Please remember that the value of shares can go down as well as up and you may not ge amount inv culated as at 31 December 2011 (unless otherwise indicated).
Increased operating profits and cash flow delivered in challenging market conditions
) and third party assets under management (AUM) of £71.8bn (2010: £67.7bn
• EEV operating capital and cash generation 53% higher at £438m (2010: £287m)
• IGD surplus of £3.1bn (2010: £3.8bn) following successful tender for €687m of lower tier two subordinated liabilities
• Continued growth of MyFolio with assets now exceeding £1.0bn and launch of suite of income funds
David Nish, Chief Executive, commented: “Today’s results again demonstrate that we are well on track to transform the operational and financial performance of Standard
“We have delivered increased operating profits and cash flow while investing to strengthen our market positions. We have developed innovative propositions to respond to the changing needs of our customers and their advisers, ensuring we are well positioned to benefit from market changes and the new regulatory environment.
“In the year ahead, we expect to see the work that we have done as part of the transformation programme reinforce our clear leading positions in our chosen markets.
Delivering on our strategy We are well on track to transform the operating and financial performance of Standard Life as we continue to focus on meeting the long-term savings and investment needs of our customers. We have launched a number of propositions to build on the leading market positions we have across the Group and are making progress in increasing the scalability and operational efficiency of our businesses through technology, process improvement and external sourcing arrangements.
Standard Life continues to have a strong capital position, with an IGD surplus of £3.1bn (2010: £3.8bn) reflecting the successful tender for €687m of lower tier two subordinated liabilities. In the last few years we have significantly de-risked our business and this, combined with our capital-lite business model, means we believe we are well placed to operate in the currently proposed Solvency 2 environment, although there remains significant uncertainty about the final outcome of this regulatory change. We have removed the Scrip dividend option from the 2011 final dividend and we will continue to look for opportunities to drive our capital efficiency and improve return on equity.
In the year ahead, we expect to see the work that we have done as part of the transformation programme reinforce our clear leading positions in our chosen markets ensuring we are well on track to achieve an ongoing improvement in financial performance.
Operating profit increased by 28% Operating profit before tax from continuing operations was 28% higher at £544m and 31% higher at £480m (2010: £366m) excluding the impact of the UK staff pension scheme release.
Revenues from fee business were 8% higher at £1,223m and now make up 77% of total income (2010: 75%). The remaining 23% (2010: 25%) of total income is a margin on spread/risk business. The increase in the spread/risk margin in our Canada business included the positive impact of specific management actions designed to enhance investment yields on assets, including a gain on sale of a significant property, as well as reserving changes from revisions to investment allocations offset by the impact of strengthened mortality assumptions. The increase in spread/risk margin in Canada was offset by a reduction in the UK spread/risk margin which fell as a result of annuity reserve strengthening in 2011 and the non-recurrence of a benefit from changes in investment strategy and reserve releases in 2010. In total these resulted in the spread/risk margin being 4% lower at £356m (2010: £370m).
EEV operating capital and cash generation increased by 53% Gross EEV operating capital and cash generation increased by 26% to £749m (2010: £596m) driven by higher contributions from our covered businesses in Canada and International as well as increased profits from global investment management and the improved funding position of the UK pension scheme.
EEV operating capital and cash generation from continuing operations increased by 53% to £438m (2010: £287m), reflecting the increase in gross capital and cash generation which has been used to fund the largely fixed new business strain of £226m (2010: £220m) and lower investment for transformation and growth spend of £85m (2010: £89m).
EEV operating profit increased by 26% Total EEV operating profit (EVOP) from continuing operations increased by 26% to £989m (2010: £787m). Within this, core EVOP was 16% higher at £731m (2010: £629m), due to higher new business contribution (NBC) of £335m (2010: £308m), increased expected return on existing business and higher profits from global investment management.
Efficiency operating profit of £88m (2010: £132m) reflects the impact of a management action within the UK business to reduce current and future investment expenses as well as positive assumption changes mainly in Canada. The positive expense assumptions reflect the reduction in the ongoing expenses of managing our covered business and the growth in business volumes.
Back book management operating profit of £170m (2010: £26m) includes the remaining £64m (2010: £59m) benefit following the change in the basis of future pension increases in the UK staff pension scheme as well as the impact of tax variances and management actions in Canada to enhance investment yields on assets.
During 2011 we expensed £137m (2010: £149m) in our transformation and growth programme, with a combination of new customer and adviser propositions launched, investment in our underlying technology to support our growth and the one-off costs related to our new brand and visual identity. Our total investment in transformation and growth, including capitalised development spend and capital injections into our India and China JV businesses, was £196m (2010: £201m). We invested £23m in our JV businesses (2010: £16m).
As we have previously stated, we expect our total investment in transformation and growth (including capitalised investment expenditure and capital injections into the joint venture businesses) to decline modestly in 2012.
Strong balance sheet The strong capital position of the Group is evidenced by our balance sheet which continues to be robust on both an embedded value and IFRS basis despite the recent volatility in financial markets. Our IGD surplus stands at £3.1bn (2010: £3.8bn) reflecting our decision to successfully tender for €687m of the lower tier two subordinated liabilities. Direct shareholder exposure to debt issued by governments and banks in Greece, Ireland, Italy, Portugal and Spain equates to less than £50m. Our capital and cash generation continues to be strong.
Our embedded value increased to £7,428m (2010: £7,321m) representing an embedded value per share of 317p (2010: 322p). IFRS equity excluding intangible assets and non-controlling interests was £3,761m (31 December 2010: £3,768m), representing 160p per share (2010: 166p). The change in IFRS equity, excluding intangible assets and non-controlling interests, relates primarily to profit for the period attributable to equity holders of £298m offset by the cash impacts of the dividend, net actuarial losses on defined benefit pension schemes, capitalised investment expenditure and the purchase of Focus Solutions.
Increase in dividend and commitment to progressive policy The Board have proposed a final dividend of 9.20p per share (2010: 8.65p). This makes a total of 13.80p (2010: 13.00p) for the year, an increase of 6.2%. Following the Board’s decision to remove the Scrip option a Dividend Reinvestment Plan (DRIP) alternative will be offered in 2012, commencing with the final dividend for 2011. The Group will continue to apply its existing progressive dividend policy taking account of market conditions and the Group’s financial performance.
opportunities created by the RDR and pensions reform for increased individual savings will provide us with an increased flow of new business over the medium to long term.
The prospects for Standard Life Investments remain strong. The business is well positioned across a diversified range of asset classes and provides the investment solutions expertise which continues to allow the Group to capture a greater proportion of the platform value chain and third party assets.
UK fee business AUA grew by 2% to £100.6bn, reflecting a continuation of good flows which were partly offset by negative market movements in the second half of the year. Fee business net inflows, into our core retail and corporate pension propositions, increased by 37% to £2.9bn, while new business sales were up 8% to £14.0bn, driven by success of our core propositions. The average revenue yield across our UK fee business was 73bps reflecting the impact of changes in product mix.
Our award-winning platforms continue to attract customers, advisers and assets, as we further enhance the features and usability of our proposition. Collectively, our platforms account for 196,800 customers with total assets under administration of £11.4bn. At 31 December 2011 we had 999 (2010: 820) adviser firms on the Wrap platform signing up our 1,000th adviser firm shortly into the new year. We continue to embed the Wrap platform with existing adviser firms resulting in the average AUA per firm rising to £8.5m (2010: £7.4m) despite a 7% decrease in the FTSE All-Share Index during the year.
Standard Life Wealth continues to build a strong presence in the IFA market with the launch of a Managed Portfolio Service, achieving over £1bn of AUA shortly into the new year.
We have now streamlined our approach to implementation of Lifelens, our market-leading fully integrated pension and employee benefit solution. We expect the next wave of clients to transition throughout 2012 following the successful implementation of Lifelens for Standard Chartered Bank in the first quarter of this year.
Operating profit before tax in the UK business amounted to £220m (2010: £234m). The continued growth in our fee based business resulted in a 5% increase in fee revenue to £625m, although revenues were impacted by significantly lower equity market levels in the second half of the year. This was offset by a reduction in the spread/risk margin which fell by £73m as a result of annuity reserve strengthening in 2011 and a £30m benefit from changes in investment strategy and reserve releases in 2010.
Technology continues to be a key enabler in our drive to lower unit costs. We have undertaken a number of initiatives to manage the acquisition and maintenance expenses of our business and these are beginning to show results. Acquisition expenses expressed as a proportion of PVNBP fell by 10% to 120bps (2010: 133bps) despite the difficult market conditions in the second half of the year. Maintenance expenses expressed as a proportion of average AUA fell to 33bps (2010: 34bps) reflecting the scalability of our operations.
We are lowering unit costs by improving existing propositions and processes, reusing core components across our retail and corporate channels. Offerings such as Lifelens have been designed to be scalable by making greater use of online technologies and direct links to employers, and their employees, increasing self-servicing. Our market-leading adviser portal, Adviserzone, has seen usage double, with the number of users, online quotations and individual adviser firm customisations increasing all the time. We have continued to grow our business while maintaining leading levels of customer service against an improving cost base. The number of full-time equivalent customer service employees fell by 15% since the start of 2010. We have implemented two significant sourcing agreements which will help to reduce both the risk of delivery and overall costs of future IT development.
We continued to make progress in increasing our global presence. Our award-winning GARS fund has been made available, for the first time, to retail as well as institutional investors in the US via John Hancock Mutual Funds. We have also entered into an agreement with Swedish banking group Länsförsäkringar to distribute our GARS fund to investors in Sweden.
Operating profit before tax increased by 21% to £125m (2010: £103m). Revenue increased by 16% to £383m driven by strong flows into higher margin products, such as GARS and UK mutual funds, and included a fee received following the transfer of UK money market funds.
Operating costs were tightly controlled while allowing us to accelerate the expansion of our business in our chosen markets. Earnings before interest and tax (EBIT) margin increased by 1% to 34%.
Within Canada spread/risk business, the Group insurance and disability management business continues to perform well with PVNBP sales up 34%
to £826m and strong growth in market share benefiting from large mandates. A large part of these sales consisted of future renewal premiums and as such had a marginal impact on inflows. AUA has increased to £10.3bn driven by market movements partly offset by scheduled outflows in our annuity back book.
We continue to enhance our propositions for both corporate and retail customers. The launch of a stock and options feature and the introduction of the Standard Life Investments GARS proposition to our Quality & Choice investment programme support our market positioning as a provider of comprehensive solutions in benefits and pension management. The addition of a trust capability to our SLX platform enabled us to secure key accounts. In the retail space we launched Ideal Income Segregated Funds which help our customers protect their assets against risks in their retirement. In addition we announced an alliance with Qtrade Financial Group, an online brokerage platform and investment dealer, which will enhance our distribution capabilities.
Operating profit before tax in our Canada business increased by 70% to £187m.
The spread/risk margin included the positive impact of specific management actions designed to enhance investment yields on assets, including a gain on sale of a significant property, as well as one off reserving changes from revisions to investment allocations offset by the impact of strengthened mortality assumptions.
Net inflows in Ireland increased by 15% to £0.8bn despite the effects of increased competition and the impact of austerity measures such as the pension levy. We continued to enhance our offshore bond proposition, launching a recurring single premium bond. Our International Bond which exceeded £2bn in AUA, continues to grow. Net inflows in Hong Kong increased by 80% reflecting ongoing demand for our Harvest propositions. The average revenue yield across International wholly owned businesses was lower at 186bps (2010: 212bps), reflecting the charging structure of legacy business and the change in asset mix across International territories.
International operating profit before tax more than doubled to £40m. Our joint venture in India, HDFC Life, has achieved profitability and is nearing capital self sufficiency. We continue to make progress in China. Profit from the wholly owned businesses remained strong at £38m.
Higher average AUA resulted in an increase in revenue while higher acquisition expenses reflected growth in sales. The increase in maintenance expenses was due to our growing back book.
Year ended 31 December 2011 £m £m £m £m £m £m £m
Year ended 31 December 2010 £m £m £m £m £m £m £m
Notes to Editors: 1 In order to be consistent with the presentation of new business information, certain products are included in both long-term savings and investments AUA and net flows. Refer to Supplementary information 4.4 - Group assets under administration and net flows for further information.
3 Operating profit is IFRS profit before tax from continuing operations adjusted to remove the impact of market driven short-term fluctuations in investment return and economic assumptions, restructuring costs (including the Solvency 2 restructuring programme), impairments of intangible assets, amortisation of intangible assets acquired in business combinations, profit or loss on the disposal of a subsidiary, joint venture or associate and other significant one-off items outside the control of management.
7 Comprises market and other movements including the transfer of our UK money market funds following our decision to exit this sector of the industry.
9 Global investment management fee based revenue includes share of profits from HDFC Asset Management Company Limited.
1 Business review 15 1.1 Chief Executive’s overview 17 1.3 Chief Financial Officer’s overview 24 1.4 Business segment performance 32 1.4.2 Global investment management 38 1.8 Basis of preparation 50 2 International Financial Reporting Standards (IFRS) 51 IFRS primary statements 52
“Our results in 2011 again demonstrate that we are well on track to transform the operational and financial performance of Standard Life. We have delivered increased operating profits and cash flow while investing to strengthen our market positions. We have developed innovative propositions to respond to the changing needs of our customers and their advisers, ensuring we are well positioned to benefit from market changes and the new regulatory environment.” David Nish, Chief Executive
We’ve increased the pace and agility with which we are delivering on our strategy. There is more to do but we are in a good place to make that happen.
We set our key strategic priorities in March 2010 with the aim of transforming the business over the three years to 2012. This required an increased level of investment in order to grow our business. As we move into the final year of our transformation we are well on track to achieve an ongoing improvement in profitability and performance. Some highlights are: Delivering performance across the Group
• Global investment management continued its excellent record of strong and profitable growth in 2011 • In Canada, our fee based propositions are growing and we continue to drive value from our existing spread/risk business • In International, we are rapidly growing the Hong Kong and offshore businesses and will expand into new markets
Building on our market-leading propositions that benefit advisers, customers and Standard Life
• Assets in our Global Absolute Returns Strategies (GARS) fund now total over £13bn and it has outperformed its LIBOR benchmark over all key time periods since inception
IFRS profit for the year has fallen to £346m (2010: £493m) due to the impact of short-term fluctuations in investment return.
Lowering unit costs 1.1 Chief Executive’s overview continued Objectives and strategy
• In the UK, we grew our share of the corporate benefits market to 19.1% (2010: 17.0%)
Success will be achieved by providing our customers with the confidence to look forward to a well-planned financial future, as a result of the long-term savings and investments propositions we have provided.
Our strategy is underpinned by a simple business model. Find out more about the strategy of our individual businesses and how they contribute to our business model in Section 1.4 – Business segment performance.
The strength of the Group is enhanced by the excellent investment performance record of Standard Life Investments. Our focus remains on sustaining that level of performance and on building an investment platform that can support our growth ambitions.
We manage these businesses with a view to maximising their long-term value. The operations in China and India give us the opportunity to participate in sizeable markets with major growth potential.
• We continued to build on the success of our Wrap platform with approximately 1,000 firms using our platform. We delivered enhanced functionality which focused on reducing risk and costs in adviser businesses.
• We launched new propositions such as an online stocks and shares ISA and online mutual funds
• Our retail IFA market share in 2011 was 14.9% (2010: 14.6%)
• Our GARS fund has outperformed its LIBOR benchmark over all key time periods since inception and assets in the fund now exceed £13bn
• We have entered into an agreement with John Hancock Financial giving the GARS fund access to the United States market and allowing us to work with a leading distributor to help deliver potential for our global clients
Our new repositioned brand was launched across the Group in 2011. The brand is more than just a new look – it’s about the way we work and the experiences we create for our customers. It’s also about the unique combination of capabilities we have, including the strong distributor relationships that differentiates us strongly from competitors.
Investment in technology is delivering improved digital experiences and service for our customers. We will continue to leverage technology to deliver efficient, scalable and robust operations.
Population by age, UK, 1992, 2011 and 2033 1.1 Chief Executive’s overview continued
European sovereign debt crisis • Stagnated global growth and the downward revisions to growth forecasts in a number of major economies • A shift towards lower-risk assets as investors try to reduce their exposure to volatile equity markets both in the UK and abroad. To illustrate this volatility, the FTSE All-Share Index closed at a high of 3,161 points and a low of 2,558 points during 2011, a significant trading range.
Changing demographics continue to impact our key markets. The changes include: an ageing population, with people living longer whilst managing more extensive debt; diminishing state and employer pension provision; an increasing wealth gap between the rich and poor; and lower long-term birth rates.
We regularly publish new insight and support to policy makers and industry stakeholders to help stimulate long-term savings. In October 2011, we published the results of a research project undertaken with the assistance of experts in behavioural economics. The aim of Keep on nudging – making the most of auto enrolment was to identify how we can maximise the potential of workplace savings to help those on low-to-moderate incomes save for retirement.
Our strategy is specifically focused on the post-RDR world, both in ensuring that we comply with the regulation and more so in capturing the long-term strategic advantage. We provide high value fee based propositions and investment solutions for our customers and intermediaries and therefore we do not rely on paying commission to promote our propositions.
The ban on commission that will come as part of the RDR will significantly increase the size of our accessible corporate market in the UK.
The Canadian Government is expected to introduce Pooled Registered Pension Plans (PRPP), since only around 40% of Canadians have a private corporate pension arrangement. The PRPP is the Canadian version of a governmentsponsored auto enrolment plan.
Solvency 2 is a major European regulatory change initiative that brings consistency to how EU insurers manage capital and risk with the aim of protecting consumers. We expect the new rules to ‘go live’ on 1 January 2014 for firms, although this is still subject to some uncertainty.
We have been following the development of the new regime for many years and are actively involved in industry and regulatory discussions within the UK and Europe.
We set up our Solvency 2 Programme in January 2010 to help us manage the transition. The Programme is making good progress and we are well prepared for the implementation of Solvency 2.
The 2011 Budget announced significant changes to the UK life insurance tax regime.
We are actively engaged in the ongoing consultation process with HMRC. There is still uncertainty regarding the final detail of the new regime provisions, including the impact of the transition to the new tax regime. Therefore, we consider that it is too early in the consultation process to be certain about the impact.
From 21 December 2012, a European Court of Justice ruling will take effect that prevents using gender as a factor in determining premiums and benefits in insurance contracts.
We are working to ensure that we implement the appropriate changes so that our business complies with the ruling. We do not currently anticipate a significant impact on our results.
A number of key appointments have been made to further strengthen our senior management team. This includes the promotion of Paul Matthews to Chief Executive of the UK business in June 2011 and Charles Guay joined us in February 2012 as the new Chief Executive of our business in Canada.
We can achieve our goals more efficiently by making sure we keep attracting new talent and developing our own people. Our investment in developing talent, in particular in leadership development, is key to our continued success. The next phase of our talent management programme will continue to develop our current leaders and help tomorrow’s leaders grow.
Investing in our people helps guarantee our continued success. We encourage and reward high performance right across the Group. We are expanding this further, strengthening the link between individual performance and reward, so our people become more accountable for the contribution they make to our success.
Better and more efficient communication has helped us increase our understanding of what we can do to help our people develop themselves. Our staff engagement survey, InterAction, provided a huge amount of insight and from it we have identified areas to focus our attention. These areas of focus are centred around our people, to help them grow and further their careers at Standard Life.
The uncertain economic backdrop and its effect on consumer confidence have impacted new business volumes since the start of 2012 against a strong start to 2011. However, we see significant opportunities in all our chosen markets and are confident that the investments we are making will lead to continued strong growth in assets together with further improvements in efficiency and we expect to continue to drive an ongoing improvement in financial performance.
• Group operating profit before tax increased by 28% to £544m • Fee based revenue increased by 8% to £1,223m • Operating profit in 2011 included the remaining £64m benefit following the change in the basis of future pension increases in the UK staff pension scheme. The initial benefit recognised in 2010 was £59m.
EEV operating profitability measures our ability to effectively manage our existing book of business and to write profitable new business.
• New business contribution up 9% to £335m due to higher sales volumes in the UK and increased margins in our businesses in the UK and Canada
• EEV operating capital and cash generation increased by 53% to £438m • This increase in 2011 was mainly due to higher capital and cash from increased non-covered profits and activities to manage our existing book, particularly in Canada
• Net flows reduced to £5.4bn, impacted by difficult market conditions across the Group and higher outflows in older style propositions in the UK
• Launched in October 2010, our MyFolio fund range is growing rapidly and now has assets of approximately £1bn
Acquisition expenses expressed as a proportion of sales 1.3 Chief Financial Officer’s overview “We operate a simple business model which focuses on increasing assets, maximising revenue, lowering unit costs and optimising the balance sheet. In 2011, we continued to invest in the future, increase the quantity and quality of the assets we administer on behalf of our customers as well as managing down our costs. This will help us to meet our strategic objectives of driving sustainable, high quality returns for our shareholders. I believe we are well placed to deliver increased profits and cash flow in the future.” Jackie Hunt, Chief Financial Officer
IFRS profit for the year was £346m (2010: £493m). This comprised profit after tax attributable to equity holders of £298m (2010: £432m) and profit attributable to non-controlling interests of £48m (2010: £61m). The IFRS result included a 28% increase in operating profit before tax from continuing operations from £425m to £544m. Non-operating losses were £214m (2010: profit £85m).
Group operating profit before tax increased to £544m. The key highlights are: • Fee based revenue, which mainly relates to asset management charges, increased by 8% to £1,223m. This was due to the strong level of net inflows, higher average asset values and the shift to higher margin products in our global investment management business.
• Acquisition expenses are the costs we incur in writing new business. Acquisition expenses were broadly maintained at £270m despite the strong growth in sales volumes. Acquisition expenses expressed as a proportion of sales improved to 140bps (2010: 149bps).
Continuing operations exclude Standard Life Healthcare Limited, which was sold on 31 July 2010. 2
Group operating profit before tax from continuing operations 544 425 24 Standard Life
• Maintenance expenses mainly relate to the ongoing costs that we incur to service and administer customer policies. Maintenance expenses increased to £723m in 2011 due to further development of the business and expressed as a proportion of average AUA improved to 41bps (2010: 42bps).
• Capital management increased to £74m due to the investment of shareholders’ funds in higher yielding assets and the improved funding position of our UK staff pension scheme
The improvement in both acquisition and maintenance expense trends demonstrates the scalability of our business. We continue to lower unit costs both by growing assets and improving existing propositions and processes to make better use of automation and self servicing.
We have continued to invest to transform and grow the business: • Investment spend included in Group operating profit before tax decreased to £137m in 2011
Find out more about the IFRS results in Section 1.4 – Business segment performance and Section 1.8 – Basis of preparation
Group non-operating (loss)/profit before tax from continuing operations 2011 2010 £m £m
Other operating profit adjustments (5) (1) Group non-operating (loss)/profit before tax from continuing operations (214) 85
There was a good level of demand for our innovative products and services. However, market conditions were volatile and net inflows decreased to £5.4bn. Our relatively resilient asset mix partly mitigated the impact of volatile market conditions on assets under administration (AUA).
There was a 1% increase in AUA to £198.4bn: • The increase in AUA was driven by continuing strong flows, particularly into our newer fee based propositions and our third party investment management business. This was offset by the external transfer of approximately £4bn of our UK money market funds following our decision to exit this sector of the industry.
• Of the total AUA, 82% (2010: 83%) related to fee business
• Fee business AUA was maintained at £163.3bn (2010: £163.4bn net flows of £6.1bn (2010: £7.9bn) partially offset by the UK money market funds transfer
Find out more about AUA and new business for each of our businesses in Section 1.4 – Business segment performance 1 Continuing operations exclude Standard Life Healthcare Limited, which was sold on 31 July 2010.
The 1% increase in EEV was more than offset by a 3% increase in the diluted closing number of ordinary shares, resulting in the overall EEV per share falling by 5p.
EEV profit before tax of £526m (2010: £1,152m) includes: • EEV operating profit from continuing operations of £989m (2010: £787m)
• EEV non-operating loss from continuing operations of £463m (2010: profit £348m). EEV profit from discontinued operations was £nil before tax (2010: profit £17m).
1 Continuing operations exclude Standard Life Healthcare Limited, which was sold on 31 July 2010.
1.3 Chief Financial Officer’s overview continued Group EEV capital and cash generation
EEV operating capital and cash generation from continuing operations 438 287
Coverage of EEV operating capital and cash to dividend declared 1.4 1.0
Coverage of EEV operating capital and cash to dividend was 1.4 compared to 1.0 for 2010.
Total capital and cash generation was £324m (2010: £441m). The reduction mainly reflects negative non-operating items in 2011. In overall terms, our EEV operating capital and cash generation from continuing operations has increased to £438m: • Capital and cash generation from existing business increased by £39m reflecting the higher opening in-force business values • Non-covered business core capital and cash generation was £42m higher compared to 2010 mainly due to increased profit from our global investment management business • Back book management contributed an additional £72m in 2011, including the benefits from post tax profits on the UK pension scheme and tax variances and management actions to enhance investment yields in Canada surplus movement
Capital and cash generation from existing business 688 (45) 643 626 (22) 604
Covered business capital and cash generation from new business and expected return 398 19 417 361 23 384
EEV operating capital and cash generation from continuing operations 415 23 438 320 (33) 287
EEV capital and cash generation from discontinued operations - - - 20 - 20
Total EEV capital and cash generation 43 281 324 433 8 441 28 Standard Life
Reconciliation of Group operating profit to EEV operating capital and cash generation
• £12m negative impact from the difference in the treatment of deferred acquisition costs (DAC)/deferred income recognition (DIR), intangibles, tax and other. Other includes the impact of different methodologies in respect of expected income. In EEV operating profit this income is included on an expected return basis but the actual fees are included in Group operating profit.
Capital management is the ongoing process of determining and maintaining the quantity and quality of capital appropriate for the Group and ensuring capital is deployed so that the risk/return is optimised in a manner consistent with the expectations of our stakeholders. This requires a clear understanding of the drivers of capital requirements and therefore capital management is a critical component in the strategic planning process and the ongoing running of the business.
There are two primary objectives of capital management within the Group. The first objective is to ensure that capital is, and will continue to be, adequate to maintain the required level of safety and stability of the Group and therefore provide an appropriate degree of security to our key stakeholders. This aspect is measured by the Group’s regulatory solvency position. The second objective is to create equity holder value by driving profit attributable to equity holders.
Capital is measured and managed on both regulatory capital metrics and on internal economic capital metrics. Risk appetites are set on an economic basis and the potential impact of business decisions on positions versus these appetites forms a key part of the decision making process.
External credit rating agencies perform independent assessments of the financial strength of companies. The current insurer financial strength ratings for Standard Life Assurance Limited (SLAL) are A1/Stable and A+/Stable from Moody’s and Standard & Poor’s respectively. There were no changes to these ratings in 2011. The Standard Life Assurance Company of Canada has a separate rating from Standard & Poor’s and was upgraded in June 2011 from A/Stable to A+/Stable.
Group capital resources include the capital resources within the longterm business funds but the Insurance Groups Directive (IGD) limits the amount that can be recognised to the level of the capital resources requirement for that fund. This resulted in a restriction of £1.0bn (2010: £1.4bn) and a net zero contribution to the Group capital surplus from the long-term business funds.
The Group’s liquidity and capital management policy governs the level of liquidity that each business unit holds and the objective is to ensure that sufficient liquidity exists across the business to withstand extreme stresses.
2011 figures above based on estimated regulatory returns. 2010 based on final regulatory returns.
The following diagram illustrates the key differences between regulatory, IFRS and EEV capital measures at 31 December 2011: Looking forward
We delivered increased operating profitability and cash in 2011. Our investment programme and transformation are on track and the successful implementation of our strategy is starting to show in an improved financial performance. We are well placed for a post-RDR, auto enrolment and Solvency 2 environment, and we expect to continue to drive an ongoing improvement in financial performance.
• MyFolio is growing rapidly and now has assets of approximately £1bn
• A notable number of new institutional clients were won in the UK and Europe during the year
• Third party AUM increased to a year end record of £71.8bn
• Fee based revenue increased by 5% due to strong growth in AUA
• Spread/risk margin fell in 2011 to £75m with 2010 benefiting from a reserve release of £30m
• Maintenance expenses increased mainly due to the impact of recently acquired businesses, but as a percentage of AUA improved to 33bps
• Other comprises the remaining £64m (2010: £59m) benefit following the change in the basis of future pension increases in the UK staff pension scheme
• Revenue rose by 16% driven by strong third party new business flows mainly into higher margin products, such as GARS and UK mutual funds
• Average fee revenue yield from third party business increased to 37bps from 35bps
• Maintenance expenses increased mainly due to higher employee numbers to support growth. Compared to total average AUM maintenance expenses were controlled at 15bps (2010: 13bps).
We will continue to differentiate our business by providing innovative retirement and investment solutions combined with a world-class customer experience. We continue to actively promote ourselves as a long-term savings and investments business in our chosen markets.
Our strategy is to deliver profitable growth by expanding our operations in attractive international and offshore wealth management markets. We will also continue to maximise the value in our existing wholly owned businesses and to develop the joint venture businesses.
• Fee based AUA increased by £0.3bn due to strong net flows despite negative market movements
• In the offshore business in Ireland, net flows were up 26% due to high retail inflows
• Hong Kong net flows were up 87% in constant currency
• Strong net flows in the Ireland domestic business and Germany but lower than prior year due to difficult economic conditions
• Fee based revenue benefited from an increase in management charge income from higher AUA
• Spread/risk margin increased to £281m due to the impact of specific management actions designed to enhance the investment yields on assets
• Decrease in acquisition costs primarily due to lower commission charges
• Increase in maintenance expenses to £201m mainly due to the rise in AUA
• Operating profit before tax increased from £15m to £40m driven by the progress of the JV businesses
• Operating profit before tax of the wholly owned businesses was maintained at £38m
• Fee based revenue increased by 4% to £221m from the growing asset base
EEV non-covered business operating profit before tax from continuing operations £67m £28m 1 Continuing operations exclude Standard Life Healthcare Limited, which was sold on 31 July 2010.
The UK market is in a period of unprecedented change, driven by customer demand as well as economic, regulatory and technological trends which are creating exciting opportunities and challenges for both change and growth.
2011 saw economic uncertainty and volatility return to the forefront of UK financial markets, resulting in a more cautious sentiment amongst our customers and the industry. We demonstrated our continued momentum and resilience by retaining our number one position in both our retail and corporate markets as customers, advisers and employers continued to rely on a brand that they can trust.
Our regulatory environment is changing. The RDR and pensions reform will completely transform the nature, scale and profitability of our marketplace. These changes will significantly increase the market available to Standard Life by stopping payment of commission on new sales and by increasing the number of employees investing in pensions through auto enrolment. These changes are causing customers, financial advisers and employers to seek holistic solutions to manage their risk whilst reducing their administrative burden. Our suite of investment solutions and market-leading platform propositions means we are well placed to support our retail and corporate customers, advisers and intermediaries through this industry transition.
Our customer campaigns, including our retirement roadshows and customer mailings, together with government and media focus on pensions and saving for retirement, is driving increased consumer awareness. The growth and usage of the internet and technology has increased usage of our sites by consumers, driving engagement and efficiency. The UK has an ageing population with people now seeking more flexible retirement solutions. We are well placed to benefit from these changes through the continued development of our investment solutions and platform innovations.
• Investment for transformation and growth decreased to £53m as a number of key customer propositions launched during the year including our direct channel’s online stocks and shares ISA and our corporate Wrap portal, Lifelens
UK operating return on equity reduced to 15.5%. Although operating profit after tax of £204m was 3% higher than 2010, return on equity fell by 1.9% points as a result of the combined effects of the asset position of our UK staff pension scheme and the impact of higher market values of investments at the start of 2011.
The growth in our core business was offset by net outflows of £87m, reflecting institutional pensions net inflows of £1,414m (2010: £2,440m) and conventional with profits (CWP) net outflows of £1,501m (2010: £923m). CWP does not contribute to UK profits.
Core retail net inflows (excluding CWP) increased by 19% to £839m. This reflects a 7% increase in mutual funds net inflows which was driven by new business sales demonstrating our success in this market.
Spread/risk net outflows have increased by 6% due to lower new business sales compared to 2010 as a result of the legislative change in retirement age.
In each of our core markets we ended the year in a strong position, with our 2011 retail IFA market share improving to 14.9% (2010: 14.6%) and our equivalent corporate market share improving to 19.1% (2010: 17.0%). Our market-leading positions in each market have been achieved through the introduction of our investment solutions and our focus on managing our underlying cost base through technology advances increasing our scalability.
We will continue to support our intermediary advisers through the regulatory changes in the market. The RDR will remove commission from product selection and will force advisers to set charges in agreement with their clients. Post-RDR we are well positioned to capitalise on these changes as we are already the leading provider in the nil commission market and have an established model for those advisers who are already operating a charging model. From the end of 2012 employers will have to automatically enrol all qualifying employees into a pension scheme, presenting a significant opportunity for Standard Life as we help our corporate clients to comply with their new duties.
We have strategically positioned ourselves across the value chain to maximise revenues from fees, platform and tax wrapper charges and overall investment charges.
During 2011, we made significant progress with our high margin investment propositions. Our three most popular solutions, Standard Life Wealth, MyFolio Managed Funds and MyFolio Multi-Manager Funds, secured total new assets in excess of £1bn in 2011.
The RDR and pensions reform have driven demand for risk based packaged investment solutions that fit the financial advice process, whilst uncertain markets have also encouraged more investors to look for managed solutions offering lower volatility.
Our current investment solutions range comprises a full private client discretionary service from Standard Life Wealth, the Managed Portfolio Service, and the MyFolio fund range – the most comprehensive range of risk based funds available in the market.
Our success is underpinned by our understanding of the UK corporate and retail markets and the end-to-end investment process. Our propositions benefited from the in-house investment expertise of Standard Life Investments and have demonstrated their ability to deliver for our customers. Standard Life Wealth, our flagship discretionary investment service, demonstrated the strength of its investment process by delivering positive returns in its core portfolio strategy for 2011, when all of the key Private Client Indices provided by Asset Risk Consultants for competitor benchmark indices were negative.
We are continuing to see the benefits of our scalable business model with maintenance expenses bps compared to average AUA falling to 33bps (2010: 34bps). Acquisition expenses as a percentage of PVNBP reduced significantly to 120bps (2010: 133bps).
Our overall strategy seeks to lower costs through technology advances, increased scalability and reduced commissions. We have in place a flexible and efficient IT change model, leveraging our investment in technology to deliver exceptional digital experience and service. We are also re-using core components across various channels creating scalable and low-cost operations.
We are meeting the changing shape of demand and improving our customers’ experience through active promotion of our online technology – making us easy to do business with. At the same time, and demonstrating the scalability of our operating model, we have significantly improved customer service efficiency, with a reduction in full-time equivalent employees of 15% since the end of 2009 despite an increase in our AUA of 16% over the same period.
“Standard Life Investments is a premier asset manager with an expanding global reach. Our wide range of investment solutions is backed by our distinctive ‘focus on change’ investment philosophy, disciplined risk management and shared commitment to a culture of investment excellence. This has proved itself to be robust and repeatable in both good and bad market conditions. We have an unbroken record of positive annual net flows over the last eight years and have delivered a strong track record of profitable organic growth. Earnings before interest and tax have a compound annual growth rate over the last five years of 14%.” Keith Skeoch, Standard Life Investments Chief Executive Officer
Market update 2011 was a difficult year for both financial markets and the fund management industry. The effects of the European sovereign debt crisis, downgrade of the United States debt ratings by Standard & Poor’s and historic low returns in the safe haven sovereign bond market were further compounded by downward revisions to growth forecasts in a number of major economies. Market sentiment deteriorated during the second half of the year resulting in increased volatility across a range of markets. Equity markets in the UK and abroad fell sharply as investors tried to reduce their exposure to higher risk assets. The volatile markets had a significant impact on investor sentiment and resulted in a significant reduction in demand for mutual funds and a substantial fall in the turnover of institutional mandates. Average market values were slightly higher than in 2010, despite increased volatility in global financial markets. The average daily FTSE All-Share Index rose by 5% between 2010 and 2011.
We continued to deliver a robust investment performance over the longer term with 49% of funds over one year, and 82% of funds over three year time periods outperforming their benchmark. Our GARS fund has outperformed its LIBOR benchmark over all key time periods since inception and our mutual fund strength is shown by the proportion of eligible and actively managed funds (22 out of 29) rated A or above by Standard & Poor’s in the UK. The pipeline for institutional business is strong with fixed income and GARS products attracting a lot of interest, increasingly from outside the UK. There is also positive demand for our mutual funds in the UK and for our SICAV funds in continental Europe.
We achieved third party net inflows of £4,280m (2010: £6,200m). This represents 6% of opening third party AUM, excluding money market funds. This continued Standard Life Investments’ unbroken record of positive annual net flows over the last eight years. UK mutual funds net inflows of £1,643m (2010: £2,221m) were robust despite volatile market conditions. A significant number of new institutional clients were won in the UK and Europe during the period, increasing the institutional client base in these markets by 13% despite a substantial slow down in the number of institutional mandates across the market as a whole. Our high overall retention rates are reflected in redemptions being only 14% of opening AUM, which is in the top quartile in the industry. Inflows throughout 2011 have reflected the increasingly diverse nature of our product offering and the increasingly international character of our clients and distribution channels.
Third party AUM increased to a year end record of £71.8bn (2010: £71.6bn). The transfer of approximately £4bn of money market fund assets was offset by underlying new business flows. Third party AUM continues to represent 46% of total AUM (2010: 46%). In-house AUM decreased to £83.1bn (2010: £85.3bn) with favourable market movements offsetting outflows from the with profits business. As a result, total assets managed by Standard Life Investments stood at £154.9bn (2010: £156.9bn).
During 2011, Standard Life Investments successfully launched its refreshed visual identity and brand positioning. This builds on our commitment to increase the international nature of our business, as well as broaden the asset classes in which we excel, and helps to ensure that we present ourselves in a way that reflects our ambition, strengths and increasingly diversified business.
The increasing volume of business in 2011 resulted in a rise in maintenance expenses from £194m to £227m. Opportunities in the market were utilised to accelerate the expansion of our business in our chosen markets. Maintenance expenses compared to total average AUM were controlled at 15bps (2010: 13bps).
Capital management 38 30 Canada operating profit before tax from continuing operations
Operating profit before tax increased to £187m (2010: £110m). The key highlights are: • Fee based revenue benefited from an increase in management charge income from higher AUA • Spread/risk margin increased mainly due to the impact of specific management actions which led to a gain of £88m in 2011
(2010: £32m). Specific management actions in 2011 included the sale of a property which realised a significant gain of £42m and were designed to enhance the investment yields on assets. One-off reserving changes increased policyholder liabilities by £57m (2010: increase £13m). In 2011, one-off reserving changes were adversely impacted by strengthened mortality assumptions which were partly offset by revised investment allocations in line with the long-term asset strategy.
EEV operating profit before tax increased by 28% in constant currency to £324m (2010: £250m). Back book results increased from management actions designed to enhance the investment yields on assets and higher investment returns, but this was offset by adverse changes in mortality assumptions.
Mutual funds net outflows of £111m (2010: £39m) were impacted by lower sales levels. This was partially offset by lower redemptions.
In our spread/risk business, retail net outflows improved from £328m to £245m, mainly due to higher sales of annuities and lower annuities and term funds redemptions. Group savings and retirement net outflows slightly improved to £206m (2010: £227m). A large part of group insurance sales consisted of future renewal premiums which had a marginal impact on this year’s inflows, which increased by 6% in constant currency to £442m (2010: £411m).
Strong sales in our retail segregated funds, which increased by 22% in constant currency, led to an increased market share and drove our retail line sales. Individual insurance, savings and retirement increased by 17% in constant currency. Mutual funds sales decreased to £218m (2010: £313m).
In our group savings and retirement line, we delivered the second phase of the member statement project that allows for significant member customisation. The trust application addition to our SLX platform enabled us to secure key accounts. We added several investment managers and new funds to our Quality and Choice Investment Programme and we have launched our simplified Ideal Term Funds and new Socially Responsible Investment option. In our retail line, we expanded our successful segregated funds range with the launch of the Ideal Income Series. We launched new Socially Responsible Investment segregated funds and introduced four new mutual funds. We enhanced our distribution through an agreement with Qtrade Financial Group, an online brokerage and investment dealer.
In our group savings and retirement line, product enhancements enabled us to win 204 new defined contribution accounts, increasing members to 561,000 (2010: 537,000), with defined contribution AUA increasing by 3% in constant currency to £9.4bn. The strength of our retail sales force and investment fund offering led to strong sales and increased asset share in our retail segregated funds, where we were one of the fastest growing companies in 2011
The average revenue yield on our fee business decreased slightly to 117bps (2010: 118bps), reflecting pricing conditions prevailing in our markets. Our spread/risk margin reflects several actions taken during the year to maximise cash flows on assets and enhance investment yields. On 1 January 2012 we ceased selling individual life insurance products in order to sharpen our focus on long-term savings and investments.
As measured by net flows as a percentage of opening AUA.
Overall customer sentiment was impacted by market uncertainties caused by the Eurozone crisis and volatile investment markets. International operates in a number of territories and these are subject to different market dynamics. In Germany, the economy continued to grow in 2011 and our successful repositioning saw us increasing our market share, particularly in the second half of 2011. The domestic market in Ireland was dominated by customers’ reactions to the economy and austerity measures. Our businesses in Ireland performed well in these difficult conditions and increased our market share to all time high levels in our chosen market segments. Economies in Asia continued to grow strongly and we are well placed to expand our operations in our chosen markets. Changes to product regulation in India impacted sales levels in this market in the short term. However, the India joint venture has performed well despite the challenging regulatory environment and has improved both positioning in the market and market share.
Total EEV operating profit increased to £96m from £86m. EEV operating profit before tax of the wholly owned businesses, including non-covered business, increased to £91m (2010: £83m) predominantly from improved back book profitability in Ireland and Germany. EEV covered business operating profit before tax for the joint ventures was up to £5m (2010: £3m) with improved back book profitability partially offset by lower new business contribution.
We have undertaken significant proposition development work in both our domestic and international offshore businesses to generate higher inflows.
These market initiatives and our strong customer relationship model contributed to the 14% increase of wholly owned gross inflows in 2011 leading to an 11% increase in wholly owned AUA to £12.3bn.
The risk of exposure to loss if a counterparty fails to perform its financial obligation, including failure to perform those obligations in a timely manner. It also includes the risk of a reduction in the value of assets due to a widening of mortgage, bond and swap spreads.
• Burnthrough from the Heritage With Profits Fund (HWPF) and German With Profits Fund
• Changes in the value of future profits earned on unit linked funds and collective investment schemes where the underlying funds are invested in fixed interest assets
• Corporate bonds and commercial mortgages held in Canada to back annuities
2011 summary The economic crisis in the Eurozone has resulted in increased volatility in the equity and bond markets with UK, German and Canadian fixed interest yields falling.
We have also reviewed our portfolios to consider both the direct and indirect consequences that could arise from one or more countries ceasing to use the Euro.
The economic crisis in the Eurozone has resulted in the value of debt securities issued by certain sovereign states and banking counterparties falling in value.
We have also reduced our securities lending activity during the year which has reduced our counterparty exposures.
• Annuity contracts written by the UK and Canada where the current experience differs from that expected, more volatility of experience than expected, or the rate of improvement in mortality is greater than anticipated
The Group is exposed to liquidity risk from the following sources: • The type of business that is written, the assets and liabilities arising from that business and how the assets are managed to meet those liabilities
• The collateralisation of derivatives which results in cash volatility as the value of the derivative changes
The key operational and strategic themes affecting the Group are: • Management of existing processes • Management of information security • Management of third party providers • Project and programmes – managing change and the execution of projects • People – succession planning, skilling and resource levels • Delivering the strategic plan
We are actively engaging with advisers in the market to minimise the potential adverse impacts resulting from advisers seeking to move schemes in advance of the RDR being implemented in 2013.
The economic crisis in the Eurozone has reduced the liquidity for certain asset classes. Through our monitoring of market conditions we have sought to anticipate potential issues.
During the year we have continued to: � Centrally co-ordinate strategic planning and funding requirements. This helped support our decision to repurchase some of our subordinated debt during the year.
In 2011 we also established a Euro Medium Term Note Programme.
The Group has not invoked any deferral terms on unit linked contracts during the year and there are no funds subject to deferral at 31 December 2011.
We have continued to work on implementing appropriate processes and controls to prepare for regulatory changes.
The Eurozone crisis has presented additional pressures on various operating processes and systems during the year however the controls embedded within the Group have ensured we have been able to avoid any serious losses or adverse consequences.
1.6 Our customers “We serve a wide variety of customers – individuals, financial advisers, corporate customers and large institutions. Our role is to help all of our customers look forward to their financial future with confidence and optimism. We continue to drive our transformation by putting customers at the heart of everything we do.” Bruce Kelsall, Group Marketing Director
The new brand positioning was accompanied by a new visual identity but the brand is more than just a new look – it’s about the way we work and the experiences we create for our customers. And it is about the unique combination of capabilities we have that differentiates us strongly from competitors. We are a long-term savings and investments business that helps customers look forward to their financial future with confidence and optimism. This is summed up in our new endline, The Way Forward.
Underpinning our brand are four pillars that recognise the core needs of customers: • Working to ensure that we offer products that are easy to understand and access, and that Standard Life is easy to deal with
• Helping customers handle their finances effectively. Our core purpose is to help customers take better care of their money.
Technology now plays an important role in the lives of all our customers and is also an important component of our brand. The way that we help our customers think and plan for the future, purchase our products and manage their finances, has been evolving to meet these dramatic digital changes. Our business with advisers is increasingly written through our award-winning technology platforms. Consumers can now purchase an ISA and pension online and manage their products through our online servicing capability. In 2011, we launched Facebook, LinkedIn, YouTube and Twitter feeds across our consumer and adviser channels, which are enabling us to engage in a different form of dialogue around long-term savings and investments. In Hong Kong, over 5,000 customers have downloaded the Asian iPhone and iPad app that enables them to view and transact against their portfolio.
We are committed to building a customer-centric organisation. We have embedded the Financial Service Authority’s Treating Customers Fairly (TCF) principles across the business and continue to have a strong management focus on how we deliver against the six TCF outcomes. However, we seek to deliver over and above these principles and we have significantly enhanced our complaint management process to give customers a more consistent and fair experience. In addition, we continue to invest in and improve the customer experience.
Our www.standardlife.co.uk website has been extensively redeveloped. This meant improving the structure and design and simplifying the content. Our website now: • Engages customers with clear, interactive and open content designed to help them get to grips with their finances • Lets customers apply for the Active Money Personal Pension online • Has tools to help customers become more confident in making financial decisions • Lets customers purchase ISAs and mutual funds online
In early 2011, we launched the employee benefits platform, Lifelens. This cutting-edge technology allows employers to offer and showcase all employee benefits and rewards through one single application. It means all members of corporate savings schemes get an easily accessible, personalised, single view of their benefits package. Lifelens has been well received by the market and after successfully streamlining our approach to its implementation, we expect the next wave of clients to transition during 2012.
We have been designing a pensions reform solution to help companies to meet the requirements and also minimise the disruption and cost of complying with the new regulations in the market. An example of this is by helping fully automate the auto enrolment process.
In line with our theme of better communication for consumers, we have also significantly improved the information companies use to explain their pension schemes to employees, designing new websites and joining guides.
• Five awards from the Finance and Technology Research Centre (FTRC). Our Group SIPP; Group Personal Pension; Group Contracted-in Money Purchase; and Wrap platform all received the top ‘eee’ rating. We were also awarded SIPP and SIPP specialist ‘eee’ rating for the third consecutive year.
• ‘Best Website for IFAs’ at the Professional Adviser Awards • ‘Bundled/Full Service Defined Contribution Provider of the Year’ at the UK Pensions Awards • ‘SIPP and/or SSAS Provider of the Year’ and ‘Best Income Drawdown Provider’ at the Financial Adviser Life & Pensions Awards • At the Aberdeen UK Platform Awards we were awarded ‘Wrap Platform of the Year’
• Best Investment Service Provider 1993 to 2010 from Financial Adviser in recognition of our long-term commitment to the IFA community over the last 18 years
• ‘Most Innovative Asset Manager’ at the Engaged Investor Trustee Awards • Standard Life Investments’ UK Equity Unconstrained Fund was ‘Highly Commended’ in the ‘UK All Companies’ category at the 2011 Moneywise Fund Awards • ‘Investment Manager of the Year’ and ‘DC Investment Only Provider of the Year’ at the UK Pensions Awards 2011 • At the 2011 Eurofonds – Fund Class Awards, Standard Life Investments won a special award as ‘Best Asset Manager in Europe over 7 years’ in the asset managers category with between 26 and 40 funds rated, including both OEICs and SICAVs • Five awards at the prestigious Lipper Fund Awards 2011. The funds recognised were the European Smaller Companies SICAV, the China Equities SICAV, the UK Smaller Companies Fund and the Managed Fund (two awards). • Standard Life UK Smaller Companies Fund named ‘Best UK Small-Cap Equity Fund’ at the 2011 Morning Star UK Fund Awards • Standard Life Investments’ Global Absolute Return Strategies Fund won ‘Best Absolute Return Fund’ at the Professional
• Eight Insurance and Financial Communicators Association awards, recognising excellence in marketing and communications creativity, design and writing in the North American insurance and financial services industry
• Environics Adviser Perception Study ranked Standard Life Canada second in advisor perception of overall company and segregated funds division, and ranked first amongst top-selling advisers
One of our core values is to deliver exceptional customer service and always put our customers at the heart of our thinking. In 2011, we actively managed our customer relationships which led to very good customer retention in our offshore bond business and Germany. In Hong Kong we developed additional web-enabled services which will add further customer value to our propositions.
• In India, HDFC Life won the ‘Best Product Innovation Award 2011 – Life Insurance’ for the HDFC SL Crest product 48 Standard Life
1.7 Our people “To become a more customer-focused business we need to develop and harness the talents of our people, working closely with them to make change happen. We believe that highly engaged people are more productive and have a positive effect on profit and shareholder value. So, in 2011, we focused on getting great employee insight and using this to help strengthen the relationship that each individual employee has with our business. During 2012 we will continue to focus on increasing leadership capability, ensuring our leaders are equipped to help our people grow and fulfil their potential.” Sandy Begbie, Group People and Operations Director
In April 2011 we introduced a new approach to measuring employee satisfaction with the launch of the ‘InterAction’ survey. ‘InterAction’ measures how engaged employees are and how enabled employees feel to do their job to the best of their ability. 86% of our employees worldwide participated and we used this insight to develop clear action plans at both Group and business unit levels to address the key themes identified.
We have embarked on a group-wide programme of activity to bring to life what we stand for as an organisation. By June 2011 over 600 employees across Standard Life Group had come together at sessions in all locations to share their stories of what it looks and feels like when we do the right thing for our customers, collaborate with each other and care about our stakeholders in all of our geographies and communities. We have used our understanding of what we stand for as an organisation to help define what underpins how we do things in Standard Life; ‘We Care, We Do The Right Thing, We Come Together, We Get On With It and We Celebrate’.
A priority is to ensure that we have the depth and flexibility of talent we need for the future, as well as powerful and consistent leadership at all levels of the business. In 2011 we made further progress in moving towards these objectives by including more people and more roles than ever before in our talent review. We have continued to increase the ratio of internal appointments into senior roles as a result of previous investment in building talent pipelines.
All our executives have completed 360 degree feedback against our leadership framework and have established individual development plans to support their development as leaders. Through these sessions, and other activities across the Group, all people leaders are expected to establish a development plan to build and develop their leadership and support delivery of personal objectives.
We are continuing to attract and recruit high calibre graduate entrants across the range of our programmes, with 19 new graduates and 10 interns joining us in 2011.
The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as endorsed by the European Union (EU). However, our Board believes that non-Generally Accepted Accounting Principles (GAAP) measures, which have been used in the Business review, are useful for both management and investors and make it easier to understand our Group’s performance.
The most important non-GAAP measures in the Business review include operating profit, European Embedded Value (EEV) operating profit and EEV operating capital and cash generation. All non-GAAP measures should be read together with the Group’s IFRS summary consolidated income statement, summary consolidated statement of financial position and summary consolidated statement of cash flows, which are presented in the Group financial statements section of this report.
The financial results are prepared on both an IFRS basis and an EEV basis. All EU-listed companies are required to prepare consolidated financial statements using IFRS issued by the International Accounting Standards Board (IASB) as endorsed by the EU. EEV measures the net assets of the business plus the present value of future profits expected to arise from in-force long-term life assurance and pensions policies. The IFRS financial results in Section 1.2 of the Business review and in the IFRS financial statements section of this report have been prepared on the basis of the IFRS accounting policies in the Group’s Annual Report and Accounts 2011. The EEV basis has been determined in accordance with the EEV Principles and Guidance issued in May 2004 and October 2005 by the Chief Financial Officers (CFO) Forum. The CFO Forum represents the chief financial officers of major European insurers, including Standard Life. EEV methodology has been applied to covered business, which mainly comprises the Group’s long-term savings business. Non-covered business is reported on an IFRS basis. The EEV financial results in Section 1.2 of the Business review and in the EEV financial information section of this report have been prepared in accordance with the EEV methodology applied by the Group in Note 17 of the EEV financial information section of this report for 2011, and in the relevant EEV methodology notes included in the Annual Report and Accounts 2010 in respect of the comparative period.
This document may contain ‘forward-looking statements’ about certain of the Standard Life Group’s current plans, goals and expectations relating to future financial conditions, performance, results, strategy and objectives. Statements containing the words: ‘believes’, ‘intends’, ‘targets’, ‘estimates’, ‘expects’, ‘plans’, ‘seeks’ and ‘anticipates’ and any other words of similar meaning are forward-looking. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which may be beyond the Group’s control. As a result, the Group’s actual financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward-looking statements, and persons receiving this document should not place undue reliance on forward-looking statements. The Standard Life Group undertakes no obligation to update any of the forward-looking statements in this document or any other forward-looking statements it may make.
Change in liability for third party interest in consolidated funds 103 443
Tax (expense)/credit attributable to: Total tax expense attributable to equity holders’ profits (32) (98)
The Group’s healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 and has been classified as a discontinued operation. The analysis of operating profit presented for the years ended 31 December 2011 and 31 December 2010 include continuing operations only. 2 As described in Note 2.1 – Accounting policies – (b) Operating profit, the Group has amended its operating profit accounting policy. As a result, £30m has been reallocated from other operating profit adjustments to short-term fluctuations in investment return and economic assumption changes for the year ended 31 December 2010.
Total comprehensive income for the year - - - 237 (34) 203 48 251
Shares acquired by employee trusts - (7) - - - (7) - (7)
Reserves credit for employee share-based payment schemes - - - - 18 18 - 18
Shares distributed by employee trusts - 10 - (10) - - - -
Transfer between reserves on disposal of subsidiaries - - - 121 (121) - - -
There has been a reallocation between cash and cash equivalents and debt securities of £1,629m at 31 December 2010, which has impacted the statement of cash flows. Refer to Note 2.1 – Accounting policies – (a) Basis of preparation. 2 There has been a reallocation between disposal of subsidiaries net of cash disposed and change in operating assets of £150m at 31 December 2010.
It should be noted that the Group’s accounting policy for cash and cash equivalents states that cash and cash equivalents include any highly liquid investments with less than three months to maturity from the date of acquisition. Any debt instruments with a maturity date greater than three months from the date of acquisition are classified as debt securities. Following a review of shortdated debt instruments during the year, there has been a reallocation from cash and cash equivalents to debt securities (included in investment securities) at 31 December 2010 of £1,629m. There has been no change to total assets or net assets.
• Amendment to IFRIC 14 Prepayment of a Minimum Funding Requirement
Operating profit also excludes the impact of the following items: • Restructuring costs and significant corporate transaction expenses
• Profit or loss arising on the disposal of a subsidiary, joint venture or associate
• Items which are one-off in nature and outside the control of management and which, due to their size or nature, are not indicative of the long-term operating performance of the Group
The Group has amended its operating profit accounting policy in respect of the treatment of the volatility arising from changes in insurance and investment contract liabilities driven by corresponding changes in tax provisions. Previously, such volatility was excluded from operating profit. Under the revised policy, volatility in relation to insurance contract liabilities is excluded from operating profit, only to the extent that it relates to short-term fluctuations in investment return and economic assumption changes or arises from items which are one-off in nature and outside the control of management. The purpose of this amendment is to improve consistency with the underlying principles of the Group’s operating profit methodology. The change to the operating profit policy did not have a significant impact on the operating profit reported for the year ended 31 December 2010.
International The businesses included in this reportable segment offer a range of life and pension products and comprise wholly owned operations in Ireland, Germany, Austria and Hong Kong and investments in joint ventures in India and China.
Other This reportable segment primarily includes the group corporate centre and related activities.
Profit/(loss) attributable to equity holders of Standard Life plc 135 92 101 19 (49) - 298
Operating profit/(loss) before tax 220 125 187 40 (28) - 544
Depreciation of property, plant and equipment - 1 2 1 11 - 15
Included in the international reporting segment, total net revenue, excluding inter-segment revenue, for Germany, Austria, Ireland and Asia is £925m
Tax attributable to policyholders’ returns 385 - - 16 (1) - 400
Tax attributable to equity holders’ profits 27 27 43 8 (7) - 98
Profit attributable to non-controlling interests from continuing operations (61) - - - - - (61)
Tax attributable to equity holders’ profits from continuing operations 27 27 43 8 (7) - 98
Non-operating (profit)/loss before tax from continuing operations (33) (3) (78) 3 26 - (85)
Operating profit/(loss) before tax from continuing operations 234 103 110 15 (37) - 425
In addition to interest expense of £19m (2010: £17m), interest expense of £116m (2010: £113m) was incurred in respect of subordinated liabilities and £42m (2010: £40m) in respect of deposits from reinsurers. For the year ended 31 December 2011, total interest expense is £177m (2010: £170m).
Total restructuring costs from continuing operations incurred during the year were £72m (2010: £72m). These include £59m (2010: £64m) of expenses in relation to the Solvency 2 programme and a number of local business unit transformation programmes. Of the restructuring costs from continuing operations, £70m (2010: £71m) is adjusted when determining operating profit before tax, with the remaining £2m (2010: £1m) incurred by the Heritage With Profits Fund in relation to Solvency 2.
The share of tax of associates and joint ventures is £23m (2010: £4m) and is included in profit before tax in the summary consolidated income statement in ‘Share of profit from associates and joint ventures’.
Basic earnings per share is calculated by dividing profit attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the year. The weighted average number of ordinary shares outstanding during the year is the weighted average number of shares in issue less the weighted average number of shares owned by employee share trusts that have not vested unconditionally to employees.
Basic earnings per share from discontinued operations (pence per share) - 0.9
Diluted earnings per share from discontinued operations (pence per share) - 0.9
Earnings per share is also calculated based on operating profit as well as on the profit attributable to equity holders. The Directors believe that earnings per share based on operating profit provides a better indication of the operating business performance of the Group.
Operating profit before tax from continuing operations 544 23.6 425 19.0
Short-term fluctuations in investment return and economic assumption changes1 (139) (6.0) 157 7.0
As described in Note 2.1 – Accounting policies – (b) Operating profit, the Group has amended its operating profit accounting policy. As a result, £30m was reallocated from other operating profit adjustments to short-term fluctuations in investment return and economic assumption changes for the year ended 31 December 2010.
Short-term fluctuations in investment return and economic assumption changes1 (139) (6.0) 157 6.9
Profit attributable to equity holders of Standard Life plc 298 12.9 432 19.2
The Group focuses on operating profit as a measure of its performance which incorporates expected returns on investments backing equity holder funds with a consistent allowance for corresponding expected movements in equity holder liabilities. The methodology used in operating profit is outlined below.
The principal assumptions, as set at the start of the year, in respect of gross investment returns underlying the calculation of the expected investment return for equity securities and property are as follows: In respect of debt securities, the expected rate of return is determined based on the average prospective yields for the debt securities actually held or, in respect of the Canadian operations, is determined by the Appointed Actuary in Canada.
2.7 Dividends The Company paid a final dividend of 8.65 pence per share (final 2009: 8.09 pence) totalling £197m in respect of the year ended 31 December 2010 on 27 May 2011 (final 2009: £180m) and an interim dividend of 4.60 pence per share (interim 2010: 4.35 pence) totalling £106m (interim 2010: £98m) in respect of the year ended 31 December 2011 on 18 November 2011.
The option to receive dividend entitlement under the Scrip scheme was removed and has been replaced with a dividend reinvestment plan commencing with the final dividend for 2011. Investors who took part in the Scrip scheme received their dividend entitlement in the form of shares rather than cash and the distribution under the Scrip scheme was recorded as an appropriation of retained earnings. Dividends paid during the year ended 31 December 2011 comprise £141m (2010: £92m) settled by the issue of shares under the Scrip scheme and £162m paid in cash (2010: £186m).
The movement in the issued ordinary share capital of the Company during the year was: Number £m Number £m
Shares issued in lieu of cash dividends 70,138,459 7 44,854,401 4
Shares issued in respect of share incentive plans 507,364 - 566,626 -
Shares issued in respect of bonus issue - - 583 -
During the year ended 31 December 2011, 70,138,459 (2010: 44,854,401) shares have been issued in respect of dividends paid in the period under the Scrip dividend scheme.
The Group operates share incentive plans, allowing employees the opportunity to buy shares from their salary each month. The maximum purchase that an employee can make in any one year is £1,500. The Group offers to match the first £25 of shares bought each month. During the year ended 31 December 2011, the Company allotted 507,364 (2010: 566,626) ordinary shares to Group employees under the share incentive plans.
The Employee Share Trust (EST) purchases and holds shares in the Company for delivery to employees under various employee share schemes. Shares purchased by the EST are presented as a deduction from equity in the summary consolidated statement of financial position. Share-based liabilities to employees may also be settled by the issue of new shares.
Shares held by trusts also include shares held by the Unclaimed Asset Trust (UAT). The shares held by the UAT are those not yet claimed by the eligible members of The Standard Life Assurance Company (SLAC) following its demutualisation on 10 July 2006.
The movement in insurance contract liabilities, participating investment contract liabilities and reinsurance contracts during the year was as follows: Participating insurance contract liabilities
Movements attributable to discontinued healthcare operations - (147) - (147) 4 (143)
The change in non-participating investment contract liabilities was as follows: Initial charges and reduced allocations (7) (9)
The change in the unallocated divisible surplus (UDS) was as follows: At 1 January
In 2011, a credit from past service costs of £64m (2010: £59m) was recognised as a result of a change in the basis of future pension discretionary increases in the UK staff pension scheme.
(b) Analysis of amounts recognised in the summary consolidated statement of financial position
Present value of unfunded obligation - (68) - (68) - (56) - (56)
Adjustment for unrecognised past service costs - (5) - (5) - (6) - (6)
Under the guidance contained in IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, when measuring the defined benefit asset, £209m (2010: £nil) of the surplus is not considered recoverable.
The principal economic assumptions used in determining pension benefit obligation for the Group’s plans are as follows: 2011 2010 UK Canada Ireland UK Canada Ireland % % % % % %
As at 31 December 2011, the Group had committed the following unrecognised financial instruments to customers and third parties: Commitments to extend credit: Original term to maturity of one year or less 109 51
The Group has entered into commercial non-cancellable leases on certain property, plant and equipment where it is not in the best interest of the Group to purchase these assets. Such leases have varying terms, escalation clauses and renewal rights.
Transactions with related parties carried out by the Group were as follows: Sale to: Purchase from: Transactions with associates presented above relate primarily to the sales and purchases of holdings in investment funds managed by the Group.
In addition to the amounts shown above, the Group’s defined benefit pension schemes have assets of £739m (2010: £655m) invested in investment vehicles managed by the Group.
(b) Transactions with key management personnel and their close family members
All transactions between key management personnel and their close family members and the Group are on commercial terms which are equivalent to those available to all employees of the Group.
During the year ended 31 December 2011, key management personnel and their close family members contributed £4.4m (2010: £1.9m) to products sold by the Group.
Held outside life assurance funds - - 849 849 1,176 2,025 1,029 3,054
Held within life assurance funds - 907 - 907 - 907 - 907
Changes to the valuation of contract liabilities 3,409 2 - 3,411 - 3,411 - 3,411
Exclusion of deferred income 98 248 - 346 (1) 345 - 345 Exclusion of non-qualifying subordinated liabilities - - (54) (54) - (54) - (54)
Equity attributable to ordinary equity holders of Standard Life plc - 879 1,008 1,887 1,220 3,107 796 3,903
Regulatory capital surplus 3,821 1 Capital resources amounting to £34m in respect of other with profits funds are disclosed within the Heritage With Profits Fund column.
2 The Group’s healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 and its capital resources are not, therefore, included in the analysis.
2.14 Capital statement continued Movements in capital The movements in the total capital resources shown in the capital statement are set out below.
Change in assumptions used to measure life assurance contract liabilities and experience differences (24) 3 - (21) (218) (239) - (239)
Change in assumptions used to measure life assurance contract liabilities and experience differences includes a decrease to capital resources as a result of changes in Canadian mortality assumptions. This is primarily due to a change in mortality improvement rates.
Equity holder/inter-fund transfers include the transfer of £68m (2010: £71m) from the HWPF to the Proprietary Business Funds (PBF) in relation to additional expenses charged on German unitised with profits business.
UK regulated life business Standard Life Assurance Limited’s (SLAL) regulatory solvency position is determined using the FSA’s ‘twin peaks’ approach, which requires liabilities to be valued on both a realistic and a regulatory basis. The realistic basis removes some of the margins for prudence included in calculations under the regulatory basis. However, it requires discretionary benefits that are not considered under the regulatory basis, such as final bonuses, to be valued. The extent to which the realistic peak is more onerous than the regulatory peak increases the amount of the Capital Resources Requirements (CRR).
Capital subject to constraints for the UK regulated life business of £4.4bn at 31 December 2011 (2010: £4.4bn) represents capital resources held within long-term business funds, or in relation to other regulated entities, the amount of the CRR.
SLAL has issued subordinated loans to the Company, which SLAL treats as capital for regulatory purposes. The Standard Life Assurance Company of Canada has issued subordinated liabilities of £253m (2010: £257m) to the Company. During the year ended 31 December 2010, Standard Life Investments Limited repaid the subordinated liabilities of £15m that it had issued. At Group level only subordinated liabilities issued to external parties are included in the Group’s capital resources.
2.16 Investments in associates and joint ventures During the year ended 31 December 2011, two sub-funds of Standard Life Investments (Global Liquidity Funds) plc (GLF), the Sterling Liquidity Fund and Euro Liquidity Fund, were restructured. The majority of the external holding in these funds transferred to a third party. The remaining assets were transferred into two new GLF sub-funds being the GBP VNAV Liquidity Fund and the Euro VNAV Liquidity Fund, which are subsidiaries of the Group. As a result of the restructure, the GLF sub-funds are no longer associates of the Group.
2.17 Subordinated liabilities Included in subordinated liabilities at 31 December 2010 was €750,000,000 (£660,000,000) Euro denominated 6.375% fixed/floating rate subordinated guaranteed bonds due 2022 (the Bonds). On 12 September 2011, the Company announced that it had agreed to purchase €687,220,000 of the Bonds at a purchase price of €10,200 per €10,000. After settlement on 14 September 2011, and at 31 December 2011, €62,780,000 in aggregate principal amount of the Bonds remain outstanding. The maturity date for the remaining Euro denominated bonds is 12 July 2022 and all outstanding obligations under the instruments become immediately due and payable on this date.
2 Exchange differences primarily relate to Canada (£30m) and India (£24m).
3.1 Basis of preparation The European Embedded Value (EEV) basis results have been prepared in accordance with the EEV Principles and Guidance issued in May 2004 by the CFO Forum of European Insurance Companies and the Additional Guidance issued in October 2005 and the Interim Transitional Guidance issued in September 2011. EEV reports the value of business in-force based on a set of best estimate assumptions, allowing for the impact of uncertainty inherent in future assumptions, the cost of holding required capital and the value of free surplus. The total profit recognised over the lifetime of a policy is the same as under International Financial Reporting Standards (IFRS) but the timing of recognition of profits is different.
A detailed description of EEV methodology is provided in Note 3.17. There have been no significant changes to EEV methodology from that adopted in the previous reporting period, except as noted below.
The Hong Kong EEV results for 31 December 2010 were calculated on a 'risk neutral' approach, whereby projected investment returns and discount rates were based on risk free rates. For the results for 31 December 2011, Hong Kong is using a similar approach to that used in the rest of the Group's wholly owned businesses. This involves projecting investment returns on real world assumptions and setting a risk discount rate that removes the market risk above the risk free rate. Principal economic assumptions for investment returns and risk discount rates are provided in Note 3.13 – Principal economic assumptions – deterministic calculations – covered business. Due to the calibration methodology for setting the risk discount rate, there is no material impact on the results produced on the previous 'risk neutral' approach. Therefore the comparative results for 31 December 2010 have not been restated. The India and China joint venture (JV) businesses are still calculated on a 'risk neutral' approach.
The 2011 Budget statement also announced the Government's intention to make further reductions in the rate of UK corporation tax in 2013 and 2014. However, these reductions are subject to legislation being enacted in future years and, in accordance with our previous approach, have not been included within the best estimate assumptions as at 31 December 2011.
Events after the reporting period A judgment handed down on 1 February 2012 in the Commercial Court in London found in favour of SLAL in its claim of approximately £100m against the insurers of its 2008/2009 professional indemnity policy in relation to the Standard Life Pension Sterling Fund. The insurers are appealing the judgment and the appeal is unlikely to be heard before autumn 2012. No recoveries in respect of the claim are recognised in the income statement for the year ended 31 December 2011. The recognition of the benefit of any recoveries in respect of the claim will depend on the timing and outcome of the appeal.
UK Canada International HWPF TVOG Total 12 months to 31 December 2010 Notes £m £m £m £m £m
Contribution from in-force business: Expected return on existing business 237 142 43 - 422
EEV operating profit before tax for covered business is calculated using the expected long-term investment return which is based on opening economic assumptions. Investment variances, the effect of economic assumption changes and other EEV non-operating items are excluded from EEV operating profit and are reported as part of total EEV profit.
The negative £6m expected return on free surplus in the UK reflects the relatively low expected returns currently available on cash assets within free surplus, along with a higher expected increase in the value of subordinated liabilities relative to the expected return on the assets backing subordinated liabilities. The improvement over the £20m UK loss reported in 2010 mainly reflects the impact of a change in investment strategy in the assets that are backing the subordinated liabilities together with the impact on expected return of the completion of a tender for a tranche of subordinated liabilities in 2011.
Effect of economic assumption changes was an overall loss of £500m. The main cause of the loss was higher TVOG within the HWPF of negative £251m and within the German With Profit Fund of negative £30m, which were largely due to lower risk free rates and higher swaption volatility. Reductions in risk free rates led to losses from lower future assumed investment returns of £615m in the UK and £161m in Canada, partly offset by a profit of £471m from reduced risk discount rates, which is explained in Note 3.13 – Principal economic assumptions – deterministic calculations – covered business. Changes to the long term corporation tax rates in the UK, Canada and Germany, along with the impact of the temporary levy on pension business in Ireland, resulted in an overall profit of £97m. Refer to Note 3.1 – Basis of preparation. Increases in the market valuation of the Canada subordinated liabilities created a loss within covered business of £59m, but this is offset within the overall Group EEV profit by a consolidation adjustment for different accounting bases.
3.2 Segmental analysis – covered business continued (b) Segmental analysis of movements in EEV
Aggregate tax effect of items not recognised in income statement - 12 - - 12
Actuarial losses on defined benefit pension schemes - (20) (9) - (29)
3.3 Analysis of new business contribution The following table sets out the premium volumes and contribution from new business written by the life and related businesses, consistent with the definition of new business set out in Note 3.17 – EEV methodology.
PVNBP margins are calculated as the ratio of NBC to PVNBP and are based on the underlying unrounded numbers.
Management action that reduced future tax payable on profits from overseas branches resulted in positive tax variances of £36m in the UK and £15m in International. Tax variances in Canada represent the expected release of tax provisions within the actuarial reserves along with operating tax variances.
Other UK variances of £18m include a £50m profit from the impact of a management action to reduce current and future investment expenses; a £28m loss from an agreement to fund future recharges to non-covered businesses; various modelling improvements which generated a profit of £13m; a £7m cost from the completion of a tender for a tranche of subordinated liabilities; with £10m of other losses mainly arising from the impact of reserve changes and other reconciliations.
For the 12 months to 31 December 2010, other UK variances of £43m include a £28m gain from the impact of investment strategy changes in the assets backing annuity business; a £17m loss from an agreement to fund future recharges to non-covered businesses; various modelling improvements which generated a profit of £31m; with £1m of other profits mainly arising from the impact of reserve changes and other reconciliations and management actions.
Canada lapse assumption gains of £34m mainly arise from improved persistency within pensions business.
Canada expense assumption profits of £40m include a £31m profit from mutual fund and segregated fund business and £15m of gains from group insurance business.
Canada expense assumption profits of £68m mainly arise from improved expenses for group savings and retirement products, reflecting the significant growth in business volumes during 2010. The other assumption changes in Canada include a £37m loss from a reduction in expected fee income in our group savings and retirement products.
UK non-covered primarily comprises UK non-covered mutual funds business and the non-covered UK pension scheme. The Group’s healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 and has therefore been classified as a discontinued operation for the year ended 31 December 2010.
business 12 months to 31 December 2011 £m £m £m £m £m
Transfer back of net worth from covered business (19) 41 - 5 27
business 12 months to 31 December 2010 £m £m £m £m £m
Transfer back of net worth from covered business (28) 52 - 4 28
Global investment management non-covered business profits are included in EEV on a look through basis. This means that the profits from global investment management which are generated from life and pensions business are allocated to covered business. Therefore, the difference between third party non-covered business EEV operating profit before tax of £69m (2010: £33m) and operating profit for the global investment management business of £125m (2010: £103m) is the profit allocated to covered business.
Third party related covered business EEV operating profit before tax 32 33
Total third party business EEV operating profit before tax 101 66
The increase in the proportion of global investment management EEV operating profit before tax generated from third parties is due to new business flows into higher margin products, a refinement of cost allocations and the fee received following the transfer of money market funds in the first half of 2011.
Canada non-life subsidiaries are included within the Canada segment of the IFRS financial statements.
Total comprehensive income for the period attributable to equity holders 252 1,085
Present value of in-force life and pensions business net of cost of capital (3,840) (3,838)
Net assets attributable to equity holders on an IFRS basis 3,961 3,903
The movement in Canada marked to market adjustment reflects the impact of the adoption of IFRS reporting on EEV net worth for the Canada business. This change has not had a significant impact on the total Canada EEV results (net worth and present value of in-force life and pensions business net of cost of capital). Refer to Note 3.1 – Basis of preparation.
Expected return transfer to net worth 684 (85) 599 (599) -
Transfer back of surplus to Standard Life Investments (41) - (41) - (41)
Transfer back of mutual funds net worth 14 - 14 - 14
Actuarial losses on defined benefit pension schemes (34) - (34) - (34)
Transfer back of surplus to Standard Life Investments (52) - (52) - (52)
The adjustment to opening EEV net worth and PVIF net of cost of capital represents a change to the presentation of certain Canada GAAP guarantee reserves. Prior to the results for the 12 months to 31 December 2010, these reserves were replaced with a time value of options and guarantees (TVOG) within the Group's EEV results. In order to better align the Group's EEV net worth movement and the Group's primary measure of performance, Group operating profit, these reserves are now included within the EEV net worth. Total EEV operating profit for the 12 months to 31 December 2010 is unaffected by this adjustment.
Transfer back of surplus to Standard Life Investments (47) - (47) - (47)
Contribution from in-force business: Expected return on existing business - 33 33 75 108
Expected return transfer to net worth 168 (85) 83 (83) -
Transfer back of mutual funds net worth (5) - (5) - (5)
Actuarial losses on defined benefit pension schemes (42) - (42) - (42)
Contribution from in-force business: Expected return on existing business - 30 30 75 105
The adjustment to opening EEV net worth and PVIF net of cost of capital represents a change to the presentation of certain Canada GAAP guarantee reserves. Prior to the results for the 12 months to 31 December 2010, these reserves were replaced with a TVOG within the Group's EEV results. In order to better align the Group's EEV net worth movement and the Group's primary measure of performance, Group operating profit, these reserves are now included within the EEV net worth. Total EEV operating profit for the 12 months to 31 December 2010 is unaffected by this adjustment.
Actuarial losses on defined benefit pension schemes (9) - (9) - (9)
The £24m increase in TVOG within International mainly reflects the higher cost of guarantees for post demutualisation business in Germany.
Subordinated liabilities within EEV covered business are based on the market value of the debt. The free surplus shown in Note 3.2(c) – Segmental analysis – Covered business – Segmental analysis of opening and closing EEV is net of these liabilities.
The impact of these movements, other than those related to the tender, are reflected in EEV non-operating profit in UK and Canada as shown in Note 3.2(a) – Segmental EEV income statement. For Canada, this has been offset by the Group EEV consolidation adjustment in respect of Canadian subordinated liability, as shown in the EEV consolidated income statement.
3.12 PVIF monetisation profile The following tables show the PVIF emergence on a discounted and undiscounted basis along with a reconciliation to the total closing PVIF and the PVIF net of cost of capital impact from new business.
PVIF Cash emerging during years (£m) At 31 December 2011 £m 1-5 6-10 11-15 16-20 20+
As outlined in Note 3.1 – Basis of preparation, the Group’s EEV results do not include any allowance for changes to the reserving or required capital bases anticipated under future reporting or regulatory regimes. The PVIF monetisation profile therefore excludes changes anticipated under Solvency 2. Similarly, no allowance has been made for forthcoming changes to the UK life insurance tax regime. The deferred tax position has been calculated using the legislation in force at 31 December 2011.
Excludes corporate bond returns on annuities. For annuities in UK equity holder owned funds, the overall investment return, after allowing for assumed defaults, is 4.20% for annuities that are level or subject to fixed escalations and 2.73% for annuities where escalations are linked to a price index. 4 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 a mixture of government and corporate bonds. 5 0.000% in 2012. The rate in subsequent years is based on a moving 30-year bond yield less a 3% deduction.
5 0.691% in 2011. The rate in subsequent years is based on a moving 30-year bond yield less a 3% deduction.
The Hong Kong EEV results for 31 December 2010 are calculated on a risk neutral approach, whereby projected investment returns and discount rates are based on risk free rates. Refer to Note 3.13(d) – Principal economic assumptions – deterministic calculations – covered business – International – Asia for more detail.
Risk margin before cost of capital adjustment: Risk margin after cost of capital adjustment 4.50 2.70 4.50 2.00 1.30 2.30 3.10
Using the value of in-force business as weights, the average risk discount rates for UK and Europe were 5.55% and 3.51% respectively.
During 2011, separate risk discount rate risk margins were developed for the UK, the Ireland offshore business, and the combined German and Ireland domestic business. Previously, average risk margins had been used across all four businesses. The main impact was to decrease the risk margins used for the combined German and Ireland domestic in-force business, reflecting in particular their lower exposure to market risk for the HWPF and lower non-market risk for equity holder owned funds. Corresponding increases were applied to the separate UK risk margins.
As part of the adoption of IFRS in Canada from 2011, the opening risk discount rate was changed from 6.89% to 6.79%. The effect of this change is included within the overall impact of the adoption of IFRS in Canada. Refer to Note 3.1 – Basis of preparation.
The impact of the other changes in risk discount rates has been included in the effect of economic assumption changes shown in Note 3.2(a) – Segmental EEV income statement. The amounts within these totals that relate to the changes in risk discount rates are for UK: profit £295m, for Canada: loss £18m, and for International: profit £194m. These profits reflect the benefit of reduced risk discount rates which are mainly driven by reductions in risk free rates.
As the new business contribution is calculated using start of period economic assumptions, the risk free rates shown here represent market yields at 31 December
Using the value of in-force for new business as weights, the average risk discount rates for UK and Europe were 6.77% and 6.31% respectively. 5 The Hong Kong EEV results for 31 December 2010 are calculated on a risk neutral approach, whereby projected investment returns and discount rates are based on risk free rates. Refer to Note 3.13(d) – Principal economic assumptions – deterministic calculations – covered business – International – Asia for more detail.
As a result of this risk neutral approach there is no requirement to hold a market risk margin within the risk discount rate.
The implied volatility is that required in order that the price of the option calculated via the Black-Scholes Formula equals the market price of that option.
The model equity-implied volatilities are set out in the following table: UK equities Term (years) 31 December 2011 31 December 2010
Property-implied volatilities The implied volatilities have been set as best estimate levels of volatility based on historic data.
Note 3.10 – Time value of options and guarantees (TVOG) also shows the value of TVOG in Canada and International, which are in addition to the HWPF TVOG. Where material, these values are also calculated using ESG similar to that used for the HWPF TVOG calculation.
3.15 Foreign exchange The principal exchange rates applied are: Local currency: £
• 10% decrease in lapse rates (a 10% sensitivity on a base lapse assumption of 5% p.a. would represent a lapse rate of 4.5% p.a.)
• 5% decrease in both mortality and morbidity rates for annuitant and non-annuitant policies
Fall in equity market values by 10% (158) (30) (24) (19) (231)
The sensitivity of the Canada embedded value as shown above includes the effect of changes in the market value of the subordinated liability. Whilst Group EEV is adjusted for the different subordinated liability valuation bases used for covered and non-covered business as explained in Note 3.17 – EEV methodology, the impact of these sensitivities on the Group EEV consolidation adjustment is not included in this sensitivity analysis.
The demographic sensitivities shown above represent a standard change to the assumptions for all products. Different products will be more or less sensitive to the change, and impacts may partially offset one another.
The Group’s covered business is its life assurance and pensions businesses in the UK, Canada and International (Germany including Austria, Ireland, Hong Kong and the India and China JV businesses), as well as the current and future profits and losses from Standard Life Investments arising on its management of funds relating to the life and pensions businesses.
UK covered business also includes: • Non-insured self invested personal pension (SIPP) business
• The Group’s offshore bond business, which is sold by Standard Life International Limited (SLIL)
Under the EEV Principles and Guidance we are required to provide business classifications which are consistent with those used for the primary statements. In the IFRS financial statements the Group’s reportable segments have been identified in accordance with the way in which the Group is structured and managed, as required under IFRS 8. The EEV segmentation has been prepared in a consistent manner, whilst also distinguishing between covered and non-covered business. HWPF TVOG is disclosed separately in EEV, as explained in Note 3.2(a) – Segmental analysis – covered business – Segmental EEV income statement.
The value of future equity holders’ cash flows is calculated for each material business unit on an after-tax basis, projected using best estimate future assumptions as described in the EEV methodology.
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.
Separate risk discount rates have been calculated for in-force and new business and for the principal geographic segments (UK, Germany, Ireland domestic, Ireland offshore, Canada and Hong Kong). 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 inter-fund arrangements) and on policies that are in equity holder owned funds. For HWPF policies, there is a significant interfund arrangement in respect of mortality surpluses on annuities. The HWPF risk margin anticipates diversification benefits including the annuity mortality risk, since the overall capital structure also benefits from this diversification.
Market risk margins are reviewed at each valuation date, allowing for changes in risk profile arising from movements in asset mix. Non-market risk margins are reviewed in detail once a year.
We have set required capital to be the higher of regulatory capital and our own internally assessed risk-based capital requirement. In determining the required capital for the purposes of assessing EEV, the Group excludes any capital which is provided by the existing surplus in the HWPF, as this capital is provided by policyholders. Any required capital in excess of that provided by the existing surplus in the HWPF would need to be provided by assets in the equity holders’ funds. As part of the annual assessment, projections of the expected surplus in the HWPF, on best estimate assumptions, are carried out to assess whether this is sufficient to cover the level of required capital in respect of the HWPF. Required capital used in the EEV is also net of any capital that is assumed to be available from subordinated liabilities.
TVOG represents the potential additional cost to equity holders where a financial option exists which affects policyholder benefits and is exercisable at the option of the policyholder.
• Each projection allows for the gradual release of the residual estate over time to policyholders where there are sufficient funds
The Group’s offshore business, which is sold by SLIL, is included within International results but has the same other economic assumptions as UK covered business.
Global investment management expenses are also allowed for, and the assumptions for these reflect the actual investment expenses of Standard Life Investments in providing global investment management services to the life and pensions businesses rather than the investment fees actually charged.
Assumptions are made in respect of future levels of mortality, morbidity, premium terminations, option take-up, surrenders and withdrawals. The assumptions reflect our best estimates of the likely future experience, and are based on recent experience and relevant industry data, where available.
For the UK, classification as new or existing business is determined using the approach used for the published new business figures as follows: • New recurrent single premium business is classified as new regular premium business to the extent that it is deemed likely to renew
• Pensions vesting into annuity contracts under existing group defined benefits contracts are not included as new business
• Products substituted due to the exercise of standard contract terms are not deemed to be new business
For Ireland, new business is determined as follows: • New contracts written during the period are included as new business
• New premiums on recurrent single premium contracts are included as new business
For Canada, business is deemed to be new business if a contract has been issued during the reporting period. NBC 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.
For the Asia businesses, new business is defined as that arising from the sale of new contracts during the reporting period. The value of new business includes the value of expected renewals on those new contracts.
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 approach is annuity business in the UK and Ireland where, to ensure consistency between the economic assumptions used in NBC 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, and the asset allocations are those used in the pricing basis.
Investment for transformation and growth (53) (31) (36) (12) (5) - (137)
India and China JV businesses - - - 2 - - 2
Operating profit/(loss) after tax from continuing operations 204 95 156 32 (30) - 457
Tax on non-operating items 26 1 19 3 6 - 55
IFRS profit/(loss) after tax attributable to equity holders 135 92 101 19 (49) - 298
India and China JV businesses - - - (23) - - (23)
IFRS profit/(loss) after tax attributable to equity holders 260 79 145 4 (56) - 432
EEV operating profit after tax from continuing operations 346 244 78 56 - 724
Tax on EEV operating profit (117) (64) (21) (47) - (249)
EEV operating profit/(loss) after tax from continuing operations 311 186 72 (31) - 538 24
EEV non-operating profit/(loss) after tax and EEV profit after tax from discontinued operations 250 (33) 21 2 38 278 12
Operating profit/(loss) before tax from continuing operations 220 125 187 40 (28) 544
Tax on EEV operating profit (16) (30) (31) (8) (2) (87)
Operating profit/(loss) after tax from continuing operations 204 95 156 32 (30) 457
Impact of different treatment of assets and actuarial reserves - - (11) 4 - (7)
DAC and DIR1, intangibles, tax and other 11 - 11 (34) - (12)
EEV operating capital and cash generation from continuing operations 251 54 158 5 (30) 438
UK Investment management Canada International Other Total 2010 £m £m £m £m £m £m
Tax on EEV operating profit (36) (27) (20) (8) 2 (89)
DAC and DIR1, intangibles, tax and other (6) - 12 (41) - (35)
Look through to investment management 47 (52) 3 2 - -
EEV operating profit/(loss) after tax from continuing operations 302 24 183 64 (35) 538
Group assets under administration (summary) 12 months ended 31 December 2011
Closing AUA at 31 Dec 2011 £bn £bn £bn £bn £bn £bn
Standard Life Investments third party2 71.6 12.9 (8.6) 4.3 (4.1) 71.8
Standard Life Wealth has been disclosed separately from Individual SIPP for the first time. The 2010 comparatives have not been restated.
In order to be consistent with the presentation of new business information, certain products are included in both life and pensions AUA and investment operations.
Group assets under administration managed by: Standard Life Group entities 164.0 163.3
Other third party managers 32.8 35.1 1 Standard Life Wealth has been disclosed separately from Individual SIPP for the first time. The 2010 comparatives have not been restated.
4.4 Group assets under administration and net flows continued Long-term savings operations net flows (regulatory basis) 12 months ended 31 December 2011
The mutual funds net flows are also included within mutual funds net flows in the third party investment operations. In addition, an element of the UK non-insured
SIPP is included within UK mutual funds net flows in the third party investment operations. 2 Standard Life Wealth has been disclosed separately from Individual SIPP for the first time in 2011 and an elimination line has been added to remove the double count between Wealth and Ireland. The 2010 comparatives have not been restated. 3 UK long-term savings include a total net outflow of £2,341m in relation to conventional with profits business (2010: net outflow £1,778m). Of this, a net outflow of £839m is in relation to annuities business (2010: net outflow £855m). 4 Includes net flows in respect of Standard Life's share of the India and China JV businesses.
4.4 Group assets under administration and net flows continued Long-term savings operations net flows (regulatory basis) 15 months ended 31 December 2011
New business gross sales for overseas operations are calculated using average exchange rates. The principal average rates for the twelve months to 31 December
4.5 Analysis of new business continued Investment operations 12 months ended 31 December 2011
Third party insurance contracts (new business classified as insurance products) 24,367 4,959 (2,754) 2,205 112 2,317 26,684
Total third party assets under management 71,613 12,918 (8,638) 4,280 (4,116) 164 71,777
In the 12 months to 31 December 2010, UK mutual funds gross inflows were £3,838m and net inflows were £2,221m.
In the 12 months to 31 December 2010, Canada mutual funds gross inflows were £309m and net outflows were £38m.
International gross inflows include India where, due to the nature of the Indian investment sales market, the new business is shown as the net of sales less redemptions. India cash funds are included as money market and related funds in the table. 5 Due to the nature of the UK money market funds and India cash funds, the flows are calculated using average net client balances. Other movements are derived as the difference between these average net inflows and the movement in the opening and closing AUM. Market and other movements include the transfer of UK money market funds in Global Liquidity Fund, as a result of Standard Life Investments withdrawal from constant net asset value money market funds.
6 Funds denominated in foreign currencies have been translated to Sterling using the closing exchange rates at 31 December 2011. Investment fund flows are translated at average exchange rates. Gains and losses arising from the translation of funds denominated in foreign currencies are included in the market and other movements column. The principal closing exchange rates used as at 31 December 2011 were £1: C$1.58 (31 December 2010: £1: C$1.56) and £1:€1.20 (31 December 2010: £1: €1.17). The principal average exchange rates for the 12 months to 31 December 2011 were £1: C$1.58 (2010: £1: C$1.60) and £1: €1.15 (2010: £1: €1.17).
3 months to 31 Dec 3 months to 31 Dec 3 months to 31 Dec 3 months to 31 Dec 3 months to 31 Dec 3 months to 31 Dec 2010 Change
Joint ventures long-term savings 17 23 24 26 116 136 (15%) (6%)
New business gross sales for overseas operations are calculated using average exchange rates. The principal average rates for the 12 months to 31 December
The PVNBP figures for the three months to 31 December 2011 and to 31 December 2010 exclude the full impact of the year end changes to non-economic assumptions. The effect of changes to year end non-economic assumptions was an increase in total PVNBP of £91m in the final PVNBP results published in the 2011 Preliminary results (2010: increase £171m).
Total third party assets under management 69,096 2,750 (1,910) 840 1,841 2,681 71,777
UK money market funds and India cash funds5 1,591 (307) - (307) (10) (317) 1,274 Total third party assets under management excluding money market and related funds 67,505 3,057 (1,910) 1,147 1,851 2,998 70,503
Included within mutual funds are cash inflows which have also been reflected in UK and Canada mutual funds new business sales and net flows for UK mutual funds, an element of UK non-insured SIPP and Canada mutual funds. 2 In the three months to 31 December 2010 UK mutual funds gross inflows were £1,239m and net inflows were £750m.
In the three months to 31 December 2010 Canada mutual funds gross inflows were £68m and net outflows were £19m.
International gross inflows include India where, due to the nature of the Indian investment sales market, the new business is shown as the net of sales less redemptions. India cash funds are included as money market and related funds in the table. 5 Due to the nature of the UK money market funds and India cash funds, the flows are calculated using average net client balances. Other movements are derived as the difference between these average net inflows and the movement in the opening and closing AUM. 6 Funds denominated in foreign currencies have been translated to Sterling using the closing exchange rates at 31 December 2011. Investment fund flows are translated at average exchange rates. Gains and losses arising from the translation of funds denominated in foreign currencies are included in the market and other movements column. The principal closing exchange rates used as at 31 December 2011 were £1: C$1.58 (30 September 2011: £1: C$1.62) and £1:€1.20 (30 September 2011: £1: €1.16). The principal average exchange rates for the 12 months to 31 December 2011 were £1: C$1.58 (2010: £1: C$1.60) and £1: €1.15 (2010: £1: €1.17).
Investments in associates and joint ventures 15 - 27 13 55
Investments in associates and joint ventures 32 1,557 1,143 117 2,849
The total shareholder exposure to investment property and financial assets of £17.5bn (2010: £17.5bn) includes £11.4bn (2010: £10.8bn) of assets held by non-segregated funds of the Group’s Canada operations. The effective exposure of shareholders to assets of the non-segregated funds in Canada was significantly lower than the nominal level of exposure presented below because changes in the value of assets are typically accompanied by offsetting changes in the value of related liabilities. The shareholder exposure is limited to the net impact on the shareholder surplus and the value of any guarantees which may be triggered.
Investments in associates and joint ventures 15 21 - 11 15 32
Shareholder exposure to debt securities excluding Canada non-segregated funds consists primarily of debt securities backing annuity liabilities and subordinated debt liabilities.
The Group’s exposure to debt securities has been further analysed in the tables below. The high quality of the debt security portfolio has been maintained, with 48% of debt securities rated AAA (2010: 51%) and 95% (2010: 94%) being rated as investment grade.
4.6 Exposure to investment property and financial assets continued Shareholder exposure to debt securities
At 31 December 2011, total shareholder exposure to debt securities was £11,511m (2010: £10,594m), of which 96% (2010: 95%) was rated as investment grade, showing the high quality of the debt securities held.
BBB - - 70 36 54 16 727 517 - - 851 569 Below BBB or not rated 5 - 41 13 309 351 59 78 74 71 488 513 1 Government, Provincial and Municipal includes debt securities which are issued by or explicitly guaranteed by the national government. For Canada, this includes debt securities which are issued by or explicitly guaranteed by the Crown Corporations of the Government of Canada.
Total 1 Government, Provincial and Municipal includes debt securities which are issued by or explicitly guaranteed by the national government. For Canada, this includes debt securities which are issued by or explicitly guaranteed by the Crown Corporations of the Government of Canada.
At 31 December 2011 the shareholder exposure to government securities issued by peripheral European countries was £nil (2010: £15m).
The Canadian mortgage book has an average loan to value of 44% (2010: 45%).
As explained in Note 2.1 – Accounting policies – (a) Basis of preparation, there has been a reallocation between cash and cash equivalents and debt securities at 31 December 2010. The information presented in this Note reflects the position after this reallocation.
Level 2 financial instruments principally include certain government bonds, listed or publicly quoted corporate bonds, commercial paper, certificates of deposit and derivative instruments which are not exchange traded. Corporate bonds have generally been classified as level 2 as the composite price provided by external pricing providers may include, as an input, quotes provided by some banks that are not based on actual transaction prices.
Level 1 Level 2 Level 3 Total 4.8 Total expenses and operating cost base 2011 2010 £m £m
Less: Claims, commissions and changes in provisions and liabilities (6,640) (15,694)
Opening operating cost base in respect of continuing operations 369 229 171 96 58 923
Movement in investing for transformation and growth costs5 20 20 4 - (1) 43
Closing operating cost base in respect of continuing operations 369 229 171 96 58 923
Notional level of inflation that would have impacted the operating cost base during the year. Blended rate used for staff and non-staff costs of 3.3% for 2011
Adjustment to opening cost base as a result of movement in the average exchange rate.
4.9 Investment for transformation and growth 2011 2010 Movement £m £m £m
This document has been published by Standard Life for information only. It is based on our understanding as a