Final Results - Part 4 of 5

RNS Number : 2066Z

Standard Life plc

13 March 2012

 



Standard Life plc

Preliminary Results 2011

Part 4 of 5

3 European Embedded Value (EEV)

EEV consolidated income statement

For the year ended 31 December 2011

		2011	2010
	Notes	£m	£m
Covered business
UK		450	436
Canada		324	250
International		104	93
HWPF TVOG		11	(8)
Covered business EEV operating profit	3.2(a)	889	771
UK		67	28
Global investment management1	3.6(b)	69	33
Group corporate centre costs		(50)	(54)
Other	3.6(c)	14	9
Non-covered business EEV operating profit		100	16
EEV operating profit before tax from continuing operations		989	787
EEV non-operating items
Long-term investment return and tax variances		70	578
Effect of economic assumption changes		(500)	(209)
Impairment of intangible assets		(5)	-
Impairment of investments in associates		-	(1)
Restructuring costs2		(73)	(71)
Other EEV non-operating items		(13)	-
Consolidation adjustment for different accounting bases3		58	51
EEV non-operating (loss)/profit before tax from continuing operations		(463)	348
EEV profit before tax from continuing operations		526	1,135
Tax attributable to:
EEV operating profit		(265)	(249)
EEV non-operating items		108	(90)
EEV profit after tax from continuing operations		369	796
EEV profit after tax from discontinued operations4		-	20
Total EEV profit after tax		369	816

¹      Global investment management non-covered EEV operating profit of £69m (2010: £33m) represents operating profit of £125m (2010: £103m) after excluding profits of £56m (2010: £70m) which have been generated by life and pensions covered business. Global investment management EEV operating profit therefore represents third party non-covered EEV operating profit. Refer to Note 3.6(b) - Global investment management EEV operating profit before tax and Note 3.17 - EEV methodology.

²    Refer to IFRS financial information Note 2.3 - Administrative expenses. The £73m of restructuring costs in 2011 also include additional impacts to required capital and PVIF following the termination of an internal reinsurance agreement.

³    This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 3.17 - EEV methodology.

⁴    The Group's healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010 and was classified as a discontinued operation for the year ended 31 December 2010.

EEV earnings per share (EPS)

For the year ended 31 December 2011

	2011	2010
EEV operating profit after tax from continuing operations (£m)1	724	538
Basic EPS (pence) from continuing operations	31.5	24.0
Weighted average number of ordinary shares in issue (millions)	2,301	2,242
Diluted EPS (pence) from continuing operations	31.4	23.9
Weighted average number of ordinary shares on a diluted basis (millions)	2,304	2,248

¹      EEV operating profit before tax from continuing operations of £989m (2010: £787m) less attributed tax on EEV operating profit from continuing operations of £265m (2010: £249m).

EEV consolidated statement of comprehensive income

For the year ended 31 December 2011

		2011	2010
	Notes	£m	£m
EEV profit after tax		369	816
Less: EEV profit after tax from discontinued operations		-	20
EEV profit from continuing operations		369	796
Fair value gains/(losses) on cash flow hedges1		-	(2)
Actuarial (losses)/gains on defined benefit pension schemes1		(88)	184
Exchange differences on translating foreign operations2		(69)	152
Net investment hedge1		13	(39)
Aggregate tax effect of items not recognised in income statement		27	(59)
Other		-	9
Other comprehensive (expense)/income for the year		(117)	245
Total comprehensive income for the year attributable to equity holders from continuing operations		252	1,041
EEV profit after tax from discontinued operations		-	20
Other comprehensive income from discontinued operations3		-	24
Total comprehensive income for the year attributable to equity holders from discontinued operations		-	44
Total comprehensive income for the year attributable to equity holders	3.7	252	1,085

¹      Consistent with the IFRS consolidated statement of comprehensive income.

²      Exchange differences primarily relate to Canada (£30m) and India (£24m).

³      Refer to the Annual Report and Accounts 2011 IFRS financial information Note 10 - Discontinued operations.

EEV consolidated statement of financial position

As at 31 December 2011

		31 December  2011	31 December 2010
	Notes	£m	£m
Covered business
Free surplus		651	1,202
Required capital		1,296	1,031
Net worth		1,947	2,233
Present value of in-force		4,423	4,277
Cost of required capital		(583)	(439)
Total embedded value of covered business	3.2(c)	5,787	6,071
Non-covered business
UK		393	271
Global investment management		256	256
Group corporate centre		650	457
Other		253	221
Total net assets of non-covered business	3.6(a)	1,552	1,205
Consolidation adjustment for different accounting bases1		89	45
Total Group embedded value	3.7	7,428	7,321
Equity
Share capital		235	228
Shares held by trusts		(19)	(21)
Share premium reserve		1,110	976
Retained earnings on an IFRS basis		1,030	1,094
Other reserves		1,605	1,626
Additional retained earnings on an EEV basis		3,467	3,418
Total equity		7,428	7,321

¹      This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 3.17 - EEV methodology.

EEV per share

As at 31 December 2011

		31 December 2011	31 December 2010
Total Group embedded value (£m)		7,428	7,321
EEV per share (pence)		317	322
Diluted closing number of ordinary shares in issue (millions)		2,344	2,275

Notes to the EEV financial information

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.

EEV includes the net assets of the businesses that are owned by equity holders of Standard Life plc (the Company) plus the present value of future profits expected to arise from in-force long-term insurance policies (PVIF) where these future profits are attributable to equity holders under the Scheme of Demutualisation (the Scheme) or from sales of new business since 10 July 2006.

The opening and closing EEV numbers, and therefore the profit arising in the period, for the covered business are determined on an after-tax basis. The tax assumptions are based upon the best estimate of the actual tax expected to arise. Profit before tax is derived by grossing up profit after tax at the long-term rate of corporation tax appropriate to each territory. While for some territories this rate does not equate to the actual effective rate of tax used in the calculation of after-tax profits, it provides a consistent grossing-up basis upon which to compare results from one year to another and is in line with the Group's expectation of the rate of tax applicable to business sold after demutualisation.

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.

Covered business

A detailed description of EEV covered business is provided in Note 3.17 - EEV methodology.

With effect from January 2011, Canadian insurers have adopted IFRS as their basis for reporting, replacing the previous Canadian GAAP (CGAAP) basis. The impact of the change has been to reduce the Canada EEV by £59m. The comparative results for the 12 months to 31 December 2010 have not been restated.

Elsewhere within the Group, the regulatory basis for setting actuarial reserves and required capital has been calculated assuming the continuation of current regimes. Therefore, no allowance has been made for the change in reserving or required capital bases anticipated under Solvency 2. This approach is in accordance with the Interim Transitional Guidance for Embedded Value Reporting issued by the CFO Forum in September 2011. Similarly, no allowance has been made for forthcoming changes to the UK life insurance tax regime. The deferred tax position has been calculated using legislation in force at 31 December 2011.

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. 

Segmentation

Within the IFRS segmental analysis, UK operations primarily comprise life and pensions, 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. Following the acquisition of Focus Solutions Group plc on 11 January 2011, UK non-covered business results for the year ended 31 December 2011 include Focus. UK non-covered business is shown within Note 3.6 - Non-covered business.

The EEV consolidated income statement presents EEV operating profit from continuing operations only and therefore excludes the results from discontinued operations.

Impact of UK budget changes announced on 23 March 2011

The Finance Act 2011 reduced the UK corporation tax rate to 25% with effect from 1 April 2012. The reduction to 25% has been included within our best estimate assumptions for UK corporation tax as at 31 December 2011.

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. 

3.1 Basis of preparation continued

Recapture of internal reinsurance

On 31 December 2011, the business of Standard Life Investment Funds Limited (SLIF) was transferred to the Standard Life Assurance Limited (SLAL) Shareholder Fund and Proprietary Business Fund under a court approved scheme pursuant to Part VII of, and Schedule 12 to, the Financial Services and Markets Act 2000. The impact of the change has been to reduce the UK EEV by £10m. This is included within restructuring costs.

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.

3.2 Segmental analysis - covered business

(a) Segmental EEV income statement

This Note provides an analysis of EEV covered business as defined in Note 3.17 - EEV methodology. 

		UK	Canada	International	HWPF TVOG	Total
12 months to 31 December 2011	Notes	£m	£m	£m	£m	£m
Contribution from new business	3.3	204	73	58	-	335
Contribution from in-force business:
Expected return on existing business		242	144	54	-	440
Experience variances	3.4	12	118	7	11	148
Operating assumption changes	3.5	31	(8)	10	-	33
Development expenses		(33)	(14)	(27)	-	(74)
Expected return on free surplus		(6)	11	2	-	7
EEV operating profit before tax		450	324	104	11	889
Investment return and tax variances		41	41	(19)	7	70
Effect of economic assumption changes		(173)	(181)	105	(251)	(500)
Restructuring costs		(53)	(3)	(3)	-	(59)
EEV profit/(loss) before tax		265	181	187	(233)	400
EEV attributed tax		(66)	(45)	(56)	58	(109)
EEV profit/(loss) after tax		199	136	131	(175)	291

		UK	Canada	International	HWPF TVOG	Total
12 months to 31 December 2010	Notes	£m	£m	£m	£m	£m
Contribution from new business	3.3	173	68	67	-	308
Contribution from in-force business:
Expected return on existing business		237	142	43	-	422
Experience variances	3.4	32	16	(13)	(8)	27
Operating assumption changes	3.5	44	18	19	-	81
Development expenses		(30)	(10)	(27)	-	(67)
Expected return on free surplus		(20)	16	4	-	-
EEV operating profit/(loss) before tax		436	250	93	(8)	771
Investment return and tax variances		463	40	22	53	578
Effect of economic assumption changes		(77)	(83)	10	(59)	(209)
Restructuring costs		(39)	(1)	(5)	-	(45)
EEV profit/(loss) before tax		783	206	120	(14)	1,095
EEV attributed tax		(212)	(53)	(27)	4	(288)
EEV profit/(loss) after tax		571	153	93	(10)	807

An analysis of EEV profit after tax by territory is provided in Note 3.9 - Analysis of covered business EEV PVIF and net worth movements (net of tax).

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.

HWPF TVOG represents the time value of financial options and guarantees (TVOG) arising from the Heritage With Profits Fund (HWPF). Although the HWPF includes business written by the UK, Germany and Ireland, the Group manages the risk at an aggregate level. This is consistent with the Group's IFRS consolidated financial statements as disclosed in Note 42 - Risk management of the Annual Report and Accounts 2011. The results for Canada and International include the cost of the Canada and Asia TVOG and the cost of TVOG arising on business written outside of the HWPF in Germany.

Improved new business profitability was due to higher sales volumes in the UK and increased margins in the UK and Canada. An analysis of new business contribution is provided in Note 3.3 - Analysis of new business contribution.

The increase in the expected return on existing business from £422m in 2010 to £440m in 2011 is primarily due to higher opening PVIF, partly offset by lower opening risk discount rates.

Details of experience variances and operating assumption changes are provided in Note 3.4 - Experience variances and Note 3.5 - Operating assumption changes.

Development expenses of £74m in 2011 (2010: £67m) reflect the increased investment in the business. Development expenses of £33m in the UK mainly relate to investment in corporate propositions, in particular trust based pensions; retail propositions, largely SIPP; and to investment in the launch of our repositioned brand and refreshed visual identity. The £27m of development expenses in International include £8m relating to the costs of developing the JV businesses and £19m relating to development of the wholly owned businesses to build future growth.

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.

Investment return and tax variances generated a profit of £70m across all covered business. Investment return and tax variances in the UK produced a profit of £41m. Investment returns in 2011 generated an increase in free surplus of £165m, largely within annuity business, which was offset by a reduction in PVIF of £237m, largely due to lower than expected investment returns on unitised business. In addition, there was a profit of £110m, in excess of the returns that are included in the expected return on free surplus and in operating variances, arising from differences in movements of subordinated liabilities and the assets that are backing the subordinated debt. Canada investment return and tax variances generated a profit of £41m which is after a £79m pre-tax loss (£59m post-tax loss) from the impact of adopting IFRS accounting. Refer to Note 3.1 - Basis of preparation. The remaining positive variances in Canada primarily reflect the benefits of strong investment returns 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.

Restructuring costs of £59m include £53m within the UK. This primarily represents the covered business costs associated with a number of restructuring programmes including Solvency 2, as well as the free surplus and associated other EEV impacts arising from the termination of the internal reinsurance agreement between SLAL and SLIF.

3.2 Segmental analysis - covered business continued

(b) Segmental analysis of movements in EEV

	UK	Canada	International	HWPF TVOG	Total
12 months to 31 December 2011	£m	£m	£m	£m	£m
Opening EEV	3,657	1,758	732	(76)	6,071
EEV profit/(loss) after tax	199	136	131	(175)	291
Internal capital transfers	(376)	(116)	34	-	(458)
Transfer back of surplus to Standard Life Investments	(36)	(2)	(3)	-	(41)
Transfer back of mutual funds net worth	19	(5)	-	-	14
Actuarial (losses)/gains on defined benefit pension schemes	-	(42)	8	-	(34)
Foreign exchange differences	-	(30)	(36)	-	(66)
Aggregate tax effect of items not recognised in income statement	-	12	-	-	12
Other	(4)	1	1	-	(2)
Closing EEV	3,459	1,712	867	(251)	5,787

	UK	Canada	International	HWPF TVOG	Total
12 months to 31 December 2010	£m	£m	£m	£m	£m
Opening EEV	3,120	1,553	658	(66)	5,265
EEV profit/(loss) after tax	571	153	93	(10)	807
Internal capital transfers	(15)	(65)	(3)	-	(83)
Transfer back of surplus to Standard Life Investments	(47)	(3)	(2)	-	(52)
Transfer back of mutual funds net worth	28	(4)	-	-	24
Actuarial losses on defined benefit pension schemes	-	(20)	(9)	-	(29)
Foreign exchange differences	-	139	(5)	-	134
Aggregate tax effect of items not recognised in income statement	-	5	-	-	5
Closing EEV	3,657	1,758	732	(76)	6,071

Internal capital transfers mainly reflect dividend transfers to Standard Life plc.

(c) Segmental analysis of opening and closing EEV

	UK	Canada	International	HWPF TVOG	Total
12 months to 31 December 2011	£m	£m	£m	£m	£m
Analysis of EEV
Free surplus	930	226	46	-	1,202
PVIF	2,637	1,061	655	(76)	4,277
Required capital	159	813	59	-	1,031
Cost of capital	(69)	(342)	(28)	-	(439)
Opening EEV	3,657	1,758	732	(76)	6,071
Analysis of EEV
Free surplus	686	(103)	68	-	651
PVIF	2,683	1,229	762	(251)	4,423
Required capital	169	1,059	68	-	1,296
Cost of capital	(79)	(473)	(31)	-	(583)
Closing EEV	3,459	1,712	867	(251)	5,787

	UK	Canada	International	HWPF TVOG	Total
12 months to 31 December 2010	£m	£m	£m	£m	£m
Analysis of EEV
Free surplus	673	136	91	-	900
PVIF	2,359	962	545	(66)	3,800
Required capital	139	770	47	-	956
Cost of capital	(51)	(315)	(25)	-	(391)
Opening adjusted EEV	3,120	1,553	658	(66)	5,265
Analysis of EEV
Free surplus	930	226	46	-	1,202
PVIF	2,637	1,061	655	(76)	4,277
Required capital	159	813	59	-	1,031
Cost of capital	(69)	(342)	(28)	-	(439)
Closing EEV	3,657	1,758	732	(76)	6,071

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.

New business contribution (NBC) and the present value of new business premium (PVNBP) margins are shown after the effect of required capital.

	Fee (F) -Spread/risk (S/R)	NBC	Single premiums	Annualised regular premiums	PVNBP	PVNBP multiplier1	PVNBP margin2
12 months to 31 December 2011		£m	£m	£m	£m		%
Individual pensions	F	12	3,598	99	3,936	3.4	0.3
Savings and investments	F	15	1,973	24	2,151	7.4	0.7
Annuities	S/R	58	312	-	312	-	18.6
Protection	S/R	-	-	-	1	-	5.2
Retail		85	5,883	123	6,400	4.2	1.3
Corporate pensions	F	60	1,889	620	4,607	4.4	1.3
Institutional pensions	F	59	3,027	1	3,028	1.0	2.0
Corporate		119	4,916	621	7,635	4.4	1.6
UK		204	10,799	744	14,035	4.3	1.5
Fee	F	38	1,216	33	1,695	14.5	2.2
Spread/risk	S/R	35	306	61	1,233	15.2	2.9
Canada		73	1,522	94	2,928	15.0	2.5
Wholly owned	F	51	1,567	86	2,275	8.2	2.2
Joint ventures		7	82	100	500	4.2	1.4
International		58	1,649	186	2,775	6.1	2.1
Total covered business		335	13,970	1,024	19,738	5.6	1.7

¹    The PVNBP multiplier is calculated as the total of PVNBP less single premiums, divided by annualised regular premiums.

²    PVNBP margins are calculated as the ratio of NBC to PVNBP and are based on the underlying unrounded numbers.

3.3 Analysis of new business contribution continued

	Fee (F) -Spread/risk (S/R)	NBC	Single premiums	Annualised regular premiums	PVNBP	PVNBP multiplier1	PVNBP margin2
12 months to 31 December 2010		£m	£m	£m	£m		%
Individual pensions3	F	19	3,539	92	3,858	3.5	0.5
Savings and investments	F	7	1,827	23	1,997	7.4	0.4
Annuities	S/R	56	341	-	341	-	16.5
Protection	S/R	-	-	1	1	1.0	(12.9)
Retail		82	5,707	116	6,197	4.2	1.3
Corporate pensions3	F	45	1,225	508	3,287	4.1	1.4
Institutional pensions	F	46	3,472	-	3,472	-	1.3
Corporate		91	4,697	508	6,759	4.1	1.3
UK		173	10,404	624	12,956	4.1	1.3
Fee	F	47	1,216	68	2,048	12.2	2.3
Spread/risk	S/R	21	239	52	1,000	14.6	2.1
Canada		68	1,455	120	3,048	13.3	2.2
Wholly owned	F	44	1,313	77	1,929	8.0	2.3
Joint ventures		23	74	119	550	4.0	4.3
International		67	1,387	196	2,479	5.6	2.7
Total covered business		308	13,246	940	18,483	5.6	1.7

¹    The PVNBP multiplier is calculated as the total of PVNBP less single premiums, divided by annualised regular premiums.

²    PVNBP margins are calculated as the ratio of NBC to PVNBP and are based on the underlying unrounded numbers.

³    Individual pensions include Retail Trustee Investment Plan. This was previously included in corporate pensions. The 2010 impact on PVNBP is £25m.

3.4 Experience variances

	UK	Canada	International	HWPF TVOG	Total
12 months to 31 December 2011	£m	£m	£m	£m	£m
Lapses	(37)	-	(11)	-	(48)
Maintenance expenses	(4)	-	-	-	(4)
Mortality and morbidity	3	-	1	-	4
Tax	32	72	16	(1)	119
Other	18	46	1	12	77
Total	12	118	7	11	148

The lapse experience loss of £37m in the UK includes a negative variance within our pensions business of £29m. This was mainly due to transfers within our pension business. UK lapse experience variance also includes a £10m adverse variance within mutual funds and a £2m loss on institutional pensions mainly arising from the loss of one large scheme. The £11m adverse lapse experience within International mainly arises from a £4m loss within the Ireland domestic business and a £5m loss within the JV businesses.

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.

Within Canada, other variances mainly arise from the impact of management actions to enhance investment yields on assets.

	UK	Canada	International	HWPF TVOG	Total
12 months to 31 December 2010	£m	£m	£m	£m	£m
Lapses	(3)	-	(2)	-	(5)
Maintenance expenses	(4)	5	1	-	2
Mortality and morbidity	4	17	-	-	21
Tax	(8)	9	(1)	-	-
Other	43	(15)	(11)	(8)	9
Total	32	16	(13)	(8)	27

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.

3.5 Operating assumption changes

	UK	Canada	International	HWPF TVOG	Total
12 months to 31 December 2011	£m	£m	£m	£m	£m
Lapses	31	34	(18)	-	47
Maintenance expenses	10	40	(8)	-	42
Mortality and morbidity	(11)	(139)	(3)	-	(153)
Tax	1	-	-	-	1
Other	-	57	39	-	96
Total	31	(8)	10	-	33

Positive lapse assumption changes in the UK include a £25m gain from improved long-term assumptions for institutional pensions, and a £8m profit on legacy life business reflecting recent experience. Favourable changes in assumed early retirement rates for individual pensions have been offset by anticipating a period of higher paid-up activity as a result of pension reform changes.

Canada lapse assumption gains of £34m mainly arise from improved persistency within pensions business.

Within International, the lapse assumption loss of £18m includes a £7m loss from the JV businesses and a £6m loss from higher paid-up assumptions in Hong Kong.

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.

The £11m loss from mortality assumption changes in the UK mainly arise from annuities, reflecting updates for recent experience and revised longevity improvement rates. In Canada, most of the £139m loss from mortality assumptions reflects the impact of revised industry-standard mortality improvement rates.

The £57m other assumption changes in Canada include a £109m profit from various changes in asset allocation strategies, including the benefits of management actions aimed at enhancing the investment yield on assets. This was partly offset by a loss of £62m from a reduction in expected fee income in our group savings and retirement products.

The £39m other assumption changes in International include a gain of £48m within Germany due to revised assumptions for certain classes of deferred annuities, which enables recognition of the profits expected when the policy converts to an annuity in-payment.

	UK	Canada	International	HWPF TVOG	Total
12 months to 31 December 2010	£m	£m	£m	£m	£m
Lapses	13	-	(7)	-	6
Maintenance expenses	48	68	14	-	130
Mortality and morbidity	(19)	(12)	2	-	(29)
Tax	(1)	-	-	-	(1)
Other	3	(38)	10	-	(25)
Total	44	18	19	-	81

3.5 Operating assumption changes continued

For the 12 months to 31 December 2010, expense assumption gains in the UK and in Europe reflect changes in the expense allocation for investment related expenses. The UK figure also includes an allowance for the expected benefits on maintenance costs arising from the headcount reductions announced during 2010, but only to the extent that these arrangements had been finalised by 31 December 2010.  

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.

3.6 Non-covered business

Non-covered business EEV operating profit is represented by operating profit¹ as adjusted for Standard Life Investments (global investment management) look through profits and the return on mutual funds which are recognised in covered business. Refer to Note 3.17 - EEV methodology.

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.

(a) Segmental analysis - non-covered business

	UK	Global investment management	Discontinued operations	Other including group corporate centre	Total non-covered business
12 months to 31 December 2011	£m	£m	£m	£m	£m
Opening EEV net assets	271	256	-	678	1,205
EEV profit/(loss) after tax	37	51	-	(54)	34
Transfer back of net worth from covered business	(19)	41	-	5	27
Foreign exchange differences	-	(6)	-	3	(3)
Internal capital transfers	136	(88)	-	410	458
Distributions to equity holders	-	-	-	(303)	(303)
Other	(32)	2	-	164	134
Closing EEV net assets	393	256	-	903	1,552

The transfer back of net worth from covered business represents the transfer of profits and losses in relation to the Group's investment management business, the UK mutual funds business (within UK non-covered, Standard Life Savings Limited) and the Canada mutual funds business (within other non-covered), necessary to reconcile the opening and closing EEV net assets. For further detail refer to Note 3.17 - EEV methodology, under consolidation adjustments. 

The Company operated a Scrip dividend scheme for dividends paid in 2010 and 2011. Investors taking part in the Scrip scheme receive their dividend entitlement in the form of new shares issued in lieu of cash dividends. For the 12 months ended 31 December 2011, dividends paid comprise £141m (2010: £92m) settled by the issue of shares under the Scrip scheme, and £162m paid in cash (2010: £186m).  

The other movement in the UK EEV net assets mainly relates to the change in the UK non-covered pension scheme of negative £51m (2010: positive £214m) and the associated deferred tax asset of positive £15m (2010: negative £65m).

Other movements in other including group corporate centre predominantly relate to the £141m issue of share capital other than in cash in relation to the Scrip dividend paid by the Company.

	UK	Global investment management	Discontinued operations	Other including group corporate centre	Total non-covered business
12 months to 31 December 2010	£m	£m	£m	£m	£m
Opening EEV net assets	(19)	195	343	644	1,163
Opening adjustments	34	-	-	(34)	-
Opening adjusted EEV net assets	15	195	343	610	1,163
EEV (loss)/profit after tax	(9)	26	20	(66)	(29)
Transfer back of net worth from covered business	(28)	52	-	4	28
Foreign exchange differences	-	2	-	16	18
Internal capital transfers	144	(18)	(387)	344	83
Distributions to equity holders	-	-	-	(278)	(278)
Other	149	(1)	24	48	220
Closing EEV net assets	271	256	-	678	1,205

The opening adjustment of £34m represents the reclassification of other non-covered to UK non-covered business during the period.

 ¹   Refer to Note 2.1(b) - Accounting policies - Operating profit in the IFRS financial information.

(b) Global investment management EEV operating profit before tax

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.

	12 months to 31 December 2011	12 months to 31 December 2010
	£m	£m
Global investment management third party non-covered business EEV operating profit before tax	69	33
Third party related covered business EEV operating profit before tax	32	33
Total third party business EEV operating profit before tax	101	66
Other covered business EEV operating profit before tax	24	37
Global investment management operating profit before tax	125	103

Total global investment management EEV operating profit allocated to covered business of £56m (2010: £70m) consists of third party related covered business EEV operating profit of £32m (2010: £33m) and other covered business EEV operating profit of £24m (2010: £37m).

Third party related covered business EEV operating profits relate to products actively marketed and sold to third parties through global investment management distribution channels. If these profits are added to the global investment management third party non-covered business EEV operating profits of £69m (2010: £33m), there are £101m (2010: £66m) of total third party related profits for global investment management.

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.

(c) Other EEV operating profits before tax

	12 months to 31 December 2011	12 months to 31 December 2010
	£m	£m
Canada non-life subsidiaries	6	1
Mutual funds transferred to covered business	(7)	(3)
Canada non-life subsidiaries excluding transfers to covered business	(1)	(2)
Standard Life plc income	6	3
Other	9	8
Other non-covered business EEV operating profit before tax	14	9

Canada non-life subsidiaries are included within the Canada segment of the IFRS financial statements.

Included within other are the head office costs relating to the International businesses. These costs are included within the International segment of the IFRS financial statements.

3.7 EEV reconciliation of movements in consolidated statement of financial position

	12 months to 31 December 2011	12 months to 31 December 2010
	£m	£m
Opening EEV	7,321	6,435
Total comprehensive income for the period attributable to equity holders	252	1,085
Distributions to equity holders	(303)	(278)
Issue of share capital other than in cash	141	92
Shares acquired by employee trusts	(7)	(35)
Shares gifted to charity	-	4
Reserves credit for employee share-based payment schemes	24	18
Closing EEV	7,428	7,321

3.8 Reconciliation of EEV net assets to IFRS net assets

	31 December 2011	31 December 2010
	£m	£m
Net assets on an EEV basis	7,428	7,321
Present value of in-force life and pensions business net of cost of capital	(3,840)	(3,838)
EEV net worth	3,588	3,483
Adjustment of long-term debt to market value	(44)	(40)
Canada marked to market adjustment	(19)	(46)
Deferred acquisition costs net of deferred income reserve	350	378
Deferred tax differences	123	98
Adjustment for share of joint ventures	24	35
Consolidation adjustment for different accounting bases1	(89)	(45)
Other	28	40
Net assets attributable to equity holders on an IFRS basis	3,961	3,903

¹    This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 3.17 - EEV methodology.

Reconciling items are shown net of tax where appropriate.

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.

3.9 Analysis of covered business EEV PVIF and net worth movements (net of tax) 

(a)       Total

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2011	£m	£m	£m	£m	£m
Opening EEV	1,202	1,031	2,233	3,838	6,071
Contribution from new business	(290)	64	(226)	484	258
Contribution from in-force business:
Expected return on existing business	(1)	40	39	294	333
Expected return transfer to net worth	684	(85)	599	(599)	-
Experience variances	52	2	54	58	112
Operating assumption changes	(33)	2	(31)	49	18
Development expenses	(58)	-	(58)	-	(58)
Expected return on free surplus	5	-	5	-	5
EEV operating profit after tax	359	23	382	286	668
Investment return and tax variances	159	94	253	(206)	47
Effect of economic assumption changes	(512)	181	(331)	(50)	(381)
Restructuring costs	(41)	(17)	(58)	15	(43)
EEV profit/(loss) after tax	(35)	281	246	45	291
Internal capital transfers	(458)	-	(458)	-	(458)
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)
Foreign exchange differences	(6)	(17)	(23)	(43)	(66)
Aggregate tax effect of items not recognised in income statement	12	-	12	-	12
Other	(3)	1	(2)	-	(2)
Closing EEV	651	1,296	1,947	3,840	5,787

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2010	£m	£m	£m	£m	£m
Opening EEV	925	956	1,881	3,384	5,265
Opening adjustments	(25)	-	(25)	25	-
Opening adjusted EEV	900	956	1,856	3,409	5,265
Contribution from new business	(265)	45	(220)	451	231
Contribution from in-force business:
Expected return on existing business	(1)	37	36	275	311
Expected return transfer to net worth	625	(59)	566	(566)	-
Experience variances	35	(1)	34	(17)	17
Operating assumption changes	6	(55)	(49)	108	59
Development expenses	(51)	-	(51)	-	(51)
Expected return on free surplus	2	-	2	-	2
EEV operating profit/(loss) after tax	351	(33)	318	251	569
Investment return and tax variances	179	10	189	234	423
Effect of economic assumption changes	(73)	31	(42)	(110)	(152)
Restructuring costs	(33)	-	(33)	-	(33)
EEV profit after tax	424	8	432	375	807
Internal capital transfers	(83)	-	(83)	-	(83)
Transfer back of surplus to Standard Life Investments	(52)	-	(52)	-	(52)
Transfer back of mutual funds net worth	24	-	24	-	24
Actuarial losses on defined benefit pension schemes	(29)	-	(29)	-	(29)
Foreign exchange differences	13	67	80	54	134
Aggregate tax effect of items not recognised in income statement	5	-	5	-	5
Closing EEV	1,202	1,031	2,233	3,838	6,071

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.

3.9 Analysis of covered business EEV PVIF and net worth movements (net of tax) continued

(b) UK and HWPF TVOG

	Free  surplus	Required capital	Net worth	PVIF net of  cost of  capital	Total
12 months to 31 December 2011	£m	£m	£m	£m	£m
Opening EEV	930	159	1,089	2,492	3,581
Contribution from new business	(146)	18	(128)	282	154
Contribution from in-force business:
Expected return on existing business	(1)	5	4	177	181
Expected return transfer to net worth	390	(4)	386	(386)	-
Experience variances	(23)	1	(22)	39	17
Operating assumption changes	(3)	1	(2)	26	24
Development expenses	(25)	-	(25)	-	(25)
Expected return on free surplus	(5)	-	(5)	-	(5)
EEV operating profit after tax	187	21	208	138	346
Investment return and tax variances	222	(4)	218	(182)	36
Effect of economic assumption changes	(219)	10	(209)	(110)	(319)
Restructuring costs	(37)	(17)	(54)	15	(39)
EEV profit/(loss) after tax	153	10	163	(139)	24
Internal capital transfers	(376)	-	(376)	-	(376)
Transfer back of surplus to Standard Life Investments	(36)	-	(36)	-	(36)
Transfer back of mutual funds net worth	19	-	19	-	19
Other	(4)	-	(4)	-	(4)
Closing EEV	686	169	855	2,353	3,208

	Free  surplus	Required capital	Net worth	PVIF net of  cost of  capital	Total
12 months to 31 December 2010	£m	£m	£m	£m	£m
Opening EEV	673	139	812	2,242	3,054
Opening adjustments	-	-	-	-	-
Opening adjusted EEV	673	139	812	2,242	3,054
Contribution from new business	(134)	17	(117)	242	125
Contribution from in-force business:
Expected return on existing business	(1)	5	4	169	173
Expected return transfer to net worth	374	(3)	371	(371)	-
Experience variances	34	(3)	31	(15)	16
Operating assumption changes	(26)	-	(26)	58	32
Development expenses	(21)	-	(21)	-	(21)
Expected return on free surplus	(14)	-	(14)	-	(14)
EEV operating profit after tax	212	16	228	83	311
Investment return and tax variances	187	-	187	190	377
Effect of economic assumption changes	(80)	4	(76)	(23)	(99)
Restructuring costs	(28)	-	(28)	-	(28)
EEV profit after tax	291	20	311	250	561
Internal capital transfers	(15)	-	(15)	-	(15)
Transfer back of surplus to Standard Life Investments	(47)	-	(47)	-	(47)
Transfer back of mutual funds net worth	28	-	28	-	28
Closing EEV	930	159	1,089	2,492	3,581

3.9 Analysis of covered business EEV PVIF and net worth movements (net of tax) continued

(c)       Canada

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2011	£m	£m	£m	£m	£m
Opening EEV	226	813	1,039	719	1,758
Contribution from new business	(42)	36	(6)	61	55
Contribution from in-force business:
Expected return on existing business	-	33	33	75	108
Expected return transfer to net worth	168	(85)	83	(83)	-
Experience variances	75	4	79	10	89
Operating assumption changes	(26)	1	(25)	19	(6)
Development expenses	(10)	-	(10)	-	(10)
Expected return on free surplus	8	-	8	-	8
EEV operating profit/(loss) after tax	173	(11)	162	82	244
Investment return and tax variances	(63)	99	36	(6)	30
Effect of economic assumption changes	(280)	171	(109)	(27)	(136)
Restructuring costs	(2)	-	(2)	-	(2)
EEV profit/(loss) after tax	(172)	259	87	49	136
Internal capital transfers	(116)	-	(116)	-	(116)
Transfer back of surplus to Standard Life Investments	(2)	-	(2)	-	(2)
Transfer back of mutual funds net worth	(5)	-	(5)	-	(5)
Actuarial losses on defined benefit pension schemes	(42)	-	(42)	-	(42)
Foreign exchange differences	(5)	(13)	(18)	(12)	(30)
Aggregate tax effect of items not recognised in income statement	12	-	12	-	12
Other	1	-	1	-	1
Closing EEV	(103)	1,059	956	756	1,712

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2010	£m	£m	£m	£m	£m
Opening EEV	161	770	931	622	1,553
Opening adjustments	(25)	-	(25)	25	-
Opening adjusted EEV	136	770	906	647	1,553
Contribution from new business	(18)	20	2	48	50
Contribution from in-force business:
Expected return on existing business	-	30	30	75	105
Expected return transfer to net worth	142	(60)	82	(82)	-
Experience variances	14	5	19	(6)	13
Operating assumption changes	30	(55)	(25)	39	14
Development expenses	(8)	-	(8)	-	(8)
Expected return on free surplus	12	-	12	-	12
EEV operating profit/(loss) after tax	172	(60)	112	74	186
Investment return and tax variances	(12)	9	(3)	32	29
Effect of economic assumption changes	4	27	31	(92)	(61)
Restructuring costs	(1)	-	(1)	-	(1)
EEV profit/(loss) after tax	163	(24)	139	14	153
Internal capital transfers	(65)	-	(65)	-	(65)
Transfer back of surplus to Standard Life Investments	(3)	-	(3)	-	(3)
Transfer back of mutual funds net worth	(4)	-	(4)	-	(4)
Actuarial losses on defined benefit pension schemes	(20)	-	(20)	-	(20)
Foreign exchange differences	14	67	81	58	139
Aggregate tax effect of items not recognised in income statement	5	-	5	-	5
Closing EEV	226	813	1,039	719	1,758

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. 

3.9 Analysis of covered business EEV PVIF and net worth movements (net of tax) continued

(d) International

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2011	£m	£m	£m	£m	£m
Opening EEV	46	59	105	627	732
Contribution from new business	(102)	10	(92)	141	49
Contribution from in-force business:
Expected return on existing business	-	2	2	42	44
Expected return transfer to net worth	126	4	130	(130)	-
Experience variances	-	(3)	(3)	9	6
Operating assumption changes	(4)	-	(4)	4	-
Development expenses	(23)	-	(23)	-	(23)
Expected return on free surplus	2	-	2	-	2
EEV operating profit/(loss) after tax	(1)	13	12	66	78
Investment return and tax variances	-	(1)	(1)	(18)	(19)
Effect of economic assumption changes	(13)	-	(13)	87	74
Restructuring costs	(2)	-	(2)	-	(2)
EEV profit/(loss) after tax	(16)	12	(4)	135	131
Internal capital transfers	34	-	34	-	34
Transfer back of surplus to Standard Life Investments	(3)	-	(3)	-	(3)
Actuarial profits on defined benefit pension schemes	8	-	8	-	8
Foreign exchange differences	(1)	(4)	(5)	(31)	(36)
Other	-	1	1	-	1
Closing EEV	68	68	136	731	867

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2010	£m	£m	£m	£m	£m
Opening EEV	91	47	138	520	658
Opening adjustments	-	-	-	-	-
Opening adjusted EEV	91	47	138	520	658
Contribution from new business	(113)	8	(105)	161	56
Contribution from in-force business:
Expected return on existing business	-	2	2	31	33
Expected return transfer to net worth	109	4	113	(113)	-
Experience variances	(13)	(3)	(16)	4	(12)
Operating assumption changes	2	-	2	11	13
Development expenses	(22)	-	(22)	-	(22)
Expected return on free surplus	4	-	4	-	4
EEV operating profit/(loss) after tax	(33)	11	(22)	94	72
Investment return and tax variances	4	1	5	12	17
Effect of economic assumption changes	3	-	3	5	8
Restructuring costs	(4)	-	(4)	-	(4)
EEV profit/(loss) after tax	(30)	12	(18)	111	93
Internal capital transfers	(3)	-	(3)	-	(3)
Transfer back of surplus to Standard Life Investments	(2)	-	(2)	-	(2)
Actuarial losses on defined benefit pension schemes	(9)	-	(9)	-	(9)
Foreign exchange differences	(1)	-	(1)	(4)	(5)
Closing EEV	46	59	105	627	732

3.10 Time value of options and guarantees (TVOG)

	31 December 2011	31 December 2010
	£m	£m
UK and Europe HWPF	(251)	(76)
Canada	(29)	(26)
International	(41)	(17)
Total	(321)	(119)

UK and Europe HWPF TVOG reflects the value of shareholder exposure to the policyholder guarantees within the HWPF. The value of this exposure has increased by £175m during 2011. This mainly arose from adverse economic assumption changes reflecting the increased cost of guarantees in a low yield environment, in particular for German business, alongside a general increase in both implied volatility and corporate bond spreads. 

The £24m increase in TVOG within International mainly reflects the higher cost of guarantees for post demutualisation business in Germany.

3.11 Market value of subordinated liabilities within covered business

	31 December 2011	31 December 2010
	£m	£m
UK	(1,005)	(1,682)
Canada	(341)	(302)
Total	(1,346)	(1,984)

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.

3.11 Market value of subordinated liabilities within covered business continued

UK subordinated liabilities include Euro denominated subordinated guaranteed bonds. On 14 September 2011, the Company settled a tender for these bonds, as described in Note 37 to the IFRS financial information in the Annual Report and Accounts 2011. The tender was accepted for bonds with a face value of €687m and bonds with a face value of €63m remain outstanding. This tender resulted in a loss of £7m which is included within UK EEV operating profit as described in Note 3.4 - Experience variances.

The decrease in the UK subordinated liability mainly reflects the tender referred to above, along with increased market yields during 2011. The £39m increase in the Canada subordinated liability includes a £5m reduction from currency movements.

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.         

(a) PVIF emergence

In-force business
	PVIF	Cash emerging during years (£m)
At 31 December 2011	£m	1-5	6-10	11-15	16-20	20+
UK	4,280	1,501	978	673	449	679
Canada	4,291	484	455	440	416	2,496
International	1,337	386	248	147	102	454
Total undiscounted	9,908	2,371	1,681	1,260	967	3,629
Total discounted	4,744	2,069	1,108	628	364	575

New business
	PVIF		Cash emerging during years (£m)
At 31 December 2011	£m	1-5	6-10	11-15	16-20	20+
UK	520	148	118	94	67	93
Canada	157	21	27	21	18	70
International	230	85	53	29	24	39
Total undiscounted	907	254	198	144	109	202
Total discounted	508	220	129	72	42	45

(b) Reconciliation to closing PVIF

In-force business	Reconciliation of discounted PVIF
	PVIF	TVOG	Total
At 31 December 2011	£m	£m	£m
UK and HWPF TVOG	2,683	(251)	2,432
Canada	1,258	(29)	1,229
International	803	(41)	762
Total	4,744	(321)	4,423

See also Note 3.2(c) - Segmental analysis - covered business - Segmental analysis of opening and closing EEV.

New business	Reconciliation of discounted PVIF
	PVIF	Cost of capital	TVOG	Total
At 31 December 2011	£m	£m	£m	£m
UK	289	(7)	-	282
Canada	68	(7)	-	61
International	151	(5)	(5)	141
Total	508	(19)	(5)	484

See also Note 3.9 - Analysis of covered business EEV PVIF and net worth movements (net of tax).

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.

3.13 Principal economic assumptions - deterministic calculations - covered business

(a) Gross investment returns and expense inflation

	UK HWPF/PBF1	Canada	Europe HWPF/PBF1	Europe offshore2	Hong Kong
At 31 December 2011	%	%	%	%	%
Gross investment returns
Risk free	1.93	2.17	1.83	1.93	1.09
Corporate bonds	2.993	4	n/a	n/a	3.41
Equities	4.93	8.60	4.83	4.93	4.09
Property	3.93	8.60	3.83	3.93	n/a
Other
Expense inflation:	3.37	5		3.37	2.50
Germany			1.85
Ireland			2.74

¹    Proprietary Business Fund (PBF) denotes the equity holder owned fund in SLAL.

²    Europe offshore denotes Standard Life International Limited (SLIL).

³    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. 

	UK HWPF/PBF1	Canada	Europe HWPF/PBF1	Europe offshore2	Hong  Kong
At 31 December 2010	%	%	%	%	%
Gross investment returns
Risk free	3.49	3.29	2.96	3.49	6
Corporate bonds	4.083	4	n/a	n/a	6
Equities	6.49	8.60	5.96	6.49	6
Property	5.49	8.60	4.96	5.49	6
Other
Expense inflation:	3.95	5		3.95	6
Germany			2.29
Ireland			3.01

¹    Proprietary Business Fund (PBF) denotes the equity holder owned fund in SLAL.

²    Europe offshore denotes Standard Life International Limited (SLIL).

³    Excludes corporate bond returns on annuities. For annuities in UK equity holder funds, the overall investment return, after allowing for assumed defaults, is 4.91% for annuities that are level or subject to fixed escalations and 4.02% 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 government bonds.

⁵      0.691% in 2011. The rate in subsequent years is based on a moving 30-year bond yield less a 3% deduction.

⁶    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. 

3.13 Principal economic assumptions - deterministic calculations - covered business continued

(b) Risk discount rates - in-force business

	UK HWPF	UK PBF1	Canada	Europe HWPF	Europe PBF1	Europe offshore2	Hong Kong
At 31 December 2011	%	%	%	%	%	%	%
Risk margin - in-force business
Risk margin before cost of capital adjustment:
Market risk	1.90	1.90	3.20	0.70	1.50	1.80	1.60
Non-market risk	2.60	0.90	3.50	1.30	0.80	0.70	1.50
Total	4.50	2.80	6.70	2.00	2.30	2.50	3.10
Cost of capital adjustment	-	(0.10)	(2.20)	-	(1.00)	(0.20)	-
Risk margin after cost of capital adjustment	4.50	2.70	4.50	2.00	1.30	2.30	3.10
Risk discount rates - in-force business
Risk free	1.93	1.93	2.17	1.83	1.83	1.93	1.09
Risk margin	4.50	2.70	4.50	2.00	1.30	2.30	3.10
Risk discount rate3	6.43	4.63	6.67	3.83	3.13	4.23	4.19

¹    Proprietary Business Fund (PBF) denotes the equity holder owned fund in SLAL.

²    Europe offshore denotes Standard Life International Limited (SLIL).

³    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.

	UK HWPF	UK PBF1	Canada	Europe HWPF	Europe PBF1	Europe offshore2	Hong Kong
At 31 December 2010	%	%	%	%	%	%	%
Risk margin - in-force business
Risk margin before cost of capital adjustment:
Market risk	1.80	1.60	2.60	1.80	1.60	1.60	4
Non-market risk	1.80	1.60	2.80	1.80	1.60	1.60	4
Total	3.60	3.20	5.40	3.60	3.20	3.20	4
Cost of capital adjustment	-	(0.50)	(1.80)	-	(0.50)	(0.50)	4
Risk margin after cost of capital adjustment	3.60	2.70	3.60	3.60	2.70	2.70	4
Risk discount rates - in-force business
Risk free	3.49	3.49	3.29	2.96	2.96	3.49	4
Risk margin	3.60	2.70	3.60	3.60	2.70	2.70	4
Risk discount rate3	7.09	6.19	6.89	6.56	5.66	6.19	4

¹    Proprietary Business Fund (PBF) denotes the equity holder owned fund in SLAL.

²    Europe offshore denotes Standard Life International Limited (SLIL).

³    Using the value of in-force business as weights, the average risk discount rates for UK and Europe were 6.73% and 6.10% respectively.

⁴    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.

Changes in market risk margins generally arise from changes in the mix of business and asset allocations. In Canada, the market risk is also impacted by the relative movements in the returns assumed on equities and property compared to risk free, which in 2011 led to a significant increase in Canada risk margins.

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.

Annuity-in-payment profits were recognised for certain classes of deferred annuities in Germany during 2011. Refer to Note 3.5 - Operating assumption changes. The recognition of the additional non-market risks within these annuity-in-payment profits has increased the risk discount rates used to value the German and Ireland domestic business. This generated a loss of £9m which has been included within other assumption changes in the International EEV operating profit.

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.

(c) Risk discount rates - new business

	UK HWPF	UK PBF1	Canada	Europe HWPF	Europe PBF1	Europe offshore2	Hong Kong
12 months to 31 December 2011	%	%	%	%	%	%	%
Risk margin - new business
Risk margin before cost of capital adjustment:
Market risk	2.00	2.10	1.10	1.80	1.90	1.70	1.40
Non-market risk	0.90	0.90	1.20	1.30	1.30	0.70	1.50
Total	2.90	3.00	2.30	3.10	3.20	2.40	2.90
Cost of capital adjustment	-	(0.20)	(0.30)	-	(2.00)	(0.20)	-
Risk margin after cost of capital adjustment	2.90	2.80	2.00	3.10	1.20	2.20	2.90
Risk discount rates - new business
Risk free3	3.49	3.49	3.29	2.96	2.96	3.49	2.10
Risk margin	2.90	2.80	2.00	3.10	1.20	2.20	2.90
Risk discount rate4	6.39	6.29	5.29	6.06	4.16	5.69	5.00

¹    Proprietary Business Fund (PBF) denotes the equity holder owned fund in SLAL.

²    Europe offshore denotes Standard Life International Limited (SLIL).

³    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 2010.

⁴    Using the value of in-force for new business as weights, the average risk discount rates for UK and Europe were 6.30% and 4.54% respectively.

	UK HWPF	UK PBF1	Canada	Europe HWPF	Europe PBF1	Europe offshore2	Hong Kong
12 months to 31 December 2010	%	%	%	%	%	%	%
Risk margin - new business
Risk margin before cost of capital adjustment:
Market risk	1.80	1.50	1.40	1.80	1.50	1.50	5
Non-market risk	0.50	1.60	1.90	0.50	1.60	1.60	5
Total	2.30	3.10	3.30	2.30	3.10	3.10	5
Cost of capital adjustment	-	(0.40)	(0.70)	-	(0.40)	(0.40)	5
Risk margin after cost of capital adjustment	2.30	2.70	2.60	2.30	2.70	2.70	5
Risk discount rates - new business
Risk free3	4.11	4.11	3.85	3.39	3.39	4.11	5
Risk margin	2.30	2.70	2.60	2.30	2.70	2.70	5
Risk discount rate4	6.41	6.81	6.45	5.69	6.09	6.81	5

¹    Proprietary Business Fund (PBF) denotes the equity holder owned fund in SLAL.

²    Europe offshore denotes Standard Life International Limited (SLIL).

³    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 2009.

⁴      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.

3.13 Principal economic assumptions - deterministic calculations - covered business continued

(d) International - Asia

The PVIF and cost of required capital of the India and China JV businesses is calculated using a 'risk neutral' approach whereby projected investment returns and discount rates are based on risk free rates. This was also the approach adopted for Hong Kong until 2011. The risk free rates used were:

	31 December 2011	31 December 2010
	%	%
India	8.55	6.81
China	3.89	3.92
Hong Kong	n/a	1.55

As a result of this risk neutral approach there is no requirement to hold a market risk margin within the risk discount rate.

Non-market risk has been allowed for via a specific deduction to PVIF, based on a non-market risk 'cost of capital' approach. This has reduced the PVIF of the India and China JV businesses at 31 December 2011 by £25m (31 December 2010: £22m). Similarly, the 2011 pre-tax NBC has been reduced by £7m (2010: £8m) as an allowance for non-market risk.

3.14 Principal economic assumptions - stochastic calculations

The level of TVOG is generally calculated using a stochastic projection. This requires an economic scenario generator (ESG) which projects the relevant fund under a large number of different future economic scenarios. A detailed description of the methodology applied in the relevant funds is provided in Note 3.17 - EEV methodology.

Characteristics of ESG used for HWPF TVOG calculations - UK and Europe

The ESG simulates future economic environments in a market-consistent manner. The outputs of the ESG include:

·  Cash account index

·  Gross redemption yield term structure

·  Equity total return index

·  Property total return index

·  Gilt total return index

·  Corporate bond total return index

·  Equity dividend yields

·  Property rental yields

·  Price inflation

·  Earnings inflation

The ESG allows option-pricing techniques to be used to value TVOG.

Parameters used in ESG

Cash and bond returns

These variables are calibrated using repo rates and government strips.

Inflation

This variable is calibrated based on the relationship between real and nominal yield curves.

Equity returns

The volatility of equity returns is calibrated to the market prices of a range of FTSE 100 and Dow Jones Euro Stoxx options.

Property returns

As there is no liquid property option market, a best estimate of property return volatility is used. The property volatility is estimated from adjusted Investment Property Databank UK data.

Dividend and rental yields

Dividend yields are derived from current market observable yields (FTSE All Stocks for UK and Euro Stoxx 50 for Europe).

Rental yields are derived from rental income on our actual portfolio of property (with a three month lag).

Swaption-implied volatilities

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 swaption-implied volatilities are set out in the following table:

	31 December 2011		31 December 2010
UK Sterling	Swap term (years)		Swap term (years)
Option term (years)	10	15	10	15
10	19.1%	17.1%	14.4%	14.2%
15	17.7%	16.1%	14.5%	14.3%
20	16.0%	14.6%	14.2%	13.9%
25	14.6%	13.4%	13.6%	13.3%

	31 December 2011		31 December 2010
Euro	Swap term (years)		Swap term (years)
Option term (years)	15	20	15	20
10	20.2%	19.8%	15.5%	15.1%
15	19.4%	18.6%	15.0%	14.4%
20	17.6%	16.6%	13.5%	12.8%
25	16.3%	n/a	12.6%	n/a

Equity-implied volatilities

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
10	26.2%	25.4%
15	26.7%	26.7%
20	27.4%	27.4%
25	28.4%	28.4%
European equities
Term (years)
10	27.9%	25.8%
15	27.9%	27.9%
20	28.6%	29.0%
25	28.9%	29.6%

Property-implied volatilities

The implied volatilities have been set as best estimate levels of volatility based on historic data.

For the UK and Europe, the model is calibrated to property-implied volatility of 15% for 31 December 2011 and 15% for 31 December 2010.

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: £	Closing 31 December 2011	Average to 31 December 2011	Closing 31 December 2010	Average to 31 December 2010
Canada	1.582	1.584	1.556	1.605
Europe	1.197	1.152	1.167	1.165
India	82.529	75.027	70.007	70.803
China	9.782	10.378	10.317	10.477
Hong Kong	12.070	12.499	12.171	12.032

3.16 Sensitivity analysis - economic and non-economic assumptions

The tables below show the sensitivity of the embedded value and NBC to different scenarios.

Sensitivities tested were:

·  1% increase and decrease in risk discount rates

·  Interest rates 1% higher and lower than base case, with consequential changes in fixed interest asset values, reserving assumptions, risk discount rates and investment returns on equities and properties

·  10% fall in market value of equity assets

·  10% fall in market value of property assets

·  10% decrease in maintenance expenses (a 10% sensitivity on a base expense assumption of £10 p.a. would represent an expense assumption of £9 p.a.). Where there is a look through into service company expenses, the fee charged by the service company is unchanged while the underlying expense decreases.

·  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

·  EEV results assuming only prescribed minimum capital (where economic capital has been used in the EEV calculations)

Embedded value:

	UK	Canada	International	HWPF TVOG	Total
31 December 2011	£m	£m	£m	£m	£m
Embedded value	3,459	1,712	867	(251)	5,787
Risk discount rates +1%	(196)	(191)	(84)	-	(471)
Risk discount rates -1%	229	242	112	-	583
Interest returns +1%	(11)	37	(4)	97	119
Interest returns -1%	19	(359)	(25)	(344)	(709)
Fall in equity market values by 10%	(158)	(30)	(24)	(19)	(231)
Fall in property market values by 10%	(17)	(56)	(2)	(15)	(90)
Maintenance expenses -10%	132	100	13	-	245
Lapse rates -10%	116	118	17	(24)	227
Annuitant mortality -5%	(74)	(49)	(6)	(8)	(137)
Non-annuitant mortality -5%	8	30	2	1	41
Prescribed minimum capital	-	139	-	-	139

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.

New business contribution:

	UK	Canada	International	HWPF TVOG	Total
12 months to 31 December 2011	£m	£m	£m	£m	£m
New business contribution	204	73	58	-	335
Risk discount rates +1%	(31)	(13)	(13)	-	(57)
Risk discount rates -1%	37	16	18	-	71
Interest returns +1%	(1)	(8)	3	-	(6)
Interest returns -1%	-	10	(11)	-	(1)
Fall in equity market values by 10%	(25)	(10)	(4)	-	(39)
Fall in property market values by 10%	(4)	-	-	-	(4)
Maintenance expenses -10%	23	14	5	-	42
Lapse rates -10%	18	12	6	-	36
Annuitant mortality -5%	(3)	(1)	-	-	(4)
Non-annuitant mortality -5%	-	16	2	-	18
Prescribed minimum capital	-	2	-	-	2

Sensitivities to higher and lower assumed equity and property risk premiums in future investment earnings have not been calculated, as the effect of the risk premium is removed in setting the market risk margin in the risk discount rate.

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.

3.17 EEV methodology

Covered business

For the purposes of EEV reporting, a distinction is drawn between covered business to which EEV methodology is applied and non-covered business where results and balances are based on those determined under IFRS and included in the IFRS financial statements, unless otherwise stated.

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

·  Those elements of Wrap business that are contained within a long-term product wrapper, i.e. bonds, SIPPs and mutual funds

·   Mutual funds sold by the UK business

Canada covered business also includes mutual funds.

International covered business consists of:

·  The Group's Germany branch of Standard Life Assurance Limited (SLAL)

·  The Group's Ireland branch of SLAL

·  The Group's offshore bond business, which is sold by Standard Life International Limited (SLIL)

·  The Group's business in Hong Kong (Standard Life (Asia) Limited)

·   The Group's share of results in the JV in India, HDFC Standard Life Insurance Company Limited, at 26% for the 12 months to 31 December 2011 (2010: 26%)

·   The Group's share of results in the JV in China, Heng An Standard Life Insurance Company Limited, at 50% for the 12 months to 31 December 2011 (2010: 50%)

Non-covered business

The Group's non-covered business predominantly consists of the third party global investment management business of Standard Life Investments, Standard Life plc, the non-covered business of Standard Life Savings Limited, other non-life and pensions entities and the Group's UK pension scheme. The Group's healthcare business, Standard Life Healthcare Limited, was sold on 31 July 2010.

Non-covered business EEV operating profit is represented by operating profit as adjusted for Standard Life Investments (global investment management) look through profits and the return on mutual funds which are recognised in covered business.

3.17 EEV methodology continued 

Segmentation

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.

Consolidation adjustments

Covered business includes the profits and losses arising from non-covered businesses providing investment management and other services to the Group's life and pensions businesses. As a result, the profits and losses on an IFRS basis have been removed from the relevant non-covered segments (global investment management, UK non-covered and other non-covered) and are instead included within the EEV results of the covered businesses.

The capitalised values of the future profits and losses from such service companies are included in the opening and closing embedded value for the relevant businesses, but the net assets remain within the relevant non-covered businesses. A transfer of profits from the covered business to the non-covered business is deemed to occur in order to reconcile the profits and losses arising in the financial period within each segment with the opening and closing EEV net assets. 

The consolidation adjustment to remove the impact of the accounting differences for the Canada subordinated liability is explained in more detail under subordinated liabilities in the EEV methodology.

Value of in-force covered business

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.

Allowance is made for external reinsurance and reinsurance within the Group. The cash flows include the profits and losses arising in Group companies providing global investment management and other services where these relate to covered business. This is referred to as the 'look through' into service company expenses.

The projected cash flows are discounted to the valuation date using a risk discount rate which is intended to make sufficient allowance for the risks associated with the emergence of these cash flows, other than those risks allowed for elsewhere in the EEV calculations. In particular, a deduction is made from the present value of the best estimate cash flows to reflect the risks associated with the existence of financial options and guarantees, this deduction being assessed using stochastic techniques as described in the EEV methodology.

Free surplus

The free surplus is the market value of any assets allocated to, but not required to support, the in-force covered business at the valuation date. In the UK, this comprises the market value of the assets in the equity holders' fund, plus the value of the equity holders' interests in the surplus of the long-term fund, after appropriate allowance for tax, less the required capital supporting the covered business.

For some assets and liabilities where market value is not the normal basis for accounting, the free surplus is restated to market value, adjusted as required to allow for the present value of any tax which would become payable if the assets were realised.

Allowance for risk

Under the EEV Principles and Guidance, risks within the covered business are allowed for in the following ways:

·  Application of risk discount rates to projected cash flows, which are derived by adding a risk margin to a risk free rate

·  Holding of required capital for the covered business, determined by reference to both regulatory requirements and internal economic capital assessments

·  Allowing for TVOG

Risk discount rates

Under the EEV methodology, a risk discount rate is required to calculate the present value of expected future distributable profits as a single value at a particular date. The risk discount rate comprises a risk free rate which reflects the time value of money and a risk margin allowing for the risk that experience in future years may differ from that assumed. In particular, a risk margin is added to allow for the risk that expected additional returns on certain asset classes are not achieved.

Risk discount rates have been determined as the risk free government bond yield plus a risk margin. The risk margins have been determined for market risk and non-market risk separately. For market risk, we have opted for an approach whereby the risk margin is determined such that PVIF (excluding the allowance for TVOG) calculated using expected 'real world' asset returns equates with PVIF calculated using 'risk neutral' investment returns and discount rates. In this way, the benefits of assuming higher than risk free returns on future cash flows are offset by using a higher discount rate. However, when returns above the risk free rate arise from the additional returns available from investing in illiquid assets, namely corporate bonds and mortgages, where they are matched to appropriate liabilities, these are not offset in determining the discount rate. Allowance has then been made for non-market risk by applying stress tests to PVIF using our internal capital model, and quantifying an additional risk margin based on the results of the stress tests. 

The main elements of non-market risk which are stress tested are lapse, mortality, expense and credit risk assumptions. Benefits of diversification between risk types are allowed for in deriving the risk margins in line with our internal capital model.

Separate risk discount rates have been calculated for in-force and new business and for the principal geographic segments (UK, 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 inter-fund 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. 

The risk margins are also reduced to allow for any cost of required capital (excluding double taxation cost) which is already reflected within the EEV.

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.

The values of the risk discount rates used for this reporting period are provided in Note 3.13 - Principal economic assumptions - deterministic calculations - covered business.

Within the EEV results for the India and China JV businesses, PVIF and cost of required capital are calculated using a 'risk neutral' approach, whereby projected investment returns and discount rates are based on risk free rates. As a result, there is no need for an additional market risk margin in the discount rate. Non-market risk is deducted directly from PVIF using a 'cost of capital' approach on the risk capital arising from the key sources of non-market risk. For the India and China JV businesses, this methodology would give a similar result to the methodology used in the UK, Europe, Canada and Hong Kong, since the calibration of a risk discount rate would have allowed for the market and non-market risks.

Required capital

Required capital represents the amount of assets over and above those required to back the liabilities in respect of the covered business whose distribution to equity holders is restricted. As a minimum, this will represent the capital requirement of the local regulator.

The levels of required capital are reviewed in detail at least 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.

The levels of required capital in the current EEV calculations are therefore as follows:

·  UK and Europe (business in HWPF) - no capital requirement in excess of statutory reserves or asset shares is valued in the EEV

·  UK and Europe (business in equity holder owned funds) - 100% of EU minimum regulatory capital, which is higher in aggregate than Standard Life's internal risk-based capital requirement

·  Canada - the level of required capital is taken as 170% of minimum continuing capital and surplus requirements (MCCSR)

·  India, China and Hong Kong - required capital is based on the local statutory capital requirements

The cost of required capital has been calculated using assumptions consistent with those used in the value of in-force (VIF) calculations.

3.17 EEV methodology continued 

Time value of financial options and guarantees (TVOG)

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. 

UK and Europe - HWPF

The main source of TVOG in the Group EEV arises from the HWPF. Under the terms of the Scheme, equity holder cash flows from the HWPF are held back if required to cover HWPF liabilities on the Financial Services Authority realistic or regulatory basis. This option for the UK, Germany and Ireland results in the loss of cash flows when the HWPF has insufficient assets to pay guaranteed policy benefits. The main options and guarantees within the HWPF in respect of UK and Europe business relate to with profits business and include minimum guaranteed rates of return.

The value of TVOG arising from the HWPF at any point in time will be sensitive to:

·  The level of the residual estate (working capital in the HWPF)

·  Investment conditions in terms of bond yields, equity and property values, and implied market volatility

·  The investment profile of the assets backing the applicable policies, the residual estate and non profit business in the fund at the time TVOG is calculated

The level of TVOG has been calculated by a model which projects the HWPF under a large number of different future economic scenarios. Particular features of this calculation are:

·  The projected economic scenarios and the methodology used to discount equity holder cash flows are based on market-consistent assumptions

·  The total cost includes an allowance for non-market risk

·  Changes in policyholder behaviour are allowed for according to the particular economic scenario

·  Changes in management actions, including the dynamic guarantee deductions, are allowed for according to the particular economic scenario, such actions being expected to be consistent with the way that the HWPF will be managed in future as described in the Scheme and in the Principles and Practices of Financial Management (PPFM)

·  Each projection allows for the gradual release of the residual estate over time to policyholders where there are sufficient funds

UK and Europe - other

Most with profits business written post demutualisation is managed in a number of new with profits funds. For the present reporting period, the only significant volumes of this type of new business have arisen in Germany. These policies have guarantees relating to benefits available on the policy maturity date, some of which increase each year with the addition of bonuses. 

Equity holder assets are at risk if the resources of these with profits funds are insufficient to pay the guaranteed benefits. The level of TVOG has been calculated using stochastic techniques. TVOG has reduced both NBC and closing PVIF for Germany.

An adjustment is made within free surplus to allow for the potential cost of a selection of guaranteed annuity benefits on unit linked and smoothed-managed business within Germany.

Canada

The main options and guarantees within the Canada business are in respect of minimum investment returns, guaranteed maturity and death benefits, and vested bonuses, which apply to certain investment and insurance contracts.

Asia

TVOG in the Asia businesses within International arises from guarantees and options given to with profits business written in India and China.

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.

The inflation rates assumed are, in general, based on the market implied long-term price inflation plus a margin to allow for salary inflation.

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.

Details of the assumptions used for this reporting period are provided in Note 3.13 - Principal economic assumptions - deterministic calculations - covered business.

Non-economic assumption changes

Non-economic assumptions for the main classes of business, including most expense assumptions, are reviewed on an annual basis.

Expense assumptions

Expense assumptions on a per policy basis have been derived based on an analysis of management expenses performed by each business, and are split between acquisition and maintenance assumptions. 

In determining future expenses in relation to covered business, no allowance has been made in the EEV or NBC for any allocation of group corporate centre costs.

Development expenses represent specific expenses incurred which are considered temporary in nature and are not expected to occur again.

Costs related to restructuring have been excluded from the EEV results where it has been agreed that these costs are to be met by the HWPF and therefore would not form part of the surplus cash flows.

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.

Restructuring costs for covered and non-covered business are consistent with those identified in the Group operating profit adjustments and primarily represent costs in relation to a number of restructuring programmes including Solvency 2. Refer to the IFRS financial information Note 2.3 - Administrative expenses for further detail. Restructuring costs in 2011 also include the impact on free surplus, required capital, cost of required capital and PVIF arising from the termination of the internal reinsurance agreement between SLAL and SLIF.

Acquisition costs used within the calculation of NBC reflect the full acquisition expenses incurred in writing new business in the period.

Expenses - pension scheme deficits

Pension scheme deficits have been included in accordance with International Accounting Standard (IAS) 19 Employee Benefits. IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction was adopted by the Group from 1 January 2008. The interpretation provides guidance on assessing the limit in IAS 19 Employee Benefits on the amount of any surplus that can be recognised as an asset and explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement.

Other non-economic experience assumptions

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. 

Annuitant mortality assumptions use a combination of base mortality rates, which are generally set by reference to recent experience, and expected future changes in mortality. The latter uses company-specific considerations, along with data provided by the Continuous Mortality Investigation Bureau in the UK and the Canadian Institute of Actuaries in Canada.

Assumptions regarding option take-up, surrenders and withdrawals are assumed to vary, where appropriate, according to the investment scenario under consideration when deriving TVOG, to reflect our best estimate of how policyholder behaviour may vary in such circumstances.

New business

Definition of new business

New business includes new policies written during the period and some increments to existing policies.

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

·  Department for Work and Pensions (DWP) rebates are deemed to be new single premiums

·  Pensions vesting into annuity contracts under existing group defined benefits contracts are not included as new business

·  Pensions vesting under other group contracts and individual pensions are included as new business

·  Products substituted due to the exercise of standard contract terms are not deemed to be new business

·  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

For Germany, new business comprises new contracts written into the equity holder owned funds during the period (with the exception of vesting annuities for tax layer 1 deferred annuities sold before September 2009). NBC for Germany is calculated assuming a specific level of future premium indexation. Similarly, it is assumed that premiums on 'low start' policies increase at the end of the low start period.

3.17 EEV methodology continued 

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

·   Pensions vesting into annuity contracts under existing group defined benefits contracts are not included as new business

·   Pensions vesting under other group contracts and individual pensions are included as new business

·   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

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.

New business contribution (NBC)

The contribution generated by new business written during the period is the present value of the projected stream of after-tax distributable profit from that business. NBC before tax is calculated by grossing up the contribution after tax at the full corporation tax rate for UK business and at other equivalent rates of tax for other countries. NBC is calculated as at the end of the reporting period.

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.

Present value of new business premiums (PVNBP)

New business sales are expressed as PVNBP. The PVNBP calculation is equal to total single premium sales received in the period plus the discounted value of regular premiums expected to be received over the term of the new contracts, and is expressed at the point of sale. The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate NBC, except that PVNBP is discounted using the relevant opening risk free rate rather than the risk discount rate. 

Tax

The opening and closing EEV numbers for covered business are determined on an after-tax basis. The tax assumptions used are based upon the best estimate of the actual tax expected to arise. EEV attributable tax and EEV profit before tax are derived by grossing up EEV profit after tax at the long-term rate of corporation tax appropriate to each territory. While for some territories this rate does not equate to the actual effective rate of tax used in the calculation of EEV after-tax profits, it provides a consistent grossing-up basis upon which to compare results from one year to another and is in line with the Group's expectation of the rate of tax applicable to new business.

During 2009, a loan was made to the HWPF by the Company, repayment of which is contingent on the emergence of recourse cash flows and surplus in the HWPF (contingent loan agreement). A transfer to equity holders was then made to transfer the remaining unallocated surplus to equity holders without equity holder tax arising. As a result of this, the market risk associated with unallocated surplus was reduced. Future transfers to equity holders from the HWPF will, in the first instance, take the form of repayments under the contingent loan agreement. Such transfers can be made without equity holder tax arising for a number of years. Over time the actual effective tax rate on these transfers to equity holders will move towards the standard rate of corporation tax.

For non-covered business, attributed tax is consistent with the IFRS financial statements, unless otherwise stated.

Subordinated liabilities

The liabilities in respect of the UK subordinated debt plus the subordinated debt issued by Canada form part of covered business and have been deducted at market value within EEV. The Canada subordinated liability is owned by a non-covered subsidiary of the Group, where the asset is valued on an amortised cost basis. Total Group EEV has been adjusted to exclude the difference between the market value and the amortised cost value of the Canada subordinated liability.

For non-covered business, no adjustment is made to the IFRS valuation of debt.

Foreign exchange

Embedded value and other items within the statement of financial position denominated in foreign currencies have been translated to Sterling using the appropriate closing exchange rates. NBC and other items within the income statement have been translated using the appropriate average exchange rates. Gains and losses arising from foreign exchange differences on consolidation are presented separately within the EEV consolidated statement of comprehensive income. Details of the exchange rates applied are provided in Note 3.15 - Foreign exchange.

 

END

 

 

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