• Net flows across the Group up 51% to £6.5bn (2008: £4.3bn)1,2
• EEV core capital and cash generation after tax up 16% to £350m (2008: £303m)4,5
• IFRS profit after tax attributable to equity holders of £213m (2008: £100m)
“Today's announcement highlights good profits and healthy cash flow for the year, and the ongoing delivery of efficiency savings in our business despite the difficult and uncertain year for financial markets. We continued to grow customer assets, generated further value from back book management, and maintained a robust capital position through our disciplined approach to risk management.
“Standard Life starts 2010 in a good position. We will continue to drive shareholder value through being a customer-centric business, focused on long-term savings and investments propositions. We are stepping up our investment in our leading corporate and retail propositions during 2010 and are excited by the many opportunities across our markets. We have also announced an increase to our efficiency targets which will improve margins. These actions will enable Standard Life to grow profits more strongly.”
Unless otherwise stated, all comparisons are in Sterling and are for the 12 months ended 31 December 2008.
Contribution from in-force business: Expected return on existing business 375 431
Market conditions remained challenging as we entered 2009. Consequently our strategic priority was to strengthen and stabilise our business model by focusing on key objectives within our control, namely balance sheet strength, the sustainability of our cash flow, our continued drive for operational efficiency, the mitigation of unrewarded risk and our desire to do the right thing for our customers. Our success in achieving these aims has created a strong platform for our future investment programme as we look to accelerate our strategy for profitable growth.
At the end of December 2009 total assets under administration (AUA) had increased 13% to £177.6bn (31 December 2008: £156.8bn, 30 June 2009: £156.5bn). Excluding our discontinued banking operations total AUA increased 15% to £170.1bn (31 December 2008: £147.9bn).
Market and other movements increased AUA by £16.3bn (2008: decrease £14.9bn).
EEV operating profit before tax was £919m (2008: £933m)4, delivering a return on embedded value (RoEV) of 10.6% (2008: We report our RoEV under three components: core, efficiency and back book management.
We continue to invest in our market leading propositions across our life and pensions businesses. This has been reflected in a slight increase in core development expenses to £41m (2008: £36m)4.
Our new business metrics of internal rate of return (IRR) and discounted payback period were 14% (2008: 16%)4 and 9 years
Efficiency comprises covered business maintenance expense variances and assumption changes. In 2009 expense variances reduced RoEV by 0.1% (2008: increase 0.8%)4. The negative expense assumption reflects mainly the reclassification of expenses as maintenance.
In 2009 we have achieved £47m of annual efficiency savings towards this target. We have achieved this through a number of initiatives including: • Alignment of our UK distribution and marketing operating models with our strategic objectives. This has led to a headcount reduction of around 200 and a reduction in associated overheads.
We remain committed to driving increased value from the management of our back book. This category includes all nonexpense related operating variances and assumption changes for covered business plus those development costs directly related to back book management initiatives and, for non-covered business, specific costs attributed to back book management.
IFRS normalised underlying profit excluding the impact of market movements on surplus assets and reserves in Canada was £298m (2008: £349m). Excluding our discontinued banking operations, this figure was £238m (2008: £323m). The decrease was due to lower management charge income (£66m) resulting from lower average market levels, partially offset by a reduction in operating costs of £18m from our ongoing efficiency programme. The profit is after expensing £86m of proposition and system development spend.
Marked to market value adjustments in respect of surplus assets, coupled with reserve movements, have reduced profit in Canada by £70m (2008: £143m). Under EEV the impact of these adjustments is treated as a non-operating item. Including the impact of these adjustments, normalised underlying profit was 11% higher at £228m (2008: £206m).
Group embedded value of £6,435m (31 December 2008: £6,245m)4, represents an embedded value per share of 288p
(31 December 2008: 286p)4. IFRS equity excluding intangible assets and non-controlling interests was £3,351m (31 December 2008: £3,295m), representing 150p per share (31 December 2008: 151p). The increase in Group embedded value and IFRS equity during the year primarily reflects the profit for the year offset by an increase in the liabilities of the Group’s defined benefit pension schemes and dividend payments made in 2009.
At 31 December 2009 the Group was classified as a ‘financial conglomerate’ as defined by the Financial Groups Directive (FGD). Following the sale of Standard Life Bank plc on 1 January 2010 the Group is now classified as an ‘insurance group’ and from this 4 www.standardlife.com
Our strategic focus is to: • Build on our strength in our pension savings and corporate benefits markets across all our businesses, delivering corporate benefits solutions to employers, and providing broader savings propositions to employees. We are excited about the opportunities in our core corporate markets, with total pensionable assets of £1.4 trillion and £0.6 trillion in the UK and Canada respectively.
Newswires and online publications A conference call will take place for newswires and online publications from 8.00-9.00am. Participants should dial +44 (0)1452 555566 and quote Standard Life Preliminary Results 2009. The conference ID number is 59435427. A replay facility will be available for 7 days. Investors and analysts should dial +44 (0)1452 550000. The pass code is 59435427#.
Investors and Analysts A presentation to investors and analysts will take place at 9:30am at UBS Ground Floor Conference Centre, 1 Finsbury Avenue, London. A live webcast of the presentation and the presentation slides will be available on the Group’s website. In addition a replay will be available on this website later today.
2 Assets under administration (AUA) and net flows have been adjusted to exclude discontinued banking operations for both 2009 and 2008.
3 AUA are gross assets that the Group administers for customers, including both those managed by the Group and those placed with third party managers.
4 The Asia life and pensions operations have been included on an EEV basis for the first time. Comparative figures for 2008 have not been restated.
6 Certain items are included in both life and pensions and investment flows. Therefore, at Group level, an elimination adjustment is required to remove any duplication.
7 The only difference between IFRS normalised underlying profit and IFRS underlying profit for non-covered business arises within global investment management. Net negative fair value movements in respect of the liability remaining following the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc and the 'Contract for Differences' written in September 2008 which limited this liability for Standard Life Investments and fair value movements of the corresponding assets which were brought directly on to the statement of financial position, are included within IFRS underlying profit, but are excluded from IFRS normalised underlying profit.
1.1 Group overview Our results are affected by external market forces, which can influence the Group’s current performance and, to an extent, shape our future strategic direction.
Lower market levels Despite rallies in equity markets in the second half of 2009, the average market values of assets were substantially lower than the previous year. For example, the average daily FTSE All-Share Index fell 15% between 2008 and 2009 and the UK IPD All Property Index was 22% lower over the same period. Combined with similar falls in other major world markets, this inevitably put downward pressure on our asset management revenues.
Demographics continue to have important ramifications in our key markets. They are defined by: an ageing population, with people living longer whilst managing more extensive debt; diminishing state and employer pension provision; an increasingly polarised distribution of wealth; and lower long-term birth rates. In the UK, the structure of the population is changing radically as life expectancy rapidly increases. By 2050 it is predicted that men could expect to live for a further 27 years and women for 28 years after reaching 65.
Ageing populations have dramatic implications for labour forces. For an economy to be sustainable, approximately 50% of the population has to be economically active. On current projections for the UK, this will only just be the case by 2050 when there will have been a 20% increase in the ratio of non-workers (dependents) to workers. This further emphasises the need for individuals to ensure that they have adequate pension provision.
* Source: Office for National Statistics. Crown Copyright material is reproduced with the permission of the Office of Public Sector Information (OPSI).
The CFO Forum announced on 22 May 2009 that it believed that it was sensible to defer mandatory MCEV reporting for all member firms until 2011. On the publication of the revised MCEV Principles on 20 October 2009 it noted that it was continuing to perform further work to develop more detailed application guidance to increase consistency going forward. As a member of the CFO Forum, the Group will continue to participate in this work.
From 2012, individuals who are not members of a company pension scheme will be automatically enrolled into low-cost personal accounts, but they will have the choice of opting out. Personal accounts are intended to solve the problems of low portability and high charges. They are intended to operate as a large, multi-employer occupational pension scheme and extend the benefits of employer schemes to those who currently don’t have access to them. The government estimates that personal accounts could have between 6 and 10 million members with private pension savings of around £8bn a year, of which approximately 60% will be new savings.
The Retail Distribution Review (RDR) is designed to increase transparency in retail financial services and to raise professional standards. The review has significant implications for those providing retail financial advice and involves new examination standards applicable to all advisers. The objectives of the RDR are to: • Improve the clarity with which firms describe their services and fees to consumers
Our customer-centric, capital-lite approach means that we have made good progress in a number of areas and are well placed to meet the proposed changes to the market in terms of removal of commission, increased transparency and professionalism. We believe that platforms will play a major role in supporting firms of all shapes and sizes to meet the requirements of the RDR and again we are well placed in this respect.
Solvency II is a major European regulatory change initiative which is currently due to be implemented on 31 October 2012, although firms will be required to be ready well in advance of this date. Solvency II will affect risk and capital management, external reporting, supervision and business strategies of the European insurance industry.
EEV operating profit before tax – core £584m (2008: £685m, 2007: £791m)
EEV operating profit before tax – core, efficiency and back book management
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 management.
New business profitability decreased by 19% to £213m and reflects the lower sales volumes during the year. The total internal rate of return (IRR) for the Group was 14% (2008: 16%) and the discounted payback period extended to 9 years (2008: 8 years).
We remain committed to our strategy of focusing on capital-efficient products which deliver high capital returns and fast recovery of investment. Please refer to Section 1.4 – Business segment performance for further discussion of new business profitability by business segment.
operating profits of £349m (2008: £184m). During the year a number of management actions were taken to reduce market risk associated with the Heritage With Profits Fund (HWPF) which have generated back book profits. A profit of £143m arose from the impact of asset allocations and hedging arrangements which reduced the HWPF time value of options and guarantees (TVOG). A
Total operating assumption changes in relation to lapses was positive £77m, compared to negative £61m in 2008. This was predominantly due to improved lapse experience in our UK individual pensions business. Improved lapse experience in our Canada group savings and retirement business was offset by adverse experience in our business in Europe.
Movement in Group embedded value 1.2 EEV – Group continued Return on embedded value (RoEV)
Total EEV non-operating loss before tax was £445m in 2009 (2008: loss £1,091m) and was mainly due to a £539m loss from economic assumption changes in covered business, which includes a £214m loss from the change in risk discount rates. Investment variance of £70m improved as a result of good performance in equities and corporate bonds, but this was offset by the increase in the fair value of subordinated debt liabilities and falls in Canada property values.
Included within restructuring and corporate transaction costs is £50m (2008: £45m) of costs incurred as part of our Continuous Improvement Programme. Volatility arising from adjustments for different accounting bases resulted in a gain of £107m (2008: loss £152m).
Group embedded value increased to £6,435m (2008: £6,245m), with a total operating profit movement of £640m after tax, only partially offset by total nonoperating losses after tax of £335m and non-trading movements of negative £148m. The operating profit and non-operating profit are explained in this section of the Business review. Non-trading movements included the £158m cash dividend paid to equity holders. Other nontrading movements include positive exchange movements of £26m and actuarial losses of £50m in relation to the UK, Canada and Ireland pension schemes.
Our IFRS consolidated income statement which shows IFRS profit after tax attributable to equity holders, and the reconciliation to underlying profit are shown in the Group IFRS financial statements section of this report. We believe that the IFRS underlying profit before tax provides a more meaningful analysis of the underlying business performance.
* Comparatives have been restated to reflect the inclusion of offshore bonds within the Europe results. Prior to 2009 this was included within UK.
1.3 IFRS – Group continued Segmental analysis of IFRS underlying profit
(2008: £11m) primarily due to increased investment income and decreased operating costs.
Canada Canada recorded an underlying loss of £7m (2008: loss £102m). This improvement compared to the prior year was driven by the recovery of equity and bond asset values. However, results in 2009 were adversely impacted by falling investment property valuations.
Europe Europe’s underlying profit fell to £45m (2008: £48m) with a reduction in German profitability due to the reducing transfer of profit to shareholders from the HWPF. This was partially offset by lower operating costs across the territories.
Other Group corporate centre costs remained steady at £50m (2008: £50m), reflecting continued cost control and ‘other’ decreased to £5m (2008: £13m), primarily due to reduced interest income in the parent company.
Please refer to Section 1.4 – Business segment performance for further detail on the IFRS underlying result for our businesses.
The UK business combines the UK life and pensions, savings and mortgages and healthcare businesses. Focusing on delivering customer-centric and capital-lite propositions, it has a strong and diversified distribution network, which puts it in a good position to grow assets under administration and generate sustainable profitable returns. On 1 January 2010 the sale of the savings and mortgages business to Barclays Bank PLC was completed.
3 PVNBP margins are calculated as the ratio of new business to PVNBP and are based on the underlying unrounded numbers.
Our continued focus on capital-lite products was demonstrated by the launch of our tailored investment bond in June 2009, which offers a flexible transparent funded remuneration structure. We also continue to see good growth in our individual SIPP customer base with the total number of customer accounts increasing by 27% to 83,900 compared to 65,900 as at 31 December 2008.
EEV operating profit before tax UK EEV operating profit including HWPF TVOG and non-covered business decreased slightly during the year to £631m (2008: £637m). Core profit of £288m (2008: £475m) decreased by £187m, mainly driven by a £60m fall in NBC, a lower unwind of in-force business due to lower markets and a lower risk discount rate. Changes in the allocation of investment related expenses resulted in a negative efficiency variance of £26m (2008: positive £37m).
During the year a number of management actions were taken to reduce market risk associated with the HWPF which have generated back book profits. A profit of £143m arose from the impact of asset allocations and hedging arrangements which reduced the HWPF TVOG. A further benefit of £111m arose from actions taken to reduce the market risk to the tax treatment of future shareholder transfers from the HWPF. In addition, the back book result benefited from a £63m (2008: £98m) release of reserves from the ongoing review of our deferred annuity data.
The 2008 result also included a £107m benefit following the reinsurance of UK immediate annuities and a £108m charge relating to the cash injection into the Pension Sterling Fund.
IFRS underlying profit before tax UK life and pensions IFRS underlying profit before tax was £184m (2008: £201m). The result includes a positive £17m (2008: negative £73m) impact of a recovery in the value of the underlying assets within the previously reported ‘Contract for Differences’ written in September 2008. A release of statutory reserves following the ongoing review of the deferred annuity data also contributed £63m (2008: £98m). The 2008 result included a positive £105m reserve movement following the reinsurance of UK immediate annuities, which was offset by a £102m charge relating to the cash injection into the Pension Sterling Fund. The normalised underlying IFRS result of £111m (2008: £173m) was £62m lower than 2008. Although annual management charge income improved in the second half of the year as equity markets recovered, the result was adversely impacted by lower average market values and interest rates during 2009.
£60m £38m* £32m £26m * 2006 results are shown on a pro forma basis.
Challenging credit and funding market conditions persisted during 2009, so the strategic focus remained on managing our mortgage exposure, with gross mortgage lending decreasing by 74% to £281m (2008: £1,101m). The whole UK mortgage market experienced significant reductions in gross lending during 2009 compared to previous years, with the Council of Mortgage Lenders (CML) reporting total gross lending of £144bn compared to £253bn in 2008.
We remained well capitalised throughout 2009 due to our high quality mortgage book and continued access to a wide range of funding sources, with no draw down made on the committed facilities provided by our relationship banks. All regulatory liquidity and capital ratios remained within target ranges during the year.
The savings and mortgages business delivered a robust performance, focusing on managing profitability whilst ensuring liquidity requirements were met. IFRS underlying profit before tax (excluding volatility in respect of nonqualifying economic hedges) increased to £60m (2008: £26m). This increase was primarily due to improved interest margins and lower administration expenses, partially offset by increased impairment charges during the year.
The healthcare business offers a comprehensive range of private medical insurance (PMI) and other health and well-being solutions to individuals, families, small businesses and companies, and is the fourth largest PMI provider in the UK.
Overall new business sales decreased by 16% to £21m (2008: £25m) due to continuing adverse economic conditions. However, our sales performance in the final quarter demonstrated the positive impact of distribution improvements. In-force premium income dropped slightly from 2008 levels because of lower new business levels. Our strategic focus remained the acquisition of profitable business. This was supported by the launch of Personal Healthcare in June 2009 – a new retail product, which completes a powerful range of flexible solutions for individuals and businesses of all sizes. This new suite of products won the 2009 Health Insurance Award for Most Innovative Product.
IFRS underlying profit before tax was £15m (2008: £11m), before taking into account restructuring costs to deliver operational excellence. The £4m increase in IFRS underlying profit for 2009 was primarily due to increased investment income and decreased operating costs.
Strong underwriting discipline and rigorous expense control saw the underwriting profit increase by 8% to £13m despite the reduction of in-force premium income. The claims ratio was kept broadly in line with 2008 performance.
This strong business performance has helped to grow the annualised return on equity after tax by 1.7% points to 10.3% (2008: 8.6%).
Overall sales remained stable in constant currency at £2,460m (2008: £2,240m), whilst sales in our retail line, which includes individual insurance, savings and retirement and mutual funds, increased by 31% in constant currency to £848m (2008: £589m). This reflects a recent restructure in our sales function. In the second half of the year, sales benefited from an improvement in customer sentiment, following the recovery in equity markets. In group savings and retirement, sales in our core defined contribution offering increased by 18% in constant currency to £793m (2008: £612m), with a large win accounting for £240m. Overall group savings and retirement sales decreased by 22% in constant currency to £981m (2008: £1,138m), due to the distorting impact of a large defined benefit administration mandate secured in 2008. Group insurance sales increased by 12% in constant currency to £631m (2008: £513m), on the strength of an innovative disability offering, highlighted by a 20% increase in sales in that segment.
Canada EEV operating profit before tax £192m (2008: £215m, 2007: £178m)
In line with our strategy to position ourselves as a long-term savings and investments business, we launched a new phase of our corporate advertising campaign. This used a new creative approach to demonstrate our expertise in risk management and superior capabilities as a manufacturer of investment products. We enhanced the investment programme and award-winning member communication plan of our group pensions platform, providing plan members with improved tools to manage their retirement needs. Our member and sponsor interactive websites were both recognised in 2009 through the winning of awards for marketing and communication excellence and for technological achievements. We launched our Monitored Avenue Portfolio Programme, an innovative investment solution designed to offer full governance support and investment monitoring aspects to plan sponsors and their advisers, addressing customer needs for investment risk management. In our group insurance line, we responded to sponsor needs with the launch at the end of 2009 of a cost-efficient flexible benefits solution and we intend to enhance this by introducing new products such as critical illness cover. In our retail line, we continue to expand our fund offering and have offered clients innovative fund portfolios which enable them to manage investment risk in a more proactive manner. In a recent industry survey, we received the highest recognition from advisers for our sales team, recognising the strength of our business consultancy model. This is a reflection of the progress we have made in improving our retail sales function and building solid distributor relationships. Performance
IFRS underlying loss before tax Recovering capital markets significantly improved IFRS results, with an underlying loss before tax of £7m in 2009 (2008: loss £102m). The recovery in equity and bond prices reduced losses on assets supporting shareholder capital to £11m (2008: loss £43m) and enabled a release of reserves previously required in respect of policy guarantees of £32m (2008: charge £42m). This was partly offset by declines in investment property values, which led to a strengthening of policyholder liabilities due to lower anticipated cash flows from property assets. This amounted to £91m in 2009 (2008: £58m). A further charge of £34m was made to the reserves in respect of ceded reinsurance contracts (2008: £nil). The business maintained its good credit profile, experiencing no defaults in its corporate bond and mortgage loan portfolios, despite worsening credit experience in the market. The mortgage portfolio had an average loan to value ratio of 46% (2008: 44%). The value of mortgages where the loan to value ratio exceeded 70% amounted to just 5% of the mortgage portfolio.
1 The 2009 figures include offshore bonds that were previously reported within UK. 2 The 2008 figures have been restated to reflect the inclusion of offshore bonds. The 2008 impact is: net inflows by £632m, AUA by £1.0bn, PVNBP by £661m, NBC by £13m, IRR by 1%, discounted payback period by (1 year), EEV operating profit before tax by (£1m) and IFRS underlying profit before tax by (£17m).
Total net flows in Europe fell by 35% in constant currency to £869m with the strength of German gross inflows from regular premium business partly offsetting lower flows of offshore bonds. Total new business sales decreased by 29% in constant currency to £1,289m (2008: £1,677m).
In Ireland, domestic sales increased by 10% in constant currency to £512m (2008: £413m) due to the comprehensive choice and strength of the Synergy investment offering, with the option to invest in the Global Absolute Return Strategies (GARS) products managed by Standard Life Investments proving particularly popular with customers. Offshore bond sales were 44% lower at £370m (2008: £661m) due to weak economic conditions during the year.
2 2008 and 2007 have been restated to reflect the inclusion of offshore bonds within the Europe results. Prior to 2009 this was included within UK.
EEV operating profit before tax EEV operating profit before tax decreased by 75% in constant currency to £19m (2008: £68m). EEV operating profits in Germany and the offshore business were affected by lower sales and adverse persistency experience, but this was partially offset by increased profits in Ireland due to improved back book management which included an £8m profit from the successful agreement of prior year tax affairs. In addition, the 2008 result included a benefit of £12m arising from improved risk margins following the reinsurance of UK immediate annuities.
IFRS underlying profit before tax IFRS underlying profit before tax decreased by 19% in constant currency to £45m (2008: £48m) with Germany contributing £55m (2008: £62m) and Ireland recording a profit of £4m (2008: £3m). The result also includes losses of £14m (2008: loss £17m) primarily related to the offshore bond business. In Germany, the fall in profitability of 22% in constant currency was primarily due to the decreasing transfer of profit to shareholders from the HWPF in accordance with the Scheme of Demutualisation. This was partly offset by increasing profits from the post-demutualisation business. The offshore bond results improved due to increased charge income and a reduction in operating costs.
Net flows for the operations in Asia are being reported for the first time. These were broadly flat at £223m (2008: £226m). Growth in the Asian markets was adversely impacted by the effects of the global economic recession. As Asian equity markets have steadily recovered during 2009, consumer sentiment has improved. Despite challenging trading conditions, Asia continued to achieve growth, with sales up 13% in constant currency to £617m (2008: £495m).
The life and pensions market in India showed signs of recovery as the resilience of the equity markets increased consumer confidence and appetite for life insurance products. Sales in India were stable in constant currency at £360m (2008: £345m) as the business continued to focus on greater profitability.
Our Hong Kong operation continues to deliver strong growth with sales up 189% in constant currency to £141m (2008: £41m).
2 IFRS normalised underlying profit before tax excludes costs of £9m (2008: £51m) associated with the restructuring of a sub-fund of Standard Life Investments (Global
The financial crisis continued to weigh heavily on the global economy in 2009. Despite the rally in equity markets during the second half of the year, average market values in 2009 were substantially lower than in 2008. The average daily FTSE All-Share Index, for example, fell 15% between the two years and this, combined with similar falls in other major world markets, inevitably put downward pressure on asset management revenues. We were able to mitigate the worst effects of the market falls and also maintained strong third party sales momentum across both institutional and retail customer segments.
Investment performance was robust during 2009, including a significant improvement for UK equities and multi-asset portfolios, and we continued to deliver strong 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 comfortably above median for our third party business. The strength of our investment process across a range of open-ended investment companies (OEICs) and unit trusts is demonstrated by the proportion of eligible and actively managed funds (19 out of 29) rated ‘A’ or above by Standard & Poor’s.
£75m £82m * 2006 results are shown on a pro forma basis.
Standard Life Investments achieved third party net inflows of £5,674m (2008: £3,395m), a 67% increase and representing 13% of opening third party AUM. Over 80% of the third party net inflows came from outside the UK, further emphasising our growing global capability. Retail net inflows (UK mutual funds and SICAVs) rose significantly to £1,109m (2008: £123m). 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 26%.
IFRS normalised underlying profit before tax, which excludes all restructuring costs, was £75m (2008: £93m). The reduction was mainly due to lower interest rates on our cash balances and the cost of servicing a £30m subordinated loan, which was repaid in full before the end of 2009. IFRS profit before tax was £64m (2008: £nil). This reflected restructuring costs of £2m and a £9m net negative fair value movement in respect of the liability remaining following the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc and the ‘Contact for Differences’ written in September 2008 which limited the liability for Standard Life Investments. In 2008, the impact of restructuring this fund was negative £90m.
1.5 Capital and cash generation The Group’s strategy remains focused on careful capital management and generating cash. The emphasis on capital-efficient products is important as it demonstrates our ability to write profitable new business without committing high levels of capital.
1 Net of tax. 2 2009 Asia results have been prepared on an EEV basis for the first time. Prior to 2009 these were included on an IFRS basis. Comparatives have not been restated. 3 2009 based on draft regulatory returns. 2008 based on final regulatory returns.
Covered business capital and cash generation from new business and expected return 315 43 358 280 42 322
Non-covered business core, capital and cash generation 24 - 24 8 - 8
Operating profit capital and cash generation 364 50 414 377 46 423
Capital and cash generation from non-operating items (388) 12 (376) (131) 44 (87)
Total capital and cash generation (24) 62 38 246 90 336
2008 and 2007 NBS margin is calculated excluding Asia. 2007 NBS margin has not been restated for Sigma mutual funds.
The analysis on the previous page highlights the impact of profit on free surplus and shareholders’ net worth. This includes investment of shareholder capital in new business – or new business strain (NBS) – and the amount of capital and cash emerging from existing business. Including Asia on an EEV basis for the first time in the results for the 12 months to 31 December 2009, the NBS margin fell to 1.3% (2008: 1.5%), primarily due to planned reductions in sales of UK onshore bonds and management actions to reduce NBS. Excluding Asia, the NBS margin has fallen to 1.0%. Our covered business capital and cash flows from new business and expected return have increased to £358m (2008: £322m). This was due to the decrease in NBS described above. This has led to NBS being covered almost three times by capital and cash flows from existing business. In overall terms, our operating profit capital and cash generation was broadly unchanged at £414m (2008: £423m). This is discussed in further detail below.
We also analyse capital and cash generation into the three components that reflect the focus of our business effort – core, efficiency and back book management. Core and back book management were the main contributors to our capital and cash generation during the year. The core capital and cash flows of £350m (2008: £303m) primarily reflect robust capital and cash generation from new business and expected return, and after-tax profits from non-life operations, partially offset by development expenses.
The back book management capital and cash flows of £71m includes the benefit of the release of deferred annuity reserves in the UK. The decrease from 2008 reflects the impact of the reinsurance of the UK immediate annuities in 2008.
Non-operating capital and cash generation of negative £376m (2008: negative £87m) is driven by £414m of negative capital and cash generation (2008: positive £93m) in the life businesses. This included the impact of increases in the fair value of UK subordinated debt liabilities and falls in Canada property values.
Holding company capital and cash flows In addition to the movement in capital and cash on an EEV basis, the following summary is provided to show an analysis of holding company cash flows and capital in relation to the Group’s ultimate holding company, Standard Life plc and its overseas holding company, Standard Life Oversea Holdings Limited. The capital position is based on these companies’ net assets, excluding investments in operating subsidiaries.
The capital and cash held in the holding company is managed at a level to fund the Group’s dividend obligations and strategic investments. During 2009, capital decreased by £21m, primarily as a result of reduced dividends received from subsidiaries. This was partially offset by the capital impact of a reduction in cash dividends paid to shareholders following the introduction of the Scrip dividend scheme. Standard Life plc’s ability to pay dividends to shareholders is determined by the distributable reserves of the Company, which broadly comprise its retained earnings and special reserve. When determining the level of dividends, the Board must also consider the Group’s future business plans, market conditions and regulatory solvency.
Highlight - Capital attributable to equity holders only - Key performance metric for Group non-life companies - Key determinant of distributable profits - IFRS equity attributable to equity holders: - IFRS dividend cover: - Capital attributable to equity holders only - Key performance metric for Group life companies - Robust embedded value underpins the financial strength of the Group - Capital attributable to equity holders and policyholders - Monitored globally and locally using relevant solvency measures - Key determinant of distributable profits
The FGD surplus remains largely insensitive to a further 30% fall in equities from the 31 December 2009 position, with the surplus estimated to reduce by approximately £0.6bn. A 100bps rise in yields is estimated to reduce the surplus by approximately £0.3bn.
Movement in capital resource requirements of long-term business funds - 2.7
The significant factors affecting the capital surplus during the year ended 31 December 2009 were: Shareholder funds: • Ongoing investment of shareholder capital in the Group through writing new business offset by the recourse cash flows emerging from pre-demutualisation business
The largest regulated entity within the Group is Standard Life Assurance Limited (SLAL), and its regulatory position reflects capital resources that include long-term business funds. SLAL’s capital resources have decreased due to a number of factors including the costs of writing new business, the costs of paying regular and final bonuses and the payment of dividends. This has led to a decrease in solvency cover to 259% (31 December 2008: 274%). The capital resources of SLAL include the residual estate of approximately £0.6bn, an increase of £0.1bn from the level at 31 December 2008. The hedges we have in place continue to mitigate the impact of falls in equity markets on the residual estate. The impact of most other adverse asset movements would, in the first instance, be met by policyholders. There would be indirect impacts on shareholders via higher guarantee costs, and hence higher burnthrough cost. Shareholder exposure is also limited by the structure of the capital support mechanism set up at demutualisation, with shareholder support being obtained by encumbering the furthest out cash transfers from the HWPF to shareholders.
Recourse cash flows arising on UK and Irish non-unitised contracts 65 124
In accordance with the Scheme of Demutualisation of the Standard Life Assurance Company (the Scheme), certain transfers are made out of the HWPF to the shareholder fund after the year end position is finalised. The recourse cash flows accruing in respect of UK and Irish unitised contracts fell to £191m (2008: £243m) primarily due to reduced management charge income on a lower average asset base. The German additional expense charge has reduced as the percentage allocation has fallen in accordance with the Scheme.
On 31 December 2009 Standard Life plc lent £588m to SLAL’s HWPF under a contingent loan agreement (a contingent recourse cash flows loan, as defined under the Scheme). Simultaneously, the HWPF lent £588m to Standard Life plc under a limited recourse loan agreement. Under the Scheme this resulted in an obligation arising in the HWPF to transfer the loan proceeds received under the contingent loan agreement to the Shareholder Fund. However, the transfer of this amount has not been reflected in the FGD surplus or IFRS equity as the instrument held by the Shareholder Fund as a result of this transfer has cash flows which are contingent on the emergence of recourse cash flows within the HWPF. For further information on this arrangement, please refer to Notes 3.10 and 3.16 of the IFRS Group financial statements section of this report.
• A restricted amount of policyholder capital of £1.6bn at 31 December 2009, which matches the capital resource requirements of that business, and includes the HWPF
Similarly, EEV recognises certain valuation adjustments to give the EEV net worth, resulting in an equivalent adjustment of £0.4bn to IFRS equity holder funds. The total EEV of the Group relates to the net worth adjusted for the cost of capital of £0.4bn and increased by the value of the present value of in-force business (PVIF) of £3.7bn to give the total EEV of £6.4bn at 31 December 2009.
• The Group uses subordinated debt to provide capital to the life assurance and banking businesses
• Further analysis of Group borrowings is provided in Note 3.11 – Borrowings of the IFRS Group financial statements section of this report
Shareholder asset exposures At 31 December 2009, shareholders had direct exposure to equity, debt securities and investment property of £10.6bn (2008: £9.6bn). This included exposure to equity securities of £0.5bn (2008: £0.4bn). The exposure to debt securities was £9.3bn (2008: £8.3bn) and consisted of government debt securities of £4.2bn (2008: £3.7bn), corporate bonds of £4.9bn (2008: £4.3bn) and other debt securities including supranationals of £0.2bn (2008: £0.3bn). The exposure to investment property amounted to £0.8bn (2008: £0.9bn). The total shareholder exposure to equity securities, debt securities and investment property of £10.6bn (2008: £9.6bn) includes £7.1bn (2008: £6.6bn) of assets held by non-segregated funds in Canada. The effective exposure of shareholders to assets of the non-segregated funds in Canada was significantly lower than £7.1bn (2008: £6.6bn). This is because changes in the value of assets are typically offset by changes in the value of the related liabilities. The shareholder exposure is limited to the net impact on the shareholder surplus and the value of any guarantees that may be triggered. In addition, shareholders had direct exposure to loans and receivables of £9.9bn (2008: £11.7bn), which included £7.5bn (2008: £9.5bn) in respect of the retail mortgage book of Standard Life Bank and £2.4bn (2008: £2.2bn) in respect of the commercial mortgage book of the business in Canada. Both mortgage books are deemed to be of very high quality. Please refer to Sections 1.4.1 – Business segment performance – UK and 1.4.2 – Business segment performance – Canada for further information in respect of the mortgage books.
Credit ratings External credit ratings agencies perform independent assessments of the financial strength of companies. The current insurer financial strength ratings for SLAL are A1/Stable and A+/Stable from Moody’s and Standard & Poor’s respectively. These ratings are unchanged from those reported in the Interim results 2009.
1.6 Risk management Risk management is an integral part of the Group’s corporate agenda. The Group’s risk strategy statement links value and risk in a concise expression of our objectives, aligned with our corporate purpose.
The Group has recently established a ‘Risk Hub’ as a centralised area with specific responsibility for developing risk transfer solutions. This will further develop the Group’s ability to proactively manage risk and lead to innovation in risk solutions.
Definition The risk that arises from the Group’s exposure to market movements which could result in the value of income, or the value of financial assets and liabilities, or the cash flows relating to these, fluctuating by differing amounts.
Appetite The Group has no appetite for market risk exposures except where exposures arise as a consequence of core strategic activity, principally as a consequence of exposure of revenue streams to market risks.
Market risk: Equity and property risk Equity and property risk for the Group primarily relates to the risk that the value of future fund charges on unit linked, 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 duration matching and an expectation that such assets would increase returns to shareholders. As indicated in Section 1.4.2 – Business segment performance – Canada, variability in the values of these assets will be reflected in the financial results of the Canadian business unit.
More generally, the Group’s earnings have been adversely impacted by lower returns earned on working capital during 2009.
The IFRS underlying profit after tax for the UK business has been adversely impacted by the lower interest rates experienced in 2009.
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.
In Sterling terms, the principal risk arises from the Group’s holdings in overseas subsidiaries, primarily Canada and Asia (including HDFC Standard Life and Heng An Standard Life). The UK business also has Euro exposure as a consequence of branch business undertaken in Ireland and Germany and its holding in Standard Life International Limited.
Other exposures arise largely as a consequence of holdings in overseas assets within business units and variances in charges taken from linked and similar funds.
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 corporate bonds due to a widening of corporate bond spreads.
In Canada, the main component of credit risk is the risk of a fall in value of corporate bonds and provincial government bonds due to a widening of credit spreads that is not reflected in a change in liability value.
In addition, all businesses have exposure to the risk of counterparty default, including exposures arising from cash and bond holdings and commercial mortgages (principally within Canada). All such portfolios continue to perform well despite adverse economic conditions.
This risk is controlled through business retention activities and regular monitoring of persistency experience, as well as through product design. Recent performance has been ahead of expectations, particularly in the UK business, resulting in a revision to long-term assumptions. For further information please refer to section 1.4.1 – Business segment performance – UK.
Similar risks exist in respect of Standard Life Investment’s third party assets under management and segregated funds business written by Canada.
Longevity Longevity risk reflects the risk that annuitants live longer than expected. The principal risk to the Group arises in respect of annuity contracts written by the UK business and Canada.
The Group continues to write annuity contracts and to acquire additional risk as a consequence as we believe the business to be sufficiently profitable to justify the risks of doing so.
The Group manages and mitigates liquidity risk by employing a variety of techniques as appropriate, including: • Maintenance of a portfolio of assets of appropriate duration to match liabilities
As a result of the policies and processes established with the objective of managing exposure to liquidity risk, the Group considers the extent of liquidity risk arising from its activities – with the exception of business written by Standard Life Bank plc – to be deminimis. Standard Life Bank plc was sold to Barclays Bank PLC on 1 January 2010. For further information please refer to Note 3.18
Operational and strategic risk exposures are managed actively with action planning and progress monitoring in place. The operational risk processes and systems continue to be revised and enhanced, together with a substantial programme of education and skill improvements within the business.
During 2010, we will continue to focus on finding, acquiring and retaining valuable customers for our mutual and sustained financial benefit in a way that works for them, our business partners and our shareholders. To support this, we will further develop our ever increasing understanding of current and potential customers’ needs. This understanding enables us to ensure that our brand, service and product propositions are aligned with creating exceptional customer experiences.
We are going to accelerate our efforts to build these valuable customer relationships in 2010. We intend to do this through refining what our brand stands for, and ensuring that our brand values are lived by our people and appeal to our customers.
We remain committed to building strong customer and adviser relationships and consider this to be the keystone of our drive to grow our assets under administration and generate sustainable profitable returns.
Despite the impact of unstable global market conditions upon investment performance, which has a considerable influence on overall service satisfaction, the feedback opposite illustrates that the long-term trend in service satisfaction is very positive.
• Logica UK Platform Awards: - Platform of the Year - Best Platform Enabled SIPP Proposition
High quality customer service is the basis of our growth strategy, which focuses on building retention and strong customer relationships. Our client retention level, based on internal methodology, was 94.8% in 2009 (2008: 94.6%). We continually invest in technology, training and processes to help us meet the service expectations of our customers. As part of this, we have enhanced web-based functionality across our group lines to ease administration of our products for both sponsors and participants. Our focus on customers was recognised during the year with a range of awards including: • OCTAS finalist: Group Savings and Retirement Plan Sponsor VIP Room, recognising achievement in Quebec's information technology industry
• Insurance and Financial Communicators Association Awards: - Best of Show: Group Savings and Retirement VIP Room and Plan for Life Communications Programme - Award of Excellence: Group Savings and Retirement Pension Legislation Communication - Award of Excellence: Standard Life Mutual Funds Quarterly Review
Our business remains underpinned by our strong investment performance, delivered through the rigorous application of our ‘focus on change’ investment philosophy, and by our continuing commitment to very high levels of client service. High quality support by our client service teams, combined with strong investment performance from our fund management teams, has been recognised with 11 awards in 2009, including: • Best Sterling Corporate Bond Fund – Morningstar Fund Awards
• 5-Star Award in Investment Category – FTAdviser Online Service Awards
• Fastest Growing Money Manager over CA$10 billion – Benefits Canada Award
• Winner, Global Fixed Income Fund (Unhedged Category) – Asian Investor Awards
• Winner, UK Smaller Companies Category - Moneywise Investment Trust Awards
During 2010 we will continue to focus on driving leadership capability, thereby ensuring our leaders are equipped to help our people grow and fulfil their potential.
Our annual survey showed that employee engagement continued to improve across all of our businesses. Our latest results increased to 3.99 out of 5 (2008: 3.91), putting us in the 55th percentile when measured against Gallup’s global database. This improvement is encouraging and provides a good platform for implementing the key elements of our people strategy in 2010.
To further improve employee engagement, we need to use the fresh insight we gain each year to develop clear action plans that address the barriers our people identify. Doing this at both a team and corporate level supports our objective of being in the top performing quartile of the Gallup global employee engagement database by 2012.
All of our businesses recognise the importance of developing the skills and capabilities of our people in support of our business goals, whilst promoting a strong culture of integrity, honesty and treating individuals with respect.
We are also creating strong interventions to identify, assess and develop those with the potential to progress further in the organisation. These processes begin with our graduate intake and extend to our most senior leaders: • Our graduate recruitment and development activities are critical in creating a sustainable supply of future professionals and leaders. In 2009, we recruited 43 graduates onto the different streams within the Standard Life graduate programme.
Our Business review for the period to 31 December 2009 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).
All non-GAAP measures should be read together with the Group’s IFRS income statement, statement of financial position and statement of cash flows, which are presented in the IFRS Group financial statements section of this report.
EEV IFRS 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.
Profit on in-force business is recognised with the unwind of the risk discount rate as future cash flows move one year nearer to realisation. Adjustments are also made to profit in order to reflect changes to current best estimate assumptions.
Long-term investment return and tax variances 70 - 70 (849) - (849)
Consolidation adjustment for different accounting bases4 67 - 67 (58) - (58)
EEV operating profit after tax attributable to equity holders of Standard Life plc (£m)
EEV consolidated statement of comprehensive income For the year ended 31 December 2009
Total comprehensive income for the period attributable to equity holders from continuing operations 241 326
Additional retained earnings on an EEV basis 2,978 2,838 1 This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 2.16 – EEV methodology. 2 Embedded value equity per share is 288p as at 31 December 2009 compared to 286p as at 31 December 2008, based on diluted share totals of 2,237m as at 31 December 2009 and 2,180m as at 31 December 2008.
The opening and closing EEV numbers, and therefore the profit arising in the period, for the covered business are determined on an after-tax basis. The tax assumptions are based upon the best estimate of the actual tax expected to arise. Profit before tax is derived by grossing up profit after tax at the long-term rate of corporation tax appropriate to each territory. While for some territories this rate does not equate to the actual effective rate of tax used in the calculation of after-tax profits, it provides a consistent grossing up basis upon which to compare results from one year to another and is in line with the Group’s expectation of the rate of tax applicable to business sold after demutualisation.
Prior to the 12 months to 31 December 2009, Asia was included on an IFRS basis. This business was previously immaterial in the context of both the Group embedded value and the Group EEV operating profit, and therefore the Group was not required to report Asia on an EEV basis. The EEV results for the 12 months to 31 December 2008 have not been restated.
On 26 October 2009, the Group announced that it had entered into an agreement with Barclays Bank PLC to sell Standard Life Bank plc. The formal transfer took place on 1 January 2010, with an expected consideration of £245m, which is subject to adjustments resulting from the conclusion of the completion accounts of Standard Life Bank plc for the year ended 31 December 2009. The Group’s decision to sell Standard Life Bank plc was primarily driven by the view that the growth of the volume of lending activity is no longer consistent with its long-term financial objectives.
As a result of entering into the disposal agreement, the assets and liabilities of Standard Life Bank plc were measured at fair value less costs to sell, and this has resulted in a loss of £10m being recognised in the year ended 31 December 2009.
Separately, the Group has agreed heads of terms to enter into a strategic agreement with Barclays UK Retail Banking to explore joint opportunities in the UK retail long-term savings and investments sector. The initial focus is expected to be on the development of a simplified pension product and, thereafter, both parties will continue to explore and develop further opportunities in this market.
In January 2010, the FSA announced that it had fined Standard Life Assurance Limited £2.45m for serious systems and controls failings that resulted in the production of misleading marketing material for the Pension Sterling Fund. This amount has been recognised in the year ended 31 December 2009. A full and thorough review of existing literature has been conducted and a new improved process for new literature has been put in place.
This note provides an analysis of EEV covered business as defined in Note 2.16 – EEV methodology.
HWPF TVOG Total 12 months to 31 December 2009 Notes £m £m £m £m £m £m
Contribution from in-force business: Expected return on existing business 204 132 34 5 - 375
Investment return and tax variances (8) (31) 35 12 62 70
Investment return and tax variances (484) (173) (62) - (130) (849)
2.2 Segmental analysis – covered business continued (a) Segmental EEV income statement continued
HWPF TVOG represents the time value of financial options and guarantees (TVOG) arising from the Heritage With Profits Fund (HWPF). Although the HWPF includes business written by the UK, Germany and Ireland, the Group manages the risk at an aggregate level. This is consistent with the Group’s IFRS financial statements as disclosed in Note 39 – Risk management to the Group’s Annual Report and Accounts 2009. The results for Canada and Asia include the cost of the Canada and Asia TVOG respectively, whilst the results for Europe include the cost of TVOG arising on business written outside of the HWPF in Germany.
The lower expected return on free surplus in the UK reflects lower expected returns on cash assets within free surplus, along with a higher expected increase in the value of subordinated debt liabilities relative to the expected return on the assets backing subordinated debt.
Effect of economic assumption changes includes the effect of changes to risk discount rates of (£214m) (1 January to 31 December 2008: £277m), which are explained in Note 2.12 – Principal economic assumptions – deterministic calculations – covered business. The total UK loss of £243m includes (£76m) from the change in risk discount rates and (£60m) in respect of higher inflation assumptions. The total Canada loss of £292m includes (£116m) from the change in risk discount rates and (£66m) from the change in subordinated debt liability.
HWPF TVOG shows separate movements in investment variances and economic assumptions, whereas in practice, economic assumption changes are highly dependent on the same factors that give rise to investment variances, for example market yields. Therefore, the key consideration is the net effect of the two items rather than the individual items themselves. Further comments on the movement in TVOG are provided in Note 2.4 – Experience variances, and Note 2.10 – Time value of options and guarantees (TVOG).
Transfer back of mutual funds net worth 20 (1) - - - 19
Aggregate tax effect of items not recognised in income statement - 5 - - - 5
Actuarial gains/(losses) on defined benefit pension schemes - 12 (10) - - 2
Opening adjusted EEV in Asia for the 12 months to 31 December 2009 reflects the inclusion of Asia on an EEV basis for the first time. The opening adjustment is explained in more detail in Note 2.1 – Basis of preparation. The results for the 12 months to 31 December 2008 have not been restated and include Asia on an IFRS basis.
2.3 Analysis of new business contribution The following table sets out the premium volumes and contribution from new business written by the life and related businesses, consistent with the definition of new business set out in Note 2.16 – EEV methodology.
margin3 12 months to 31 December 2008 £m £m £m £m PVNBP
The results for the 12 months to 31 December 2009 include Asia on an EEV basis for the first time. The results for the 12 months to 31 December 2008 have not been restated and include Asia on an IFRS basis. Refer to Note 2.1 – Basis of preparation.
Mortality profits in Canada arise from a release of annuity reserves following an exercise to validate the policy data.
‘Other’ UK variances for the 12 months to 31 December 2008 includes the impact of the cash injection into the Pension Sterling Fund which resulted in a loss of £108m.
Positive lapse assumption changes in UK and Canada mainly arise from the improved persistency of pensions business. The £22m loss in Europe reflects higher paid up assumptions in Germany and higher lapse rates for offshore bond business.
The expense assumption loss in the UK predominantly reflects changes in expense allocation for investment related expenses. The gain of £16m in Europe mainly arises within Germany and Ireland.
UK operations comprise primarily life and pensions business and the healthcare business. UK non-covered business is shown within this note and includes healthcare, UK non-covered mutual funds businesses and the non-covered UK pension scheme. The Group’s banking business, Standard Life Bank, has been classified as a discontinued operation. Refer to Note 2.1 – Basis of preparation.
On 15 May 2009, the Group’s equity holders approved the introduction of the Scrip dividend scheme, effective for the final 2008 dividend payment onwards. Investors taking part in the Scrip scheme receive their dividend entitlement in the form of new shares issued in lieu of cash dividends. For the 12 months ended 31 December 2009, dividends paid comprise £102m (12 months to 31 December 2008: £nil) settled by the issue of shares under the Scrip scheme, and £158m paid in cash (12 months to 31 December 2008: £257m).
Transfer back of net worth from covered business 33 (17) - 1 17
Third party related life and pensions profits before tax 19 20
Total EEV profit before tax 64 1 The non-operating loss items for the 12 months to 31 December 2009 include £9m net negative fair value movement in respect of the liability remaining following the restructuring of a sub-fund of the Standard Life Investments (Global Liquidity Funds) plc and the ‘Contract for Differences’ written in September 2008 which limited this liability for Standard Life Investments. The non-operating items for the 12 months to 31 December 2008 include total losses of £90m from the restructuring of the Global Liquidity Funds sub-fund. Of these total restructuring losses, £51m for the 12 months to 31 December 2008 relate to losses arising from the fair value movements of assets brought directly on to the statement of financial position. The losses for all periods relating to the non-life net negative fair value movement and the fair value movement of assets brought directly on to the statement of financial position are included within IFRS underlying profit but excluded from IFRS normalised underlying profit. Also included within non-operating items for the 12 months to 31 December 2009 are £2m of costs relating to the CIP programme and other restructuring costs (12 months to 31 December 2008: £3m).
Opening adjustments in the full year 2008 relate to the transfer of Sigma mutual funds from non-covered to covered business.
2.8 Reconciliation of EEV net assets to IFRS net assets 31 December £m £m
Present value of in-force life and pensions business net of cost of capital (3,384) (3,053)
Net assets attributable to equity holders on an IFRS basis 3,457 3,407 1 This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 2.16 – EEV methodology.
2.9 Analysis of covered business EEV PVIF and net worth movements (net of tax) (a) Total
Contribution from in-force business: Expected return on existing business (1) 39 38 236 274
Expected return transfer to net worth 579 (60) 519 (519) -
Transfer back of mutual funds net worth 19 - 19 - 19
Actuarial losses on defined benefit pension schemes (3) - (3) - (3)
Transfer back of mutual funds net worth 20 - 20 - 20
Contribution from in-force business: Expected return on existing business (1) 3 2 206 208
Contribution from in-force business: Expected return on existing business - 34 34 64 98
Expected return transfer to net worth 132 (60) 72 (72) -
Aggregate tax effect of items not recognised in income statement 5 - 5 - 5 64 www.standardlife.com
Expected return transfer to net worth 105 3 108 (108) -
Actuarial gains on defined benefit pension schemes 13 - 13 - 13
The EEV results for the 12 months to 31 December 2008 have not been restated and include Asia on an IFRS basis. The IFRS opening and closing net assets for this business were included within the opening and closing free surplus, and the IFRS underlying loss after tax included within Expected return on free surplus.
The results for the 12 months to 31 December 2009 include Asia on an EEV basis for the first time. The results for the 12 months to 31 December 2008 have not been restated and include Asia on an IFRS basis, therefore no TVOG is shown.
The UK and Europe HWPF TVOG reflects the value of shareholder exposure to the policyholder guarantees within the HWPF. This has reduced significantly during 2009 due to the impact of changes in asset allocations, as described in Note 2.4 – Experience variances, and the overall favourable non-operating profit of £71m as shown in Note 2.2(a) – Segmental analysis – covered business – Segmental EEV income statement. The Asia TVOG is reported for the first time and reflects the value of guarantees and options within participating funds.
2.12 Principal economic assumptions – deterministic calculations – covered business (a) Gross investment returns and expense inflation
* Excludes corporate bond returns on annuities. For annuities in UK equity holder funds, the overall investment return, after allowing for assumed defaults, is 6.44% for annuities that are level or subject to fixed escalations and 3.42% 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. ***0.94% in 2008. The rate in subsequent years is based on a moving 30-year bond yield less a variable deduction.
Risk margin before cost of capital adjustment: Risk margin after cost of capital adjustment 3.50 2.80 3.30 3.50 2.80
Europe includes an allowance for SLIL which uses the same risk discount rate assumptions as UK business.
Risk margin before cost of capital adjustment: Risk margin after cost of capital adjustment 3.60 2.90 3.50 3.60 2.90
Changes in market risk margins generally arise from changes in the mix of business and asset allocations. The increases in nonmarket risk margins primarily arise from changes in the mix of business.
The impact of the changes in risk discount rates has been included in the effect of economic assumption changes shown in Note 2.2(a) – Segmental analysis – covered business – Segmental EEV income statement. The amounts within these totals that relate to changes in the risk discount rate are: for UK: loss £76m; for Europe: loss £15m; for Canada: loss £116m; and for Asia: loss £7m.
As there is no liquid property option market, a best estimate of property return volatility is used. The property volatility is estimated from adjusted Investment Property Databank UK data.
The principal correlations in the ESG are between equity, bond and property returns.
The average simulated internal economy correlations between the major asset classes are: • Equity/property = 0.14
The average simulated cross economy correlations between the major asset classes are: • UK Equity/EU Equity = 0.82
Note 2.10 – Time value of options and guarantees (TVOG) also shows the value of TVOG in Canada, Europe and Asia, which are in addition to the HWPF TVOG. Where material, these values are also calculated using ESG similar to that used for the HWPF TVOG calculation.
2.15 Sensitivity analysis – economic and non-economic assumptions The tables below show the sensitivity of the embedded value and the new business contribution (NBC) to different scenarios.
• 10% fall in market value of equity and property assets (not applicable for NBC)
Fall in equity/property market values by 10% (165) (94) (13) (2) (12) (286)
The Group’s covered business is its life assurance and pensions businesses in the UK, Canada, Europe (Germany including Austria, and Ireland) and Asia, 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.
• The results of the Group’s business in Hong Kong (Standard Life Asia Limited)
Cash flows emerging in the period on covered business that do not reside within a life and pensions company on a statutory basis are transferred back to the relevant non-covered entity for disclosure within their closing net assets. This treatment is applied to both the return from global investment management and the return on certain mutual funds included in covered business.
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 below.
For some assets and liabilities where market value is not the normal basis for accounting, as in Canada, the free surplus is restated to market value, adjusted as required to allow for the present value of any tax which would become payable if the assets were realised.
Under the EEV Principles and Guidance, risks within the covered business are allowed for in the following ways: • Application of risk discount rates to projected cash flows, which are derived by adding a risk margin to a risk free rate • Holding of required capital for the covered business, determined by reference to both regulatory requirements and internal economic capital assessments
Required capital represents the amount of assets over and above those required to back the liabilities in respect of the covered business whose distribution to equity holders is restricted. As a minimum, this will represent the capital requirement of the local regulator.
The levels of required capital are reviewed in detail once a year.
• Canada – the level of required capital is taken as 150% of minimum continuing capital and surplus requirements (MCCSR)
The value of the TVOG arising from the HWPF at any point in time will be sensitive to: • The level of the residual estate (working capital in the HWPF)
The level of the TVOG has been calculated by a model which projects the HWPF under a large number of different future economic scenarios. Particular features of this calculation are: • The projected economic scenarios and the methodology used to discount equity holder cash flows are based on market consistent assumptions
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.
Canada The main options and guarantees within the Canada business are in respect of minimum investment returns, guaranteed maturity and death benefits, and vested bonuses, which apply to certain investment and insurance contracts.
Details of the assumptions used for this reporting period are provided in Note 2.12 – Principal economic assumptions – deterministic calculations – covered business.
• Department of Work and Pensions (DWP) rebates are deemed to be new single premiums
• All increments and indexations to existing policies, including new members, and increments and indexations paid by existing members of group schemes, are deemed to be new business www.standardlife.com 79
Embedded value and other items within the statement of financial position denominated in foreign currencies have been translated to Sterling using the appropriate closing exchange rates. NBC and other items within the income statement have been translated using the appropriate average exchange rates. Gains and losses arising from foreign exchange differences on consolidation are presented separately within the EEV consolidated statement of comprehensive income.
Change in liability for third party interest in consolidated funds 323 (598)
Underlying profit before tax attributable to equity holders of Standard Life plc and adjusted items 231 60 291 128 26 154
Profit/(loss) before tax attributable to equity holders’ profits 120 84 204 (72) (70) (142)
Underlying profit is calculated by adjusting the profit for the period for volatility that arises from different International Financial Reporting Standards (IFRS) measurement bases for liabilities and backing assets, volatility arising from derivatives that are part of economic hedges but do not qualify as hedge relationships under IFRS, restructuring costs, significant corporate transaction expenses, impairment of intangible assets and profit or loss arising on the disposal of a subsidiary, joint venture or associate. The Directors believe that, by eliminating this volatility from equity holder profits, they are presenting a more meaningful indication of the underlying business performance of the Group.
Equity attributable to equity holders of Standard Life plc 3,457 3,407
Liabilities of operations classified as held for sale 3.17 9,143 -
Profit/(loss) for the year - - 213 - 213 (33) 180
Other comprehensive expense for the year - - (50) 21 (29) - (29)
Total comprehensive income/(expense) for the year - - 163 21 184 (33) 151
Reserves credit for employee share-based payment schemes - - - 24 24 - 24
Transfer to retained earnings for vested employee share-based payment schemes - - 8 (8) - - -
Other movements in non-controlling interests in the year - - - - - (5) (5)
interests Total equity 2008 £m £m £m £m £m £m £m
The preliminary announcement for the year ended 31 December 2009 does not constitute statutory accounts as defined in Section 435 of the UK Companies Act 2006. PricewaterhouseCoopers LLP have audited the consolidated statutory accounts for the Group for the years ended 31 December 2008 and 31 December 2009 and their reports were unqualified and did not contain a statement under Section 498(2) or (3) of the UK Companies Act 2006. The Group’s consolidated statutory accounts for the year ended 31 December 2008 have been filed with the Registrar of Companies. The Group’s Annual Report and Accounts for the year ended 31 December 2009 will be available from 1 April 2010.
The Group’s reportable segments have been identified in accordance with the way in which the Group is structured and managed and the way in which key financial information used by the Executive team to review performance is presented. The Group’s reportable segments are as follows: UK UK operations primarily comprise life and pensions business and banking business. The life and pensions business provides a broad range of pensions, protection, savings and investment products to individual and corporate customers. The banking business provides a range of retail mortgage and deposit products via online and telephone operations. However, the Group’s banking business, Standard Life Bank plc, was sold on 1 January 2010 and has therefore been classified as a discontinued operation, refer to Note 3.18 – Events after the reporting period. Continuing UK operations also include healthcare business.
Asia The Group has investments in joint ventures in India and China and a wholly owned subsidiary in Hong Kong. These businesses offer a range of life and pension products.
Global investment management Investment management services are provided by global investment management operations to the Group’s other reportable segments. Global investment management also provides a range of investment products for individuals and institutional customers through a number of different investment vehicles.
(b) Reportable segments – income statement, underlying profit and asset information
Income statement and asset information are presented by reportable segment in the tables below. As described beneath the pro forma reconciliation of Group underlying profit to profit for the year, underlying profit is considered to present an indication of the underlying business performance of the Group. Underlying profit is one of the key measures utilised by Group management in their evaluation of segmental performance and is therefore also presented by reportable segment.
Tax attributable to equity holders’ profits (51) 33 (3) - 13 (10) - (18)
Profit/(loss) for the year from continuing operations 156 (41) 41 (27) 51 (42) - 138
Profit/(loss) attributable to equity holders of Standard Life plc 231 (41) 41 (27) 51 (42) - 213
Other income included in the income statement is as follows: Interest income: Other expenses included in the income statement include: Impairment losses recognised/(reversed): Amortisation of deferred acquisition costs1 116 12 45 - - - - 173
Depreciation of property, plant and equipment1 - 2 1 - 1 6 - 10
Investments in associates and joint ventures 1,915 104 - 80 32 38 - 2,169
Tax attributable to policyholders’ returns (317) - (17) - - - - (334) Tax attributable to equity holders’ profits (69) (64) 5 - 3 (13) - (138)
Profit/(loss) for the year from continuing operations 129 (39) 40 (35) (3) (26) - 66
Profit/(loss) for the year 80 (39) 40 (35) (3) (26) - 17
Underlying profit/(loss) before tax attributable to equity holders of Standard Life plc and adjusted items 238 (102) 48 (35) 42 (37) - 154
Other income included in the income statement is as follows: Interest income: From continuing operations 491 142 25 - 9 11 - 678 From discontinued operations 700 - - - - - - 700
Intangible assets 13 - 4 - - 9 - 26 Deferred acquisition costs 190 16 100 - - - - 306 Property, plant and equipment 267 2 1 - 2 1 - 273 Investment properties 78 30 6 - - - - 114
Of the restructuring costs from continuing operations of £59m, £58m (2008: £70m) is adjusted when determining underlying profit for the year, with the remaining £1m (2008: £1m) relating to CIP expenses incurred by the Heritage With Profits Fund. In addition, £1m (2008: £2m) of CIP costs were incurred by discontinued operations which is adjusted when determining the underlying profit from discontinued operations for the year.
3.4 Tax expense/(credit) The tax expense/(credit) is attributed as follows: Restated
Tax on fair value gains/(losses) on cash flow hedges attributable to discontinued operations
3.5 Discontinued banking operations The Group’s banking business, Standard Life Bank plc, was sold on 1 January 2010 (refer to Note 3.18 – Events after the reporting period). It has therefore been classified as a discontinued operation and the assets and liabilities attributable to Standard Life Bank plc as at 31 December 2009 have been classified as held for sale.
Total comprehensive income/(expense) for the year from discontinued operations 50 (76)
Weighted average number of ordinary shares in issue (millions) 2,201 2,176
Weighted average number of ordinary shares for diluted earnings per share (millions) 2,203 2,180
Diluted earnings per share from continuing operations (pence per share) 7.8 6.9
Profit/(loss) before tax attributable to equity holders’ profits 204 9.2 (142) (6.5)
Profit attributable to equity holders of Standard Life plc 213 9.7 100 4.6 98 www.standardlife.com
Subsequent to 31 December 2009, the Directors have proposed a final dividend for the year ended 31 December 2009 of 8.09 pence per ordinary share, £181m in total. The dividend will be paid on 28 May 2010 to shareholders on the Company’s register as at 19 March 2010, subject to approval at the Annual General Meeting on 14 May 2010. This dividend will be recorded as an appropriation of retained earnings in the financial statements for the year ended 31 December 2010.
3.9 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 bonus issue 1,847 - 20,240 -
The Scheme of Demutualisation sets a 10-year limit 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 2009, 449 ordinary shares were issued to eligible members in respect of their demutualisation entitlements (2008: nil).
During the year ended 31 December 2009, the Group introduced a Scrip dividend scheme, and 55,018,211 shares have been issued in respect of dividends declared in the year.
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 have three years from 10 July 2007 to claim their entitlements. During the year ended 31 December 2009, a further 1,847 ordinary shares were issued to equity holders entitled to receive bonus shares (2008: 20,240 ordinary shares).
Non-participating insurance contracts include £146m (2008: £160m) relating to Standard Life Healthcare and £3m (2008: £3m) relating to general insurance.
Effect of changes in: Effect of: Total change in contract liabilities (755) 2,259 (593) 911 (942) (31)
Following demutualisation it is necessary to recognise within the participating liabilities the residual estate in the HWPF as a liability, since this will in due course be distributed to existing HWPF policyholders if it is not otherwise required to meet liabilities chargeable to the HWPF in accordance with the Scheme. The movement for the year therefore includes the movement in the residual estate.
Economic assumptions reflect changes in fixed income yields, leading to lower valuation rates on non-participating business and other market movements.
Non-economic experience changes in the year primarily represent higher than expected claims.
3.10 Insurance contract liabilities, non-participating investment contract liabilities, participating investment contract liabilities and reinsurance assets continued
On 14 February 2008, Standard Life Assurance Limited (SLAL) entered into a reinsurance arrangement with Canada Life International Re in respect of certain annuity contracts. For the gross participating insurance and investment liabilities the impact of the annuity reinsurance transaction shown reflects the change in the residual estate, which therefore impacts the value of the planned enhancements (on an FSA realistic basis) included within these liabilities as covered by the Scheme. The increase in the reinsurance asset associated with the transaction represents the increase in the value of the reinsurance assets with external reinsurers due to this new arrangement.
The change in non-participating investment contract liabilities was as follows: Reinsurance contracts are generally structured to match liabilities on a class of business basis. This has a mixture of terms. The reinsurance assets are therefore broadly expected to be realised in line with the settlement of liabilities (as per the terms of the particular treaty) within a reinsured class of business.
Account balances paid on surrender and other terminations in the year (6,682) (6,584)
Certificates of deposit, commercial paper and medium term notes 816 573
Standard Life Funding B.V. commercial paper – EUR - 5.26% - 84
Standard Life Funding B.V. medium term notes – EUR 0.97% - 108 -
Standard Life Funding B.V. medium term notes – EUR - 4.10% - 117
The mortgage backed floating rate notes at year end are as follows: Average interest rates Carrying amount
Lothian Mortgages Master Issuer plc – EUR – Maturity 2050 0.86% 5.16% 348 460
Total mortgage backed floating rate notes 1,967 2,411 3.12 Defined benefit and defined contribution plans (a) Analysis of amounts recognised in the income statement
Present value of funded obligation (1,700) (135) (43) (1,878) (1,309) (105) (62) (1,476)
Present value of unfunded obligation - (41) - (41) - (32) - (32)
Rate of increase in salaries 4.80-5.80 3.50 3.50 4.35-5.35 3.50 4.83
The Group has entered into agreements to share in the assets and liabilities of joint venture and associate investments. The Directors do not anticipate any material losses from such investments, and the operations of such investments are not material in relation to the operations of the Group.
During the year ended 31 December 2007, the Company issued a guarantee to Standard Life Investments (Global Liquidity Funds) plc to cover the difference between amortised cost and marked to market value of the underlying assets of a sub-fund, should there be a need for Standard Life Investments (Global Liquidity Funds) plc to sell assets of the sub-fund at an amount below amortised cost to meet investor withdrawals. The guarantee was for a maximum of £5m and was released during 2009 as it was no longer considered to be required.
(i) In the ordinary course of business, Standard Life Trust Company 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, Standard Life Trust Company has provided as security a bank credit facility up to a maximum of CA$84m.
(ii) Under the Financial Services Compensation Scheme (FSCS), which covers business conducted by firms authorised by the Financial Services Authority (FSA), consumers can claim compensation where a firm is unable to pay claims against it. These costs are levied on the industry by the FSCS with each firm’s contribution calculated based on the tariff base of the relevant sub-class of financial activities it undertakes. Each sub-class meets the claims in their class up to an annual threshold. During 2008, FSCS involvement was triggered to protect deposits in several firms and maintain market confidence. At 31 December 2008, a provision was recognised in respect of Standard Life Bank in relation to potential compensation levies due under the FSCS based on FSA guidance issued to the British Bankers Association (BBA) on 31 December 2008 and subsequently updated on 4 February 2009. At 31 December 2008, this provision was intended to cover the management expense levies for 2008/09 and 2009/10 in relation to interest and other costs incurred on the loans taken out by the FSCS, to compensate savers with banks which defaulted during 2008. The FSA guidance issued to the BBA was further updated on 29 July 2009. During the year ended 31 December 2009, the 2008/09 management expense levy was settled, and the corresponding element of the provision that was recognised as at 31 December 2008 was released. The provision recognised as at 31 December 2009 is intended to cover the management expense levies for 2009/10 and 2010/11. Uncertainty exists over the total market FSCS levies and therefore the Standard Life Bank proportion to provide for, which will be dependent on the period of recovery, FSCS funding costs and potential capital write-offs.
The Group’s capital commitments as at 31 December are as follows: £m £m
Commitments to extend credit: Original term to maturity of less than one year 112 83
Guarantees and letters of credit include guarantees in relation to the Group’s Canadian operations. These guarantees are considered to be financial guarantee contracts under IAS 39 Financial Instruments: Recognition and Measurement.
Included in ‘Other commitments’ is £696m (2008: £942m) 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 are in respect of the Group’s banking business, Standard Life Bank plc, which was sold on 1 January 2010. Refer to Note 3.18 – Events after the reporting period.
Transactions with related parties carried out by the Group were as follows: £m £m
In addition to the amounts shown above, the Group’s defined benefit pension schemes have assets of £528m (2008: £340m) invested in investment vehicles managed by the Group.
All transactions between key management and the Group are on commercial terms which are equivalent to those available to all employees of the Group.
3.16 Capital statement The Group’s capital position is analysed between UK regulated life business, overseas life operations and other activities. The UK regulated life business is analysed by the nature of the underlying funds and includes German and Irish business written by branches of UK regulated companies. Other activities comprise investment management, general insurance and Group corporate centre. Standard Life Bank plc is a subsidiary of Standard Life Assurance Limited (SLAL) and therefore its capital resources are included within life business equity holders’ funds. The Group’s capital position, based on draft regulatory returns, is set out below: UK regulated life business
Held outside life assurance funds - - 1,077 1,077 1,053 2,130 710 2,840
Changes to the valuation of other assets and liabilities (610) (90) 645 (55) 79 24 225 249
Based on draft regulatory returns at 31 December 2009, SLAL had available capital resources of £5.3bn (2008: £6.0bn) and a CRR of £2.0bn (2008: £2.2bn). The capital resources shown in the capital statement are based on the value of assets and liabilities valued on a regulatory basis however, the CRR reflects the higher value required as a result of the application of the realistic peak.
Capital subject to constraints for the UK regulated life business of £2.2bn at 31 December 2009 (2008: £3.6bn) represents capital resources held within long-term business funds, or, in relation to other regulated entities, the amount of the CRR.
Standard Life Bank is owned by SLAL and therefore its capital resources are included within life business equity holders’ funds. Standard Life Bank’s capital resources of £576m (2008: £541m) exceed its CRR of £246m (2008: £358m) by £330m (2008: £183m), and the excess can therefore be used to meet the requirements of the life assurance business.
Overseas life operations Capital resources of £1,204m (2008: £1,188m) which relate mainly to operations in Canada, also include operations in Asia. The capital resources of the Canadian operations 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 £782m at 31 December 2009 (2008: £752m).
Other activities At 31 December 2009, capital resources of £550m (2008: £558m) and capital subject to constraints of £118m (2008: £134m) relate to the Group’s healthcare, investment management businesses and Group corporate centre activities.
As referred to in Note 3.10, on 31 December 2009 Standard Life plc lent £588m to SLAL HWPF under a contingent loan agreement (a contingent RCF loan, as defined under the Scheme). Simultaneously, the HWPF lent £588m to Standard Life plc under a limited recourse loan agreement. Under the Scheme this resulted in an obligation arising in the HWPF to transfer the loan proceeds received under the contingent loan agreement (the securitisation receipt) to the Shareholder Fund. The securitisation receipt will be transferred in March 2010. The accrual of this future transfer is reflected in the capital statement as an increase in the capital of the SLAL Shareholder Fund and a reduction in the capital of the HWPF. However, immediately after that transfer of assets is made, the Shareholder Fund will lend the same amount to Standard Life plc under a second limited recourse loan agreement and these deposits will immediately be used to repay the first limited recourse loan from the HWPF to Standard Life plc. The net effect of these arrangements is that the admissible assets of the HWPF and the SLAL Shareholder Fund are unchanged. However, due to the fact that these arrangements are reported partly in 2009 and partly in 2010, the available capital resources of the HWPF and the UK life business shareholders’ fund at 31 December 2009 appear artificially low and high respectively to the value of £588m.
The estimated FGD position at 31 December 2009 is shown in the Business review Section 1.5 – Capital and cash generation.
In respect of the Group’s financial conglomerate reporting there were no breaches of regulatory capital requirements at any time during the year.
Equity holder/inter-fund transfers (869) (63) 932 - 16 16 (16) -
Equity holder/inter-fund transfers (406) 377 29 - 26 26 (26) -
Changes in assumptions used to measure contract liabilities have not had a significant impact on capital resources.
3.17 Assets and liabilities of operations classified as held for sale Assets and liabilities of operations classified as held for sale as presented in the consolidated statement of financial position are analysed as follows: Notes £m £m
Liabilities of newly acquired subsidiaries classified as held for sale 42 -
Customer accounts related to banking activities and deposits by banks 5,927
The Group provides seed capital to newly established funds which may result in such funds becoming subsidiaries of the Group. Where the Group is actively seeking to reduce its investment in a subsidiary and it is considered highly probable that the Group will relinquish control of the subsidiary within 12 months of the original investment being made, the subsidiary is classified as held for sale. During the year, one fund (2008: none) was seeded in this manner, therefore the corresponding assets and liabilities of this fund have been classified as held for sale.
The assets of newly acquired subsidiaries classified as held for sale primarily comprise investment securities. The liabilities of newly acquired subsidiaries classified as held for sale primarily comprise third party interest in consolidated funds. No income or expense has been recognised in relation to newly acquired subsidiaries classified as held for sale. For the purpose of segmental analysis all newly acquired subsidiaries classified as held for sale have been included within the global investment management reportable segment.
3.18 Events after the reporting period On 26 October 2009, the Group announced that it had entered into an agreement with Barclays Bank PLC to sell Standard Life Bank plc. The formal transfer took place on 1 January 2010, with an expected consideration of £245m, which is subject to adjustments resulting from the conclusion of the completion accounts of Standard Life Bank plc for the year ended 31 December 2009. The Group’s decision to sell Standard Life Bank plc was primarily driven by the view that the growth of the volume of lending activity is no longer consistent with its long-term financial objectives.
Separately, the Group has agreed heads of terms to enter into a strategic agreement with Barclays UK Retail Banking to explore joint opportunities in the UK retail long-term savings and investments sector. The initial focus is expected to be on the development of a simplified pension product and thereafter both parties will continue to explore and develop further opportunities in this market.
Analysis of Group AUA For the year ended 31 December 2009
Total worldwide life and pensions 121.6 16.0 (13.3) 2.7 12.5 136.8
Individual insurance, savings and retirement 5.6 0.4 (0.6) (0.2) 0.5 5.9
(a) 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. (b) The mutual funds net flows are also included within mutual funds net flows in the third party Investment operations figures. (c) Annuities include assets deposited back with the Group as a result of the reinsurance of certain annuity contracts. (d) The offshore bond business is shown within Ireland AUA in 2009. This was previously included within UK life and pensions. Opening balances for UK and Ireland have been restated to reflect this. (e) Restated to include net flows in respect of our Hong Kong subsidiary and Standard Life’s share of the Asia Joint Ventures. (f) 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.
The total shareholder exposure to investment property and financial assets of £26.2bn (2008: £26.9bn) includes £10.1bn (2008: £9.2bn) of assets held by non-segregated funds of the Group’s Canadian operations. The effective exposure of shareholders to assets of the non-segregated funds in Canada was significantly lower than the nominal level of exposure presented below because changes in the value of assets are typically accompanied by offsetting changes in the value of related liabilities. The shareholder exposure is limited to the net impact on the shareholder surplus and the value of any guarantees which may be triggered.
Other shareholder exposure Total shareholder exposure £m £m £m £m £m £m £m £m
Standard Life Bank exposure to financial assets consists primarily of exposure to a very high-quality retail mortgage book as well as highly rated short-term debt securities and cash and cash equivalents. Standard Life Bank was sold on 1 January 2010 and therefore the Group has no exposure to those assets after that date.
Shareholder exposure to debt securities excluding Canada non-segregated funds and Standard Life Bank consists primarily of debt securities backing annuity liabilities, subordinated debt liabilities and the stock lending programme. The increase in exposure can be attributed to new annuity business written in the period.
Shareholders are directly exposed to loans and receivables of £9.9bn (2008: £11.7bn) which comprise the Standard Life Bank retail mortgage book and the Canadian non-segregated funds commercial mortgage book. Both mortgage books are deemed to be of very high quality.
The Canadian mortgage book has an average loan to value of 46% (2008: 44%), has no loans in arrears by three or more months and has experienced no impairments during 2009.
4.3 Fair value hierarchy of financial instruments To provide further information on the approach used to determine the fair value of certain financial assets and derivative financial liabilities measured as at fair value on the Group’s IFRS statement of financial position, the fair value of these financial instruments has been categorised below to reflect the following fair value hierarchy: Level 1: fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2: fair values measured using inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) Level 3: fair values measured using inputs that are not based on observable market data (unobservable inputs)
The amendment to IFRS 7 Financial Instruments: Disclosures which requires the presentation of a fair value hierarchy analysis and related disclosures was issued in March 2009. The implementation of these requirements has resulted in some reclassifications compared to the indicative fair value hierarchy information presented in the Preliminary Results 2008. The most significant reclassifications resulted in some government bonds being classified as level 2 rather than level 1 and some corporate bonds being classified as level 3 rather than level 2 on the basis that their valuation is based on a single broker indicative quote. The comparative figures in the following tables have been restated to reflect these revised classifications.
Level 1 financial instruments principally include equity securities listed on a recognised exchange, certain government and supranational institution bonds and exchange traded futures and options.
Level 3 financial instruments principally include unlisted equity securities, being predominantly interests in private equity funds, listed or publicly quoted corporate bonds for which prices are not available from external pricing providers or where such prices are considered to be stale (including some asset backed securities) or are based on single broker indicative quotes and unquoted bonds where credit spreads, being a significant input to the valuation technique, are obtained from a broker or estimated internally.
Total closing operating cost base 914 1 Notional level of inflation that would have impacted the operating cost base during the year. Blended rate used for staff and non-staff of 2.3% for 2009 (2008: 3.7%). 2 Adjustment to opening cost base as a result of movement in the average exchange rate. 3 Movement in the cost base implied by the growth of the organisation – annual premium income used as proxy for Standard Life Healthcare; a combination of
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 2009 (unless otherwise indicated).
Stan d ard Life p lc Prelim in ary R esu