Life and Pensions by country UK 230 16 Canada 168 86 Europe 108 73 Other (9) -
In 2006 EEV operating profit before tax increased by 55% to £614m delivering a return on embedded value of 8.9% (2005: 7.4%). Increased life and pensions new business contribution, improved experience variances and greater profits from our asset management, banking and healthcare businesses more than offset the impact of increased lapse assumptions. On an IFRS basis, pro forma underlying profit before tax increased by 272% to £540m. This increase was driven by higher fee and commission income resulting from increased funds under management, greater profitability in new business and the prior year including £189m in reserve strengthening in the UK life and pensions business. Worldwide insurance sales were up by 47% to £14,263m, on a PVNBP basis, reflecting strong new business performance in UK life and pensions. This substantial improvement in trading performance gives rise to diluted EEV operating earnings per share 49% higher at 20.7p. Diluted underlying earnings per share on an IFRS basis increased by 276% to 21.8p.
In addition to the positive cash flows generated by the life and pensions covered business, the Group has indicative net cash inflows (on an after-tax IFRS basis) from non-covered entities of £18m (2005: outflows of £39m).
Assets Intangible assets and deferred acquisition costs 505 334 Investments in associates and joint ventures 3,237 2,608 Investment property 11,338 9,907 Loans and receivables 12,021 12,496 Investment securities 97,224 87,431 Other assets 4,304 3,033 Cash and cash equivalents 3,962 4,451 Total assets 132,591 120,260
APE sales of SIPP and Drawdown – which now include non-insured SIPP1 – increased by 150% to £395m (2005: £158m). At the end of 2006, total SIPP assets under management amounted to £4.3bn (2005: £1.3bn). This represented an average case size of £169,000 (2005: £147,000), highlighting the attractiveness of this product to high net-worth individuals. A number of our competitors launched SIPP products during the year. Our first-mover advantage, coupled with a superior product and service offering have, however, enabled us to remain a leader in this market.
• PVNBP sales decreased by 6% to £866m • APE sales decreased by 3% to £97m
The H2 column represents all shareholder transactions from the date of demutualisation on 10 July 2006 to 31 December 2006. These figures are reported in more detail in section 2.
UK NBC increased from £27m in 2005 to £167m in 2006, with a strengthening of new business margins on a PVNBP basis from 0.4% to 1.5%. This was due to increased volumes of new business – see section 1.3.1.2 – improvements in underlying product margins, changes in the product mix towards more profitable lines and lower acquisition costs. The largest improvement in profitability was seen in pensions, driven by increased volumes of the SIPP offering.
The figures included within the underlying profit result for the period from 10 July 2006 to 31 December 2006 have been prepared in accordance with the accounting policies described in the financial statements. A reconciliation of the Group’s profit for the period to the underlying profit for the period from 10 July 2006 to 31 December 2006 is given in section 3.
Expenses during the period increased to support the business growth and performance experienced during 2006.
Pro forma period from Pro forma 1 January to 10 July 2006 FY 2005 £m £m
In its mutual company pre-demutualisation, the Group’s life and pensions business was not subject to shareholder tax. The tax attributable to that business is therefore regarded as policyholder tax, and no calculations have been made either to re-analyse that tax between shareholder and policyholder tax, or to compute any additional tax charge or credit (current or deferred taxation) which might arise in the shareholder environment. The tax charge attributable to shareholders in the HFI results solely reflects the tax in the operating subsidiaries that are held outside the HWPF.
Covered business Free surplus 720 742 Required capital 562 560 Net worth 1,282 1,302
10 July 2006 to 31 December 2006 UK Europe Canada Other HWPF TVOG Total £m £m £m £m £m £m
UK lapse variances reflect the excess of life business claims above the long-term assumptions and the provision included in the opening balance sheet.
The positive £5m change for Europe is driven mainly from expense assumption changes in Ireland, offset by lapse assumption changes, also in Ireland.
Cost of capital adjustment – – – – (1.00) Risk margin after cost of capital adjustment 3.50 3.50 3.50 3.50 2.50
Risk discount rates – new business 2.13 Principal economic assumptions – stochastic calculations Characteristics of economic scenario generator used for HWPF TVOG – UK and Europe life and pensions
The correlations between asset class returns are implied by specifying the correlations between the random innovations driving the various stochastic processes within the asset model.
Tax expense attributable to policyholders’ returns 118 239 357 531 Profit before tax attributable to equity holders 52 401 453 83
IFRS Pro forma reconciliation of Group underlying profit to profit for the period For the period from 10 July 2006 to 31 December 2006 47Standard Life
Cash flows from investing activities Net acquisition of property, plant and equipment (275) (63) Net proceeds from disposal of subsidiaries, net of cash disposed – 179 Net investment in associates and joint ventures (9) (26)
Investment management Investment management provides a range of investment products for individuals and institutional customers through a number of different investment vehicles such as mutual funds, limited partnerships and investment trusts. Asset classes offered via these vehicles include equities, bonds, cash and property. Segregated investment mandates are also provided to large investors. Additionally, investment management services are provided to other business segments.
Total revenue from external customers 14,241 252 128 704 24 – 15,349
Segment result for the year 743 1 47 58 (39) – 810
Demutualisation shares 1,463,516,990 146 Shares issued for cash on Initial Public Offering 556,944,945 56 Shares issued in respect of the over-allotment provision 83,541,742 8 Shares issued in respect of employee share compensation plans 2,066,762 – Total allotted and fully paid ordinary shares of £0.10 each 2,106,070,469 210
Non-participating contract liabilities Non-participating insurance contracts 20,202 21,158 Non-participating investment contracts 50,931 40,929
(a) Insurance contract liabilities, participating investment contract liabilities and reinsurance assets (continued) The primary role of the residual estate, as set out in paragraph 4.1 of schedule 1 of the Scheme, is to ensure a prudent amount is retained in the HWPF in respect of any amounts which may be charged to the HWPF in accordance with the Scheme. To the extent that the SLAL Board is satisfied that the residual estate exceeds that required to meet its primary role, the excess residual estate shall be distributed over time in as fair and equitable manner as is practicable as an enhancement to final bonus payable on the remaining HWPF with-profits policies. Therefore it is necessary to recognise the residual estate of the HWPF as part of the participating liabilities. The movement tables above therefore include the movements in this residual estate post-demutualisation.
Income/(expense) not recognised in the income statement during the period 11 (4) 193 23 223 – 223
The MACS are perpetual securities and as such have no fixed redemption date.