Canada and the UK. These positive expense assumptions mainly reflect the reduction in the ongoing expenses of managing our covered business and the growth in business volumes.
1 2010 payback period is calculated on an undiscounted basis. Prior to this, the calculation was on a discounted basis. The 2009 comparative has been restated.
Improved new business profitability was due to higher sales volumes across the Group and increased margins in our overseas businesses. The present value of new business premiums (PVNBP) for the Group totalled £18,483m and was 27% greater than sales volumes in 2009. The total internal rate of return (IRR) for the Group was 17% (2009: 14%) and the undiscounted payback period shortened to 6 years (2009: 7 years).
We are one of the largest providers in the long-term savings and investments business in the UK, offering solutions to both the retail and corporate markets. We offer a wide range of insurance and investment wrappers. In 2010, we began transforming our operations, investing in new customer-centric propositions and increasing our speed to market. On 31 July 2010 the sale of Standard Life Healthcare Limited was completed.
UK long-term savings and investments IFRS operating profit before tax was £234m (2009: £222m). Fee based revenue increased due to higher annual management charge income. This was driven by higher average AUA, due to both strong growth in new inflows and positive market movements during the year. The average revenue yield on fee business increased slightly to 77bps (2009: 75bps).
The spread/risk margin reduced due to changes in operating assumptions and lower annuity volumes that resulted from market-led changes in our pricing. The spread/risk margin result in 2010 benefited from investment strategy changes, partially offset by a mortality assumption change which together contributed £30m to the result. The 2010 result also included a £5m (2009: £63m) release of reserves following the review of our deferred annuity data.
We have continued to invest in growing our business. Growth investment spend increased to £61m, with a number of customer propositions launched during the year.
Corporate net inflows of £3,830m (2009: £3,056m) increased by 25% due to the success in winning new institutional pension mandates. There were significant inflows into GARS and fixed income funds offered through Standard Life Investments. This was slightly offset by corporate pension net inflows of £1,390m (2009: £1,509m) being 8% lower than last year. An increase in outflows, mainly due to the 50 to 55 age change were partially offset by higher inflows from strong sales levels.
Retail Trustee Investment Plan has been reclassified from corporate pensions to individual pensions in 2010. The impact of this was PVNBP £25m (2009: £22m).
PVNBP sales increased by 27% to £12,956m. In our retail business, PVNBP increased by 18% to £6,197m. Individual pensions, which includes individual SIPP, rose by 14% to £3,858m. Within this, individual SIPP sales were up by 18% to £3,461m. This was driven by strong growth in new customer accounts, increased activity around the tax year end and higher average market values boosting incoming transfer values. Savings and investment sales grew by 42% to £1,997m with mutual fund sales increasing by 53% to £1,795m, reflecting significant growth in sales through our Wrap platform. This was partly offset by investment bonds sales which fell by 14% to £202m.
New business contribution (NBC) increased to £173m, while the PVNBP margin fell to 1.3% (2009: 1.4%). The internaI rate of return (IRR) increased to 18% and the payback period was maintained at 6 years.
1.4 Business segment performance continued 1.4.1 UK continued EEV operating profit before tax
UK EEV operating profit, including HWPF time value of options and guarantees and non-covered business, decreased to £456m (2009: £631m) largely due to a decrease in operating profit from back book management activities. This was partially offset by a £34m increase in NBC. In addition, the return on the present value of in-force business was higher due to both a higher opening embedded value and a higher risk discount rate. Development spend increased to £30m (2009: £18m), reflecting our further investment in developing our corporate and retail propositions and our brand. Reducing the ongoing expenses of managing our business contributed to an efficiency profit of £44m (2009: loss £26m).
AUA on our Wrap platform continued to grow significantly and was up 69% to £6.1bn as at 31 December 2010 (2009: £3.6bn). This was partly due to a significant increase in the number of advisers using the platform. 820 adviser firms now use the platform compared to 583 at 31 December 2009. This contributed to an 80% increase in customer numbers to 57,000 as at 31 December 2010 (2009: 31,600). We made a number of enhancements to the platform based on adviser feedback. This included introducing model portfolios and continuing to develop back-office integration functionality for advisers. We believe this customercentric approach to introducing enhancements is one of the reasons our Wrap platform has been awarded the highest possible ‘eee’ rating by the Finance and Technology Research Centre (FTRC) for five consecutive years.
In March 2010, we announced our intention to transform how we operate by investing significantly in our propositions and increasing our speed to market, making us more nimble and allowing us to respond quickly to customer growth opportunities. We have already made significant progress. During 2010, we restructured the UK business, which included the creation of a new Take to Market function and established an Operations Transformation Programme. The new operating model will enhance customers’ experience and deliver increased value and efficiencies by increasing automation and making it easier for customers to self-serve.
Also in March 2010, we announced the purchase of the remaining 75% stake in the intermediary support services business, threesixty, having held a 25% stake since May 2007. This acquisition adds further depth to our propositions in the intermediary market and supports our long-term distribution capability. We have already begun work with threesixty to develop the business for the benefit of our independent financial adviser client firms.
In January 2011, we announced the completion of the acquisition of Focus Solutions for £48m. This will enhance and accelerate delivery of our market-leading solutions and services for intermediaries and other distribution channels. This acquisition is relevant to our core intermediary market and will help us to grow our retail bank and direct-to-customer distribution.
Operating profit before tax fell slightly to £110m (2009: £113m). Fee based revenue benefited from an increase in management charge income and surplus income from higher AUA. The average revenue yield on fee business was 118bps (2009: 116bps). This reflected changes in the product mix, including an increase in retail funds.
Net flows decreased by 84% in constant currency to £63m, due to lower inflows within the spread/risk business and higher claims and withdrawals. These more than offset the strong growth in gross inflows achieved across our fee business. In our retail fee business, which includes individual segregated funds and mutual funds, net inflows increased to £119m (2009: £81m). This reflects the strength of our savings and investments propositions, our well-positioned offering and strong adviser relationships. The recovery in equity markets during 2010 improved customer sentiment and this also increased net flows.
In our retail spread/risk business, net outflows increased from £72m to £328m, mainly due to lower term funds sales and maturing term deposits sold in 2009 when product demand was very high. Total group savings and retirement net inflows decreased by 39% in constant currency to £193m (2009: £287m). This was despite strong sales and an increase in market share. Large mandates won during the year only provided marginal inflows, consisting mostly of future annually recurring premiums. Group insurance net inflows increased by 10% in constant currency to £79m (2009: £65m), as the strength of our innovative disability offering helped us make gains in a contracting market. Total net inflows, excluding scheduled payments relating to non-core legacy annuity products decreased by 38% in constant currency to £584m (2009: £844m).
PVNBP sales increased by 12% in constant currency to £3,048m (2009: £2,460m). Sales in our retail line, which includes individual insurance, savings and retirement and mutual funds, increased by 4% in constant currency to £975m (2009: £848m). Group savings and retirement sales increased by 35% in constant currency to £1,466m (2009: £981m) with close to two-thirds of sales comprising of recurring annual premiums. Excluding large wins in both years, sales have increased by 22% in constant currency. Group insurance sales decreased by 13% in constant currency to £607m (2009: £631m), reflecting a contracted business environment.
New business contribution increased by 34% in constant currency to £68m (2009: £46m) and PVNBP margin improved to 2.2% (2009: 1.9%). This was the result of a more profitable sales mix, with higher sales of individual segregated funds and mutual funds. Internal rate of return increased to 24% (2009: 14%). This was mainly due to the change in sales mix. The undiscounted payback period shortened to 6 years (2009: 7 years).
In line with our strategy, we have continued to focus on increasing our visibility in the market. In 2010, we launched the second phase of our award-winning advertising campaign, which included online marketing and social media. A new organisational structure has also been adopted to allow our business to react more quickly to new business opportunities.
In our group savings and retirement line, we have focused on expanding in the large case segments and continued to build our core propositions. In the small market segment, we continue to evolve our Express product by launching web tools to support our advisers in their sales process. We also revamped our Plan for Life statements, highlighting the important information members need to make informed decisions about their retirement income planning. The update was well received by clients and intermediaries.
In the first quarter of 2011, we will launch a trust application platform. This will enable us to deliver a combined offering of stock plans and stock options within our regular defined contribution proposition.
The progress we have made in improving our retail sales function and building solid distribution relationships was acknowledged by an industry survey. Our retail sales team received a top ranking from retail advisers for the second year in a row, recognising the strength of our business consultancy model and the strong relationships that we have built with our advisers. We also launched our new Corporate Class Mutual Fund series featuring tax-efficient funds. This allows non-registered investors to enjoy all the benefits of our traditional range of funds with an added layer of tax efficiency. At the beginning of 2011, we launched a new Distributor Relationship Management system as part of our continuous effort to deliver propositions that meet the evolving needs of our customers. The system provides an overview of our adviser relationships and will help to extend our distribution reach.
Our International business is made up of four wholly owned businesses and two joint ventures. Our wholly owned businesses are Standard Life International Limited (offshore bonds business based in Dublin), Standard Life Ireland (Ireland domestic business), Standard Life Germany (operating in Germany and Austria) and Standard Life Asia (based in Hong Kong). The joint ventures are based in China and India. International offers long-term savings and investments products.
IFRS operating profit before tax of the wholly owned businesses decreased by 24% to £38m (2009: £50m). Profitability in Germany fell to £42m (2009: £55m) and in Ireland domestic business remained broadly stable at £8m (2009: £9m). The offshore bonds business recorded a loss of £9m (2009: loss £10m). In Germany, the fall in profitability was mainly due to the reducing transfer of profit to shareholders from the HWPF in accordance with the Scheme of Demutualisation. This was partly offset by rising profits from the post-demutualisation business. Most revenue in Germany is from premium based charges. During 2010 fee business revenue bps fell to 310bps (2009: 413bps) because of the reduction in charges from pre-demutualisation business. Profitability in Ireland benefited from increased management charge income and lower operating costs. This led to a rise in the average revenue yield on fee business to 81bps (2009: 74bps). Hong Kong recorded a profit of £4m (2009: £2m) due to strong sales and margins growth. The International result also includes central costs relating to business development.
Net flows in Germany were £666m (2009: £701m), a 1% decrease in constant currency. The market remained challenging for the whole industry, especially the IFA segment, leading to a fall in new business levels.
Our Hong Kong operation continues to deliver strong growth, with net flows up 185% in constant currency to £35m (2009: £12m).
PVNBP sales in the wholly owned businesses increased by 35% to £1,929m (2009: £1,430m). In Ireland domestic business, sales increased by 22% in constant currency to £598m (2009: £512m) due to our strong investment proposition and the launch of a new pensions product. We benefited as customers moved towards financial institutions they perceived as being more secure. Offshore bonds sales were 89% higher at £700m (2009: £370m) due to an improved proposition and better market conditions. In Germany, sales of £337m (2009: £407m) were 14% lower than 2009 in constant currency.
EEV operating profit before tax of the wholly owned businesses, including non-covered business, increased to £83m (2009: £24m). This increase was mainly due to increased profits from new business and the positive persistency in Ireland and Germany. The NBC for Ireland and Hong Kong increased due to higher sales levels. PVNBP margin was 2.3%.
Standard Life Asia is now recognised as a leading provider of long-term savings and investments products through intermediaries in the Hong Kong market. The business grew its market share significantly with targeted sales and marketing activity and superior market-leading propositions, like the newly launched Harvest Supreme proposition.
The joint ventures contributed an IFRS operating loss before tax of £23m (2009: loss £27m) to the Group, reflecting the continued progression of the business and our commitment to invest in the region.
EEV covered business operating profit before tax for the joint ventures was £3m (2009: loss £1m). Sales increased by 9% in constant currency and led to a strong rise in NBC to £23m (2009: £11m). This resulted in a PVNBP margin of 4.3%.
Standard Life Investments performed strongly in 2010, despite volatile and subdued markets. The sales growth of past periods was maintained with strong inflows of institutional and wholesale business of £6.2bn. After removing the structural outflows of money market assets, the underlying net inflow was £7.3bn. These flows increased third party AUM to a record level of £71.6bn (2009: £56.9bn). The increase in new business flows and a rise in average market values resulted in strong revenue growth of 29%, driving EBIT up 33% to £106m (2009: £80m) and EBIT margin to 33% (2009: 32%). Our continued focus on serving existing clients and winning new clients through strong investment performance, product innovation, global distribution and high levels of customer service has paid off. The economic recovery remains subdued and fragile but this robust performance shows that Standard Life Investments can prosper in difficult conditions and is in good shape to benefit from a future return to stability.
Revenue rose by 29% because of increased third party new business flows, many of which were into higher margin products, such as GARS and UK mutual funds, and stronger market conditions. This raised the average revenue yield on third party AUM to 35bps (2009: 34bps).
Operating costs were tightly controlled while allowing for continued investment in the business to maintain our longer term growth. These measures resulted in an increased EBIT of 33% to £106m and an EBIT margin of 33% (2009: 32%).
Lower interest expense also contributed to the increased IFRS operating profit. A subordinated loan of £30m was repaid at the end of 2009 and a further £15m subordinated loan was repaid at the end of 2010, leaving the business with no gearing.
Investment performance was strong during 2010 and we continued to deliver a robust investment performance over the longer term. The money-weighted average active investment performance over all time periods – one, three, five and ten years – continues to be above median for our third party business. Our mutual fund and unit trust range strength is shown by the proportion of eligible and actively managed funds (23 out of 28) rated A or above by Standard & Poor’s in the UK.
1.4 Business segment performance continued 1.4.4 Global investment management continued Assets under management and net flows
We achieved third party net inflows of £7,269m (2009: £4,848m), after removing the structural outflows from money market funds. This was a 50% increase from 2009, representing 14% of opening third party AUM. Total third party net inflows were £6,200m. UK mutual funds net inflows rose significantly to £2,221m (2009: £669m). A notable number of new institutional clients were won in the UK and Europe during the year, increasing the institutional client base in these markets by 32%. Our high overall retention rates are reflected in nearly £1bn of net inflows generated from existing institutional clients.
During 2010 we also made some enhancements to our infrastructure. This included restructuring our Global Client Group, investing in our people (880 staff at 31 December 2010, up from 783 at the beginning of the year) and investing in our core operational platforms.
Our pipeline of new product initiatives is strong, and we are confident that we will continue to meet the ever changing demands of our clients through new and innovative products.
Capital and cash generation enables the Group to invest in new business and profitable growth opportunities. Gross operating capital and cash generation before investment in new business and growth investment spend was £596m (2009: £617m). Excluding the contribution from back book management activities of £10m (2009: £71m), which is more variable from year to year, adjusted capital and cash generation was £586m. This represents an increase of 7% from £546m in 2009.
The growth in NBS contributed to a fall in the coverage ratio of gross operating capital and cash to NBS, which was down from 3.3 to 2.7. This was also due to a decrease in capital and cash from management of the existing book of business. The decrease in capital and cash from back book management activities contributed 0.3 to the fall in the coverage of gross operating capital and cash to NBS.
Coverage of operating capital and cash to dividend was 1.0 compared to 1.4 for 2009. The decrease in back book management capital and cash and the increase in growth investment spend were the main contributors to the total decrease in the ratio.
Reconciliation of IFRS operating profit to EEV operating capital and cash generation for the year ended 31 December 2010
Capital and cash generation from existing business after new business sales of £384m was the main contributor to our operating capital and cash generation. There was negative capital and cash contribution from our growth investment activities. This is reflected in our core covered business development expenses of £48m (2009: £32m) and it also contributed to the increased losses from our core non-covered businesses from £19m to £47m.
As with EEV operating capital and cash generation, IFRS operating profit removes the impact of short-term economic volatility. Whilst there is clear alignment between IFRS operating profit and EEV operating capital and cash generation, there are differences which include: • £14m from the difference in the treatment of assets and liabilities. EEV capital and cash is more consistent with local statutory valuation bases, which for some territories and certain classes of investment liabilities are measured differently for IFRS reporting. This difference primarily reflects a higher increase in reserves in the UK EEV capital and cash compared to IFRS operating profit.
• £35m from the difference in the treatment of deferred acquisition costs/deferred income recognition, intangibles, tax and other. The impact of different methodologies in respect of expected income is the main reason for the movement. In EEV operating profit this income is included on an expected return basis, but the actual fees are included in IFRS operating profit.
Required capital movement Net worth movement £m £m £m £m £m £m
Capital and cash generation from existing business 626 (22) 604 567 (21) 546
Capital and cash generation from non-operating items 93 41 134 (394) 12 (382)
Total EEV capital and cash generation from continuing operations 413 8 421 (73) 62 (11)
External credit ratings agencies perform independent assessments of the financial strength of companies. The current insurer financial strength ratings for Standard Life Assurance Limited (SLAL) are A1/Stable and A+/Stable from Moody’s and Standard & Poor’s respectively. These ratings are unchanged from those reported in the Half Year Results 2010.
2010 figures above based on estimated regulatory returns. 2009 based on final regulatory returns. The 2010 figures have been prepared on an Insurance Groups Directive (IGD) basis; previous periods on a Financial Groups Directive (FGD) basis.
• The risk aspects of major investments, major product developments and other corporate transactions
• Material risk and capital matters affecting the Heritage With Profits Fund
Appetite The Group has no appetite for market risk exposures except where they arise as a consequence of core strategic activity, principally as a consequence of revenue streams being exposed to market risks.
Equity and property risk Equity and property risk for the Group mainly relates to the risk that the value of future fund charges on unit linked funds, collective investment schemes, segregated funds and future recourse cash flow payments from the HWPF will fall (or that burnthrough costs to the shareholder arise) if the value of assets under management falls due to adverse market conditions.
There is currently no restriction on cash flows due from the HWPF. The key existing mitigants to reduce the risk of burnthrough from the HWPF include the actively managed investment policy for asset shares, the dynamic guarantee deduction framework and hedging of the cost of guarantees for certain contracts. The fund remains well capitalised and market risk mitigants continue to perform in line with expectations.
Canada has exposure to equity and property risks as a consequence of direct holdings in such assets. These holdings have been acquired for a number of reasons, including an expectation that such assets would increase returns to shareholders. A hedge was put in place during the year that reduces the risk arising from the limited policyholder guarantees on segregated fund business.
Fixed interest risk Shareholder exposure to fixed interest risk arises from a number of sources, but is mainly attributable to asset liability mismatches in certain portfolios of liabilities. The extent of such mismatches has been reduced over the course of the year, most notably through improvements in cash flow matching of annuities written in the UK. Mismatches in Canada arise mainly as a consequence of the difficulty in obtaining long-dated fixed income assets to match the long-term liability cash flow which gives rise to reinvestment risk.
1.6 Risk management continued Similar to equity and property risk, the Group is also exposed to currency risk through the potential impact of market movements on the value of assets held in defined benefit pension schemes operated by the Group.
Definition 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 assets due to a widening of mortgage, bond and swap spreads.
Appetite The Group has an appetite for credit risk to the extent that acceptance of this risk optimises the Group risk adjusted return. However, the Group has limited appetite for significant losses arising from counterparty failures and will therefore establish robust risk limits which Group companies must adhere to.
Shareholder exposure to credit risk arises from a number of sources. In the UK business, the principal exposures are in respect of the corporate bonds held to back annuities written post-demutualisation and the assets held to back the subordinated debt liability. In Canada, the main component of credit risk arises from the use of corporate bonds and commercial mortgages to back annuities.
Credit risk also arises as a consequence of burnthrough from the HWPF, though as noted above, this fund remains well capitalised, burnthrough cost is low and there is currently no restriction on transfers. Further credit risk exposure arises from variations in the value of future fund charges on unit linked funds and collective investment schemes that are invested in corporate bonds.
The previously disclosed ‘Contract for Differences’ between Standard Life Assurance Limited and Standard Life Investments was closed out during the year and the Group’s exposure to credit risk arising from asset backed securities has been reduced. The credit risk associated with swap spread widening has also been reduced over the course of the year following the implementation of cash flow matching of annuities written in the UK business post-demutualisation.
In addition, credit risk arises from holding cash and cash equivalents, debt securities and the reinsurance of certain insurance liabilities to various counterparties.
All credit portfolios are subject to strict limits on permissible counterparty exposures and continue to perform well despite adverse economic conditions. Where appropriate, collateralisation is used to reduce credit risk.
The Group’s principal exposures are to persistency and longevity risk, arising as a consequence of normal business activity.
The Group is also exposed to the risk that members of the defined benefit pension schemes operated by the Group live longer than expected.
Definition 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 cost.
• Central monitoring, assessment and oversight of the investment of assets within the Group
Appetite The Group has an appetite for operational risks where exposures arise as a consequence of core strategic activity. However, the Group has limited appetite for large operational losses due to the likely related reputational damage and opportunity costs. The Group will seek to put effective controls in place to reduce operational risk exposures, except where the costs of such controls exceed the expected benefits.
Operational and strategic risk exposures are actively managed with action planning and progress monitoring in place. The operational risk processes and systems have been extensively revised and enhanced, together with a substantial programme of education and skill improvements within the business. During 2010 the overall risk structure was revised with the creation of Chief Risk Officers within the UK business, Standard Life Investments and the International business.
Operational risk is identified, assessed, managed and reported in a consistent and coherent way across the Group and is recorded on a single global system. The assessment of operational risk is linked to the objectives of each business, function or department. Assessment considers financial impact, reputational impact, customer impact and strategic impact. We measure impact of risk both before the application of controls/mitigation and post application. This ensures we are aware of control/mitigation dependencies. Where risk is considered outwith appetite, or where the control environment is considered in need of improvement, then action plans are created, maintained and delivered. These have visibility at a Group level and are actively managed.
• Management of information security: control enhancement and control performance monitoring
• People: identification and management of the people risks (succession planning, skilling and resource levels)
• Delivering the strategic plan: ensuring that the risks associated with the delivery of our strategic plan are identified, assessed, understood and mitigated
We believe it’s our responsibility to help customers get to grips with their finances. So even in these uncertain times, they can look forward to the future with confidence and optimism. At the same time, they’re reassured by the knowledge that we’re secure and that we’ll invest their money responsibly.
Putting customers at the heart of our work means we’ve got to keep listening, responding and developing our understanding of their needs and challenges. We know that customers want us to treat their money responsibly. We believe it’s our job to look after their money better than they could themselves.
Our approach to putting customers first has four main pillars: • Making sure we offer products that are easy to access, understand and have tangible long-term benefits
• Making sure that Standard Life is easy to deal with and that we respond to customer needs
In 2010, this resulted in a number of initiatives with customers at their heart including: Active Money Personal Pension Our research showed us that 28-40 year olds in the UK needed a different kind of pension product. They needed different ways of interacting with us, as well as high levels of flexibility. We developed the Active Money Personal Pension for them. After testing its content and application process, we got hugely positive feedback, with customers describing their experience as modern, straightforward, informative, friendly, easy, sensible, flexible, professional, clear and personal. In November, we launched the option for customers to apply directly online.
www.standardlife.co.uk relaunches We listened to what our customers told us and we redeveloped our website to meet their needs more closely. This meant improving the structure and design, and simplifying the content.
• Lets customers apply for the Active Money Personal Pension online
W1 W2 W2 W1 W1 W2 W1 W2 their investment process by launching a new investment proposition. To make it easier for them to manage risk effectively, we made a number of improvements to our platform, including introducing bulk re-balancing.
Corporate customers We redesigned the pack employees receive when they join their corporate pension scheme. We worked with employees throughout the redesign to make sure our ideas were working. The new pack gives them the information they want in a format they like. In 2010, more than 400,000 employees managed their flexible benefit options through our technology.
We’re keeping close tabs on our customers’ thoughts and views of the service we give. We do a survey twice a year with customers who have been in touch with us recently. It shows the long-term trend is very positive. In 2010, 69% of customers we surveyed said they’d be likely or very likely to recommend Standard Life to family or friends. We’ve also introduced a new way for people to give us feedback on our service levels straight after they’ve talked to us on the phone.
In 2010 our UK business was recognised with awards, including: • Financial Adviser Service Awards: - Life and pensions five star provider award
• Finance and Technology Research Centre (FTRC): - Group SIPP received the top ‘eee’ rating for four consecutive years - Group Personal Pension ‘eee’ rating for five consecutive years - Group Contracted-in Money Purchase ‘eee’ rating for four consecutive years - SIPP and SIPP specialist ‘eee’ rating for three consecutive years - Wrap platform ‘eee’ rating
• UK Pensions Awards: - Bundled/Full Service Defined Contribution Provider of the Year
• Financial Adviser Life & Pensions Awards: - SIPP and/or SSAS Provider of the Year for five consecutive years - Best Income Drawdown Provider for four consecutive years
High quality customer service is the basis of our growth strategy. We focus on building retention and strong customer relationships. In 2010, our client retention level based on internal methodology was 94.4%. We’re constantly investing in technology, training and processes to help us provide the level of service our customers need and expect. This includes continuing to enhance web-based functionality across our group lines. This makes it easier for both sponsors and participants to administer our products.
Our customer focus has earned us a number of awards throughout the year, including: • Best Financial Services Integrated Advertising for our ‘One key, countless possibilities’ multimedia campaign, highlighting our success in connecting with our customers
• Insurance and Financial Communicators Association Awards: - Award of Excellence: Group Savings and Retirement – ‘Welcome kits’ - Award of Excellence: Group Savings and Retirement Summary of Pension Legislation in Canada
• Excellent rating in the DALBAR Trends and Best Practices in Defined Contribution Pension Plan Statements report www.standardlife.com 39
All International operations are committed to maintaining the highest level of customer service. This commitment to customer service was acknowledged during 2010 by various awards received by our operations including: • The German business won two awards for outstanding service and broker support
• The offshore bonds business received an International Adviser Award for ‘Best Adviser Support and Customer Service – UK Offshore’
Our business is underpinned by strong investment performance achieved by rigorously applying our ‘focus on change’ investment philosophy. High quality support by our client service teams – combined with this strong investment performance – won us a number of awards in 2010 including: • Best Investment Service Provider 1993 to 2010 from Financial Adviser in recognition of our long-term commitment to the IFA community over the last 18 years
• Investment Provider 5-Star Award at the Financial Adviser Service Awards. Standard Life Investments has secured success in the 5-Star category in 14 of the last 15 years
• The Scottish Financial Services Award in recognition of its role in promoting stewardship and for excellent performance
• Best Fund – Equity Global High UK category at the Lipper Awards for the performance of its Managed Fund over a three and five year period 40 www.standardlife.com
The second Transformation Tracker ran in November 2010, with the results we expected following a period of significant change. We will use these results to build on our successes this year, and to inform how we do things in 2011.
In 2011 we will be launching our refreshed approach to monitoring, measuring and tracking employee engagement within Standard Life. We’re working with the Hay Group on a new survey that will give us a more complete view of what influences each employee’s relationship with Standard Life.
A priority is to ensure that we have the depth and flexibility of talent we need for the future, as well as powerful and consistent leadership at all levels of the business. In 2010 we made good progress in moving towards these objectives. We made significant changes at senior levels, with 40% of executives leaving during the year and many others moving to new roles that will support our transformation and new organisation design. At the same time we increased the ratio of internal appointments into this level as a result of previous investment in building talent pipelines.
As a consequence of these and other activities, the strength of our internal talent pipelines and depth of succession coverage is steadily improving. We will also continue to strengthen our senior leadership and executive populations as required.
The annual bonus measures performance against clear financial and non-financial (customer, people and strategic) targets set out in personal scorecards for both Group and personal outcomes.
The 2010 and 2011 LTIP targets are entirely focused on IFRS operating profit before tax (excluding joint ventures) designed to deliver our three year strategic plan. Full details of the LTIP targets will be included in the Directors’ remuneration report in the Annual Report and Accounts 2010.
Our Business review for the year to 31 December 2010 has been prepared in line with the Companies Act 2006 and the Disclosure and Transparency Rules (DTR) issued by the Financial Services Authority (FSA). Under section 417 of the Companies Act 2006, DTR 4.1.8 and DTR 4.1.9, the Group is required to provide a fair review of the business and a description of the principal risks and uncertainties facing the Group. Principal uncertainties are detailed in Section 1.1 – Group overview. Principal risks are detailed in Section 1.6 – Risk management. To provide clear and helpful information, we have also considered the voluntary best practice principles of the Reporting statement: Operating and Financial Review (OFR) issued by the Accounting Standards Board (ASB).
The financial results are prepared on both an IFRS basis and an EEV basis. All EU-listed companies are required to prepare consolidated financial statements using IFRS issued by the International Accounting Standards Board (IASB) as endorsed by the EU. EEV measures the net assets of the business plus the present value of future profits expected to arise from in-force long-term life assurance and pensions policies. The IFRS financial results in Section 1.2 of the Business review and in the IFRS financial information section of this report have been prepared on the basis of the IFRS accounting policies applied by the Group in the IFRS financial information section of this report. The EEV basis has been determined in accordance with the EEV Principles and Guidance issued in May 2004 and October 2005 by the Chief Financial Officers (CFO) Forum. The CFO Forum represents the chief financial officers of major European insurers, including Standard Life. EEV methodology has been applied to covered business, which mainly comprises the Group’s long-term savings business. Non-covered business is reported on an IFRS basis. The EEV financial results in Section 1.3 of the Business review and in the EEV financial statements section of this report have been prepared in accordance with the EEV methodology applied by the Group in Note 3.17 to the EEV financial information in this report for 2010, and in the relevant EEV methodology notes included in the Annual Report and Accounts 2009 in respect of the comparative period.
For new business, all profits expected to arise on the contract are recognised at the point of sale. Future profits are discounted to a present value using an appropriate discount rate over the lifetime of the contract.
Aggregate equity holder tax effect of items recognised in comprehensive income (60) 28
Other comprehensive income/(expense) for the year from continuing operations 189 (37)
Total comprehensive income for the year from continuing operations 662 94
Profit for the year 493 180 * The Group’s healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 and the Group’s banking business, Standard Life Bank plc, was sold on 1 January 2010. Both businesses have been classified as discontinued operations. The analysis of operating profit presented for the years ended 31 December 2010 and 31 December 2009 include continuing operations only.
Adjustment is made for restructuring costs and significant corporate transaction expenses. Operating profit is also adjusted for impairment of intangible assets and profit or loss arising on the disposal of a subsidiary, joint venture or associate. Other operating profit adjustments include volatility arising from changes in insurance and investment contract liabilities driven by corresponding changes in tax provisions, and items which are one-off in nature and outside the control of management and which, due to their size or nature, are not indicative of the long-term operating performance of the Group.
Issue of share capital other than in cash 4 - 88 - - 92 - 92
Shares acquired by employee trusts - (35) - - - (35) - (35)
Other movements in non-controlling interests in the year - - - - - - (22) (22)
Profit/(loss) for the year - - - 213 - 213 (33) 180
Other movements in non-controlling interests in the year - - - - - - (5) (5)
Capital flows from non-controlling interests and third party interest in consolidated funds 2,553 960
Effects of exchange rate changes on cash and cash equivalents 2 (42)
The preliminary announcement has been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) as endorsed by the European Union (EU), with interpretations issued by the International Financial Reporting Standards Interpretations Committee and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.
• Amendments to IAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items
• Adjustment will also be made for one-off items which are outside the control of management and which, due to their size or nature, are not indicative of the long-term operating performance of the Group. Previously such items would have been included in IFRS underlying profit. In 2010 and 2009, no such one-off items were adjusted in determining operating profit.
Adjusted for the following items: Short-term fluctuations in investment return and economic assumption changes - (214) (214)
Profit before tax attributable to equity holders’ profits 111 - 111
Total tax credit attributable to equity holders’ profits 20 - 20
The Group’s reportable segments have been identified in accordance with the way in which the Group is structured and managed. The Group’s reportable segments are as follows: UK UK operations comprise life and pensions business and healthcare business. The life and pensions business provides a broad range of pensions, protection, savings and investment products to individual and corporate customers. The Group’s healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010. It has therefore been classified as a discontinued operation, refer to Note 2.5 – Discontinued operations. UK operations previously included the Group’s banking business, Standard Life Bank plc, which was sold on 1 January 2010.
Other This reportable segment primarily includes the group corporate centre and the shared service centre.
(b) Reportable segments – income statement, operating profit and asset information
Share of profit/(loss) from associates and joint ventures 21 15 (23) 11 - - 24
Tax attributable to equity holders’ profits 27 43 8 27 (7) - 98
Profit/(loss) attributable to equity holders of Standard Life plc 260 145 4 79 (56) - 432
Tax expense/(credit) attributable to equity holders’ profits from continuing operations 27 43 8 27 (7) - 98
Investments in associates and joint ventures 2,697 123 211 42 14 - 3,087
Additions during the year 1 The Group’s healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 and has therefore been classified as a discontinued operation. The reconciliation to consolidated operating profit for the year ended 31 December 2010 includes continuing operations only.
2.2 Segmental analysis continued (b) Reportable segments – income statement, operating profit and asset information continued
Global investment management Other Elimination Total 2009 £m £m £m £m £m £m £m
Profit/(loss) for the year from continuing operations 149 (41) 14 51 (42) - 131
Profit/(loss) for the year 198 (41) 14 51 (42) - 180
Loss attributable to non-controlling interests from continuing operations 33 - - - - - 33
Profit/(loss) attributable to equity holders of Standard Life plc 231 (41) 14 51 (42) - 213
Less: Profit for the year from discontinued operations (49) - - - - - (49)
Additions during the year 1 The Group’s healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 and has therefore been classified as a discontinued operation. The Group’s banking business, Standard Life Bank plc, was sold on 1 January 2010. The reconciliation to consolidated operating profit for the year ended 31 December 2009 includes continuing operations only.
2 The business areas included in the Europe and Asia reportable segments presented as at 31 December 2009 are included within the International reportable segment.
Inter-segment transactions are entered into under normal commercial terms and conditions that would be available to unrelated third parties. The allocation of total net revenue presented above is based on customer location and this basis is not materially different to geographical origin. The Group has a widely diversified policyholder base and is therefore not reliant on any individual customers. The Group utilises additional measures to assess the performance of each of the reportable segments, which are presented in the European Embedded Value financial information.
Interest expense of £113m (2009: £123m) in respect of subordinated liabilities is included within finance costs. For the year ended 31 December 2010, total interest expense is £130m (2009: £373m).
Restructuring costs from continuing operations incurred during the year include £64m of expenses in relation to the Group’s Transformation and Solvency 2 Programmes (2009: £50m) and £8m (2009: £9m) of transaction costs incurred from the sale of Standard Life Bank plc and Standard Life Healthcare Limited.
2.4 Tax expense/(credit) The tax expense/(credit) is attributed as follows: Tax expense attributable to policyholders’ returns 400 299
The share of tax of associates and joint ventures is £4m (2009: £9m) and is included above the line ‘Profit before tax’ in the summary consolidated income statement in ‘Share of profit/(loss) from associates and joint ventures’.
Tax relating to components of other comprehensive income is as follows: £m £m
Tax on fair value gains on cash flow hedges attributable to discontinued operations
2.5 Discontinued operations The Group’s healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 for a cash consideration of £138m and has therefore been classified as a discontinued operation. The Group’s banking business, Standard Life Bank plc, was sold on 1 January 2010 for a cash consideration of £246m and was classified as a discontinued operation for the year ended 31 December 2009. The assets and liabilities attributable to Standard Life Bank plc as at 31 December 2009 have been classified as held for sale.
The profit included in the consolidated income statement in respect of discontinued operations is as follows: Revenue
Other comprehensive income for the year from discontinued operations 24 8
Profit attributable to equity holders of Standard Life plc (£m) 432 213
Weighted average number of ordinary shares for diluted earnings per share (millions) 2,248 2,203
Operating profit before tax from continuing operations 425 19.0 399 18.1
Short-term fluctuations in investment return and economic assumption changes for the year ended 31 December 2010 were £127m (2009: (£214m)). Short-term fluctuations in investment return relate principally to the investment volatility in Canada non-segregated funds, UK annuities and in respect of the Group’s subordinated liabilities and assets backing those liabilities.
The volatility arising from changes in insurance and investment contract liabilities caused by changes in tax provisions in the Group’s Canadian subsidiary was £30m (2009: £13m). This volatility has no impact on equity holder profit after tax and as such is excluded from operating profit before tax.
2.8 Dividends The Company paid a final dividend of 8.09 pence per share (final 2008: 7.7 pence) totalling £180m in respect of the year ended 31 December 2009 on 28 May 2010 (final 2008: £168m) and an interim dividend of 4.35 pence per share (interim 2009: 4.15 pence) totalling £98m (interim 2009: £92m) in respect of the year ended 31 December 2010 on 19 November 2010.
2.9 Issued share capital and shares held by trusts (a) Issued share capital
The movement in the issued share capital of the Company during the year was: Number £m Number £m
Shares issued in respect of employee share plans 566,626 - 630,003 -
Shares issued in respect of share options 1,305,584 - 2,842,293 -
Shares issued in respect of bonus issue 583 - 1,847 -
During the year ended 31 December 2010, 44,854,401 shares have been issued in respect of dividends declared in the year under the Scrip dividend scheme (2009: 55,018,211).
The Scheme of Demutualisation sets a 10-year limit, ending in 2016, for those eligible members of The Standard Life Assurance Company (SLAC) who were not allocated shares at the date of demutualisation to claim their entitlements. During the year ended 31 December 2010, 490 ordinary shares were issued to eligible members in respect of their demutualisation entitlements (2009: 449).
As part of the offer on the demutualisation of SLAC and flotation of Standard Life plc, holders of demutualisation shares, employee shares or shares acquired in the preferential offer who retained their shares for a continuous period of one year from 10 July 2006 were entitled to one bonus share for every 20 shares. Equity holders who are entitled to bonus shares but were not allocated shares on 10 July 2007 had until 10 July 2010 to claim their entitlements. During the year ended 31 December 2010, 583 ordinary shares were issued to equity holders entitled to receive bonus shares (2009: 1,847).
Shares held by trusts also include shares held by the Unclaimed Asset Trust (UAT). The shares held by the UAT are those not yet claimed by the eligible members of the Standard Life Assurance Company (SLAC) following its demutualisation on 10 July 2006.
Any corresponding obligation to deliver a fixed number of the Company’s equity instruments to employees, or eligible members of the SLAC, is offset within the shares held by trusts reserve.
The movement in insurance contract liabilities, participating investment contracts and reinsurance assets during 2010 was as follows: Participating insurance contract liabilities
Reinsurers’ share of liabilities (reinsurance asset) Net 2010 £m £m £m £m £m £m
Effect of changes in: Effect of: Total change in contract liabilities 891 922 368 2,181 97 2,278
Reinsurers’ share of liabilities (reinsurance asset) Net 2009 £m £m £m £m £m £m
Account balances paid on surrender and other terminations in the year (7,589) (6,682)
Certificates of deposit, commercial paper and medium term notes - 816
Present value of funded obligation (1,724) (175) (51) (1,950) (1,700) (135) (43) (1,878)
Present value of unfunded obligation - (56) - (56) - (41) - (41)
The principal economic assumptions used in determining pension benefit obligation for the Group’s plans are as follows: UK Canada Ireland UK Canada Ireland % % % % % %
Rate of increase in salaries 4.65-5.65 3.50 3.50 4.80-5.80 3.50 3.50
In the ordinary course of business, Standard Life Trust Company (SLTC) enters into agreements which contain guarantee 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, SLTC has provided as security a bank credit facility up to a maximum of CA$84m.
As at 31 December 2010, capital expenditure that was authorised and contracted for, but not provided and incurred, was £251m (2009: £296m) in respect of investment properties. Of this amount, £239m (2009: £283m) and £12m (2009: £13m) relates to the contractual obligations to purchase, construct or develop investment property and repair, maintain or enhance investment property respectively.
Original term to maturity of more than one year 7 1,859
Included in other commitments is £315m (2009: £696m) committed by certain subsidiaries which are not fully owned by the Group. These commitments are funded through (contractually agreed) additional investments in the subsidiary by the Group and the non-controlling interests. The levels of funding are not necessarily in line with the relevant percentage holdings.
The commitments to extend credit with an original term to maturity of more than one year as at 31 December 2009 were primarily in respect of the Group’s banking business, Standard Life Bank plc, which was sold on 1 January 2010.
All transactions between key management personnel and the Group are on commercial terms which are equivalent to those available to all employees of the Group.
Equity attributable to ordinary equity holders of Standard Life plc - 617 1,077 1,694 1,053 2,747 710 3,457
Total available capital resources to meet regulatory requirement 1,655 258 3,379 5,292 1,204 6,496 550 7,046
UK regulated life business Standard Life Assurance Limited’s (SLAL) regulatory solvency position is determined using the Financial Services Authority’s (FSA) ‘twin peaks’ approach, which requires liabilities to be valued on both a realistic and a regulatory basis. The realistic basis removes some of the margins for prudence included in calculations under the regulatory basis. However, it requires discretionary benefits that are not considered under the regulatory basis, such as final bonuses, to be valued. The extent to which the realistic peak is more onerous than the regulatory peak increases the amount of the Capital Resources Requirements (CRR).
Based on draft regulatory returns at 31 December 2010, SLAL had available capital resources of £6.7bn (2009: £5.3bn) and a CRR of £2.9bn (2009: £2.0bn). 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.
2.16 Capital statement continued Overseas life operations Capital resources of £1,413m (2009: £1,204m), which relate mainly to operations in Canada, also include operations in Asia. The capital resources of the operations in Canada are based on local Generally Accepted Accounting Principles financial statements adjusted where necessary to reflect the fair value of assets with a corresponding adjustment to liabilities. The Canadian regulator sets the minimum required capital. It also requires certain assets to be held in trust to increase policyholder protection (vested assets). As a result of the combination of the capital requirement and vested assets, the overseas life capital subject to constraints amounted to £836m at 31 December 2010 (2009: £782m).
Other activities At 31 December 2010, capital resources of £704m (2009: £550m) and capital subject to constraints of £81m (2009: £118m) relate to the Group’s investment management businesses and group corporate centre activities.
SLAL has issued subordinated loans to the Company, which SLAL treats as capital for regulatory purposes. The Standard Life Assurance Company of Canada has issued subordinated liabilities of £257m (2009: £236m) to the Company. During the year, Standard Life Investments Limited repaid the subordinated liabilities of £15m that it had issued. This amount of subordinated liabilities is included within the capital resources of that business during 2009. At Group level only subordinated liabilities issued to external parties are included in the Group’s capital resources.
Group capital requirement The Group must also calculate a group solvency position under the Insurance Groups Directive (IGD). The IGD calculation is a very prudent aggregate value for the Group’s capital resources. The capital held within the long-term business funds of approximately £4.4bn (2009: £1.9bn) is restricted to the level of the CRR of those funds of approximately £2.6bn (2009: £1.6bn). Therefore, the Group recognises no net surplus in respect of capital within the long-term business funds.
In respect of the Group’s IGD reporting there were no breaches of regulatory capital requirements at any time during the year.
Change in assumptions used to measure life assurance contract liabilities and experience differences (56) 8 - (48) (6) (54) - (54)
Equity holder/inter-fund transfers (71) 71 - - 32 32 (32) -
Equity holder/inter-fund transfers in 2009 of £844m include £588m relating to a contingent loan agreement. In 2010, a £195m repayment of this contingent loan was made from the Shareholder Fund to SLAL’s HWPF. This loan repayment is included in other factors.
Total profit after tax 816 305 1 The Group’s healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 and has therefore been classified as a discontinued operation. The presentation of the 2009 comparatives in certain primary statements and in the corresponding notes has been reclassified accordingly, as indicated. The Group’s banking business, Standard Life Bank plc, was sold on 1 January 2010 and was classified as a discontinued operation for the year ended 31 December 2009. Refer to Note 3.1 – Basis of preparation.
Aggregate tax effect of items not recognised in income statement (59) 27
Total comprehensive income for the period attributable to equity holders from discontinued operations 44 57
Additional retained earnings on an EEV basis 3,418 2,978 1 This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 3.17 – EEV methodology.
3.1 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.
Covered business A detailed description of EEV covered business is provided in Note 3.17 – EEV methodology.
The regulatory basis for setting actuarial reserves and required capital has been calculated assuming the continuation of current regimes. Therefore, no allowance has been made for the change in reserving or required capital bases anticipated under either Solvency 2 or from the adoption of IFRS reporting in place of local GAAP in the Canada business.
Within the IFRS segmental analysis, UK operations primarily comprise life and pensions, UK non-covered mutual funds business and the non-covered UK pension scheme. The Group’s healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 and has therefore been classified as a discontinued operation for the year ended 31 December 2010. The Group’s banking business, Standard Life Bank plc, was sold on 1 January 2010. The comparatives for the year ended 31 December 2009 include both the banking and healthcare businesses as discontinued operations. UK non-covered business is shown within Note 3.6 – Non-covered business.
Impact of UK legislation enacted in 2010 The impact of UK legislation enacted in 2010: a) Reduced the corporation tax rate from 28% to 27% effective from 1 April 2011, and b) Increased the rate of Value Added Tax (VAT) from 17.5% to 20% effective from 4 January 2011
Sensitivity analysis The sensitivity analysis contained within Note 3.16 – Sensitivity analysis – economic and non-economic assumptions shows the sensitivity of the embedded value and the new business contribution to different scenarios. The sensitivity of the embedded value and new business contribution to a 10% fall in the market value of equity assets and a 10% fall in the market value of property assets is disclosed separately for the first time for the results as at 31 December 2010. Prior to this, we disclosed a combined test of the embedded value to a 10% fall in the market value of equity and property assets.
UK Canada International HWPF TVOG Total 12 months to 31 December 2009 Notes £m £m £m £m £m
Contribution from in-force business: Expected return on existing business 204 132 39 - 375
An analysis of profit after tax by territory is provided in Note 3.9 – Analysis of covered business EEV PVIF and net worth movements (net of tax).
Operating profit before tax for covered business is calculated using the expected long-term investment return which is based on opening economic assumptions. 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.
The increase in the expected return on existing business is primarily due to higher opening PVIF and higher opening risk discount rates.
Profits within investment return and tax variances are largely driven by the impact of higher investment returns experienced in 2010 than had been anticipated. The UK profit of £463m includes a £43m profit from the Contract for Differences – refer to Note 3.6(b) – non-covered business – Global investment management EEV profits before tax. This also includes a £21m loss, in excess of the expected returns that are included in the expected return on free surplus, arising from differences in movements of subordinated debt liabilities and the assets that are backing the subordinated debt. The £53m profit from HWPF TVOG reflects the impact of higher than expected returns which reduced the burnthrough risk.
Aggregate tax effect of items not recognised in income statement - 5 - - 5 78 www.standardlife.com
Transfer back of mutual funds net worth 20 (1) - - 19
The adjustment to opening EEV net worth and PVIF represents a change to the presentation of certain Canada GAAP guarantee reserves. Prior to the results for the 12 months to 31 December 2010, these reserves were replaced with a time value of options and guarantees (TVOG) within the Group's EEV results. In order to better align the Group's EEV net worth movement and the Group's primary measure of performance, IFRS operating profit, these reserves are now included within the EEV net worth with an offset in the PVIF. This change does not affect the TVOG. Total EEV operating profit for the 12 months to 31 December 2010 is also unaffected by this adjustment.
Single premiums in India have been restated by £8m to reflect the reclassification of regular premiums to single premiums. The impact on regular premiums is negative £2m. The impact on PVNBP for the 12 months to 31 December 2009 is £2m.
Canada expense assumption profits of £68m mainly arise from improved expenses for group savings and retirement products, reflecting the significant growth in the business volumes during 2010.
The other assumption changes in Canada include a £37m loss from a reduction in expected fee income in our group savings and retirement products.
The transfer back of net worth from covered business represents the transfer of profits and losses in relation to the Group’s investment management business, the UK mutual funds business (within UK non-covered, Standard Life Savings Limited) and the Canada mutual funds business (within other non-covered), necessary to reconcile the opening and closing EEV net assets. For further detail refer to Note 3.17 – EEV methodology under consolidation adjustments.
Less: Third party related life and pensions profits before tax 33 19
This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 3.17 – EEV methodology.
3.9 Analysis of covered business EEV PVIF and net worth movements (net of tax) (a) Total
Expected return transfer to net worth 625 (59) 566 (566) -
The adjustment to opening EEV net worth and PVIF net of cost of capital represents a change to the presentation of certain Canada GAAP guarantee reserves. Prior to the results for the 12 months to 31 December 2010, these reserves were replaced with a time value of options and guarantees (TVOG) within the Group's EEV results. In order to better align the Group's EEV net worth movement and the Group's primary measure of performance, IFRS operating profit, these reserves are now included within the EEV net worth. Total EEV operating profit for the 12 months to 31 December 2010 is unaffected by this adjustment.
Expected return transfer to net worth 374 (3) 371 (371) -
Transfer back of mutual funds net worth 28 - 28 - 28 88 www.standardlife.com
Transfer back of mutual funds net worth 20 - 20 - 20 www.standardlife.com 89
Aggregate tax effect of items not recognised in income statement 5 - 5 - 5
Expected return transfer to net worth 109 4 113 (113) -
The impact of these movements is reflected in non-operating profit in the UK and Canada as shown in Note 3.2(a) – Segmental analysis – covered business – Segmental EEV income statement. For Canada, however, this has been offset by the Group EEV consolidation adjustment in respect of Canada subordinated debt liability, as shown in the EEV consolidated income statement.
3.12 PVIF monetisation profile The following tables show the PVIF emergence on a discounted and undiscounted basis along with a reconciliation to the total closing PVIF as disclosed in Note 3.2(c) – Segmental analysis – covered business – Segmental analysis of opening and closing EEV, and the PVIF net of cost of capital impact from new business as disclosed in Note 3.9 – Analysis of covered business EEV PVIF and net worth movements (net of tax).
(b) Reconciliation to closing PVIF In-force business Reconciliation of discounted PVIF
PVIF Cost of capital TVOG Total At 31 December 2010 £m £m £m £m * See also Note 3.9 – Analysis of covered business EEV PVIF and net worth movements (net of tax).
As outlined in Note 3.1 – Basis of preparation, the Group’s EEV results do not include any allowance for changes to the reserving or required capital bases anticipated under future reporting or regulatory regimes. The PVIF monetisation profile therefore excludes changes anticipated from the adoption of IFRS reporting in place of local GAAP in the Canada business, and also the regulatory changes under Solvency 2.
(a) Gross investment returns and expense inflation UK Canada Europe At 31 December 2010 % % %
for annuities that are level or subject to fixed escalations and 4.02% for annuities where escalations are linked to a price index. **
Current holdings are assumed to yield in future years the earned rate for the year preceding the valuation. Future reinvestments are assumed to be in government bonds. ***
* Excludes corporate bond returns on annuities. For annuities in UK equity holder funds, the overall investment return, after allowing for assumed defaults, is 5.36%
for annuities that are level or subject to fixed escalations and 4.11% for annuities where escalations are linked to a price index. **
Using the value of in-force business as weights, the average risk discount rates for UK and Europe were 6.73% and 6.10% respectively. The weighted average for
Europe includes an allowance for Standard Life International Limited (SLIL) which uses the same risk discount rate assumptions as UK business.
Using the value of in-force business as weights, the average risk discount rates for UK and Europe were 7.38% and 6.56% respectively. The weighted average for
3.13 Principal economic assumptions – deterministic calculations – covered business continued
Risk margin before cost of capital adjustment: Risk margin after cost of capital adjustment 2.30 2.70 2.60 2.30 2.70
Cash and bond returns These variables are calibrated using the repo rates and government strips.
Dividend and rental yields Dividend yields are derived from current market observable yields (FTSE All Stocks for UK and Euro Stoxx 50 for Europe).
3.14 Principal economic assumptions – stochastic calculations continued Swaption-implied volatilities The implied volatility is that required in order that the price of the option calculated via the Black-Scholes Formula equals the market price of that option.
The model swaption-implied volatilities are set out in the following table: 31 December 2010 31 December 2009 UK Sterling Swap term (years) Swap term (years) Option term (years) 10 15 10 15 31 December 2010 31 December 2009 Euro Swap term (years) Swap term (years) Option term (years) 15 20 15 20
Equity-implied volatilities The implied volatility is that required in order that the price of the option calculated via the Black-Scholes Formula equals the market price of that option.
Average to 31 December 3.16 Sensitivity analysis – economic and non-economic assumptions The tables below show the sensitivity of the embedded value and the NBC to different scenarios.
Fall in equity market values by 10% (162) (30) (21) (2) (215)
Fall in property market values by 10% (16) (52) (2) (5) (75)
The sensitivity of the Canada embedded value as shown above includes the effect of changes in the market value of the subordinated liability. Whilst Group EEV is adjusted for the different subordinated debt valuation bases used for covered and noncovered business as explained in Note 3.17 – EEV methodology, the impact of these sensitivities on the Group EEV consolidation adjustment is not included in this sensitivity analysis.
Fall in equity market values by 10% (23) (10) (5) - (38)
The Group’s covered business is its life assurance and pensions businesses in the UK, Canada and International (Germany including Austria, Ireland, Hong Kong and joint venture businesses in China and India), as well as the current and future profits and losses from Standard Life Investments arising on its management of funds relating to the life and pensions businesses.
International covered business consists of: • The Group’s Germany branch of Standard Life Assurance Limited (SLAL)
• The Group’s offshore bond business, which is sold by SLIL
• The Group’s business in Hong Kong (Standard Life Asia Limited)
Non-covered business EEV operating profit is represented by IFRS operating profit as adjusted for Standard Life Investments (global investment management) look through profits and the return on mutual funds which are recognised in covered business.
Covered business includes the profits and losses arising from non-covered businesses providing investment management and other services to the Group’s life and pensions businesses. As a result, the profits and losses on an IFRS basis have been removed from the relevant non-covered segments (investment management, UK non-covered and other non-covered) and are instead included within the EEV results of the covered businesses.
The capitalised value of the future profits and losses from such service companies are included in the opening and closing embedded value for the relevant business, but the net assets remain within the relevant non-covered businesses. A transfer of profits from the covered business to the non-covered business is deemed to occur in order to reconcile the profits and losses arising in the financial period within each segment with the opening and closing EEV net assets.
The consolidation adjustment to remove the impact of the accounting differences for the Canada subordinated liability is explained in more detail under subordinated liabilities within the EEV methodology.
The projected cash flows are discounted to the valuation date using a risk discount rate which is intended to make sufficient allowance for the risks associated with the emergence of these cash flows, other than those risks allowed for elsewhere in the EEV calculations. In particular, a deduction is made from the present value of the best estimate cash flows to reflect the risks associated with the existence of financial options and guarantees, this deduction being assessed using stochastic techniques as described in the EEV methodology.
3.17 EEV methodology continued Separate risk discount rates have been calculated for in-force and new business and for the principal geographic segments (UK, Europe and Canada). Within the UK and Europe, separate risk margins are calculated for profits emerging on policies inside the HWPF (regardless of whether these profits emerge directly from the HWPF or by reassurance into other Group entities) and on policies that are in equity holder owned funds. For HWPF policies, there is a significant inter-Group reassurance agreement in respect of mortality surpluses on annuities, which are reassured out of the HWPF. The HWPF risk margin anticipates diversification benefits including the annuity mortality risk, since the overall capital structure also benefits from this diversification.
We have set required capital to be the higher of regulatory capital and our own internally assessed risk-based capital requirement. In determining the required capital for the purposes of assessing EEV, the Group excludes any capital which is provided by the existing surplus in the HWPF, as this capital is provided by policyholders. Any required capital in excess of that provided by the existing surplus in the HWPF would need to be provided by assets in the equity holders’ funds. As part of the annual assessment, projections of the expected surplus in the HWPF, on best estimate assumptions, are carried out to assess whether this is sufficient to cover the level of required capital in respect of the HWPF.
• UK and Europe (business in equity holder owned funds) – 100% of EU minimum regulatory capital, which is higher in aggregate than Standard Life’s internal risk-based capital requirement
• Asia – required capital is based on the local statutory capital requirements
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 Europe business relate to with profits business and include minimum guaranteed rates of return.
• Investment conditions in terms of bond yields, equity and property values, and implied market volatility
• 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 104 www.standardlife.com
UK and Europe Most with profits business written post demutualisation is managed in a number of new with-profits funds. For the present reporting period, the only significant volumes of this type of new business have arisen in Germany. These policies have guarantees relating to benefits available on the policy maturity date. These guarantees increase each year with the addition of bonuses.
Equity holder assets are at risk if the resources of these with-profits funds are insufficient to pay the guaranteed benefits. The level of the TVOG has been calculated using stochastic techniques. The TVOG has reduced both the NBC as well as the closing PVIF for Europe.
Expense assumptions on a per policy basis have been derived based on an analysis of management expenses performed by each business, and are split between acquisition and maintenance assumptions.
3.17 EEV methodology continued Restructuring and corporate transaction expenses for covered and non-covered business are consistent with those identified in the IFRS operating profit adjustments and primarily represent costs in relation to the Group’s Transformation and Solvency 2 Programmes, and transaction costs in relation to the sale of Standard Life Healthcare Limited and Standard Life Bank plc. Refer to the IFRS financial information Note 2.3 – Administrative expenses for further detail.
Acquisition costs used within the calculation of the NBC reflect the full acquisition expenses incurred in writing new business in the period.
Pension scheme deficits have been included in accordance with International Accounting Standard (IAS) 19 Employee Benefits. IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction was adopted by the Group from 1 January 2008. The interpretation provides guidance on assessing the limit in IAS 19 Employee Benefits on the amount of any surplus that can be recognised as an asset and explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement.
Annuitant mortality assumptions use a combination of base mortality rates, which are generally set by reference to recent experience, and expected future changes in mortality. The latter uses data provided by the Continuous Mortality Investigation Bureau in the UK and the Canadian Institute of Actuaries in Canada along with other company specific considerations.
Assumptions regarding option take-up, surrenders and withdrawals are assumed to vary, where appropriate, according to the investment scenario under consideration when deriving the TVOG, to reflect our best estimate of how policyholder behaviour may vary in such circumstances.
The liabilities in respect of the UK subordinated guaranteed bonds and Mutual Assurance Capital Securities plus the subordinated debt issued by Canada form part of covered business and have been deducted at market value within the EEV. The Canada 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 Canada subordinated liability.
IFRS operating profit/(loss) after tax from continuing operations 198 90 7 76 (35) - 336
IFRS profit/(loss) after tax attributable to equity holders 260 145 4 79 (56) - 432
IFRS operating profit/(loss) before tax from continuing operations 222 113 23 73 (32) - 399
IFRS profit/(loss) after tax attributable to equity holders 231 (41) 14 51 (42) - 213
Global investment management fee based revenue includes share of profits from HDFC Asset Management Company Limited.
EEV operating profit/(loss) before tax from continuing operations 649 192 29 (26) - 844
EEV non-operating (loss)/profit after tax and EEV profit after tax from discontinued operations (153) (239) 19 32 49 (292) (13)
EEV profit/(loss) after tax 313 (98) 40 1 49 305 www.standardlife.com 111
4.3 Reconciliation of IFRS operating profit to EEV capital and cash generation
UK Canada International Investment management Other Total 2010 £m £m £m £m £m £m
DAC & DIR, intangibles and other (6) 12 (41) - - (35)
EEV operating profit after tax – PVIF 83 74 94 - - 251
UK Canada International Investment management Other Total 2009 £m £m £m £m £m £m
IFRS operating profit/(loss) before tax from continuing operations 222 113 23 73 (32) 399
DAC & DIR, intangibles and other (13) (16) (31) - - (60)
Look through to investment management 19 3 2 (24) - -
Group assets under administration (summary) 12 months ended 31 December 2010
Conventional with profits (excluding annuities) 7.9 0.3 (1.5) (1.2) 0.2 6.9
Standard Life Investments third party 45.5 9.7 (4.0) 5.7 5.7 56.9
Individual insurance, savings and retirement 6.7 0.7 (0.9) (0.2) 1.1 7.6
Other third party managers 25.2 32.8 1 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.
4.4 Group assets under administration and net flows continued Long-term savings operations net flows (regulatory basis) 12 months ended 31 December 2010
Individual insurance, savings and retirement 734 (904) (170) 690 (727) (37)
Wholly owned long-term savings 1,313 881 77 58 1,929 1,430 35% 38%
Joint ventures long-term savings 74 72 119 96 550 478 15% 9%
Total worldwide long-term savings 13,246 10,146 940 795 18,483 14,548 27% 25%
2 Individual pensions include Retail Trustee Investment Plan. This was previously included in Corporate pensions. The 2010 impact on PVNBP is £25m (2009: £22m).
4 % change is calculated on the figures rounded to millions.
Single premiums in India have been restated by £8m to reflect the reclassification of regular premiums to single premiums. The impact on regular premiums is negative £2m. The impact on PVNBP for the 12 months to 31 December 2009 is £2m. 6 New business gross sales for overseas operations are calculated using average exchange rates. The principal average rates for the 12 months to 31 December www.standardlife.com 119
4.5 Analysis of new business continued Investment operations 12 months ended 31 December 2010
Total worldwide investment products excluding money market and related funds 32,476 8,364 (4,302) 4,062 5,320 9,382 41,858
In the 12 months to 31 December 2009, UK mutual funds gross inflows were £1,615m and net inflows were £669m.
In the 12 months to 31 December 2009, Canada mutual funds gross inflows were £231m and net inflows were £48m.
International gross inflows include India where, due to the nature of the Indian investment sales market, the new business is shown as the net of sales less redemptions. India cash funds are included as money market and related funds in the table. 5 Due to the nature of the UK money market funds and India cash funds, the flows are calculated using average net client balances. Other movements are derived as the difference between these average net inflows and the movement in the opening and closing AUM. 6
Wholly owned long-term savings 450 301 28 19 675 474 42% 46%
Joint ventures long-term savings 23 20 26 28 136 149 (9%) (15%)
Total worldwide long-term savings 3,236 3,134 186 171 4,272 4,161 3% 1%
Included within non-insured SIPP is an element which is also included within UK mutual funds net flows in the third party investment operations figures.
Individual pensions include Retail Trustee Investment Plan. This was previously included in Corporate pensions. The 2010 impact on PVNBP is £7m (2009: £9m).
4 The PVNBP figures for the three months period to 31 December 2010 and to 31 December 2009 exclude the full impact of the year end changes to non-economic assumptions. The effect of changes to year end non-economic assumptions was an increase in total PVNBP of £171m in the final PVNBP results published in the 2010 Preliminary results (2009: decrease £110m).
Single premiums in India have been restated by £2m to reflect the reclassification of regular premiums to single premiums. The impact on regular premiums is negative £1m. There impact on PVNBP for the three months to 31 December 2009 is £1m. 7 New business gross sales for overseas operations are calculated using average exchange rates. The principal average rates for the 12 months to www.standardlife.com 121
4.5 Analysis of new business continued Investment operations Three months ended 31 December 2010
Third party insurance contracts (new business classified as insurance products) 22,556 1,360 (608) 752 1,059 1,811 24,367
International gross inflows include India where, due to the nature of the Indian investment sales market, the new business is shown as the net of sales less redemptions. India cash funds are included as money market and related funds in the table. 5 Due to the nature of the UK money market funds and India cash funds, the flows are calculated using average net client balances. Other movements are derived as the difference between these average net inflows and the movement in the opening and closing AUM. 6 Funds denominated in foreign currencies have been translated to Sterling using the closing exchange rates at 31 December 2010. Investment fund flows are translated at average exchange rates. Gains and losses arising from the translation of funds denominated in foreign currencies are included in the market and other movements column. The principal closing exchange rates used as at 31 December 2010 were £1: C$1.56 (30 September 2010: £1: C$1.62) and £1: €1.17 (30 September 2010: £1: €1.15). The principal average exchange rates for the 12 months to 31 December 2010 were £1: C$1.60 (2009: £1: C$1.78) and £1: €1.17 (2009: £1: €1.12).
PVNBP for India has been restated to reflect the reclassification from regular premiums to single premiums.
Investments in associates and joint ventures 21 17 - - 16 30 37 47
Shareholder exposure to debt securities excluding Canada non-segregated funds consists primarily of debt securities backing annuity liabilities and subordinated debt liabilities. The increase in exposure can be attributed to new annuity business written in the period as well as a change in the shareholder asset mix.
Standard Life Bank was sold on 1 January 2010 and therefore the Group has no exposure to Standard Life Bank assets after that date.
AAA AA A BBB Below BBB or not rated Total 31 December 2010 £m £m £m £m £m £m
Level 1 Level 2 Level 3 Total £m £m £m £m £m £m £m £m www.standardlife.com 127
4.7 Fair value hierarchy of financial instruments continued Policyholder (unit linked) exposure
Total operating cost base in respect of continuing operations 923 827
Opening operating cost base in respect of continuing operations 339 147 97 189 55 827
Notional level of inflation that would have impacted the operating cost base during the year. Blended rate used for staff and non-staff costs of 2.5% for 2010
4 Difference between the movement 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.