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In the UK, NBC increased by 69% to £282m (2006: £167m). This was partly due to the large increase in sales volumes and also improved profit margins. The UK PVNBP margin increased from 1.5% to 2.1% exceeding our target of 2.0% in 2008 and reflecting greater profitability in individual product lines as well as a more favourable product mix. The UK internal rate of return (IRR) increased from 13% in 2006 to 20% for the full product range and reflects increasing capital efficiency.
EEV operating profit Operating profit before tax increased by £267m to £881m (2006: £614m). The EEV operating profit before tax is analysed in the three components reflecting the focus of our business effort (core1, efficiency2 and back book management3) and demonstrates clear achievement of our objectives in all three areas. In particular, the core element of our operating profit has risen from £550m to £791m, efficiency operating profit has increased from £95m to £109m and our back book management return rose from a loss of £31m in 2006 to a loss of £19m in 2007.
Total life and pensions UK life and pensions underlying profit before tax increased by 72% to £395m (2006: £230m). This increase was primarily driven by one off adjustments which included a £136m release of reserves relating to the adoption of PS06/14, a £143m release of statutory reserves in relation to deferred annuity business and £94m of other modelling and assumptions changes, offset by £100m of additional annuity reserves to reflect the strengthening of mortality assumptions. In Canada underlying profit remained steady at £168m, excluding the volatility caused by new Canadian accounting guidelines. Europe underlying profit fell by 42% to £63m mainly due to a decrease, in line with expectations, in profits transferred from the HWPF. The amount of profit transferred between the HWPF and the Proprietary Business Fund is determined by the Scheme of Demutualisation (the Scheme). This was expected to fall in the short-term following the run-off of the income earned on the exceptional level of sales in Germany in 2004 and early 2005 following changes in German tax legislation. The life and pensions result also included a £12m underlying loss for the Asia Pacific business as we continue to invest in its development.
Regulatory capital * Please refer to section 1.3 EEV - Group for analysis of the free surplus within EEV total equity.
Healthcare Standard Life Healthcare offers a range of private medical insurance (PMI) and healthcare solutions – making it the 4th largest PMI provider in the UK.
During 2007, customer service remained one of our key strengths and was recognised through the following awards: Life and pensions Life and Pensions Provider 5-Star Award from Financial Adviser Service Awards for the 12• th consecutive year; Company of the Year and Best Pension Provider for the 4• th consecutive year from Money Marketing Awards; Best SIPP Provider of the Year from Financial Adviser Awards;•
Our employment proposition is designed to attract, retain, develop and recognise the best people in the industry. The building blocks of the proposition include a focus on celebrating and building on individual strengths, a competitive remuneration and flexible benefits package and effective communication and staff representation mechanisms.
In the German life and pensions market, 2008 will be a year of uncertainty with the change in insurance contract law and the unpredictable impact of the increased transparency introduced with this change. However we are well positioned to build on our strength in distribution and it is anticipated that the results of the new unit linked product, Maxxellence will continue to be positive in 2008.
Active UK Equity Manager of the Year title at the Pension & Investment Provider Awards (PIPA) 2007;•
Looking ahead In 2008 we will continue our strategy to increase diversity in our sources of revenue through increased sales of our capability in Global equities, Global property and Absolute return strategies. We continue to see a good volume of ‘Requests for Proposals’ and our pipeline of confirmed third party new business remains strong, driven substantially by Institutional funds. It is likely that the first half of 2008 will be challenging for all players in the industry but we remain confident of delivering further growth in the year to come.
HWPF UK Canada Europe Other TVOG Total 12 months to 31 December 2007 £m £m £m £m £m £m
2.4 Experience variances HWPF UK Canada Europe TVOG Total 12 months to 31 December 2007 £m £m £m £m £m
UK Europe equity holder Europe equity holder UK HWPF owned funds Canada HWPF owned funds At 31 December 2007 % % % % % Risk margin – in-force business Risk margin before cost of capital adjustment: Market risk 2.00 2.00 2.10 2.00 2.00
Other economic assumptions The assumed investment returns reflect our estimates of expected returns on principal asset classes, and are, in general, based on market conditions at the date of calculation of the EEV.
Non-economic assumptions Non-economic assumptions for the main classes of business, including most expense assumptions, are reviewed on an annual basis.
all increments and indexations to existing policies, including new members, and increments and indexations paid by existing • members of group schemes, are deemed to be new business.
Profit for the year 576 395 Total recognised income for the year 705 272
This adjustment has not had any impact on the profit for the year, underlying profit or earnings per share in 2006, nor retained earnings, net assets or equity at 31 December 2006.
The expected future value of the recourse cash flows on UK and Irish non-participating contracts is not recognised either in the measurement of non-participating liabilities or in the unallocated divisible surplus. For regulatory reporting purposes the realistic valuation includes an adjustment to reflect the expected future value of cash flows due to equity holders. This is excluded from the IFRS valuation. As these defined cash flows arise they contribute to equity holder profit.
In addition, the life and pensions segment result is shown before deduction of tax attributable to policyholders’ returns of £111m (2006: £357m).
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 2007, the Group allotted 518,200 ordinary shares to its employees under the share incentive plans.
The impact of non-economic assumption changes has been primarily driven by changes in the mortality assumptions used by the Group including changes throughout the Group to annuity assumptions to reflect an expectation of increasing longevity which have increased non-participating insurance contract liabilities by £140m. In addition, a change to assurance mortality in Canada reflects an expectation of increasing mortality improvements. Although this reduces the gross non-participating liabilities by approximately £190m there is a consequential impact on reinsurance which leads to a minimal increase in liabilities net of reinsurance.
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 hence to provide an appropriate degree of security to our stakeholders – this aspect is measured by the Group’s regulatory solvency position. The second objective is to create shareholder value by driving profit attributable to equity holders, principally measured by the Group’s European Embedded Value.
In addition to the requirement to maintain capital resources in excess of its CRR, the FSA requires that each regulated company in the Group identifies the major risks it faces and, if appropriate, quantifies the amount and type of capital it believes is appropriate to mitigate those risks. This individual capital assessment (ICA) reflects each company’s view of the adequacy of its capital resources.
Shareholders’ funds Held outside life assurance funds - - 1,479 1,479 1,017 2,496 555 3,051 Held within life assurance funds - 231 - 231 - 231 - 231