Final Results - Part 6 of 8

RNS Number : 0461B

Standard Life plc

27 February 2014

 



Standard Life plc

Full Year Results 2013

Part 6 of 8

Independent Auditors' Report to the Directors of Standard Life plc

Report on the European Embedded Value - financial information

Our opinion                                              

In our opinion, the EEV financial information, defined below, for the year ended 31 December 2013 has been properly prepared, in all material respects, in accordance with the EEV basis set out in Notes 1 and 17 to the EEV financial information.

This opinion is to be read in the context of what we say in the remainder of this report.

What we have audited

The European Embedded Value financial information (the 'EEV financial information') basis, which is prepared by Standard Life plc (the 'Company'), comprises:

·   the EEV consolidated statement of financial position as at 31 December 2013

·   the EEV consolidated income statement and EEV consolidated statement of comprehensive income for the year then ended; and

·   the notes to the EEV financial information, which includes the EEV basis set out in Notes 1 to 17 and other explanatory information.

The financial reporting framework that has been applied in its preparation is the EEV basis set out in Notes 1 and 17 to the EEV financial information.

What an audit of the EEV financial information involves

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (ISAs (UK & Ireland)). An audit involves obtaining evidence about the amounts and disclosures in the EEV financial information sufficient to give reasonable assurance that the EEV financial information is free from material misstatement, whether caused by fraud or error. This includes an assessment of:

·    whether the accounting policies are appropriate to the Group's circumstances and have been consistently applied and adequately disclosed

·    the reasonableness of significant accounting estimates made by the directors

·    the overall presentation of the EEV financial information.

In addition, we read all the financial and non-financial information in the Annual Report and Accounts 2013 to identify material inconsistencies with the audited EEV financial information and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Responsibilities for the EEV financial information and the audit

Our responsibilities and those of the directors

The directors are responsible for the preparation of the EEV financial information in accordance with the EEV basis set out in Notes 1 and 17 to the EEV financial information.

Our responsibility is to audit and express an opinion on the EEV financial information in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

This report, including the opinion, has been prepared for and only for the Company's directors as a body in accordance with our letter of engagement dated 16 July 2013 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

PricewaterhouseCoopers LLP

Chartered Accountants

Edinburgh

27 February 2014

Notes:

(a)    The maintenance and integrity of the Standard Life plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

(b)    Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

EEV financial information

EEV consolidated income statement

For the year ended 31 December 2013

		Covered business	Non-covered business	2013 Total	Covered business	Non-covered business	2012 Total restated1
	Notes	£m	£m	£m	£m	£m	£m
UK and Europe2		465	18	483	803	10	813
Standard Life Investments3	6(b)	103	89	192	83	62	145
Canada2		399	(6)	393	315	(5)	310
Asia and Emerging Markets2		20	(5)	15	10	(11)	(1)
Group corporate centre costs2		-	(53)	(53)	-	(50)	(50)
Other2		-	(12)	(12)	-	24	24
Look through elimination3		(103)	-	(103)	(83)	-	(83)
Consolidation adjustment for different accounting bases4		-	-	-	-	(75)	(75)
EEV operating profit/(loss) before tax		884	31	915	1,128	(45)	1,083
EEV non-operating items
Long-term investment return and tax variances		293	-	293	498	-	498
Effect of economic assumption changes		168	-	168	(106)	-	(106)
Restructuring and corporate transaction expenses		(52)	(21)	(73)	(103)	(11)	(114)
Other EEV non-operating items		-	(24)	(24)	-	(18)	(18)
Consolidation adjustment for different accounting bases4		-	-	-	-	(42)	(42)
EEV non-operating profit/(loss) before tax		409	(45)	364	289	(71)	218
EEV profit/(loss) before tax		1,293	(14)	1,279	1,417	(116)	1,301
Tax attributable to:
EEV operating profit		(200)	(32)	(232)	(264)	24	(240)
EEV non-operating items		(73)	14	(59)	(64)	22	(42)
EEV attributed tax		(273)	(18)	(291)	(328)	46	(282)
Total EEV profit/(loss) after tax		1,020	(32)	988	1,089	(70)	1,019

¹      The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 - Basis of preparation.

²      The split of EEV operating profit has been updated to reflect changes in segmental reporting. Refer to Note 1 - Basis of preparation.

³      Standard Life Investments non-covered EEV operating profit of £89m (2012: £62m) represents operating profit of £192m (2012: £145m) after excluding profits of £103m (2012: £83m) which have been generated by life and pensions covered business. Refer to Note 6(b) - Standard Life Investments EEV operating profit before tax and Note 17 - EEV methodology.

⁴      This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 17 - EEV methodology.

EEV earnings per share (EPS)

For the year ended 31 December 2013

	2013	2012 restated1
EEV operating profit after tax (£m)2	683	843
Basic EPS (pence)	28.9	35.9
Weighted average number of ordinary shares outstanding (millions)	2,362	2,351
Diluted EPS (pence)	28.7	35.6
Weighted average number of ordinary shares outstanding for diluted earnings per share (millions)	2,378	2,369

¹      The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 - Basis of preparation.

²    EEV operating profit before tax of £915m (2012: £1,083m) less attributed tax on EEV operating profit of £232m (2012: £240m).

EEV consolidated statement of comprehensive income

For the year ended 31 December 2013

		2013	2012 restated1
		£m	£m
EEV profit after tax		988	1,019
Items that will not be reclassified subsequently to profit or loss:
Remeasurement gains/(losses) on defined benefit pension plans2		101	(37)
Equity holder tax effect relating to items that will not be reclassified subsequently to profit or loss		(8)	102
Other3		(22)	(1)
Total items that will not be reclassified subsequently to profit or loss		71	64
Items that may be reclassified subsequently to profit or loss:
Fair value losses on cash flow hedges2		-	(1)
Net investment hedge2		63	18
Fair value losses on non-covered business financial assets designated as available-for-sale		(18)	-
Exchange differences on translating foreign operations4		(201)	(86)
Equity holder tax effect relating to items that may be reclassified subsequently to profit or loss		3	-
Total items that may be reclassified subsequently to profit or loss		(153)	(69)
Other comprehensive income for the year		(82)	(5)
Total comprehensive income for the year		906	1,014

¹      The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 - Basis of preparation.

²      Consistent with the IFRS consolidated statement of comprehensive income.

³      Other primarily relates to the transfer of Standard Life Savings Limited to covered business. Refer to Note 1 - Basis of preparation.

⁴      Exchange differences primarily relate to Canada (loss £183m) and India (loss £28m).

EEV consolidated statement of financial position

As at 31 December 2013

	Covered business	Non-covered business	2013 Total	Covered business	Non-covered business	2012 Total restated1
	£m	£m	£m	£m	£m	£m
UK and Europe	4,538	641	5,179	4,103	514	4,617
Standard Life Investments	-	305	305	-	255	255
Canada	2,094	1	2,095	2,317	1	2,318
Asia and Emerging Markets	333	-	333	297	-	297
Group corporate centre	-	444	444	-	640	640
Other	-	67	67	-	15	15
Total Group embedded value	6,965	1,458	8,423	6,717	1,425	8,142
Analysed by:
Free surplus	843	1,458	2,301	944	1,425	2,369
Required capital	1,243	-	1,243	1,348	-	1,348
Net worth	2,086	1,458	3,544	2,292	1,425	3,717
Present value of in-force	5,453	-	5,453	5,073	-	5,073
Cost of required capital	(574)	-	(574)	(648)	-	(648)
Total net assets	6,965	1,458	8,423	6,717	1,425	8,142
Equity
Share capital			238			236
Shares held by trusts			(6)			(7)
Share premium reserve			1,110			1,110
Retained earnings on an IFRS basis			1,391			1,441
Other reserves			1,494			1,579
Additional retained earnings on an EEV basis			4,196			3,783
Total equity			8,423			8,142

¹      The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 - Basis of preparation.

EEV per share

As at 31 December 2013

		2013	2012 restated1
Total Group embedded value (£m)		8,423	8,142
EEV per share (pence)		353	343
Diluted closing number of ordinary shares outstanding (millions)		2,389	2,373

¹      The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 - Basis of preparation.

Approved on behalf of the Board of Directors on 27 February 2014 by the following Directors:

Gerry Grimstone, Chairman                                                             David Nish, Chief Executive

Notes to the EEV financial information

1.    Basis of preparation

The European Embedded Value (EEV) basis results have been prepared in accordance with the EEV Principles and Guidance issued by the CFO Forum of European Insurance Companies. 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.

A detailed description of EEV methodology is provided in Note 17 - EEV methodology. There have been no significant changes to EEV methodology from that adopted in the previous reporting period.

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 Group 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 - Operating segments. The EEV segmentation has been prepared in a consistent manner, whilst also distinguishing between covered and non-covered business.

In February 2013, changes were announced in the way the Group manages its business. The offshore bond business in Ireland which was previously reported in Asia and Emerging Markets is now managed and reported as part of UK and Europe. Additionally, due to changes in the way the Group's segments are managed, some overhead costs which were previously reported in Other within non-covered business are now reported within Group corporate centre costs in non-covered business.

The IFRS reportable segments have been changed for the year ended 31 December 2013, as explained in Group financial statements Note 2(b) - Reportable segments - Group operating profit, revenue and asset information. EEV reporting segments and the formats of the EEV consolidated income statement and EEV consolidated statement of financial position have been amended and reflect the new IFRS reportable segments. Comparative amounts for 31 December 2012 have been restated on the same basis to allow more meaningful comparison.

Business combinations

On 27 September 2013, Standard Life Wealth Limited (SLW), a wholly owned subsidiary of the Company, acquired the private client division of Newton Management Limited. Details of this transaction are included in Note 1 to the Group financial statements. SLW is a non-covered entity for EEV reporting and is therefore included in the EEV results on an IFRS basis. SLW is part of the UK and Europe segment.

Standard Life Savings Limited

Standard Life Savings Limited, which was previously treated as a non-covered entity within UK and Europe with a look through in covered business relating to mutual funds profits, has been transferred to covered business on the closing EEV consolidated statement of financial position. In addition, to allow for the anticipated transfer of certain mutual funds business to Standard Life Investments during 2014, the PVIF of this business has been extinguished. The impact of these changes is to transfer £52m of net assets from non-covered business to covered business and to reduce closing PVIF by £21m, with no impact on EEV profit. From 1 January 2014, there will therefore no longer be a look through and transfer back of net worth in respect of Standard Life Savings Limited.

Amendment to IAS 19 Employee benefits

As described in Group accounting policies (a) Basis of preparation within the Group financial statements, the amendment to IAS 19 Employee Benefits which is effective for accounting periods beginning on or after 1 January 2013 has impacted the IFRS accounting for the Group's defined benefit pension plans. In accordance with our EEV Methodology, the Group's pension plans are accounted for within the EEV results using their IFRS values. The amendment has been applied retrospectively and prior period comparatives have therefore been restated. Within the EEV consolidated income statement for the year ended 31 December 2012, EEV operating profit has reduced by £33m, other comprehensive income has increased by £33m and EEV net assets as at 31 December 2012 have increased by £4m.

Impact of UK budget changes

The Finance Act 2013 reduced the UK corporation tax rate to 20% with effect from 1 April 2015. This reduced rate has been used as our best estimate assumption for UK corporation tax as at 31 December 2013.

2.    Segmental analysis - covered business

(a)     Segmental EEV income statement

		2013				2012 restated1
	Notes	UK and Europe	Canada	Asia and Emerging Markets	Total	UK and Europe	Canada	Asia and Emerging Markets	Total
		£m	£m	£m	£m	£m	£m	£m	£m
Contribution from new business	3	245	36	39	320	267	45	27	339
Contribution from in-force business:
Expected return on existing business		223	152	19	394	223	155	17	395
Experience variances	4	65	264	(8)	321	285	293	(10)	568
Operating assumption changes	5	(36)	(55)	(12)	(103)	56	(164)	(7)	(115)
Development expenses		(24)	(12)	(20)	(56)	(29)	(16)	(18)	(63)
Expected return on free surplus		(8)	14	2	8	1	2	1	4
EEV operating profit before tax		465	399	20	884	803	315	10	1,128
Long-term investment return and tax variances		271	30	(8)	293	359	128	11	498
Effect of economic assumption changes		269	(115)	14	168	(235)	118	11	(106)
Restructuring and corporate transaction expenses		(48)	(2)	(2)	(52)	(101)	(2)	-	(103)
EEV profit before tax		957	312	24	1,293	826	559	32	1,417
EEV attributed tax		(188)	(82)	(3)	(273)	(189)	(135)	(4)	(328)
EEV profit after tax		769	230	21	1,020	637	424	28	1,089

¹      The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 - Basis of preparation.

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.

New business contribution of £320m is £19m lower than 2012, resulting from the combination of higher sales, with PVNBP up £3,610m to £22,903m, along with a lower PVNBP margin of 1.4% (2012: 1.8%).

The expected return on existing business of £394m is broadly unchanged from 2012.

Details of experience variances and operating assumption changes are provided in Note 4 - Experience variances and Note 5 - Operating assumption changes.

Development expenses of £56m were £7m lower than 2012, reflecting lower costs in UK and Europe and in Canada.

The £8m expected return on free surplus represents an increase of £4m from 2012. Higher opening free surplus in Canada contributed to a £12m increase, partly offset by a reduction of £9m in UK and Europe, reflecting the increased differential between the expected return on subordinated liabilities and the expected return on assets backing subordinated liabilities.

Long-term investment return and tax variances generated a profit of £293m, which includes a £333m profit from higher than expected investment returns.

The effect of economic assumption changes was an overall gain of £168m. The impact of changes to the long-term corporation tax rate in the UK was a profit of £123m (refer to Note 1 - Basis of preparation). Increased risk free rates were the main driver for both a loss of £625m from higher risk discount rates, which is explained in Note 13 - Principal economic assumptions - deterministic calculations - covered business, and for a profit of £692m from the use of higher future assumed investment returns.

Restructuring and corporate transaction expenses of £52m (2012: £103m) primarily represent the covered business costs associated with a number of restructuring programmes and Solvency 2.

2.    Segmental analysis - covered business continued 

(b)     Segmental analysis of movements in covered business EEV

	2013				2012 restated1
	UK and Europe	Canada	Asia and Emerging Markets	Total	UK and Europe	Canada	Asia and Emerging Markets	Total
	£m	£m	£m	£m	£m	£m	£m	£m
Opening covered business EEV	4,103	2,317	297	6,717	3,818	1,716	257	5,791
EEV profit after tax	769	230	21	1,020	637	424	28	1,089
Internal capital transfers	(280)	(281)	41	(520)	(247)	236	22	11
Transfer back of surplus to Standard Life Investments	(78)	(1)	-	(79)	(60)	(2)	-	(62)
Transfer back of net worth to other non-covered business	(8)	(6)	-	(14)	(3)	(3)	-	(6)
Remeasurement gains/(losses) on defined benefit pension plans	(7)	31	-	24	(12)	(9)	-	(21)
Foreign exchange differences	13	(183)	(25)	(195)	(16)	(49)	(16)	(81)
Aggregate tax effect of items not recognised in income statement	-	(8)	-	(8)	-	4	-	4
Other	26	(5)	(1)	20	(14)	-	6	(8)
Total other movements	(334)	(453)	15	(772)	(352)	177	12	(163)
Closing covered business EEV	4,538	2,094	333	6,965	4,103	2,317	297	6,717

¹      The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 - Basis of preparation.

Other within UK and Europe includes a £31m closing adjustment (comprising £52m net assets and (£21m) closing PVIF) to transfer Standard Life Savings Limited between non-covered business and covered business. Refer to Note 1 - Basis of preparation.

3.    Analysis of new business contribution

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

	NBC	Single premiums	Annualised regular premiums	PVNBP	PVNBP multiplier1	PVNBP margin2
2013	£m	£m	£m	£m		%
UK:
Fee	157	12,301	983	16,712	4.5	0.9
Spread/risk	49	334	-	335	-	14.5
UK	206	12,635	983	17,047	4.5	1.2
Europe	39	1,593	39	2,029	11.2	1.9
UK and Europe	245	14,228	1,022	19,076	4.7	1.3
Fee	15	1,530	26	2,097	21.8	0.7
Spread/risk	21	317	37	797	13.0	2.7
Canada	36	1,847	63	2,894	16.6	1.3
Wholly owned	20	16	67	468	6.7	4.3
Joint ventures	19	70	89	465	4.4	4.0
Asia and Emerging Markets	39	86	156	933	5.4	4.2
Total covered business	320	16,161	1,241	22,903	5.4	1.4

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.

	NBC	Single premiums	Annualised regular premiums	PVNBP	PVNBP multiplier1	PVNBP margin2
2012	£m	£m	£m	£m		%
UK:
Fee	178	9,629	638	12,599	4.7	1.4
Spread/risk	71	462	-	463	-	15.3
UK	249	10,091	638	13,062	4.7	1.9
Europe	18	1,405	40	1,873	11.7	1.0
UK and Europe	267	11,496	678	14,935	5.1	1.8
Fee	16	1,545	57	2,555	17.7	0.6
Spread/risk	29	208	52	1,029	15.8	2.8
Canada	45	1,753	109	3,584	16.8	1.3
Wholly owned	14	8	41	252	6.0	5.4
Joint ventures	13	76	104	522	4.3	2.6
Asia and Emerging Markets	27	84	145	774	4.8	3.5
Total covered business	339	13,333	932	19,293	6.4	1.8

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.

4.    Experience variances

	2013				2012 restated1
	UK and Europe	Canada	Asia and Emerging Markets	Total	UK and Europe	Canada	Asia and Emerging Markets	Total
	£m	£m	£m	£m	£m	£m	£m	£m
Lapses	(27)	-	(7)	(34)	(6)	-	(9)	(15)
Maintenance expenses	(1)	4	(2)	1	(8)	11	1	4
Mortality and morbidity	(10)	-	1	(9)	(5)	-	1	(4)
Tax	59	117	-	176	14	23	-	37
Other	44	143	-	187	290	259	(3)	546
Total	65	264	(8)	321	285	293	(10)	568

¹      The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 - Basis of preparation.

UK and Europe lapse variances include negative £31m from UK business, mainly due to the impact of higher transfer activity in corporate pensions prior to the full implementation of the Retail Distribution Review and increased net outflows from institutional pensions.

Tax variances include gains of £57m in UK and Europe and £11m in Canada following the settlement of various prior-year tax negotiations and adjustments to prior year tax provisions. Tax variances in Canada of £117m also include £84m from the release of future tax components of actuarial liabilities and £22m from lower than expected tax in the year.

Other variances in Canada of £143m include £104m from revised modelling of future actuarial liabilities and their interaction with tax variances, along with £38m from operating variances within segregated funds. Other UK and Europe variances include a £40m gain from lower TVOG, mainly reflecting improved modelling of guarantees.

For the year to 31 December 2012, the overall total of £546m of other variances includes £520m of gains from management actions. These consist of £96m in UK and Europe from a professional indemnity insurance claim; £119m variances in UK and Europe HWPF TVOG primarily from asset strategy changes and improved modelling of German business; £67m in UK and Europe from management actions that resulted in the use of higher investment returns for annuities; £90m in Canada from revised modelling of future cash flows, primarily for segregated fund business; and £148m in Canada from the sale of property and a renegotiation of an existing reinsurance arrangement.

5.    Operating assumption changes

	2013				2012
	UK and Europe	Canada	Asia and Emerging Markets	Total	UK and Europe	Canada	Asia and Emerging Markets	Total
	£m	£m	£m	£m	£m	£m	£m	£m
Lapses	(25)	(56)	(13)	(94)	(3)	(53)	(7)	(63)
Maintenance expenses	(40)	(52)	-	(92)	23	(22)	-	1
Mortality and morbidity	20	10	-	30	7	50	1	58
Tax	1	-	(1)	-	-	-	-	-
Other	8	43	2	53	29	(139)	(1)	(111)
Total	(36)	(55)	(12)	(103)	56	(164)	(7)	(115)

Lapse assumption losses of £25m in UK and Europe include a £12m loss from increased paid-up rates and a loss of £13m from other policy off-rates. Most of these changes arise from UK pensions business. Canada lapse assumption losses of £56m arise from increased lapse rates for group pensions, mutual funds and life business. Increased paid-up rates were the main source of the £13m loss within Asia and Emerging Markets.

Expense assumption losses of £40m in UK and Europe and £52m in Canada mainly arise from changes in investment related income and expenses that have been allocated to covered business.

The £20m gain from mortality assumption changes in UK and Europe mainly arises from annuities, reflecting updates from recent experience.

The £43m other assumption changes in Canada includes £18m from an update of commission assumptions and £32m from the impact of asset changes.

For the year to 31 December 2012, Canada lapse assumption losses of £53m arise from the impact of assuming higher surrenders within Group pension business, reflecting recent experience. The £50m gain from mortality assumption changes in Canada mainly arises from annuities. The adverse £139m other assumption changes in Canada include losses of £45m from the decision to impose a minimum inflation rate on expenses; £17m from a reduction in expected fee income from our existing group savings and retirement contracts; and £72m from assuming that we will earn lower fee income on the funds invested from future deposits.

6.    Non-covered business

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

(a)     Segmental analysis - non-covered business

	UK and Europe	Standard Life Investments	Canada, AEM, Group corporate centre and Other	Total non-covered business
2013	£m	£m	£m	£m
Opening EEV non-covered business net assets	514	255	656	1,425
EEV operating (loss)/profit after tax	12	66	(79)	(1)
EEV non-operating loss after tax	(15)	-	(16)	(31)
Transfer back of net worth from covered business	8	79	6	93
Foreign exchange differences	-	(4)	(2)	(6)
Internal capital transfers	90	(94)	524	520
Distributions to equity holders	-	-	(656)	(656)
Other	32	3	79	114
Closing EEV non-covered business net assets	641	305	512	1,458

Other in UK and Europe includes a negative £52m closing adjustment to transfer Standard Life Savings Limited from non-covered business to covered business. Refer to Note 1 - Basis of preparation. Other in UK and Europe also includes the change in the UK non-covered pension plan of £77m (2012: negative £13m) and the associated deferred tax asset of £nil (2012: positive £98m). Other in Canada, AEM, Group corporate centre and Other includes £63m positive net investment hedge movement (2012: £18m).

	UK and  Europe	Standard Life Investments	Canada, AEM, Group corporate centre and Other	Total  non-covered business2
2012 (restated)1	£m	£m	£m	£m
Opening EEV non-covered business net assets	393	256	903	1,552
EEV operating profit/(loss) after tax	31	45	(40)	36
EEV non-operating loss after tax	(4)	(2)	(11)	(17)
Transfer back of net worth from covered business	3	62	3	68
Foreign exchange differences	-	(3)	(2)	(5)
Internal capital transfers	(2)	(106)	97	(11)
Distributions to equity holders	-	-	(331)	(331)
Other	93	3	37	133
Closing EEV non-covered business net assets	514	255	656	1,425

¹      The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 - Basis of preparation.

²      Excluding Group elimination. Refer to Note 7 - Movements in total EEV.

(b)     Standard Life Investments EEV operating profit before tax

Standard Life Investments covered business profits are included in EEV on a look through basis. This means that the profits from Standard Life Investments 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 £89m (2012: £62m) and operating profit for the Standard Life Investments business of £192m (2012: £145m) is the profit allocated to covered business.

	2013	2012
	£m	£m
Standard Life Investments third party non-covered business EEV operating profit before tax	89	62
Third party related covered business EEV operating profit before tax	75	56
Total third party business EEV operating profit before tax	164	118
Other covered business EEV operating profit before tax	28	27
Standard Life Investments operating profit before tax	192	145

Total Standard Life Investments EEV operating profit allocated to covered business of £103m (2012: £83m) consists of third party related covered business EEV operating profit of £75m (2012: £56m) and other covered business EEV operating profit of £28m (2012: £27m).

Third party related covered business EEV operating profits relate to products actively marketed and sold to third parties through Standard Life Investments distribution channels. If these profits are added to the Standard Life Investments third party non-covered business EEV operating profits of £89m (2012: £62m), there are £164m (2012: £118m) of total third party related profits for Standard Life Investments. The proportion of Standard Life Investments operating profit before tax generated from third parties reflects new business flows into higher margin third party products and outflows from captive products.

7.    Movements in total EEV

(a)     Analysis of profit and loss movements

	Covered
	UK and Europe	Canada	Asia and Emerging Markets	Total non-covered		Group elimination		Total		Pence per share
2013	£m	£m	£m	£m		£m		£m		p
Opening EEV	4,103	2,317	297	1,425		-		8,142		343
New business contribution	245	36	39	-		-		320
Contribution from in-force business	220	363	(19)	-		-		564
Non-covered business	-	-	-	31		-		31
EEV operating profit before tax	465	399	20	31		-		915
Tax on EEV operating profit	(92)	(106)	(2)	(32)		-		(232)
EEV operating profit/(loss) after tax	373	293	18	(1)		-		683		29
EEV non-operating profit/(loss) after tax	396	(63)	3	(31)		-		305		13
EEV profit/(loss) after tax	769	230	21	(32)		-		988
Non-trading adjustments	(334)	(453)	15	65		-		(707)
Closing EEV	4,538	2,094	333	1,458		-		8,423		353

	Covered
	UK and Europe	Canada	Asia and Emerging Markets	Total non-covered		Group elimination	Total		Pence per share
2012 (restated)1	£m	£m	£m	£m		£m	£m		p
Opening EEV	3,818	1,716	257	1,552		89	7,432		316
New business contribution	267	45	27	-		-	339
Contribution from in-force business	536	270	(17)	-		-	789
Non-covered business	-	-	-	30		(75)	(45)
EEV operating profit/(loss) before tax	803	315	10	30		(75)	1,083
Tax on EEV operating profit	(187)	(76)	(1)	6		18	(240)
EEV operating profit/(loss) after tax	616	239	9	36		(57)	843		36
EEV non-operating profit/(loss) after tax	21	185	19	(17)		(32)	176		7
EEV profit/(loss) after tax	637	424	28	19		(89)	1,019
Non-trading adjustments	(352)	177	12	(146)		-	(309)
Closing EEV	4,103	2,317	297	1,425		-	8,142		343

^1.     The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 - Basis of preparation.

(b)     Analysis of non-trading adjustments

	2013	2012 restated1
	£m	£m
Items included in other comprehensive income	(82)	(5)
Other items:
Distributions to equity holders	(656)	(331)
Issue of share capital other than in cash	2	1
Shares acquired by employee trusts	(11)	(5)
Reserves credit for employee share-based payment schemes	32	25
Aggregate tax effect of items recognised directly in equity	8	6
Total EEV non-trading adjustments	(707)	(309)

¹    The EEV comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 - Basis of preparation.

8.    Reconciliation of EEV net assets to IFRS net assets and IGD regulatory capital resources

	31 December 2013	31 December 2012 restated1
	£m	£m
Net assets on an EEV basis	8,423	8,142
Present value of in-force life and pensions business net of cost of capital	(4,879)	(4,425)
EEV net worth	3,544	3,717
Adjustment of long-term debt to market value	100	77
Canada marked to market adjustment	-	(19)
Sterling reserves	55	25
Valuation movement in available-for-sale assets backing investment contract liabilities	(10)	-
Deferred acquisition costs net of deferred income reserve	423	382
Deferred tax differences	65	129
Adjustment for share of joint ventures	20	22
Other	30	26
Net assets attributable to equity holders on an IFRS basis	4,227	4,359
Valuation adjustments for IGD	(1,284)	(1,034)
External subordinated liabilities	1,861	1,868
Capital in long-term business funds	3,590	2,796
IGD regulatory capital resources2	8,394	7,989

¹    The comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 - Basis of preparation.

²    31 December 2012 based on final regulatory returns, 31 December 2013 based on estimated regulatory returns.

Reconciling items are shown net of tax where appropriate.

9.    Group EEV capital and cash generation 

(a)     Analysis of Group EEV capital and cash generation

		2013			2012
		Free surplus movement	Required capital movement	EEV net worth movement	Free surplus movement	Required capital movement	EEV net worth movement
	Notes	£m	£m	£m	£m	£m	£m
Existing business		626	6	632	636	(23)	613
New business strain		(386)	120	(266)	(325)	109	(216)
Other covered business		269	(52)	217	389	(64)	325
Covered business operating capital and cash generation	9(c)	509	74	583	700	22	722
Non-covered business		(1)	-	(1)	(21)	-	(21)
EEV operating capital and cash generation	9(b)	508	74	582	679	22	701
Non-operating capital and cash generation:
Covered business		(22)	(95)	(117)	(320)	57	(263)
Non-covered business		(31)	-	(31)	(49)	-	(49)
EEV non-operating capital and cash generation		(53)	(95)	(148)	(369)	57	(312)
Total EEV capital and cash generation		455	(21)	434	310	79	389

9.    Group EEV capital and cash generation continued 

(b)     Reconciliation of operating profit to EEV operating capital and cash generation

	UK and Europe	Standard Life Investments	Canada	Asia and Emerging Markets	Other	Total
2013	£m	£m	£m	£m	£m	£m
Operating profit/(loss) before tax	380	192	251	(6)	(66)	751
Tax on operating profit	(48)	(47)	(51)	-	(3)	(149)
Operating profit/(loss) after tax1	332	145	200	(6)	(69)	602
Impact of different treatment of assets and actuarial reserves	(30)	-	(4)	(2)	-	(36)
DAC and DIR2, intangibles, tax and other	33	-	5	(22)	-	16
Look through to investment management	78	(79)	1	-	-	-
EEV operating capital and cash generation	413	66	202	(30)	(69)	582
EEV operating profit/(loss) after tax - PVIF	(28)	-	85	44	-	101
EEV operating profit/(loss) after tax	385	66	287	14	(69)	683

¹   Group operating profit after tax consists of: Group operating profit before tax of £751m, tax charge on operating profit of (£141m) and share of joint ventures' and associates' tax expense of (£8m). 

²    Deferred acquisition costs (DAC) and deferred income reserve (DIR).

	UK and Europe	Standard Life Investments	Canada	Asia and Emerging Markets	Other	Total
2012  (restated)1	£m	£m	£m	£m	£m	£m
Operating profit/(loss) before tax	393	145	353	3	(27)	867
Tax on operating profit	(15)	(38)	(79)	-	(1)	(133)
Operating profit/(loss) after tax	378	107	274	3	(28)	734
Impact of different treatment of assets and actuarial reserves	(15)	-	-	(4)	-	(19)
DAC and DIR2, intangibles, tax and other3	(5)	-	59	(11)	(57)	(14)
Look through to investment management	60	(62)	2	-	-	-
EEV operating capital and cash generation	418	45	335	(12)	(85)	701
EEV operating profit/(loss) after tax - PVIF	229	-	(100)	13	-	142
EEV operating profit/(loss) after tax	647	45	235	1	(85)	843

¹    The comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 - Basis of preparation.

²    Deferred acquisition costs (DAC) and deferred income reserve (DIR).

³    The £59m DAC and DIR, intangibles, tax and other item in Canada includes £57m relating to the elimination of the consolidation adjustment for different accounting bases, following the redemption of inter-Group subordinated liabilities. There is an offsetting adjustment in Other.

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

Total

		2013					2012 restated1
		Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total	Free surplus	Required capital	Net worth	PVIF  net of cost of capital	Total
	Notes	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Opening EEV		944	1,348	2,292	4,425	6,717	655	1,296	1,951	3,840	5,791
Contribution from new business		(386)	120	(266)	524	258	(325)	109	(216)	481	265
Contribution from in-force business:
Expected return		621	6	627	(322)	305	633	(23)	610	(305)	305
Experience variances and operating assumption changes		321	(52)	269	(109)	160	442	(64)	378	(38)	340
Development expenses		(52)	-	(52)	8	(44)	(53)	-	(53)	4	(49)
Expected return on free surplus		5	-	5	-	5	3	-	3	-	3
EEV operating profit after tax	9(a)	509	74	583	101	684	700	22	722	142	864
Investment return and tax variances		(110)	1	(109)	343	234	22	11	33	353	386
Effect of economic assumption changes		128	(96)	32	111	143	(264)	46	(218)	136	(82)
Restructuring and corporate transaction expenses		(40)	-	(40)	(1)	(41)	(78)	-	(78)	(1)	(79)
EEV profit/(loss) after tax	2(b)	487	(21)	466	554	1,020	380	79	459	630	1,089
Internal capital transfers		(520)	-	(520)	-	(520)	11	-	11	-	11
Transfer back of surplus to Standard Life Investments		(79)	-	(79)	-	(79)	(62)	-	(62)	-	(62)
Transfer back of net worth to other non-covered business		(14)	-	(14)	-	(14)	(6)	-	(6)	-	(6)
Remeasurement gains/(losses) on defined benefit pension plans		24	-	24	-	24	(21)	-	(21)	-	(21)
Foreign exchange differences		(31)	(84)	(115)	(80)	(195)	(9)	(27)	(36)	(45)	(81)
Aggregate tax effect of items not recognised in income statement		(8)	-	(8)	-	(8)	4	-	4	-	4
Other		40	-	40	(20)	20	(8)	-	(8)	-	(8)
Closing EEV		843	1,243	2,086	4,879	6,965	944	1,348	2,292	4,425	6,717

UK and Europe

		2013					2012 restated1
		Free  surplus	Required capital	Net worth	PVIF  net of cost of capital	Total	Free surplus	Required capital	Net worth	PVIF  net of cost of capital	Total
	Notes	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Opening EEV		473	246	719	3,384	4,103	739	203	942	2,876	3,818
Contribution from new business		(194)	20	(174)	372	198	(172)	25	(147)	354	207
Contribution from in-force business:
Expected return		446	4	450	(273)	177	427	4	431	(259)	172
Experience variances and operating assumption changes		155	4	159	(135)	24	126	3	129	130	259
Development expenses		(27)	-	(27)	8	(19)	(26)	-	(26)	4	(22)
Expected return on free surplus		(7)	-	(7)	-	(7)	-	-	-	-	-
EEV operating profit/(loss) after tax		373	28	401	(28)	373	355	32	387	229	616
Investment return and tax variances		(37)	(8)	(45)	263	218	(38)	3	(35)	314	279
Effect of economic assumption changes		36	(7)	29	187	216	(170)	9	(161)	(20)	(181)
Restructuring and corporate transaction expenses		(38)	-	(38)	-	(38)	(76)	-	(76)	(1)	(77)
EEV profit after tax		334	13	347	422	769	71	44	115	522	637
Other movements	2(b)	(326)	1	(325)	(9)	(334)	(337)	(1)	(338)	(14)	(352)
Closing EEV		481	260	741	3,797	4,538	473	246	719	3,384	4,103

¹    The comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 - Basis of preparation.

9.    Group EEV capital and cash generation continued

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

Canada

		2013					2012 restated1
		Free surplus	Required capital	Net worth	PVIF  net of cost of capital	Total	Free surplus	Required capital	Net worth	PVIF  net of cost of capital	Total
	Notes	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Opening EEV		441	1,061	1,502	815	2,317	(99)	1,059	960	756	1,716
Contribution from new business		(123)	93	(30)	57	27	(101)	76	(25)	60	35
Contribution from in-force business:
Expected return		125	-	125	(13)	112	151	(30)	121	(3)	118
Experience variances and operating assumption changes		170	(57)	113	41	154	318	(65)	253	(157)	96
Development expenses		(9)	-	(9)	-	(9)	(12)	-	(12)	-	(12)
Expected return on free surplus		9	-	9	-	9	2	-	2	-	2
EEV operating profit/(loss) after tax		172	36	208	85	293	358	(19)	339	(100)	239
Investment return and tax variances		(67)	10	(57)	80	23	59	7	66	31	97
Effect of economic assumption changes		92	(89)	3	(88)	(85)	(94)	38	(56)	146	90
Restructuring and corporate transaction expenses		(1)	-	(1)	-	(1)	(2)	-	(2)	-	(2)
EEV profit/(loss) after tax		196	(43)	153	77	230	321	26	347	77	424
Other movements	2(b)	(300)	(82)	(382)	(71)	(453)	219	(24)	195	(18)	177
Closing EEV		337	936	1,273	821	2,094	441	1,061	1,502	815	2,317

Asia and Emerging Markets

		2013					2012 restated1
		Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
	Notes	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Opening EEV		30	41	71	226	297	15	34	49	208	257
Contribution from new business		(69)	7	(62)	95	33	(52)	8	(44)	67	23
Contribution from in-force business:
Expected return		50	2	52	(36)	16	55	3	58	(43)	15
Experience variances and operating assumption changes		(4)	1	(3)	(15)	(18)	(2)	(2)	(4)	(11)	(15)
Development expenses		(16)	-	(16)	-	(16)	(15)	-	(15)	-	(15)
Expected return on free surplus		3	-	3	-	3	1	-	1	-	1
EEV operating profit/(loss) after tax		(36)	10	(26)	44	18	(13)	9	(4)	13	9
Investment return and tax variances		(6)	(1)	(7)	-	(7)	1	1	2	8	10
Effect of economic assumption changes		-	-	-	12	12	-	(1)	(1)	10	9
Restructuring and corporate transaction expenses		(1)	-	(1)	(1)	(2)	-	-	-	-	-
EEV profit/(loss) after tax		(43)	9	(34)	55	21	(12)	9	(3)	31	28
Other movements	2(b)	38	(3)	35	(20)	15	27	(2)	25	(13)	12
Closing EEV		25	47	72	261	333	30	41	71	226	297

¹    The comparative amounts have been restated to reflect retrospective application of changes to IAS 19 Employee benefits. Refer to Note 1 - Basis of preparation.

10.  Time value of options and guarantees (TVOG)

	31 December 2013	31 December 2012
	£m	£m
UK and Europe	(55)	(156)
Canada	(40)	(58)
Asia and Emerging Markets	(5)	(7)
Total	(100)	(221)

The UK and Europe TVOG reflects the value of shareholder exposure to with profit policyholder guarantees. The total comprises £42m for guarantees in the HWPF and £13m for guarantees in the GWPF. The value of this exposure has reduced by £101m during 2013. This arises from a post-tax operating profit of £18m and a post-tax non-operating profit of £83m. The operating profit includes a profit of £31m from revised modelling, a loss of £11m from assumption changes and a £3m loss from new business, whilst the non-operating profit largely reflects favourable assumption changes, particularly from the impact of increased risk free yields.

11.  Market value of subordinated liabilities within covered business

	31 December 2013	31 December 2012
	£m	£m
UK and Europe	(1,245)	(1,207)
Canada	(238)	(260)
Total	(1,483)	(1,467)

UK and Europe subordinated liabilities include Euro denominated subordinated guaranteed bonds. The impact of market value fluctuations in subordinated liabilities within covered business are reflected in non-operating profit as shown in Note 2(a) - Segmental EEV income statement.

12.  PVIF monetisation profile

(a)     PVIF (gross of TVOG) emergence

	In-force						New business
	PVIF	Cash emerging during years (£m)					PVIF	Cash emerging during years (£m)
31 December 2013	£m	1-5	6-10	11-15	16-20	20+	£m	1-5	6-10	11-15	16-20	20+
UK and Europe	6,751	2,010	1,562	1,115	755	1,309	571	194	132	93	63	89
Canada	4,074	564	489	447	370	2,204	218	37	33	29	25	94
Asia and Emerging Markets	430	170	98	65	43	54	143	62	29	18	14	20
Total undiscounted	11,255	2,744	2,149	1,627	1,168	3,567	932	293	194	140	102	203
Total discounted	5,553	2,386	1,388	785	424	570	582	266	138	80	47	51

(b)     Reconciliation to closing PVIF

	In-force				New business
	Reconciliation of discounted PVIF				Reconciliation of discounted PVIF
	PVIF	Cost of capital	TVOG	Total	PVIF	Cost of capital	TVOG	Total
31 December 2013	£m	£m	£m	£m	£m	£m	£m	£m
UK and Europe	3,966	(114)	(55)	3,797	385	(10)	(3)	372
Canada	1,318	(457)	(40)	821	100	(20)	(23)	57
Asia and Emerging Markets	269	(3)	(5)	261	97	(1)	(1)	95
Total	5,553	(574)	(100)	4,879	582	(31)	(27)	524

13.  Principal economic assumptions - deterministic calculations - covered business

(a)     Wholly owned businesses

	31 December 2013		31 December 2012
	In-force business	New business	In-force business	New business
	%	%	%	%
Risk-free rate
UK / SLIL	3.01	1.74	1.74	1.93
Europe	1.94	1.32	1.32	1.83
Canada	3.16	2.32	2.32	2.17
Hong Kong	1.92	0.91	0.91	1.09
Corporate bond returns, excluding Canada1
UK	3.76	2.34	2.34	2.99
Hong Kong	2.73	1.66	1.66	3.41
Total investment returns (annuities)
UK non index-linked annuities	4.26	2	3.81	2
UK index-linked annuities	3.69	2	3.06	2
Equity returns
Canada	8.60		8.60
Other	Risk-free rate + 3%pa		Risk-free rate + 3%pa
Property returns
Canada	8.60		8.60
Other	Risk-free rate + 2%pa		Risk-free rate + 2%pa
Risk discount rate risk margin
UK HWPF	4.10	2.70	4.50	2.50
UK PBF	2.40	3.10	2.30	2.60
Europe HWPF	2.80	2.50	2.50	3.30
Europe PBF	1.50	1.60	1.30	1.70
SLIL	2.20	2.30	2.40	2.10
Canada	3.40	2.70	3.90	2.70
Hong Kong	2.90	2.90	2.90	2.90
Risk discount rate3
UK HWPF	7.11	4.44	6.24	4.43
UK PBF	5.41	4.84	4.04	4.53
Europe HWPF	4.74	3.82	3.82	5.13
Europe PBF	3.44	2.92	2.62	3.53
SLIL	5.21	4.04	4.14	4.03
Canada	6.56	5.02	6.22	4.87
Hong Kong	4.82	3.81	3.81	3.99
Expense inflation
UK / SLIL	4.00	3.39	3.39	3.37
Europe (Germany)	1.60	1.87	1.87	1.85
Europe (Ireland)	2.69	2.84	2.84	2.74
Canada 4	1.50	1.50	1.50	0.00
Hong Kong	2.50	2.50	2.50	2.50

¹    For Canada, with the exception of AFS assets used to back investment contract liabilities at amortised cost, current holdings are assumed to yield in future years the earned rate for the year preceding the valuation and future reinvestments are assumed to be in a mixture of government and corporate bonds. For AFS assets used to back investment contract liabilities at amortised cost, yields are calculated at acquisition and subsequent changes are ignored.

²    For UK immediate annuity new business, economic assumptions are updated every quarter.

³    Using the value of in-force as weights, the average risk discount rates for UK and Europe (excluding SLIL) were 6.16% and 3.88% respectively at 31 December 2013, and 5.03% and 3.09% respectively at 31 December 2012. Using the value of in-force for new business as weights, the average risk discount rates for UK and Europe (excluding SLIL) were 4.81% and 2.95% respectively at 31 December 2013, and 4.52% and 3.60% respectively at 31 December 2012.

⁴    This represents the current rate. The rate in subsequent years is based on a moving 30-year bond yield less a 2% deduction, subject to a floor of 1.50% (with the exception of 31 December 2012 new business, where the rate is based on a moving 30-year bond yield less a 3% deduction, subject to a floor of 0.00%).

Risk margins have been updated at 31 December 2013 to reflect both the impact of market movements over the year and changes to the allowance for non-market risk, as well as any cost of required capital adjustment.

For UK, the reduction in the HWPF in-force business risk margin is due to a change in the allowance for longevity risk. The increase in the new business risk margin is primarily due to changes in business mix and asset allocations. For Canada, the reduction in the in-force business risk margin is largely due to an increase to the cost of required capital adjustment.

The impact of the changes in risk discount rates has been included in the effect of economic assumption changes shown in Note 2(a) - Segmental EEV income statement. The amounts within these totals that relate to the changes in risk discount rate are for UK and Europe: loss £500m, for Canada: loss £123m, for Asia and Emerging Markets: loss £2m.

(b)     Asia and Emerging Markets - joint ventures

The PVIF and cost of required capital of the Asian joint ventures are calculated using a 'risk neutral' approach whereby projected investment returns and discount rates are based on risk free rates. The risk free rates used were:

	31 December 2013	31 December 2012
	%	%
India	8.01	8.41
China	4.94	3.93

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 2013 by £22m (2012: £25m). Similarly, the 2013 pre-tax NBC has been reduced by £6m (2012: £6m) as an allowance for non-market risk.

14.  Principal economic assumptions - stochastic calculations

Parameters used in the economic scenario generator for UK and Europe

The level of TVOG is generally calculated using a stochastic projection. This requires an economic scenario generator which projects the relevant fund under a large number of different future economic scenarios. The economic scenario generator simulates future economic environments in a market consistent manner and allows option pricing techniques to be used to value TVOG.

Cash and bond returns

These variables are calibrated using 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 2013		31 December 2012
	UK Sterling	Euro	UK Sterling	Euro
	Swap term (years)		Swap term (years)
Option term (years)	10	20	10		20
10	17.7%	19.2%	17.1%		18.7%
15	16.4%	18.2%	15.3%		18.1%
20	14.9%	17.1%	14.1%		16.5%
25	13.7%	n/a	13.1%		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.

14.  Principal economic assumptions - stochastic calculations continued

The model equity-implied volatilities are set out in the following table:

	31 December 2013		31 December 2012
Term (years)	UK equities	European equities	UK equities	European equities
10	22.3%	22.8%	26.1%	24.2%
15	22.6%	22.7%	26.4%	24.1%
20	23.0%	23.3%	26.8%	24.6%
25	23.9%	23.6%	27.7%	24.8%

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 2013 and 15% for 31 December 2012.

Note 10 - Time value of options and guarantees (TVOG) also shows the value of TVOG in Canada and Asia and Emerging Markets, which are in addition to the UK and Europe TVOG. Where material, these values are also calculated using an economic scenario generator similar to that used for the HWPF and GWPF TVOG calculations, although market observed data is not always available at all durations.

15.  Foreign exchange

The principal exchange rates applied are:

Local currency: £	Closing 31 December 2013	Average to 31 December 2013	Closing 31 December 2012	Average to 31 December 2012
Canada	1.760	1.620	1.619	1.591
Europe	1.202	1.182	1.233	1.231
India	102.447	92.110	89.061	84.877
China	10.027	9.657	10.127	10.017
Hong Kong	12.842	12.183	12.599	12.331

16.  Sensitivity analysis - economic and non-economic assumptions

The following table shows the sensitivity of the covered business embedded value and NBC to different scenarios.

The interest returns 1% higher and lower than base case scenarios include consequential changes in fixed interest asset values, reserving assumptions, risk discount rates and investment returns on equities and properties.

Under the 10% decrease in maintenance expenses scenario, 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.

Under the 10% decrease in lapse rates scenario, a 10% sensitivity on a base lapse assumption of 5% p.a. would represent a lapse rate of 4.5% p.a.

The prescribed minimum capital scenario shows the sensitivity of EEV results where economic capital has been used in the base EEV calculations.

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. Demographic sensitivities 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.

	Embedded value - covered business				New business contribution
	UK and Europe	Canada	Asia and Emerging Markets	Total	UK and Europe	Canada	Asia and Emerging Markets	Total
31 December 2013	£m	£m	£m	£m	£m	£m	£m	£m
Base Value	4,538	2,094	333	6,965	245	36	39	320
Risk discount rates +1%	(305)	(177)	(15)	(497)	(32)	(19)	(5)	(56)
Risk discount rates -1%	356	223	17	596	38	23	6	67
Interest returns +1%	(3)	111	(6)	102	7	(8)	(1)	(2)
Interest returns -1%	14	(115)	6	(95)	(9)	11	2	4
Fall in equity market values by 10%	(272)	(47)	(4)	(323)	(34)	(7)	-	(41)
Fall in property market values by 10%	(20)	(53)	(1)	(74)	(3)	(1)	-	(4)
Maintenance expenses -10%	170	93	3	266	28	9	1	38
Lapse rates -10%	174	41	8	223	21	7	3	31
Annuitant mortality -5%	(73)	(49)	-	(122)	(2)	(1)	-	(3)
Non-annuitant mortality -5%	8	19	2	29	1	6	-	7
Prescribed minimum capital	-	123	-	123	-	8	-	8

The UK and Europe embedded value sensitivity numbers above include the movement in HWPF and GWPF TVOG. The HWPF and GWPF TVOG movement has a material impact only under the interest returns sensitivities, where it contributes £21m under the interest returns +1% sensitivity and (£31m) under the interest returns -1% sensitivity.

The UK and Europe new business contribution sensitivity numbers above include the movement in the GWPF TVOG. There is no new business in the HWPF TVOG. The GWPF TVOG movement has no material impact on new business contribution sensitivity numbers.

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 Group financial statements, unless otherwise stated.

The Group's covered business is its life assurance and pensions businesses in the UK and Europe (UK, Ireland and Germany including Austria), Canada and Asia and Emerging Markets, 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 and Europe 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

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

Canada covered business also includes mutual funds.

Asia and Emerging Markets covered business consists of:

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

·  International savings and investment business in Singapore and Dubai sold by SLIL

·  The Group's share of results in the JV in India (HDFC Standard Life Insurance Company Limited) and China (Heng An Standard Life Insurance Company Limited).

Standard Life Savings Limited has been transferred to covered business on the closing EEV statement of financial position. Refer to Note 1 - Basis of preparation.

Non-covered business

The Group's non-covered business predominantly consists of:

·  Within UK and Europe, Standard Life Wealth Limited, the Group's UK pension plan, other UK subsidiaries and until 31 December 2013, the non-covered results of Standard Life Savings Limited

·  Within Standard Life Investments, the non-covered third party business of Standard Life Investments

·  Within Other including Group corporate centre, Standard Life plc and other non life and pensions entities.

Non-covered business EEV operating profit is represented by operating profit as adjusted for Standard Life Investments and other look through profits which are recognised in covered business.

17.  EEV methodology continued

Transfer back of net worth from covered business

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 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. 

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. No allowance has been made for the change in reserving or required capital bases anticipated under Solvency 2. Allowance is made for external reinsurance and reinsurance within the Group. The cash flows include the profits and losses arising in Group companies providing investment management and other services where these relate to covered business, this is referred to as the 'look through' into service companies.

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.

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 (represented by a government bond yield) plus a risk margin. Separate risk margins are determined for market risk and non-market risk, with a reduction to allow for any cost of required capital (excluding double taxation cost) which is already reflected within the EEV.

The market risk margin effectively removes the impact of assuming higher than risk free returns on the discounted EEV result.  In this way, the benefits of assuming higher than risk free investment returns on future cash flows are largely offset by using a higher discount rate. The market risk margin does not remove returns above risk free on illiquid assets (e.g. corporate bonds and mortgages) where these are matched to appropriate liabilities (e.g. immediate annuities).

The non-market risk margin is intended to allow for the risk that non-market experience in future years may differ from that assumed. Allowance has 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 allowed for are persistency, mortality, operational and expense risk assumptions. Benefits of diversification between risk types are allowed for in deriving the non-market risk margins in line with our internal capital model.

Separate risk discount rates are calculated for in-force and new business for the principal geographic segments (UK, Europe, SLIL UK, Canada and Hong Kong). In addition, for UK and Europe, separate risk margins are calculated for business that originated in the HWPF and the PBF.

Market risk margins and any cost of required capital adjustment are reviewed at each valuation date, with non-market risk margins generally reviewed in detail once a year.

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)

·  Asia and Emerging Markets - required capital is generally 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.

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 Prudential Regulation 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.

17.  EEV methodology continued

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. TVOG has reduced both NBC and closing PVIF for Canada.

Asia and Emerging Markets

TVOG in the Asia businesses within Asia and Emerging Markets 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 international savings and investment business, which is sold via branches in Singapore and Dubai, is included within Asia and Emerging Markets results but has the same other economic assumptions as the SLIL International bond business.

Non-economic assumption changes

Non-economic assumptions for the main classes of business, including most expense assumptions, are reviewed in full on an annual basis. Other non-economic assumption changes, not relating to the full annual review of non-economic assumptions, may be reflected in the half year results, for example non-economic assumption changes resulting from management action or modelling changes.

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.

Investment management expenses are also allowed for, and the assumptions for these reflect the actual investment expenses of Standard Life Investments in providing investment management services to the life and pensions businesses rather than the investment fees actually charged.

Restructuring and corporate transaction expenses are consistent with those identified in the Group operating profit adjustments. Refer to the Group financial statements Note 7 - Other administrative expenses for further detail. In addition, restructuring and corporate transaction expenses for covered business include associated impacts on PVIF and cost of required capital.

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

Expenses - pension plans

Pension plans have been included in accordance with International Accounting Standard (IAS) 19 Employee Benefits and IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements.

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. The value of new business includes the value of expected renewal premiums where these are (i) contractual, (ii) non-contractual but reasonably predictable, or (iii) recurrent single premiums that are deemed likely to renew.

Additional considerations for each territory are noted below.

For the UK and Ireland:

·  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 when received.

For Germany, new business comprises new contracts written into the PBF with the exception of vesting annuities for tax layer 1 deferred annuities sold before September 2009. The NBC assumes a specific level of future premium indexation and also assumes that premiums on 'low start' policies increase at the end of the low start period.

For Canada, expected renewal premiums on new group pension and savings contracts are included at inception. Since all deposits (new and renewal) in individual segregated funds business attract a new business/first year commission, these deposits are treated as new business when received.

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 calculated as total single premiums 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 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

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.

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

Assets designated as available-for-sale under IFRS

The Group has designated certain financial assets used to back subordinated liabilities and investment contract liabilities as available-for-sale (AFS) under IFRS accounting.

Where AFS assets are held by an EEV covered business entity and these assets are used to back investment contract liabilities accounted for under local solvency regulations at amortised cost, then the assets are also included within EEV on an amortised cost basis and EEV operating profit reflects the long-term investment return on the assets calculated at acquisition.

Where AFS assets are held by an EEV covered business entity and these assets are used to back subordinated liabilities which are accounted for in EEV at market value, then the assets are also included within EEV on a market value basis. EEV operating profit reflects the long-term investment return on the assets and unrealised gains and losses are included within EEV non-operating profit.

Where AFS assets are held by an EEV non-covered entity, unrealised gains and losses do not impact EEV profit and are recorded within the EEV consolidated statement of comprehensive income.

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.

17.  EEV methodology continued

For Canada, previously issued subordinated liabilities were owned by a non-covered subsidiary of the Group, where the asset was valued on an amortised cost basis. Total Group EEV was adjusted to exclude the difference between the market value and the amortised cost value. During the year ended 31 December 2012, the subordinated liability was fully redeemed and the consolidation adjustment for different accounting bases is therefore no longer required.

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

Foreign exchange

Embedded value and other items within the EEV consolidated 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 EEV consolidated statement of comprehensive income 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.

EEV capital and cash generation

Covered business EEV operating capital and cash generation represents the EEV operating profit net worth (free surplus and required capital) on an after-tax basis. Non-covered business EEV operating capital and cash generation represents non-covered operating profit after tax as adjusted for Standard Life Investments look through profits after tax and the after-tax return on mutual funds which are recognised in covered business.

EEV non-operating capital and cash generation comprises covered business non-operating profit items (non-operating net worth movement after tax) and non-covered business non-operating profit items on an after-tax basis.

 

END

 

 

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