Standard Life is an asset managing business and net flows and assets under administration (AUA) are key drivers of shareholder value. AUA are gross assets that the Group administers for customers, including both those managed by the Group and those placed with third party managers.
We remain committed to driving increased value from the management of our back book. This category includes all nonexpense related operating variances and assumption changes for covered business plus those development costs directly related to back book management initiatives and, for non-covered business, specific costs attributed to back book management. During the year, back book management generated an operating profit before tax of £184m (2007: loss of £19m), delivering a back book management RoEV of 2.1% (2007: (0.2%)).
Debt securities in Canadian non-segregated funds amount to £5.4bn, including £2.2bn of corporate bonds. There were no defaults within this portfolio of debt securities during 2008. We have maintained our Canadian corporate bond default assumption at 36bps while the average quality of the portfolio has increased from A to A+. The overall provision for defaults on bonds in the portfolio amounts to £90m (31 December 2007: £71m).
Standard Life’s total investment (including third party funds) in the asset backed securities markets across both short-term treasury instruments and long-term fixed interest is approximately £5.3bn or 3.3% (31 December 2007: £7.7bn or 4.6%) of Group assets under administration, predominantly in UK securities. Of the total of £5.3bn, £1.3bn relates to shareholder funds, of which £1.2bn is AAA rated. The overall level of asset backed securities has reduced compared to 31 December 2007
Notes to Editors: 1. Certain products are included in both life and pensions and investment flows. Therefore, at a Group level, an elimination adjustment is required to remove any duplication.
3 The Group PVNBP percentage change figures include percentage change figures for India, which are computed based on the movement in the new business of HDFC
Discounted payback period 8 years 8 years 1 2007 net flows and present value of new business premiums (PVNBP) have been restated to reflect the inclusion of Sigma mutual funds. The 2008 net outflow impact is £217m (2007: £250m outflow). The 2008 PVNBP impact is £88m (2007: £116m). 2 The percentage change figures include percentage change figures for India, which are computed based on the movement in the new business of HDFC
Positive mortality and morbidity experience variances and assumption changes of £55m represent an improvement of £150m on 2007 and primarily reflects the adoption of updated assumptions for UK assurance and annuity business.
Our UK life and pensions business, excluding Heritage With Profits Fund time value of options and guarantees (HWPF TVOG), accounted for the majority of the £52m increase in total Group EEV operating profit. This was primarily due to back book management gains which included £96m of profits from the reinsurance of UK immediate annuities, a £260m improvement in lapse experience and assumption changes and £47m gains from mortality assumption changes (2007: negative £52m). These positive movements were partially offset by a £108m before tax charge for the Pension Sterling Fund payment and a £70m decrease in NBC. In addition, £96m of EEV profit resulted from the release of provisions in relation to UK deferred annuities during 2008, compared with £191m EEV profit in 2007 from improved deferred annuity data modelling.
UK life and pensions which transferred future market risk on part of this sub-fund to UK life and pensions in exchange for a risk premium. Under this agreement a further loss of £73m is included within investment return and tax variances within covered business.
Please see Section 1.5 – Business segment performance for further detail on the IFRS underlying result for our businesses.
Annuities: NBC was £74m in 2008, significantly up on the 2007 figure of £54m, due to an improved margin of 15.8% in 2008 compared to 11.0% in 2007. The rise in bond yields has been the main contributor to the increase in PVNBP margin. We have not recognised any additional margin in respect of the further widening of bond spreads in the second half of 2008. On our EEV NBC assumptions our annuity business is cash generative.
Savings and mortgages The savings and mortgages business offers retail savings and mortgage products in the UK, via intermediaries and also direct to customers, all through telephone and internet-based platforms. The focus during 2008 has been on managing liquidity and the size of the mortgage book appropriately in response to ongoing volatile market conditions.
In India, we will continue to drive growth through the individual sales channel and also aim to penetrate other channels. However, we expect alternative channel volumes to decrease as banks set up their own insurance companies. We will also continue to drive efficiencies as products and processes become more established.
£65m* £75m £82m * 2005 and 2006 results are shown on a pro forma basis.
Non-operating capital and cash generation of negative £87m (2007: positive £37m) is driven by £138m of non-operating losses in the non-life businesses and includes unrealised fair value losses on derivatives, losses relating to restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc and non-life restructuring costs. Life business non-operating capital and cash generation remained positive at £93m (2007: £70m) and reflected net worth investment variances and assumption changes after negative £27m of restructuring expenses (2007: negative £4m). Non-operating capital and cash generation also includes an after-tax Group consolidation adjustment for the Canadian subordinated liability of negative £42m.
Movement in capital resources of shareholder funds: Annuity reinsurance change 0.1 -
The significant factors affecting the capital surplus were: Shareholder funds: The Group reinsured £6.7bn of pre-demutualisation UK immediate annuities in February 2008. The benefits of this included • a release of cash from reserves in 2008 and a reduction in the Individual Capital Assessment (ICA) capital requirements
The Group has robust plans in place to ensure that it has access to sufficient liquidity to meet operating requirements during the current market uncertainty.
Investment benchmarks, and risk tolerances • around these benchmarks, set regularly for each major liability based on the nature of that liability to ensure that risk remains within Group’s appetite Regular monitoring of asset mixes and the • exposure of Group companies to market risk to ensure that they remain within the above tolerances Limits for foreign currency set by the Group Board•
EEV operating profit after tax attributable to equity holders of Standard Life plc (£m)1 649 617
Additional retained earnings on an EEV basis 2,838 2,929 1 Embedded value equity per share is 286p as at 31 December 2008 compared to 285p as at 31 December 2007 based on diluted share totals of 2,180m as at 31 December 2008 and 2,177m as at 31 December 2007.
On 11 February 2009, we announced that we would make immediate payments for the benefit of all customers who invested in the Pension Sterling Fund and had been affected by the 4.8% fall in unit price arising from the valuation adjustment. The effect of the immediate cash injection into the fund has been reflected in the EEV results for the year to 31 December 2008, and results in a pre-tax charge of £108m against EEV operating profit before tax.
Effect of economic assumption changes (56) 71 - - 12 27
The reinsurance of part of the UK immediate annuity liabilities as described in Note 2.1 has led to an operating profit before tax of £119m. This is included in the segmental EEV income statement within operating assumption changes. The major source of this profit arises from a reduction in the risk of adverse changes in future annuitant mortality experience which was reflected in the UK and Europe HWPF non-market risk margins within the risk discount rates, as described in Note 2.12. This produced an operating profit before tax of £129m (£117m in UK, £12m in Europe). In addition, a profit of £11m arose from the consequential reduction in HWPF TVOG due to the reduction in the allowance for credit risk and the change in the HWPF working capital. The impact on future margins and solvency costs in the UK was negative £30m, with other UK benefits from the transaction generating £9m of profit.
Transfer back of mutual funds net worth 17 (1) - - - 16
Opening adjustments in the UK, for the 12 months to 31 December 2008, reflect the inclusion of Sigma UKFS mutual funds in covered business for the first time. These funds were previously included in non-covered business and are in addition to the UK and Canada mutual funds included in covered business for the first time in the 2007 published results. This adjustment is explained in more detail in Note 2.1 – Basis of preparation.
The UK lapse assumption change of (£35m) was primarily due to a strengthening of paid up assumptions across the pensions book, including the anticipated impact of customers postponing payments into their pension schemes during current volatile market conditions.
The Group’s defined benefit pension scheme is included within non-covered business on an IFRS basis and is accounted for under IAS 19. IFRIC 14, IAS 19 The limit on a defined benefit asset, minimum funding requirements and their interaction provides guidance on the interpretation of the requirements contained in IAS 19. Under this guidance, the Group has restricted the recognition of the pension surplus as at 31 December 2008. This is reflected in the total Group embedded value. The (£23m) under UK pension scheme deficit represents the deferred tax liability on the restricted pension surplus. This compares to (£135m) which reflects the pension deficit net of tax as at 31 December 2007.
‘Other’ primarily represents the operating loss related to the UK pension scheme.
Transfer back of surplus to Standard Life Investments (23) - (23) - (23)
Actuarial gains on defined benefit pension schemes 12 - 12 - 12
Contribution from in-force business: Expected return on existing business - - - 23 23
The level of the TVOG has been calculated by a model which projects the HWPF under a large number of different future economic scenarios. Particular features of this calculation are: The projected economic scenarios and the methodology used to discount equity holder cash flows are based on market • consistent assumptions
Notes to the EEV financial information continued 2.16 EEV methodology continued Other non-economic experience assumptions
Underlying profit before tax attributable to equity holders of Standard Life plc and adjusted items 154 714
Capital contributions from minority interest and third party interest in consolidated funds (1,047) 495
The preliminary announcement for the year ended 31 December 2008 does not constitute statutory accounts as defined in Section 240 of the UK Companies Act 1985. PricewaterhouseCoopers LLP have audited the consolidated statutory accounts for the Group for the years ended 31 December 2007 and 31 December 2008 and their reports were unqualified and did not contain a statement under Section 237(2) or (3) of the UK Companies Act 1985. The Group’s consolidated statutory accounts for the year ended 31 December 2007 have been filed with the Registrar of Companies. The Group’s Annual Report and Accounts for the year ended 31 December 2008 will be available from 2 April 2009.
92 www.standardlife.com 3.2 Segmental analysis continued (i) Segmental income statement continued
Commission expenses 452 503 Interest expenses 639 663 Staff costs and other employee related costs 606 566 Restructuring and corporate transaction expenses 73 31 Other administrative expenses 694 534 Total administrative expenses 2,464 2,297
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.