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The most important non-GAAP measures in the business review include European Embedded Value (EEV) information and IFRS underlying profit.
Where figures are described as pro forma, this means that they have been prepared for periods before demutualisation and indicate the profits that would have occurred if the post demutualisation structure had applied.
Further details can be found in section 1.7 of the business review.
1.1 Group overview Generating sustainable, high quality returns for our shareholders We have delivered strong results and achieved our financial and efficiency targets for 2007 – our first full year as a listed company following demutualisation in 2006. 2007 has been a record-breaking year for new business volumes with present value of new business premiums (PVNBP) sales increasing by 13% to £16,423m. EEV operating profit before tax increased by 43% to £881m, delivering a return on embedded value (RoEV) of 11.5% (2006: 8.9%) that has significantly exceeded the 9-10% target set for the year. This strong increase in RoEV has been driven by growth in new business profitability, the successful achievement of our cost efficiency targets and a resilient performance from our investment management business.
Delivering capital efficiency and generating cash The Group’s financial strength is reflected by the improvement in capital and cash generation in 2007 and the increase in our regulatory capital resources as at 31 December 2007. A core component of our strategy is to write capital-efficient new business. We have reduced new business strain (NBS) by 26% to £225m (2006: £303m) while growing sales volumes by 13%. New business strain as a proportion of PVNBP has improved to 1.4% (2006: 2.2%) and was comfortably covered by capital and cash flows from our existing business, which increased by 26% to £549m (2006: £436m). These factors have contributed to the 129% increase in total EEV capital and cash generation after tax to £600m (2006: £262m). Our regulatory capital resources have increased from £7.9bn to £9.2bn, giving solvency cover of 166% of capital resources requirements. The residual estate of the Heritage With Profits Fund (HWPF) at 31 December 2007 was £1.5bn compared with £1.3bn in 2006.
Driving for operational excellence As part of our aim to drive for operational excellence we have reduced expenses to create a more efficient business. Maintaining Group Corporate Centre (GCC) costs in 2007 at the pre demutualisation level of £58m in 2005 was one of the specific targets we communicated at the time of the initial public offering (IPO) in July 2006. We have succeeded in meeting this target by reducing GCC costs to £57m (2006: £89m). At the time of flotation we also announced that we would reduce UK life and pensions expenses by £30m by the end of 2007. We have achieved these cost efficiencies, reducing expenses by £31m excluding the cost of new products launched since 2005, including Wrap.
1 The expected one off benefit to pre tax embedded value operating profit has been calculated on the basis of the European Embedded Value (EEV) methodology used by Standard Life as at the end of 2007.
3 The percentage change figures include percentage change figures for India which are computed based on the percentage movement in the new business of HDFC Standard Life Insurance Company Limited as a whole to avoid distortion due to changes in the Group’s shareholding in the joint venture during 2006 and 2007.
4 2006 results are shown on a pro forma basis. 5 PVNBP margins are NBC divided by PVNBP expressed as a percentage based on the underlying unrounded numbers.
New business sales The Group’s new business performance has delivered a 13% increase in life and pensions PVNBP sales to £16,423m.
Operations in Asia continued to experience strong growth with PVNBP increasing by 47%3 in constant currency as branch expansion and agency recruitment continued in our joint ventures in China and India. We expect further growth in Asia Pacific to be driven by new product launches, wider distribution and market expansion.
New business profitability Our overall sales growth has driven higher profitability with new business contribution (NBC) up 68% to £345m and PVNBP margin increasing by 0.7% points to 2.1%. The NBC growth was driven by significantly higher sales volumes in the UK and Europe. There were improvements in margins across all territories.
Further analysis of the individual segment results can be found in section 1.6 business segment performance.
EEV operating profit before tax* £881m £614m 43% Return on embedded value* 11.5% 8.9% 2.6% points Diluted EEV operating EPS* 28.3p 20.7p 37% EEV profit before tax* £838m £1,022m (18%)
In addition, as part of our focus to actively manage the value of the in-force business, a review of UK group deferred annuity data and models resulted in a £191m benefit to operating profits and activities to reduce risks within the Heritage With Profits Fund (HWPF) have generated £42m of operating profits (2006: £44m) from a reduction in the time value of options and guarantees (TVOG).
Operating profit after tax Operating profit after tax increased by 44% to £617m (2006: £429m). The attributable tax rate was 30% in 2007 (2006: 30%).
Diluted EEV operating EPS The diluted EEV operating EPS grew significantly from 20.7p in 2006 to 28.3p in 2007. The basic EEV operating EPS also increased from 21.4p in 2006 to 28.9p in 2007. These increases were largely driven by the 37% increase in operating profit after tax since 2006 (as adjusted for IPO notional interest).
EPS is based on operating profit after tax including notional interest on IPO proceeds where appropriate (2006: £21m) and on 2,138m shares for basic EPS (2006: 2,102m) and 2,177m shares for diluted EPS (2006: 2,173m).
EEV non-operating loss The non-operating loss before tax totalled £43m (2006: profit £408m), a decrease of £451m. Our life and pensions businesses produced a non-operating profit of £10m (2006: profit £283m) from economic variances and assumption changes. This included long-term investment variances of negative £17m (2006: positive £252m) partially offset by £27m of positive changes to economic assumptions reflecting year end market conditions (2006: £31m).
1.3 EEV – Group continued For all periods after 10 July 2006 the impact of the market value movement on UK subordinated debt liabilities has been included in UK life and pensions results in line with the treatment of the assets, and flows through investment return variances. The 2006 results included a non-operating gain of £107m from the mark-to-market adjustment of the UK subordinated debt for the period ended 10 July 2006 within non-covered business.
‘Other’ includes restructuring and corporate transaction expenses of £31m (2006: £17m) mainly in relation to corporate finance activity of £18m, costs of delivering efficiencies of £9m and healthcare business restructuring of £4m. This is partially offset by a profit of £17m on the part disposal of our investment in HDFC Asset Management Limited (HDFC AM) to our Indian joint venture partner.
Non–operating loss after tax The non-operating loss after tax was £30m (2006: profit £319m). The attributed tax rate in 2007 was 30% compared to 22% in 2006. The attributable tax rate is driven by the types of business written within each of the territories, the different geographical locations and the change in the taxation of the market value adjustment for the subordinated debt following its inclusion in covered business.
Reconciliation of EEV PVIF Free Required Net net of cost Group surplus capital worth of capital EEV 12 months to 31 December 2007 £m £m £m £m £m
Segmental analysis of EEV operating profit before tax The following table provides an analysis of the EEV operating profit before tax for the year ended 31 December 2007 and also pro forma comparative results for 2006. Pro forma £m £m Covered business UK 606 372
Operating profit before tax increased by 43% to £881m (2006: £614m). Our covered business accounts for £224m of this increase.
Investment management profits Investment management profits are included in EEV on a look through basis. This means that the profits from investment management generated from life and pensions business are effectively allocated to covered business. However, included within the covered business look through is business actively marketed and sold to third parties through investment management distribution channels. When these profits are added to the third party profits already recognised under EEV, the total third party profit increases to £61m (2006: £45m).
Third party related life and pensions profits 13 3 10 Third party profits 48 42 6 Third party related profits 61 45 16
Investment management underlying profit before tax 83 70 13 Profit on part disposal of joint venture 17 - 17 Investment management total profit before tax 100 70 30
IFRS underlying profit before tax Our IFRS statutory income statement which shows IFRS profit after tax and the reconciliation to underlying profit are shown in section 3. We believe that the IFRS underlying profit before tax adjusted for non-operating items provides a more meaningful analysis of the underlying business performance.
Movement in IFRS underlying profit Underlying profit in both 2006 and 2007 includes certain one off items. In 2006, there were one off reserve releases of £53m. There was also a one off increase in profit in Germany relating to exceptionally high sales in 2004 and 2005 due to changes in tax legislation at that time.
Excluding the significant one off transactions in both years the normalised underlying profit has increased by 7% from £443m to £476m, predominantly due to increased income from annual management charges of £35m and a £32m reduction in corporate costs. These have been partially offset by increased investment in new business development of £26m.
Diluted IFRS underlying EPS Diluted IFRS underlying EPS increased by 53% to 33.3p.
Segmental analysis of IFRS underlying profit This table sets out the IFRS underlying profit attributable to equity holders for 2007 and also pro forma comparative results for 2006. Pro forma £m £m Underlying profit before tax attributable to equity holders of Standard Life plc Life and pensions: UK 395 230
Underlying profit before tax attributable to equity holders of Standard Life plc and adjusted items 714 540 Profit attributable to minority interest 111 112 Underlying profit before tax attributable to equity holders and adjusted items 825 652 Adjustments for the following items: Volatility arising on different asset and liability valuation bases4 (302) 25 Impairment of intangibles - (14) Restructuring and corporate transaction expenses (31) (17) Profit on part disposal of joint venture 17 Profit before tax attributable to equity holders 509 646 Tax credit/(expense) attributable to: Underlying profit 11 (66) Non-operating items 56 (1) Total tax credit/(expense) attributable to equity holder profits 67 (67) Profit for the year 576 579 Basic underlying earnings per share (EPS)2 33.9p 22.5p Diluted underlying EPS3 33.3p 21.8p 1 The investment management result for both periods includes the profits of other general insurance operations managed by our investment management business. In previous periods all general insurance was included in healthcare and general insurance.
3 Diluted EPS is based on 2,177m shares (2006: 2,173m shares). 4 Underlying profit has been adjusted by £(302)m (2006: £25m) in respect of volatility that arises from different IFRS measurement bases for liabilities and backing assets in the UK, Canada and Europe of £(104)m, £(159)m and £nil respectively (2006: £(5)m, £(11)m and £(7)m respectively). In addition, this adjustment includes volatility arising from derivatives that are part of economic hedges but do not qualify as hedge relationships under IFRS which amounted to £(39)m (2006: £48m).
Group Corporate Centre costs and other We succeeded in cutting GCC costs by 36% to £57m and therefore achieved our target of maintaining these costs at the 2005 level of £58m. We achieved this despite the additional costs of operating in a plc environment.
‘Other’ increased to £29m from £12m in 2006 primarily due to the inclusion of a full year of income in relation to assets held by the Group’s holding company, Standard Life plc, compared to 2006 when income only arose in the period post demutualisation. This was partially offset by a provision of £10m in respect of a guarantee provided by the Company. ‘Other’ also includes a £4m loss in relation to the development of our new Standard Life Wealth business.
Group EEV capital and cash generation1,2 £600m £262m 129% Group capital resources3 £9.2bn £7.9bn 16% Group solvency cover3 166% 176% (10% points) Realistic working capital: Heritage With Profits Fund (HWPF) £1.5bn £1.3bn 15%
1 2006 results are shown on a pro forma basis. 2 Net of tax. 3 Based on draft regulatory returns.
Group capital and cash generation The Group’s IFRS cash flow statement included in the financial statements in section 3, shows that our net cash inflows from operating activities were £2,828m (2006: outflow £730m). However, this statement combines cash flows relating to both policyholders and equity holders whereas the practical management of cash within the Group maintains a distinction between the two, as well as taking into account regulatory and other restrictions on availability and transferability of capital.
Within the Group we therefore analyse cash flow on a number of additional bases and we take the view that an analysis of the movement in the European Embedded Value (EEV) shareholders’ net worth is more representative of underlying shareholder capital and cash flow than the IFRS cash flow statement. Furthermore, under existing EEV principles we are required to identify required capital for all covered business. Increases/(decreases) in required capital will not reduce the shareholders’ net worth as no external cash flows are made but will act to decrease/(increase) the free surplus.
Capital attributable to • equity holders only Key performance metric • for Group non-life companies Key determinant of • distributable profits
Capital attributable • to equity holders and policyholders Monitored globally and • locally using relevant solvency measures Key determinant of • distributable profits
Regulatory capital • resources: 2007: £9.2bn (2006: £7.9bn) Regulatory solvency • cover: 2007: 166% (2006: 176%)
1.5 Capital and cash generation continued The following diagram illustrates the key differences between the regulatory, IFRS and EEV capital measures: Reconciliation of key capital measures The Group’s capital, as measured by the Financial Groups Directive (FGD), includes two elements of capital which are not included under IFRS or EEV because they are not attributable to equity holders. These elements relate firstly to a restricted amount of policyholder capital (£4.4bn at 31 December 2007) which equals the capital resources requirement of the long-term business funds and secondly, subordinated debt issued externally by the Group amounting to £1.9bn. In some cases, the regulatory rules for valuing assets and liabilities differ from IFRS accounting rules requiring a valuation adjustment of £0.4bn. Similarly, the EEV balance sheet recognises certain valuation adjustments to give the EEV net worth. The net worth is adjusted for the cost of capital of £0.3bn and increased by the value of the present value of in-force business (PVIF) of £3.6bn to give the total EEV of £6.2bn at 31 December 2007.
1.5 Capital and cash generation continued The FGD limits the amount of capital that can be recognised in Group capital resources where that capital is held by a UK long-term business fund. This limits the capital resources within a long-term business fund to the level of the capital resources requirement for that fund – resulting in a restriction of approximately £1.8bn at 31 December 2007 (2006: £2.3bn) – in the Group’s case this mainly relates to the residual estate of the HWPF.
The largest regulated entity within the Group is Standard Life Assurance Limited (SLAL), and its regulatory position reflects capital resources including long-term business funds. The capital resources of SLAL have risen from £8.8bn to £9.3bn at 31 December 2007. While the capital resources have increased the solvency cover has fallen to 191% from 223% due to a relative increase in the capital requirements of the HWPF, as explained in the FGD commentary above. The capital resources of SLAL include the residual estate of approximately £1.5bn (2006: £1.3bn). Although the residual estate within the HWPF is not available to equity holders, this capital is available to absorb certain risks and losses arising from the HWPF.
On 14 February 2008, the Group reinsured £6.7bn of pre-demutualisation UK immediate annuities to Canada Life International Re, a wholly owned subsidiary of Great-West Lifeco. This arrangement is expected to bring a number of benefits, including a release of cash from reserves in 2008, a reduction to the Individual Capital Assessment (ICA) capital requirements and an enhancement to the residual estate within the HWPF which would otherwise have to be met by equity holders.
Markets in Financial Instruments Directive Over the course of the year, the Group has adapted its internal processes to comply with the Markets in Financial Instruments Directive (MiFID). All relevant Group companies have prepared Individual Capital Adequacy Assessments in accordance with the relevant regulations. We do not anticipate that this will have a significant impact on the total capital requirements or strategic development of the Group.
Solvency II Implementation of Solvency II is expected in 2012, with key objectives being to improve risk and capital management and to better align the regulatory capital requirements of insurers with their actual risk profile. The Group continues to monitor, influence and support the development of the relevant standards through its participation in quantitative impact studies and contributions to HM Treasury, FSA and Association of British Insurers (ABI) working groups. Implementation will have a direct impact on SLAL (and its insurance subsidiaries) and Standard Life Healthcare. Assessment of the financial impact on the Group is under review and updates will be provided in due course.
Key elements of the capital management framework Establishing group-wide performance targets1.
1.6 Business segment performance 1.6.1 UK financial services In 2007 we announced the creation of the UK financial services division which consists of UK life and pensions, our banking business and our healthcare business. This enables us to enhance our customer propositions by combining our capabilities across these lines of business and by building on our reputation for consistent high quality customer service and excellent distribution relationships. It also provides us with opportunities to maximise efficiencies from our operating model within our core UK market.
New business PVNBP1,2 £13,324m £11,436m 17% New business APE1 £1,663m £1,446m 15% New business contribution3 £282m £167m 69% PVNBP margin3,4 2.1% 1.5% 0.6% points Net flows £2.5bn £3.2bn (22%) EEV covered business operating profit before tax3,5 £648m £416m 56% EEV non-covered business operating loss before tax3,6 (£24m) (£21m) (14%) IFRS underlying profit before tax3 £395m £230m 72%
1 The 2007 figures include mutual funds sales. The 2006 figures have been restated to reflect the inclusion of mutual funds. The 2007 impact is: PVNBP of £564m (APE of £64m). The 2006 impact is: PVNBP of £36m (APE of £4m).
New business sales Total PVNBP sales of UK life and pensions products increased by 17% to £13,324m (2006: £11,436m). Individual pensions comprises SIPPs and increments on existing pensions. SIPP sales increased by 24% to £4,536m (2006: £3,651m) driven by the continued A-day momentum into the first quarter of 2007 and the particular attractions of SIPP (customer control, choice and flexibility). Group pensions sales increased by 34% to £2,817m (2006: £2,107m), helped by our leading position in the nil commission segment via employee benefit consultants. Excluding the one off bulk Trustee investment plan mandate from Citigroup of £840m in 2006, underlying Institutional pensions new business was up 37% in 2007. This growth in new business volumes was underpinned by our excellent relationships with distributors and our commitment to continue improving our product range. Savings and investments sales increased by 38% to £2,672m (2006: £1,937m). Sales of Offshore bonds, at £284m, were over seven times the level of the prior year (2006: £39m), benefiting from the launch of our Retail portfolio bond and our distribution agreement with Fidelity. Investment bond sales fell marginally to £1,824m (2006: £1,862m), reflecting the wider slowdown in this market in the light of the weakness in global financial markets and uncertainty regarding proposed capital gains tax (CGT) changes. We await clarity on the CGT proposal.
Our non-traditional independent financial adviser (IFA) channels grew, demonstrating our focus on building relationships with bank IFAs, consulting actuaries, private banks and other distributors. Overall sales through these channels represented 41% of new business in 2007 (2006: 34%).
Group pensions NBC grew from £29m to £60m while the margin improved from 1.4% to 2.1% due to expense efficiencies more than • offsetting the effect of increased lapse assumptions. The IRR increased from 10% to 14% while the discounted payback period reduced from 19 years to 12 years.
Total NBC on Annuities was £54m in 2007, slightly up on 2006 while the margin was 11.0% compared to 11.5% in 2006. The margins • on Annuities reflect the underlying margins on backing assets and will fluctuate modestly as investment conditions change. Annuities are cash generative from the outset, after allowing for regulatory capital requirements.
We withdrew from the Protection market in 2007. NBC in 2007 was a loss of £6m down from the loss in 2006 of £14m, reflecting the • lower sales in 2007 as well as increased capital efficiency from applying PS06/14.
Insured and non-insured pension net flows (excluding Institutional TIP) were £1.7bn for 2007 (2006: £1.9bn), and SIPP celebrated its 3 year anniversary with 46,900 customers and £7.7bn funds under management.
Institutional TIP net flows were £1.0bn for 2007 (2006: £1.7bn), with 2006 net flows boosted by £840m one off bulk Trustee investment plan mandate from Citigroup.
Core elements mainly include NBC, expected return on in-force business, non-covered business losses and development costs. NBC made a significant contribution to EEV operating profit in 2007 of £282m (2006: £167m) resulting from higher volumes and better margins. In addition, expected return on in-force business of £312m was £54m higher than 2006.
We have worked hard in recent years to grow our business and control costs. This has made us more efficient and generated £77m of maintenance expense efficiencies. This increase relates partly to the recognition of higher margins due to expense efficiencies in our investment management business in respect of covered business, particularly Institutional pensions.
In 2007, we continued to see lapse experience in excess of year end 2006 long-term assumptions. We have recalibrated the long-• term lapse assumptions for life with profits and pensions contracts in line with the recently observed experience. This reflects the behaviour of advisers and customers following the fundamental regulatory changes brought in with A-day and the continued unpopularity of with profits. This has represented a material strengthening of long-term lapse assumptions which has resulted in a £277m decrease in EEV operating profit. Lapse rates have deteriorated significantly due to general market volatility, concerns regarding the outlook for commercial property investment in the second half of the year and uncertainty around proposed CGT changes.
UK life and pensions IFRS underlying profit before tax for the year was £395m in 2007 (2006: £230m). This increase was primarily driven by one off items which included a £136m release of reserves relating to the adoption of PS06/14, a £143m release of statutory reserves in relation to deferred annuity business and £94m of other modelling and assumption changes, offset by £100m of additional annuity reserves to reflect the strengthening of mortality assumptions. The figure for 2006 also included a reserves release of £53m in relation to SIPP sterling reserves and deferred annuities. If we exclude the impact of these, the underlying IFRS result was £122m for 2007 compared to £177m in 2006. The reduction in IFRS underlying profit was primarily due to the increase in new business and costs relating to Standard Life Savings Limited and Standard Life International Limited, which reflected the growth and investment in our Wrap and Offshore bond propositions. The results exclude the impact of volatility which arises due to the subordinated liabilities being measured at amortised cost, whilst the assets are measured at fair value.
Banking Standard Life Bank offers mortgage and retail saving products in the UK via intermediaries, and also direct to all customers through telephone and internet platforms. The focus for 2007 has been the control of costs in a difficult market environment.
New business In 2007, the UK mortgage market remained highly competitive. The second half of the year was dominated by the global liquidity crunch. This affected the whole banking industry and all lenders found it more challenging to maintain margins. Despite this, gross lending was up 22% to £3.7bn (2006: £3.0bn). Our market share of gross lending increased to 1.0% (2006: 0.9%), with mortgages under management increasing to £11.3bn for 2007 (2006: £10.4bn).
Funding Banking remains well funded with access to a diverse range of funding. During the year we have not utilised any committed facilities. The liquidity ratio remains within our normal range.
Performance IFRS underlying profit before tax decreased by 16% to £32m (2006: £38m), excluding the volatility in respect of non-qualifying economic hedges. In line with many of our competitors net interest margin has come under pressure from a highly competitive market throughout the year, as well as the rising cost of funding as a result of the liquidity crisis in the second half of the year. Return on equity (RoE) in 2007 was 7% (2006: 9%). The achievability of the 15% target RoE in 2008 has been impacted by competitive market conditions and the liquidity crunch resulting in continued pressure on margins.
Our cost income ratio of 60% (2006: 59%) has remained relatively stable despite increased productivity gains resulting in reduced expenses. This was offset by the impact of the increased pressure on net interest margin. We reduced staff numbers by 30% during the year to 482 at 31 December 2007 (2006: 685) while maintaining our service standards. Continued development of our e-commerce capabilities has benefited the business and helped enhance our customer and distributor relationships through increased self service, allowing us to maintain our award winning service while improving operational efficiency.
In order to ensure customers are treated fairly, we aim to provide quality products, a high level of financial security and performance and a quality of service which fully meets the needs of our customers, while at all times being ethical and compliant. We believe that the Financial Services Authority’s (FSA) Treating Customers Fairly (TCF) principles are complementary to our approach to customers and we recognise that TCF requires us to assess and monitor our performance against our customer values and actively demonstrate them on a daily basis.
People’s Choice Award for the Company with the Best Technology, • Administration and Service in the Pensions Management Administrative and Service Awards,; and
Gold Standard Award for the 5• th consecutive year from the Gold Standard Award.
UK financial services – Employees We recognise that great business results are enabled by having talented and engaged people and by creating an environment in which people can flourish. Based on the most recent Gallup survey our 2007 annual staff engagement score of 3.74 out of 5 (2006: 3.63) increased for the fourth consecutive year.
UK financial services – Looking ahead Against a backdrop of volatile investment markets, increased cost of debt, lower expected returns from commercial property and new uncertainties in the tax regime affecting bond products, we expect slower market growth in 2008. As a result, maintaining margins will continue to be challenging for the industry. With our management strategies, first class customer service and innovative products we expect to remain competitive and continue to grow the business.
We will continue to focus on high growth markets where we have competitive advantage and which generate more profitable returns.
We believe that the variable annuity market will develop over time and will be an attractive market for the Group and we will continue to develop our proposition.
1.6 Business segment performance continued 1.6.2 Canada Standard Life is the 4th largest provider of life assurance and pension products in Canada, based on assets under management. In 2007, Canada kept the emphasis on operational efficiency and margins over volume, across its range of savings, retirement and insurance products. Canada also invested in rebuilding its distribution capabilities and launched several new propositions for its clients. In 2008, Canada will be celebrating its 175th anniversary. A series of events are planned to commemorate this anniversary and strengthen the brand.
New business PVNBP1,2 £1,654m £2,091m (21%) New business APE1 £157m £196m (20%) New business contribution3 £37m £28m 32% PVNBP margin3,4 2.3% 1.6% 0.7% points EEV operating profit before tax3 £178m £163m 9% IFRS underlying profit before tax3 £168m £168m 1 The 2007 figures include mutual funds sales. The 2006 figures have been restated to reflect the inclusion of mutual funds. The 2007 impact is: PVNBP of £284m (APE of £28m). The 2006 impact is: PVNBP of £300m (APE of £30m).
3 2006 is shown on a pro forma basis. 4 PVNBP margins are NBC divided by PVNBP expressed as a percentage based on the underlying unrounded numbers.
New business sales Sales fell by 19% in constant currency to £1,654m PVNBP (2006: £2,091m). Excluding exceptionally large transactions in both years, underlying sales volumes fell by 8%. This underlying trend reflects our focus on margin over volume and the planned realignment of our distribution capability. Group savings and retirement sales decreased by 27% in constant currency, despite benefiting from a large transaction in the fourth quarter of £196m. Competition within the market remains aggressive and quote activity across all segments has reduced. The reduction in Individual insurance, savings and retirement sales reflects the realignment of our sales operations and the inclusion of unprofitable Universal life sales in 2006. Sales of mutual funds were also impacted by this realignment and decreased by 3% in constant currency. In Group insurance, sales volumes increased, reflecting our success in the disability insurance segment following our strategic repositioning in that market. In early 2008 we have also secured a large client in this segment, highlighting our leadership in this area.
New business profitability New business contribution (NBC) increased by 38% in constant currency to £37m (2006: £28m). This improvement is largely due to the repricing of certain life products, a shift to sales of higher margin products and the impact of operational efficiencies achieved through expense reductions. Mutual funds have also been included for the first time. PVNBP margins reached 2.3%, up from 1.6% achieved in 2006.
Product development In line with our commitment to product innovation and profitability we launched a number of new products and enhanced others. Our new Avenues portfolios, combining the approaches of both the target year and lifestyle funds, and our award winning Plan for life programme are two of several enhancements to our Group savings and retirement offering.
Mutual funds £1,188m £838m £357m £460m £175m £143m £284m £300m 2007
Our new individual retirement products and expanded product line are designed to target a broader range of clients and advisers, leveraging on our industry recognised investment management expertise and product characteristics. The development of our partnering programmes with our retail distributors has strengthened our offering with additional sales concepts and solutions. In Group insurance, we are exploiting our disability management expertise with our disability consulting services and our dynamic approach to health and wellness, which reinforces our traditional group life and health products. Our cross-selling initiatives within the group lines resulted in several new customers being signed in 2007 and a growing list of prospects for 2008.
Performance EEV operating profit before tax EEV operating profit before tax increased by 14% in constant currency to £178m (2006: £163m). Core accounted for £126m compared to £118m in 2006, an increase of 11% in constant currency. This increase was driven by an improvement in NBC of £9m to £37m (2006: £28m). A further increase of £1m in expected return was offset by a £2m increase in development expenses. Efficiency gains from continued cost control were £25m (2006: £53m). Back book management operating profit was £27m (2006: loss £8m), from positive lapse assumptions and tax management. These positive movements in 2007 were partially offset by adverse annuitant mortality and morbidity assumption changes.
1.6 Business segment performance continued 1.6.3 Europe Europe consists of Standard Life Ireland and Standard Life Germany, which operates in both Germany and Austria. Europe life and pensions offers a range of investment and pensions solutions. German sales were boosted by initiatives to strengthen distribution and product positioning. Maxellence, the new unit linked product which was launched in the fourth quarter of 2006, contributed to growth in a flat marketplace. Ireland continued to build on the choice and flexibility of its investment offering and capitalise on the success of its Synergy range of products.
1 2006 is shown on a pro forma basis. 2 PVNBP margins are expressed as a percentage of NBC divided by PVNBP based on the underlying unrounded numbers.
IFRS underlying profit before tax IFRS underlying profit before tax was £63m (2006: £108m) with Germany contributing £56m (2006: £105m) and Ireland £7m (2006: £3m). The main driver of the fall in Germany was the decreasing transfer of profit to the shareholder from the HWPF. The amount of the profit transferred between the HWPF and the Proprietary Business Fund is determined by the Scheme of Demutualisation (the Scheme) and was expected to reduce in the short-term following the run-off of charges emerging on the exceptional level of sales in Germany in 2004 and early 2005 following changes in German tax legislation.
We keep our standards high by continuously developing and training our people. We also gather regular feedback from employees about their thoughts on their working life and actions from this have had a positive impact on morale and retention. Based on the results of the most recent Gallup survey our 2007 annual staff engagement scores have increased in Ireland to 3.90 out of 5 (2006: 3.36) and decreased in Germany to 3.66 (2006: 3.81).
1.6 Business segment performance continued 1.6.4 Asia Pacific life and pensions Standard Life is committed to becoming a leading player in the Asia Pacific market and wants to maximise the opportunities opening up in Asia. We will continue to invest in our existing business in Hong Kong and joint ventures in India and China while seeking to identify and pursue other initiatives to enable us to put our vision into practice.
1 The PVNBP new business sales are different from those in the full year new business press release issued on 30 January 2008 as they incorporate year end non-economic assumption changes.
2 The percentage change figures include percentage change figures for India which are computed based on the percentage movement in the new business of HDFC Standard Life Insurance Company Limited as a whole to avoid distortion due to changes in the Group’s shareholding in the joint venture during 2006 and 2007.
New business Growth in Asia continues to be strong, with total PVNBP sales of the Asian life insurance businesses up 47%2 in constant currency terms to £266m (2006: £206m). APE sales were up 91%2 in constant currency to £49m (2006: £29m). In India, HDFC Standard Life Insurance Company Limited (HDFC SL) continued to perform well this year and contributed PVNBP of £187m, a growth of 20%2 in constant currency terms (2006: £180m). The number of financial consultants increased by approximately 33,000 in the last quarter of 2007 to 132,000. HDFC SL is currently ranked 4th in the private sector based on APE sales. We were delighted to increase our holding in HDFC SL to 26%, the maximum permitted under Indian regulation, demonstrating our commitment to the Indian market. In China, Heng An Standard Life Insurance Company Limited (Heng An SL) performed well with an APE growth of 118% in constant currency terms compared to 2006.
Investment performance Even in these turbulent market conditions, we continued to deliver a good investment performance for the year. The money weighted average across the portfolio was well above median for all time periods from 1 year to 10 years and remains in the top quartile over 3 and 5 years. Of our 58 retail funds, 36 were above median and 13 were top quartile over the past 12 months.
New business Strong investment performance and effective marketing have enabled us to deliver another year of strong new business growth. Third party funds under management (FUM) grew 24% to £47.7bn with net new sales of £7.9bn, up 23% on 2006. In-house FUM grew by 2% to £95.7bn, although with profits business continued to decline, albeit partially offset by new sales of £1.6bn, mainly in individual savings and pension products. Total FUM increased by 9% to £143.4bn.
This growth is firmly 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.
Performance IFRS profit before tax reached a record level of £100m, an increase of 43% from 2006.
1.7 Basis of preparation EEV and IFRS reporting The financial results are prepared on both a European Embedded Value (EEV) basis and an International Financial Reporting Standards (IFRS) basis as endorsed by the European Union (EU). All EU listed companies are required to prepare consolidated financial statements using IFRS issued by the International Accounting Standards Board as endorsed by the EU. EEV measures the net assets of the business plus the present value of future profits expected to arise from in-force long-term life assurance and pension policies and is designed to give a more accurate reflection of the performance of long-term savings business. The EEV basis has been determined in accordance with the EEV Principles and Guidance issued in May 2004 and October 2005 by the CFO forum. The CFO forum represents the chief financial officers of major European insurers, including Standard Life. EEV methodology has been applied to ‘covered’ business, which mainly comprises the Group’s life and pension business. Non-covered business is generally reported on an IFRS basis. The EEV financial results in section 2 have been prepared in accordance with the EEV methodology applied by the Group in Note 2.16 of the 2007 EEV financial statements for 2007 and the 2006 Annual Report and Accounts for 2006. The IFRS financial results in section 3 have been prepared on the basis of the IFRS accounting policies applied by the Group in the 2007 IFRS financial statements.
Operating EEV and underlying IFRS profit The segmental analysis of IFRS underlying profit before tax presents profit before tax attributable to equity holders adjusted for non-operating items. The 2007 EEV consolidated income statement presents EEV profit showing both operating and non-operating items. In doing so the Directors believe they are presenting a more meaningful indication of the underlying business performance of the Group. The explanation of the underlying IFRS profit is consistent with the bases of preparation applied by the Group in the 2007 IFRS financial statements. The 2007 EEV consolidated income statement is presented in section 2 and the 2007 IFRS reconciliation of Group underlying profit to profit before tax is presented in section 3.
Adjustments to derive pro forma profit Profit attributable to minority interest (112) HFI adjustment to unallocated divisible surplus 83 HFI adjustment to tax 2 Deferred acquisition costs 94 Assumed interest on proceeds of share issues 18 New business reserving strain (4) Pro forma profit before tax attributable to equity holders and after minority interest 534
As described in Note 3.1(c) of the IFRS financial statements, the 2006 numbers have been restated in respect of income and expenses associated with certain cash collateral received. The impact was to increase total net revenue by £83m, share of profits from associates and joint ventures by £12m and total operating expenses by £95m. There was no impact on profit before tax or profit after tax.
Non-operating items Long-term investment return and tax variances (17) 229 Effect of economic assumption changes 27 140 Impairment of acquired intangible assets – (4) Restructuring and corporate transaction expenses (31) (12) Profit on part disposal of joint venture 17 – Volatility arising on different asset and liability valuation bases (39) 29 Profit before tax 838 728
Profit after tax 587 515 * Investment management operating profit before tax is stated after excluding profits of £35m (10 July to 31 December 2006: £14m) which have been generated by life and pensions business.
Basic EPS (pence) 28.9 11.8 Weighted average number of ordinary shares in issue (millions) 2,138 2,102
** EEV operating profit before tax of £881m (2006: £346m) less attributed tax on operating profit of £264m (2006: £98m).
Net income/(expense) not recognised directly in income statement 187 (109) Profit after tax 587 515 Total recognised income for the period attributable to equity holders 2.7 774 406 * Exchange differences primarily relate to Canada.
UK pension scheme deficit (135) (140) Total net assets of non-covered business 2.6(a) 967 1,109
A detailed description of EEV methodology is provided in Note 2.16. There have been no significant changes to EEV methodology from that adopted in the 2006 Annual Report and Accounts except as noted below.
Comparatives On 10 July 2006, The Standard Life Assurance Company (SLAC) demutualised and the shares of a new holding company for the Group, Standard Life plc, were listed on the London Stock Exchange. This resulted in the parent company of the Group being a mutual insurer for the period before 10 July 2006, and the parent company of the Group being equity holder owned for the period from 10 July 2006.
As a result, the EEV results for the comparative period comprise proforma results for the period 1 January 2006 to 10 July 2006, and audited EEV results for the period 10 July 2006 to 31 December 2006. Since the results for the year are a combination of unaudited and audited results, only the audited period 10 July 2006 to 31 December 2006 is used as a comparative for the year ended 31 December 2007.
Covered business A detailed description of EEV covered business is provided within the EEV methodology in Note 2.16. The categories of business included within covered business have been expanded since the Interim Results 2007 to include certain mutual funds sold in the UK and Canada. This change has been reflected in the results by processing an opening adjustment in the EEV, capturing the PVIF as at 1 January 2007 within covered business and removing any related intangibles, e.g. deferred acquisition costs, from the opening net assets of non-covered business. The movement in the EEV of those mutual funds during the year ended 31 December 2007 is reflected in the covered business EEV movement with changes in net worth transferred back to non-covered business for inclusion in their closing net asset position. There is no restatement of the results for 10 July to 31 December 2006.
Continuous Improvement Programme In March 2007, we announced our aim to reduce underlying costs by a further £100m by 2009. £9m of costs associated with progressing this initiative have already been incurred and are included in restructuring and corporate transaction expenses.
Contribution from in-force business: Expected return on existing business 288 88 25 - - 401
HWPF UK Canada Europe Other TVOG Total Period 10 July to 31 December 2006 Notes £m £m £m £m £m £m
The one off impact of these reductions in the long-term corporation tax rates amounts to a gain of £68m (UK £50m, Europe £18m) and has been included within the effect of economic assumption changes line.
Aggregate tax effect of items not recognised in income statement - - - - - -
HWPF UK Canada Europe Other TVOG Total 12 months to 31 December 2007 £m £m £m £m £m £m Analysis of EEV Free surplus 656 24 (9) 49 - 720
Analysis of EEV Free surplus 970 168 13 86 - 1,237
HWPF UK Canada Europe Other TVOG Total Period 10 July to 31 December 2006 £m £m £m £m £m £m Analysis of EEV Free surplus 686 12 (11) 55 - 742
New business contribution (NBC) and PVNBP margins are shown after the effect of required capital.
2 PVNBP margins are calculated on the underlying unrounded numbers. 3 Includes Retail trustee investment plan.
The UK lapse variance includes £4m in respect of with profits bonds and Homeplan which saw lapse rates fall during the course of the year from a peak in February. The decreases may be partly explained by the announcement in July 2007 that we had started to distribute the residual estate of the HWPF to our with profits policyholders. Out of the remaining UK variance, £16m relates to unit linked bonds where lapse rates rose significantly in the latter half of the year, in response to the downturn in the UK commercial property market, general market volatility and also due to proposed changes to UK capital gains tax announced in October as part of the pre-budget report. The lapse variance in Europe largely arises from life business in Ireland.
The overall impact of our review of the methodology, data and modelling of UK group deferred annuities amounts to an EEV operating profit before tax benefit of £191m, consisting of an increase to free surplus due to reserve releases of £143m and PVIF and cost of capital increases of £48m. The deferred annuity book arises mostly from closed final salary schemes and bulk buy out annuities. Old final salary schemes are typically an area where data can be poor quality and approximations have to be made in the valuation of liabilities for future benefits. During 2007, an extensive sampling exercise was conducted which enabled the data for valuation purposes to be greatly improved and allowed remodelling of the business on a more accurate basis, including modelling some business that had previously not been modelled. In addition, as a result of the more accurate modelling, we were able to recognise the margins expected when the deferred annuities vest into immediate annuities which are written in the UK equity holder owned funds. Note that the vesting of these deferred annuities into immediate annuities is not reported as new business as there is no open market option on these contracts at the point of vesting.
The HWPF TVOG variance reflects interest rate hedging for HWPF annuities, refinements to the interaction of dynamic management actions across UK and German business, and modelling of the distribution of the HWPF residual estate to with profits policyholders.
2.5 Operating assumption changes HWPF UK Canada Europe TVOG Total 12 months to 31 December 2007 £m £m £m £m £m
Mortality and morbidity assumptions in the UK and in Canada have been revised to reflect valuation annuity reserve strengthening.
‘Other’ includes £274m in respect of deferred annuities described in Note 4, with the balance mainly arising from other reserving changes, including the impact of adopting PS06/14 ‘Prudential changes for insurers’.
Other including Group UK pension Total Investment Corporate scheme non-covered management Banking Healthcare Centre deficit business 12 months to 31 December 2007 £m £m £m £m £m £m
Other including Group UK pension Total Investment Corporate scheme non-covered management Banking Healthcare Centre deficit business 10 July to 31 December 2006 £m £m £m £m £m £m
Opening adjustments relate to the transfer of general insurance from Healthcare and general insurance to Investment management.
(b) Investment management EEV profits before tax Investment management profits are included in EEV on a look through basis. This means that the profits from investment management generated from the life and pensions business are allocated to covered business. However, the excluded life and pension profits include £13m (10 July to 31 December 2006: £1m) of profits relating to products which are actively marketed and sold to third parties through investment management distribution channels. If these profits are added to the third party profits disclosed for non-covered business there are £61m (10 July to 31 December 2006: £26m) of third party related profits for investment management.
12 months to 10 July 2006 to 31 December 31 December £m £m Life and pensions look through profits before tax 35 14 Third party related life and pensions profits before tax (13) (1) Life and pensions look through profits before tax excluding third party profits 22 13
Third party related life and pensions profits before tax 13 1 Third party related profits before tax 48 25 Total third party related profits before tax 61 26
(c) Other EEV operating profits before tax 12 months to 10 July 2006 to 31 December 31 December £m £m Canada non-life subsidiaries 4 2 Mutual funds transferred to covered business (4) n/a Canada non-life subsidiaries excluding transfers to covered business - 2
Standard Life Savings Limited (50) (14) Mutual funds transferred to covered business 25 n/a Standard Life Savings excluding transfers to covered business (25) (14)
The covered business results for 2007 include certain mutual funds sold in the UK and Canada. In previous periods these were included in other non-covered business. There is no restatement of the results for 10 July to 31 December 2006. A detailed description of EEV covered business is provided within the EEV methodology in Note 2.16.
Opening adjustments relate to the transfer of mutual funds from non-covered to covered business. These adjustments impacted the opening PVIF in covered business by positive £32m and the opening net assets in non-covered business by negative £13m.
Free Required net of cost surplus capital Net worth of capital Total 12 months to 31 December 2007 £m £m £m £m £m Opening EEV 720 562 1,282 3,217 4,499
Contribution from in-force business: Expected return on existing business - 26 26 262 288 Expected return transfer to net worth 552 (38) 514 (514) -
PVIF Free Required net of cost surplus capital Net worth of capital Total Period 10 July to 31 December 2006 £m £m £m £m £m Opening EEV 742 560 1,302 2,881 4,183
Investment return and tax variances 2 31 33 128 161 Effect of economic assumption changes (54) 11 (43) 140 97
Transfer back of surplus to SLI (9) - (9) - (9) Transfer back of mutual funds net worth - - - - Actuarial gains on defined benefit pension schemes 10 - 10 - 10
PVIF Required net of cost Free surplus capital Net worth of capital Total 12 months to 31 December 2007 £m £m £m £m £m Opening EEV 656 32 688 2,590 3,278
Investment return and tax variances (43) 1 (42) (21) (63) Effect of economic assumption changes (9) 1 (8) (24) (32)
Transfer back of surplus to SLI (9) - (9) - (9) Transfer back of mutual funds net worth - - - - Actuarial gains on defined benefit pension schemes - - - - -
Transfer back of surplus to SLI (2) - (2) - (2) Transfer back of mutual funds net worth (4) - (4) - (4) Actuarial gains on defined benefit pension schemes 1 4 - 1 4 - 1 4
Aggregate tax effect of items not recognised in income statement (3) - (3) - (3)
Investment return and tax variances (5) 30 25 13 38 Effect of economic assumption changes (41) 11 (30) 5 (25)
Transfer back of surplus to SLI - - - - Transfer back of mutual funds net worth - - - - Actuarial gains on defined benefit pension schemes 9 - 9 - 9
PVIF Required net of cost Free surplus capital Net worth of capital Total 12 months to 31 December 2007 £m £m £m £m £m Opening EEV 40 4 44 276 320
Contribution from in-force business: Expected return on existing business - - - 18 18 Expected return transfer to net worth 67 (2) 65 (65) -
Investment return and tax variances (1) - (1) (6) (7) Effect of economic assumption changes 2 - 2 (2) -
Transfer back of surplus to SLI - - - - Transfer back of mutual funds net worth - - - - Actuarial gains on defined benefit pension schemes 5 - 5 - 5
PVIF Required net of cost Free surplus capital Net worth of capital Total Period 10 July to 31 December 2006 £m £m £m £m £m Opening EEV 44 - 44 274 318
** 1.64% in 2007. The rate in subsequent years is based on a moving 30 year bond yield less a variable deduction.
Ireland 3.46 * 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.
UK Europe equity holder Europe equity holder UK HWPF owned funds Canada HWPF owned funds At 31 December 2006 % % % % % Risk margin – in-force business Risk margin before cost of capital adjustment: Market risk 1.75 1.55 1.70 1.75 1.55
Risk margin after cost of capital adjustment 3.00 1.70 2.50 3.00 1.70
Increases in market risk margins generally arise from changes in asset allocations, product mix and reserving changes.
Non-market risk margins have increased due to: UK and Europe HWPF – mainly as a result of changes in product mix and an increased allowance for various non-market risks;•
UK and Europe equity holder owned funds – predominantly to reflect the increased allowance for persistency and credit risks; and in•
Risk margin after cost of capital adjustment 2.50 2.90 2.90 2.50 2.90
UK Europe equity holder Europe equity holder UK HWPF owned funds Canada HWPF owned funds Period 10 July to 31 December 2006 % % % % % Risk margin – new business Risk margin before cost of capital adjustment: Market risk 2.05 1.80 1.60 2.05 1.80
Risk margin after cost of capital adjustment 2.40 2.80 2.70 2.40 2.80
The ESG simulates future economic environments in a market consistent manner. The outputs of the ESG include: cash returns;•
Inflation This variable is calibrated using the following instruments: conventional Government bond yields;•
Dividend and rental yields As market consistent estimates for dividend and rental yields cannot be derived from liquid market instruments best estimates are used.
The sensitivities tested were: 1% increase and decrease in the risk discount rates; •
interest rates 1% higher and lower than base case, with consequential changes in fixed interest asset values, reserving • assumptions, risk discount rates and investment returns on equities and properties; 10% fall in market value of equity and property assets (not applicable for new business contribution);•
5% decrease in both mortality and morbidity rates for annuitant and non-annuitant policies; and•
EEV results assuming only prescribed minimum capital (where economic capital has been used in the EEV calculations).•
HWPF UK Canada Europe Other TVOG Total 12 months to 31 December 2007 £m £m £m £m £m £m New business contribution 282 37 26 - - 345
2.16 EEV methodology Covered business For the purposes of EEV reporting, a distinction is drawn between covered business to which EEV methodology is applied and non-covered business where results and balances are based on those determined under IFRS and included in the IFRS financial statements shown in the Annual Report and Accounts, unless otherwise stated.
UK covered business also includes: non-insured self invested personal pension (SIPP) business;•
2.16 EEV methodology continued Allowance is made for external reinsurance and reinsurance within the Group. The cash flows include the profits and losses arising in Group companies providing investment management and other services where these relate to covered business. This is referred to as the ‘look through’ into service company expenses.
Risk discount rates Under the EEV methodology, a risk discount rate is required to calculate the present value of expected future distributable profits as a single value at a particular date. The risk discount rate comprises a risk free rate which reflects the time value of money and a risk margin allowing for the risk that experience in future years may differ from that assumed. In particular, a risk margin is added to allow for the risk that expected additional returns on certain asset classes are not achieved.
Risk discount rates have been determined as the risk free government bond yield plus a risk margin. The risk margins have been determined for market risk and non-market risk separately. For market risk, we have opted for an approach whereby the risk margin is determined such that the PVIF, excluding the allowance for the TVOG, calculated using expected ‘real world’ asset returns equates with the PVIF calculated using ‘risk neutral’ investment returns and discount rates. In this way, the benefits of assuming higher than risk free returns on future cash flows are offset by using a higher discount rate. However, when returns above the risk free rate arise from the additional returns available from investing in illiquid assets, namely corporate bonds and mortgages, where they are matched to appropriate liabilities, these are not offset in determining the discount rate. Allowance has then been made for non-market risk by applying stress tests to the PVIF using our internal capital model, and quantifying an additional risk margin based on the results of the stress tests. The main elements of non-market risk which are stress tested are lapse, mortality, expense and credit risk assumptions. Benefits of diversification between risk types are allowed for in deriving the risk margins in line with our internal capital model.
Separate risk discount rates have been calculated for in-force and new business and for the principal geographic segments (UK, Europe and Canada). Within the UK and Europe, separate risk margins are calculated for profits emerging on policies inside the HWPF (regardless of whether these profits emerge directly from the HWPF or by reassurance into other Group entities) and on policies that are in equity holder owned funds. For HWPF policies, there is a significant inter-Group reassurance agreement in respect of mortality surpluses on annuities, which are reassured out of the HWPF. The HWPF risk margin anticipates diversification benefits including the annuity mortality risk, since the overall capital structure also benefits from this diversification.
2.16 EEV methodology continued The values of the risk discount rates used for this reporting period are provided in Note 2.12.
Required capital 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.
We have set required capital to be the higher of regulatory capital and our own internally assessed risk-based capital requirement. In determining the required capital for purposes of assessing EEV, we exclude any required capital which is provided by the existing surplus in the HWPF, as this capital is provided by policyholders. Any required capital in excess of that provided by the existing surplus in the HWPF would need to be provided by assets in the equity holders’ fund. Projections show that the surplus in the HWPF is expected, on best estimate assumptions, to cover this level of required capital at the valuation date and in future years.
The levels of required capital in the current EEV calculations are therefore as follows: UK and Europe (business in HWPF) – no capital requirement in excess of statutory reserves or asset shares is valued in the EEV;•
The 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);•
investment conditions in terms of bond yields, equity and property values, and implied market volatility; and•
the investment profile of the assets backing the applicable policies, the residual estate and non profit business in the fund at the • time the TVOG is calculated.
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; the total cost includes an allowance for non-market risk, including credit risk arising from holding non-risk free bonds to back non • profit liabilities in the fund; changes in policyholder behaviour are allowed for according to the particular economic scenario;•
2.16 EEV methodology continued UK and Europe — Other 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.
Restructuring expenses for covered and non-covered business include the current year cost of the Continuous Improvement Programme. In addition, non-covered business includes any additional restructuring expenses consistent with those identified in the IFRS underlying profit adjustments. The total restructuring expenses are included together with the cost of any corporate activity in restructuring and corporate transaction expenses.
products substituted due to the exercise of standard contract terms are not deemed to be new business; and•
For Canada, business is deemed to be ‘new business’ if a contract has been issued during the reporting period. The new business contribution also includes the value of renewal premiums for a new contract, where the renewal premiums are (i) contractual, (ii) non-contractual but reasonably predictable, or (iii) recurrent single premiums that are pre-defined and reasonably predictable. The present value of future net income attributable to renewal premiums on existing group pension and savings contracts, including those from new members, is not included as new business. Since all deposits (new and renewal) in individual segregated funds business attract a new business/first year commission, this business is treated as new business for EEV purposes.
New business contribution The contribution generated by new business written during the period is the present value of the projected stream of after-tax distributable profit from that business. NBC before tax is calculated by grossing up the contribution after tax at the full corporation tax rate for UK business and at other equivalent rates of tax for other countries. NBC is calculated as at the end of the reporting period.
2.16 EEV methodology continued The economic assumptions used are those at the start of the reporting period, and the non-economic assumptions are those at the end of the reporting period. An exception to this policy is annuity business in the UK and Ireland where, to ensure consistency between the economic assumptions used in the new business contribution and those used in pricing the business and in the calculation of mathematical reserves, the economic assumptions used are the average rates for each quarter during the reporting period.
Transfers to equity holders from the HWPF will, in the first instance, be funded from unallocated surplus. The profit after tax result is stated after allowing for this and takes into account the risk of markets moving adversely in the future which would reduce the amount that can be transferred to equity holders from the unallocated surplus. These transfers can be made without equity holder tax arising for a number of years. Over time the actual effective tax rate on these transfers will move toward the standard rate of corporation tax.
Subordinated liabilities The liabilities in respect of the UK subordinated guaranteed bonds and Mutual Assurance Capital Securities plus the subordinated debt issued by the Canadian companies form part of covered business and has been deducted at market value within the EEV.
Details of the exchange rates applied are provided in Note 2.14.
Prior to the demutualisation of The Standard Life Assurance Company (SLAC) on 10 July 2006, the parent company of the Group was a mutual insurer and the results of the Group were attributable to participating policyholders. However, the format of the consolidated income statement for the year ended 31 December 2006 was aligned with that of an equity holder owned company. The impact of the presentation adopted for the consolidated income statement for the year ended 31 December 2006 on the results for the period 1 January 2006 to 10 July 2006 when the Group was a mutual insurer is explained in detail in Notes 3.1(b) and 3.14.
Notes £m £m Underlying profit before tax attributable to equity holders of Standard Life plc Life & Pensions
Underlying profit before tax attributable to equity holders’ of Standard Life plc and adjusted items 714 290 Profit attributable to minority interest 111 60 Underlying profit before tax attributable to equity holders and adjusted items 825 350 Adjusted for the following items: Volatility arising on different asset and liability valuation bases (302) 68 Impairment of intangibles - (5) Restructuring and corporate transaction expenses (31) (12) Profit on part disposal of joint venture 17 -
Profit before tax attributable to equity holders 509 401 Tax credit/(expense) attributable to: Underlying profit 11 (39) Adjusted items 56 (19)
Total tax credit/(expense) attributable to equity holders’ profits 67 (58) Profit for the year/period 3.14 576 343
Prior to the demutualisation of SLAC on 10 July 2006, the results of the Group were attributable to participating policyholders and the parent company of the Group did not have equity holders. Therefore, the pro forma reconciliation of Group underlying profit to profit for the comparative period is only presented for the period from 10 July to 31 December 2006.
IFRS pro forma reconciliation of Group underlying profit to profit for the period For the year ended 31 December 2007
Loans and receivables 13,056 12,021 Investment securities 102,304 97,224 Other assets 2,385 2,497 Cash and cash equivalents 9,335 6,436 Total assets 143,980 135,455
Attributable to: Equity holders of Standard Life plc 594 205 Minority interest 111 112
Prior to the demutualisation of SLAC, the parent company of the Group did not have equity holders and therefore there are no amounts attributable to equity holders for the period from 1 January to 10 July 2006.
Total recognised income for the year/period 705 265 Distributions to equity holders (197) Issue of share capital for cash, net of transaction costs 3.7 - 1,363 Issue of share capital other than in cash 3.7 7 146 Difference between fair value and book value of the Group at demutualisation - (2,065) Merger relief on issue of demutualisation shares - 3,214 Capitalisation of share premium account (7) Reserves credit for employee share-based payment schemes 12 15 Vested employee share-based payment scheme (5) -
IFRS consolidated statement of recognised income and expense For the year ended 31 December 2007
Cash flows from investing activities Net acquisition of property, plant and equipment (68) (275) Net investments in associates and joint ventures (9) (9)
Supplemental disclosures on cash flow from operating activities Interest paid 630 628 Interest received 3,581 3,054 Dividends received 1,464 1,452 Rental income received on investment properties 615 634
The impact on the consolidated cash flow statement for the year ended 31 December 2006 of the presentation adopted for the consolidated income statement in that year for the period 1 January to 10 July 2006, when the parent company of the Group was a mutual insurer, is explained in Note 3.1(b).
(b) Presentation of the comparative primary statements On 10 July 2006, The Standard Life Assurance Company (SLAC) demutualised and the shares of a new holding company for the Standard Life Group, Standard Life plc, were listed on the London Stock Exchange. As a result, the Group operated under two different operating models during the year ended 31 December 2006. For the period from 1 January to 10 July 2006, the parent company of the Group was a mutual insurer and for the period from 10 July to 31 December 2006, the Group was equity holder owned.
The consolidated cash flow statement was revised in line with the consolidated income statement in 2006, showing ‘Profit before tax’ and adjusting for the transfers to/from unallocated divisible surplus for the period from 1 January to 10 July 2006 through the ‘Change in unallocated divisible surplus’ in the reconciliation to ‘Net cash flows from operating activities’.
Investment management Investment management provides a range of investment products for individuals and institutional customers through a number of different investment vehicles such as mutual funds, limited partnerships and investment trusts. Asset classes offered via these vehicles include equities, bonds, cash and property. Segregated investment mandates are also provided to large investors. Investment management services are provided to other business segments.
Life and Investment 12 months to 31 December 2007 pensions Healthcare management Banking Other Elimination Total £m £m £m £m £m £m £m Revenue from external customers Net earned premium 3,377 264 5 - - - 3,646
Total revenue from external customers 8,990 267 138 706 12 - 10,113
Tax expense attributable to policyholders’ returns 111 Tax credit attributable to equity holders’ profits (67)
From 10 July 2006 new UK business has been written in the PBF and equity holder profits recognised on an earned basis. Any with profits element is transferred to the appropriate with profit fund.
Life and pensions operations outside the HWPF include the one off charge of £144m in relation to the implementation of the Canadian Institute of Chartered Accountants (CICA) Handbook s3855 Financial Instruments – Recognition and Measurement by the Canadian life and pensions operation (see Note 3.8). In addition, the life and pensions segment includes the impact of volatility that arises from different IFRS measurement bases for liabilities and backing assets. The underlying results of the life and pension segment excluding this volatility is shown in the pro forma reconciliation of Group underlying profit to profit for the period.
Segment result for the year 743 (1) 49 58 (39) - 810
The consolidated income statement presentation for the year ended 31 December 2006 was aligned with that of an equity owned company as described in Notes 3.1(b) and 3.14. An impact of this presentation was that the amounts included in ‘Transfer to the unallocated divisible surplus’ for the period from 1 January to 10 July 2006 were reported in ‘Change in unallocated divisible surplus’ within ‘Total expenses’ and are therefore included in ‘Segment expenses’. For the period from 1 January to 10 July 2006 ‘Increase in net assets attributable to minority interest’ was included below the ‘Result before tax’ and in the revised income statement presentation these are reported in ‘Profit before tax attributable to equity holders’ which appears above the ‘Profit for the year’.
Life and Investment At 31 December 2007 pensions Healthcare management Banking Other Elimination Total £m £m £m £m £m £m £m
Capital expenditure incurred during the year on: Intangible assets 10 6 - 1 - - 17
3.2 Segmental analysis continued (a) Primary reporting format – business segments continued
Restated Life and Investment At 31 December 2006 pensions Healthcare management Banking Other Elimination Total £m £m £m £m £m £m £m
3.2 Segmental analysis continued (b) Secondary reporting format – geographical segments The geographical segments are the United Kingdom, Canada and International operations, which includes all other geographic regions.
Capital expenditure on intangible assets, deferred Segment revenue from acquisition costs and property, At 31 December 2007 external customers Segment assets plant and equipment £m £m £m
3.4 Tax expense The income tax expense is attributed as follows: £m £m Income tax expense attributable to policyholders’ returns 111 357 Income tax (credit)/expense attributable to equity holders’ profits (67) 58
For the year ended 31 December 2007 an amount of £(16)m of income tax expense calculated at policyholder tax rates which is attributable to equity holders’ profits has been included in ‘Income tax expense attributable to equity holders’ profits’. In the prior year income tax expense calculated at policyholder tax rates attributable to equity holders’ profits was included in ‘Income tax expense attributable to policyholders’ returns’.
3.5 Earnings per share continued (b) Diluted earnings per share Diluted earnings per share is calculated adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Group has one category of dilutive potential ordinary shares – share awards and share options awarded to employees. The Group had another category of dilutive ordinary shares during the period 10 July 2006 to 9 July 2007 – the bonus shares committed to at the time of the demutualisation of The Standard Life Assurance Company and flotation of the Company.
As part of the offer on the flotation of the Company, holders of demutualisation shares, employee shares or shares acquired in the preferential offer who held such shares for a continuous period of one year, were eligible to receive, at the end of that one year period, one bonus share for every 20 shares retained. The number of bonus shares included as dilutive potential shares for the period 10 July 2006 to 9 July 2007 is based on the actual number issued on 10 July 2007.
Profit attributable to minority interest (111) (5.2) (60) (2.9) Profit attributable to equity holders of Standard Life plc 465 21.7 283 13.5
3.6 Dividends The Company paid a final dividend of £114m in respect of the period 10 July to 31 December 2006 on 31 May 2007 and an interim dividend of £83m in respect of the year ended 31 December 2007 on 30 November 2007.
Subsequent to 31 December 2007, the Directors have proposed a dividend for the year ended 31 December 2007 of 7.7 pence per ordinary share, £167m in total. The dividend will be paid on 30 May 2008, subject to approval at the Annual General Meeting on 19 May 2008. This dividend will be recorded as an appropriation of retained earnings in the financial statements for the year ended 31 December 2008.
3.7 Share capital (a) Authorised share capital The authorised share capital of the Company at the year end was: Number £m Number £m
(b) Issued share capital The movement in the issued share capital of the Company during the year was: Number £m Number £m At start of period¹ 2,106,070,469 210 30 -
The Scheme of Demutualisation sets a ten 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 2007, a further 59,432 ordinary shares were issued to eligible members in respect of their demutualisation entitlements.
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. The Company allotted 67,429,005 shares in respect of the bonus issue. Shareholders 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.
The Company issued 50,000 £1 redeemable preference shares on 10 May 2006. The preference shares were redeemable on 31 August 2007, but the Company had the option to redeem the shares prior to this date at its own discretion. The Company exercised this right on 13 July 2006. The preference shareholders were entitled to a dividend of 1% on the nominal value of the shares. However, the preference shareholders waived their right to this dividend.
3.8 Insurance contract liabilities, non-participating investment contract liabilities, participating investment contract liabilities and reinsurance assets
The Heritage With Profits Fund (HWPF) was established as part of the demutualisation transaction on 10 July 2006. Under the Scheme of Demutualisation (the Scheme) certain non-participating contracts were transferred to the HWPF. The present value of future profits (PVFP) on these non-participating contracts can be apportioned between the component related to contracts whose future cash flows under the Scheme are expected to be transferred out of the HWPF to equity holders, and the component related to contracts whose future cash flows will remain in the HWPF to be applied either to meet amounts that may be charged to the HWPF under the Scheme or distributed over time as enhancements to final bonuses payable on the remaining polices invested in the fund.
On 1 January 2007, Section 3855 Financial Instruments – Recognition and Measurement of the Canadian Institute of Chartered Accountants Handbook became effective, which changed the measurement basis of investment securities under Canadian GAAP from Canadian book value to fair value. The adoption of s3855 resulted in a reconsideration of the allocation of the fair value adjustment in respect of investment securities between insurance and investment contracts. As a result, insurance contract liabilities (net of reinsurance) have increased by £119m compared to 31 December 2006. As non unit linked investment contract liabilities are measured at amortised cost there has not been a corresponding reduction in their value. In addition, a related deferred tax adjustment increased liabilities by £25m.
The movement in insurance contract liabilities, participating investment contract liabilities and reinsurance assets during 2006 was as follows: Non- Reinsurers Participating participating Participating Total share of insurance insurance investment insurance and liabilities contract contract contract participating (reinsurance Net liabilities liabilities liabilities contracts asset) 2006 £m £m £m £m £m £m
Effect of changes in: Economic assumptions (245) (691) (238) (1,174) 18 (1,156)
* Change in Unearned Premium Reserve included liabilities acquired in relation to the private medical insurance business of FirstAssist.
3.8 Insurance contract liabilities, non-participating investment contract liabilities, participating investment contract liabilities and reinsurance assets continued (a) Insurance contract liabilities, participating investment contracts and reinsurance assets continued
The primary role of the residual estate, as set out in paragraph 4.1 of schedule 1 of the Scheme, is to ensure a prudent amount is retained in the HWPF in respect of any amounts which may be charged to the HWPF in accordance with the Scheme. To the extent that the board of Standard Life Assurance Limited (SLAL) is satisfied that the residual estate exceeds that required to meet its primary role, the excess residual estate shall be distributed over time in as fair and equitable manner as is practicable as an enhancement to final bonus payable on the remaining HWPF with profits policies. Therefore it is necessary to recognise the residual estate of the HWPF as part of the participating liabilities. The movement tables above therefore include the movements in this residual estate post-demutualisation.
Economic experience changes in the year reflect higher than anticipated investment returns during the year.
The change in the present value of future profits on non-participating contracts during 2006 was as follows: £m
3.8 Insurance contract liabilities, non-participating investment contract liabilities, participating investment contract liabilities and reinsurance assets continued (c) Non-participating investment contract liabilities The change in non-participating investment contract liabilities was as follows: £m
Contributions 11,517 Initial charges and reduced allocations (67) Account balances paid on surrender and other terminations in the year (6,685) Investment return credited and related benefits 2,073 Foreign exchange adjustment 1,333 Recurring management charges (344) Other 4 £m
Contributions 6,057 Initial charges and reduced allocations 16 Account balances paid on surrender and other terminations in the year (3,024) Investment return credited and related benefits 3,851 Foreign exchange adjustment (817) Recurring management charges (151) Other 87
3.9 Borrowings £m £m Certificates of deposit, commercial paper and medium term notes 1,843 1,812 Securitisations – mortgage backed floating rate notes 3,983 4,383 Bank overdrafts 215 242
(a) Certificates of deposit, commercial paper and medium term notes The Group has issued certificates of deposit through its subsidiary Standard Life Bank Limited (Standard Life Bank). The Group has also issued commercial paper and medium term notes through Standard Life Funding B.V. a wholly owned subsidiary of Standard Life Bank. Standard Life Bank has guaranteed the liabilities of its subsidiary in relation to the issuance of this debt. The guarantee is in respect of notes issued and is for a maximum of US$2bn and €4bn in relation to the US commercial paper and Euro commercial paper programmes respectively, and €4bn in respect of the medium term note programme. This guarantee is considered a financial guarantee contract under the revised IAS 39 Financial Instruments: Recognition and Measurement and is initially recognised at fair value. The fair value at 31 December 2007 is £nil (2006: £nil).
Due within 1 year Standard Life Bank certificates of deposit – GBP 6.28% 5.04% 989 734 Standard Life Bank certificates of deposit – USD - 5.31% - 52 Standard Life Bank certificates of deposit – EUR 4.77% 2.89% 60 10 Standard Life Funding B.V. commercial paper – GBP 6.61% 5.20% 240 20 Standard Life Funding B.V. commercial paper – USD 5.51% 5.45% 139 354 Standard Life Funding B.V. commercial paper – EUR 4.99% 3.65% 313 540 Standard Life Funding B.V. medium term notes – GBP 6.56% 5.39% 9 3
The carrying amounts disclosed above reasonably approximate the fair values as at the year end.
The Group is not obliged to support any losses suffered by the note holders and does not intend to provide such support. The notes were issued on the basis that note holders are only entitled to obtain payment, of both principal and interest, to the extent that the available resources of the respective special purpose entities including funds due from customers in respect of the securitised mortgages, are sufficient and that note holders have no recourse whatsoever to the Group. This has been clearly stated in the legal agreements with note holders.
Lothian Mortgages No. 1 plc – USD – Maturity 2017 5.49% 5.78% 79 129 Lothian Mortgages No. 1 plc – GBP – Maturity 2035 6.85% 5.68% 572 570 Lothian Mortgages No. 2 plc – GBP – Maturity 2038 6.69% 5.50% 202 202 Lothian Mortgages No. 2 plc – USD – Maturity 2038 5.53% 5.73% 34 155 Lothian Mortgages No. 2 plc – EUR – Maturity 2038 5.10% 3.95% 559 510 Lothian Mortgages No. 3 plc – USD – Maturity 2019 5.36% 5.65% 38 142 Lothian Mortgages No. 3 plc – GBP – Maturity 2039 6.71% 5.52% 789 786 Lothian Mortgages No. 4 plc – EUR – Maturity 2040 4.81% 3.66% 263 381 Lothian Mortgages No. 4 plc – GBP – Maturity 2040 6.56% 5.40% 571 570 Lothian Mortgages Master Issuer plc – USD – Maturity 2028 5.05% 5.52% 122 213 Lothian Mortgages Master Issuer plc – USD – Maturity 2050 5.31% 5.60% 25 26 Lothian Mortgages Master Issuer plc – EUR – Maturity 2050 4.85% 3.70% 348 319 Lothian Mortgages Master Issuer plc – GBP – Maturity 2050 6.58% 5.42% 381 380 Total mortgages backed floating rate notes 3,983 4,383
During the year Lothian Mortgages Master Issuer plc issued a £500m note to Standard Life Bank in exchange for Standard Life Bank transferring additional mortgage assets, amounting to £580m, to Lothian Trustees Limited, an SPE. The transaction did not qualify for derecognition under IAS 39 Financial Instruments: Recognition and Measurement.
(b) Warranties The Group has potential obligations in relation to certain warranties given in connection with the disposal of a book of business during the 2005 financial year. The Company’s total liability in respect of all relevant claims under these warranties is limited to a total of £21m and extends to a maximum period of 30 months from 30 September 2005. The likelihood of payments being made under these warranties is considered to be low.
(d) Issued share capital The Scheme of Demutualisation sets a ten year time limit for those eligible members of The Standard Life Assurance Company who were not allocated shares at the date of demutualisation to claim their entitlements. As future issues of these shares are dependent upon the actions of eligible members, it is not practical to estimate the financial effect of this potential obligation.
3.11 Commitments (a) Capital commitments The Group’s capital commitments as at the year end are: £m £m Authorised and contracted for but not provided and incurred: Investment properties 75 137 Property, plant and equipment 462 587 £61m (2006: £121m) and £14m (2006: £16m) relates to the contractual obligations to purchase, construct, or develop investment property and repair, maintain, or enhance investment property respectively.
(b) Off-balance sheet instruments The following indicates the contractual amounts of the Group’s off balance sheet financial instruments that commit it to customers and third parties, as at the year end: £m £m Guarantees and stand by letter of credit 7 Commitments to extend credit: Original term to maturity of one year or less 55 Original term to maturity of more than one year 2,237 2,218 Other commitments 773 555
Included in ‘Other commitments’ is £752m (2006: £196m) 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 minority interest. The levels of funding are not necessarily in line with the relevant percentage holdings.
3.12 Capital statement Capital management policies and risk management objectives Managing capital is the ongoing process of determining and maintaining the quantity and quality of capital appropriate for the Group, and ensuring capital is deployed in a manner consistent with the expectations of our stakeholders. For these purposes, the Board considers our key stakeholders to be the providers of capital (our equity holders, policyholders and holders of our subordinated liabilities) and the Financial Services Authority (FSA).
The capital requirements of each business unit are routinely forecast on a periodic basis, and the requirements are assessed against both forecast available capital and local regulatory capital requirements. In addition, internal rates of return achieved on capital invested are assessed against hurdle rates, which are intended to represent the minimum acceptable return given the risks associated with each investment.
HWPF’s capital resources of £6,158m at 31 December 2007 (2006: £5,881m) and future surplus arising can be used to provide support for the HWPF, enhance payments to with profits policyholders or, in relation to the recourse cash flows, transfer defined amounts out of the fund to accrue to the benefit of equity holders. Additional restrictions are placed on the HWPF by the Scheme of Demutualisation (the Scheme), which provides that the recourse cash flow will be subject to a solvency test which prevents transfers of the recourse cash flow if, as a result of the transfer, the HWPF would have a realistic deficit or would have a regulatory surplus below the level which the board of SLAL considers necessary to declare bonuses in accordance with reasonable benefit expectations of with profits policyholders without creating a regulatory deficit.
Other qualifying capital Subordinated liabilities - - 265 265 - 265 1,643 1,908
Other non-participating Insurance contracts 12,302 1,266 - 13,568 4,349 17,917 174 18,091
Shareholders’ funds Held outside life assurance funds - - 976 976 822 1,798 890 2,688 Held within life assurance funds - 171 - 171 19 190 - 190
Other non-participating Insurance contracts 13,198 410 - 13,608 3,798 17,406 155 17,561
Capital subject to constraints for the UK regulated life business of £6.6bn at 31 December 2007 (2006: £6.3bn) represents capital resources held within long-term business funds, or, in relation to other regulated entities, the amount of the CRR.
Standard Life Bank is owned by SLAL and therefore its capital resources are included within life business shareholders’ funds. Standard Life Bank’s capital resources of £489m (2006: £613m) exceed its CRR of £363m (2006: £299m) by £126m (2006: £314m), and the excess can therefore be used to meet the requirements of the life assurance business.
Other activities At 31 December 2007, capital resources of £555m (2006: £658m) relate to the Group’s healthcare and investment management businesses and Group corporate centre activities. The capital subject to constraint of £116m at 31 December 2007 (2006: £73m), represents the CRR of the healthcare and investment management activities.
Intra Group transactions The Group, through subsidiaries and joint ventures, provides insurance and other financial services in the UK, Canada, India and China and also through branches, provides such services in Ireland and Germany. With the exception of the requirements of the Scheme and the intra group subordinated debt referred to below and the capital support mechanisms, there are no formal arrangements to provide capital to particular funds or business units. Any allocations of capital would need to be approved on a case-by-case basis by the Board.
Group capital requirement The Group must also calculate a group solvency position under the Financial Groups Directive (FGD). The FGD calculation is a very prudent aggregate value for the Group’s capital resources, because capital held within the long-term business funds of approximately £6.2bn (2006: £6bn) is restricted to the level of the capital resource requirement of those funds of approximately £4.4bn (2006: £3.7bn). Therefore the Group recognises no net surplus in respect of capital within the long-term business funds.
3.12 Capital statement continued Movements in capital The movements in the total capital resources shown in the capital statement are set out below : 2007 UK regulated life business Heritage Proprietary Life business Total UK With Profits business shareholders’ regulated life Overseas life Total life Other Group Fund* funds funds business operations business Activities Total £m £m £m £m £m £m £m £m
Change in assumptions used to measure life assurance contract * Includes The Standard Life Assurance Company (SLAC) following demutualisation.
3.12 Capital statement continued Movements in capital continued 2006 UK regulated life business Heritage Proprietary Standard Life With business Life business Total UK Overseas Assurance Profits and other shareholders’ regulated life life Total life Other Group Company Fund* funds funds business operations business Activities Total £m £m £m £m £m £m £m £m £m
Change in assumptions used to measure life assurance contract liabilities 88 - - - 88 - 88 - 88
Shareholder/Inter fund transfers include the transfer of £674m (2006: £158m) from the HWPF to the Shareholder Fund in respect of the recourse cash flows for UK and Ireland and £59m (2006: £51m) to the PBF in relation is additional expenses charged on German unitised with profits business. In addition, £209m (2006: £151m) was transferred from the Shareholder Fund to the PBF.
Immediately prior to demutualisation SLAC repaid its subordinated liabilities which resulted in a reduction of capital within SLAC of £1,620m. On demutualisation the Company entered into a subordinated loan with SLAL’s Shareholder Fund, resulting in an increase in capital resources of £1,631m. On demutualisation SLAL issued share capital to the Company for £737m. £180m of this amount was inadmissible on demutualisation. The amount became admissible on 13 July 2007 and is reflected as a movement in ‘Other factors’. Certain operating subsidiaries which had been transferred to SLAL on demutualisation were transferred by a dividend in specie to other entities within the Group not engaged in life business.
The impact of demutualisation on the capital resources available to the life business was to decrease it by £89m, which primarily represents the removal of the implicit item (£200m) and changes to the value of assets and liabilities as a result of the new corporate and fund structure.
A summarised version of the consolidated income statement, split as presented in the consolidated financial statements for the year ended 31 December 2006, is shown below: Restated Restated Period Period
Expenses Net insurance benefits and claims 7,532 6,597 2,251 4,346 Change in reinsurance assets 311 (16) (28) 12 Change in insurance and participating liabilities (2,336) 119 (452) 571 Change in investment contract liabilities 2,073 5,429 1,654 3,775 Change in deduction from liabilities due to present value of future results - (180) (180) Change in unallocated divisible surplus (247) 286 391 (105)
Change in liability for third party interest in consolidated funds (78) 116 33 83
Share of profits from associates and joint ventures 181 129 67 62
Tax expense attributable to policyholders’ returns 111 357 118 239 Profit before tax attributable to equity holders 509 453 52 401
‘Increase in net assets attributable to minority interest’ was included below the ‘Result before tax’ in the mutual accounting • model. In the income statement presentation adopted for the consolidated financial statements for the year ended 31 December 2006, the amounts included in this line were reported in ‘profit before tax attributable to equity holders’ which appears above the ‘profit for the period’.
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 2007 (unless otherwise indicated).