Final Results - Part 6 of 8

RNS Number : 3934F

Standard Life plc

20 February 2015

 



Standard Life plc

Full Year Results 2014

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 2014 has been properly prepared, in all material respects, in accordance with the EEV basis set out in Notes 1 and 12 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 income statement and EEV consolidated statement of comprehensive income for the year then ended

·   The EEV consolidated statement of financial position as at 31 December 2014

·   The notes to the EEV financial information, which includes the EEV basis set out in Notes 1 to 12 and other explanatory information.

We primarily focus our work in these areas by assessing the directors' judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial information.

We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both.

The financial reporting framework that has been applied in its preparation is the EEV basis set out in Notes 1 and 12 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 2014 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 12 to the EEV financial information.

Our responsibility is to audit and express an opinion on the EEV financial information in accordance with applicable laws 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 31 July 2014 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
20 February 2015

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 consolidated income statement

For the year ended 31 December 2014

	Covered business	Non-covered business	2014	Covered business	Non-covered business	2013 restated1
	£m	£m	£m	£m	£m	£m
UK and Europe	547	22	569	373	8	381
Standard Life Investments2	84	115	199	79	70	149
Asia and Emerging Markets	34	-	34	22	(4)	18
Group corporate centre costs	-	(43)	(43)	-	(40)	(40)
Other	-	(6)	(6)	-	(15)	(15)
Look through elimination2	(84)	-	(84)	(79)	-	(79)
EEV operating profit after tax from continuing operations	581	88	669	395	19	414
EEV operating profit/(loss) after tax from discontinued operations	227	(9)	218	289	(20)	269
EEV operating profit/(loss) after tax	808	79	887	684	(1)	683
EEV non-operating items
Long-term investment return and tax variances	182	-	182	212	-	212
Non-operating assumption changes	(160)	-	(160)	229	-	229
Restructuring and corporate transaction expenses	(39)	(55)	(94)	(40)	(17)	(57)
Other EEV non-operating items	-	(55)	(55)	-	(14)	(14)
EEV non-operating (loss)/profit after tax from continuing operations	(17)	(110)	(127)	401	(31)	370
EEV non-operating profit/(loss) after tax from discontinued operations	182	(8)	174	(65)	-	(65)
EEV non-operating profit/(loss) after tax	165	(118)	47	336	(31)	305
EEV profit/(loss) after tax from continuing operations	564	(22)	542	796	(12)	784
EEV profit/(loss) after tax from discontinued operations	409	(17)	392	224	(20)	204
Total EEV profit/(loss) after tax	973	(39)	934	1,020	(32)	988

¹      Comparatives for the year ended 31 December 2013 have been restated to reflect the classification in the current year of the Group's Canadian and Dubai businesses as discontinued operations. Refer to Note 1 - Basis of preparation.

²      Standard Life Investments non-covered EEV operating profit after tax of £115m (2013: £70m) represents operating profit after tax of £199m (2013: £149m) after excluding post-tax profits of £84m (2013: £79m) which have been generated by life and pensions covered business. Standard Life Investments operating profit after tax relating to third party business was £179m (2013: £128m).

EEV operating earnings per share (EPS¹)

For the year ended 31 December 2014

	2014	2013 restated2
Basic EPS from continuing operations (pence)	28.1	17.5
Basic EPS from discontinued operations (pence)	9.1	11.4
Basic EPS (pence)	37.2	28.9
Weighted average number of ordinary shares outstanding (millions)	2,384	2,362
Diluted EPS from continuing operations (pence)	27.9	17.4
Diluted EPS from discontinued operations (pence)	9.1	11.3
Diluted EPS (pence)	37.0	28.7
Weighted average number of ordinary shares outstanding for diluted earnings per share (millions)	2,396	2,378

¹      Calculated using EEV operating profit after tax.

²      Comparatives for the year ended 31 December 2013 have been restated to reflect the classification in the current year of the Group's Canadian and Dubai businesses as discontinued operations. Refer to Note 1 - Basis of preparation.

EEV consolidated statement of comprehensive income

For the year ended 31 December 2014

	2014	2013 restated1
	£m	£m
EEV profit after tax	934	988
Less: EEV profit after tax from discontinued operations	(392)	(204)
EEV profit after tax from continuing operations	542	784
Items from continuing operations that will not be reclassified subsequently to profit or loss:
Remeasurement gains on defined benefit pension plans2	292	70
Other	(9)	(22)
Total items from continuing operations that will not be reclassified subsequently to profit or loss	283	48
Items from continuing operations that may be reclassified subsequently to profit or loss:
Fair value losses on cash flow hedges2	1	-
Net investment hedge2	(1)	1
Fair value gains/(losses) on non-covered business available-for-sale financial assets2	27	(18)
Exchange differences on translating foreign operations3	(26)	(18)
Equity holder tax effect relating to items that may be reclassified subsequently to profit or loss	(6)	3
Total items from continuing operations that may be reclassified subsequently to profit or loss	(5)	(32)
Total EEV comprehensive income for the year from continuing operations	820	800
EEV profit after tax from discontinued operations	392	204
Other EEV comprehensive income from discontinued operations	(49)	(98)
Total EEV comprehensive income for the year	1,163	906

¹      Comparatives for the year ended 31 December 2013 have been restated to reflect the classification in the current year of the Group's Canadian and Dubai businesses as discontinued operations. Refer to Note 1 - Basis of preparation.

²      Consistent with the IFRS consolidated statement of comprehensive income.

³      Exchange differences for the year ended 31 December 2014 primarily relate to Europe (loss £42m).

EEV consolidated statement of financial position

As at 31 December 2014

	Covered business	Non-covered business	2014	Covered business	Non-covered business	2013
	£m	£m	£m	£m	£m	£m
UK and Europe	4,615	874	5,489	4,538	541	5,079
Standard Life Investments	-	800	800	-	405	405
Canada	2,174	11	2,185	2,094	1	2,095
Asia and Emerging Markets	406	-	406	333	-	333
Group corporate centre	-	218	218	-	444	444
Other	-	65	65	-	67	67
Total Group EEV	7,195	1,968	9,163	6,965	1,458	8,423
Analysed by:
Net worth	1,984	1,968	3,952	2,086	1,458	3,544
Present value of in-force (excluding TVOG)	6,076	-	6,076	5,553	-	5,553
Time value of options and guarantees (TVOG)	(325)	-	(325)	(100)	-	(100)
Cost of required capital	(540)	-	(540)	(574)	-	(574)
Total EEV net assets	7,195	1,968	9,163	6,965	1,458	8,423
IFRS equity			4,672			4,227
Additional retained earnings on an EEV basis			4,491			4,196
Total Group EEV			9,163			8,423
Diluted closing number of ordinary shares outstanding (millions)			2,405			2,389
EEV per share (pence)			381			353

Approved on behalf of the Board of Directors on 20 February 2015 by the following Directors:

Sir Gerry Grimstone, Chairman                                                        Luke Savage, Chief Financial Officer

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 12 - EEV methodology. There have been no significant changes to EEV methodology from that adopted in the previous reporting period, except as noted below. The sensitivities specified by the EEV Principles and Guidance are included in Note 11 - Sensitivity analysis - economic and non-economic assumptions. No sensitivities have been provided for discontinued operations.

EEV operating profit and EEV profit

Until 31 December 2013, EEV operating profit and EEV profit were disclosed on both a before and after tax basis. EEV profit before tax was derived by grossing up profit after tax at the long-term rate of corporation tax appropriate for each territory. From 2014, EEV profit and related metrics (including new business contribution and EEV operating profit) are only disclosed on an after tax basis and comparative amounts have been restated. Where EEV operating profit before tax has been included within the company's incentive arrangements, targets have been restated to an after tax basis.

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 November 2013, the Group announced that the results of Standard Life Wealth Limited (SLW) would be managed and reported as part of the Standard Life Investments segment from 1 January 2014. Previously, this business was managed as part of the UK and Europe segment and reported within UK and Europe non-covered business. Comparative amounts for the year ended 31 December 2013 have been prepared on the same basis to allow more meaningful comparison.

Sale of Canada and closure of Dubai

As explained in Note 51 to the IFRS consolidated financial information, on 3 September 2014 the Group announced that it had entered into an agreement to sell its Canadian business to The Manufacturers Life Insurance Company. The sale of the Group's Canadian long-term savings and retirement, individual and group insurance business (Standard Life Financial Inc.) and Canadian investment management business (Standard Life Investments Inc.) completed on 30 January 2015 and the results of the Canadian business, including Canada non-covered business and Standard Life Investments Inc., are reported as EEV Discontinued operations. Comparative amounts for the year ended 31 December 2013 are reported on the same basis to allow more meaningful comparison. EEV results for Discontinued operations include a closing non-trading adjustment at 31 December 2014 to value the Canadian business at sale proceeds less estimated costs to sell.

On 5 November 2014, the Group announced the closure of the Dubai business. The results of this business are included as EEV Discontinued operations, consistent with the IFRS segmental reporting treatment. Dubai was previously included in Asia and Emerging Markets. Comparative amounts for the year ended 31 December 2013 have been restated. EEV results for Discontinued operations include a non-operating adjustment to eliminate the PVIF for the Dubai business.

Acquisition of Ignis

As explained in Note 1 to the IFRS consolidated financial information, on 1 July 2014 Standard Life Investments (Holdings) Limited, a wholly owned subsidiary of the Company, acquired the entire share capital of Ignis Asset Management Limited (Ignis). The acquired business is reported as non-covered business within the Standard Life Investments segment in the EEV financial information.

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, was transferred to covered business on the closing EEV consolidated statement of financial position at 31 December 2013. From 1 January 2014, there is no longer a look through and transfer back of net worth in respect of Standard Life Savings Limited.

Pensions Act 2014

The Pensions Act 2014 contains powers to allow the UK government to restrict charges in defined contribution workplace pensions, including a cap on management charges in default funds and the cessation of active member discounts for qualifying workplace pension schemes. The EEV results for the year to 31 December 2014 include a provision of £160m (post-tax loss) within EEV non-operating profit, representing our best estimate of the reduction in EEV that will result from these changes.

2.    Analysis of movement in EEV

	Covered
	UK and Europe	Asia and Emerging Markets	Total non-covered	Discontinued operations	Total	Pence per share
2014	£m	£m	£m	£m	£m	p
Opening EEV	4,538	329	1,452	2,104	8,423	353
New business contribution	177	29	-	33	239
Contribution from in-force business	222	20	-	118	360
Operating experience variances and assumption changes	172	(3)	-	84	253
Development costs	(24)	(12)	-	(8)	(44)
Non-covered business	-	-	88	(9)	79
EEV operating profit after tax	547	34	88	218	887	37
EEV non-operating profit/(loss) after tax	(21)	4	(110)	174	47	2
EEV profit/(loss) after tax	526	38	(22)	392	934
Non-trading adjustments	(449)	43	524	(312)	(194)
Closing EEV	4,615	410	1,954	2,184	9,163	381

	Covered
	UK and Europe	Asia and Emerging Markets	Total non-covered	Discontinued operations	Total	Pence per share
2013	£m	£m	£m	£m	£m	p
Opening EEV	4,103	297	1,419	2,323	8,142	343
New business contribution	198	33	-	27	258
Contribution from in-force business	170	19	-	121	310
Operating experience variances and assumption changes	24	(17)	-	153	160
Development costs	(19)	(13)	-	(12)	(44)
Non-covered business	-	-	19	(20)	(1)
EEV operating profit after tax	373	22	19	269	683	29
EEV non-operating profit/(loss) after tax	396	5	(31)	(65)	305	13
EEV profit/(loss) after tax	769	27	(12)	204	988
Non-trading adjustments	(334)	5	45	(423)	(707)
Closing EEV	4,538	329	1,452	2,104	8,423	353

Lower new business contribution in UK and Europe is partly due to lower sales of annuities following the 2014 Budget and lower sales of institutional pensions, offset by improved margins on group pensions business.

The contribution from in-force business has increased due to higher opening in-force and higher expected rates of return.

Operating variances and assumption changes of £253m, an increase of £93m from 2013, consists of a profit of £169m from continuing business and a profit of £84m from discontinued business. The profit of £169m from continuing business includes profits in UK and Europe of £116m from updated expense assumptions and £35m of favourable experience variances for persistency, mortality and expenses. The profit of £84m from discontinued business includes a profit of £93m from changes to assumptions on future income for group pensions business.

EEV non-operating profit of £47m includes a loss of £127m from continuing business and a profit of £174m from discontinued operations. The continuing business loss of £127m includes a loss of £160m from the impact of UK regulations that restrict charges in qualifying workplace pension schemes, a £34m impairment of intangible assets and £94m of restructuring expenses; partly offset by a profit of £181m from favourable investment returns. The £174m profit from discontinued business includes a £200m profit from favourable investment returns and the impact of lower bond yields in Canada, offset by £26m of restructuring costs incurred in the closure of the Dubai operations and the costs incurred in preparation for the sale of the Canadian business.

Non-trading adjustments of (£194m) include distributions to equity holders of £386m and the loss arising from exchange differences of £78m, partly offset by actuarial gains on pension schemes for staff across the Group of £272m.

3.    Analysis of movement in net worth

(a)     Covered and non-covered business

	2014				2013
	Total covered		Non- covered	Total Group	Total covered		Non-covered	Total Group
	Free surplus	Required capital	Free surplus	EEV net worth	Free surplus	Required capital	Free surplus	EEV net worth
	£m	£m	£m	£m	£m	£m	£m	£m
Opening EEV net worth	843	1,243	1,458	3,544	944	1,348	1,425	3,717
Expected return	613	51	-	664	626	6	-	632
New business strain	(361)	89	-	(272)	(386)	120	-	(266)
Other operating movement	220	(121)	79	178	269	(52)	(1)	216
EEV operating capital and cash generation	472	19	79	570	509	74	(1)	582
EEV non-operating capital and cash generation	(4)	37	(118)	(85)	(22)	(95)	(31)	(148)
Total EEV capital and cash generation	468	56	(39)	485	487	(21)	(32)	434
Internal capital transfers	(445)	-	445	-	(520)	-	520	-
Distributions to equity holders	-	-	(386)	(386)	-		(656)	(656)
Look through transfer of net worth	(105)	-	105	-	(93)	-	93	-
Foreign exchange differences	(7)	(26)	-	(33)	(31)	(84)	(6)	(121)
Remeasurement (losses)/gains on defined benefit pension plans	(41)	-	313	272	24	-	77	101
Other non-trading adjustments	(1)	(1)	72	70	32	-	37	69
Closing EEV net worth	712	1,272	1,968	3,952	843	1,243	1,458	3,544
Analysed by:
UK and Europe	394	307	874	1,575	481	260	541	1,282
Standard Life Investments	-	-	793	793	-	-	400	400
AEM	61	62	-	123	25	47	-	72
Other	-	-	287	287	-	-	511	511
Discontinued operations	257	903	14	1,174	337	936	6	1,279
Closing EEV net worth	712	1,272	1,968	3,952	843	1,243	1,458	3,544

3.    Analysis of movement in net worth continued  

(b)     Covered business operating net worth movement analysis

	2014				2013
	UK and Europe	Asia and Emerging Markets	Discontinued operations	Total	UK and Europe	Asia and Emerging Markets	Discontinued operations	Total
	£m	£m	£m	£m	£m	£m	£m	£m
Free surplus movement:
Expected return	452	62	99	613	439	53	134	626
New business strain	(210)	(50)	(101)	(361)	(194)	(64)	(128)	(386)
Other operating movement	127	(9)	102	220	128	(16)	157	269
Total	369	3	100	472	373	(27)	163	509
Required capital movement:
Expected return	5	3	43	51	4	2	-	6
New business strain	11	6	72	89	20	7	93	120
Other operating movement	(3)	-	(118)	(121)	4	1	(57)	(52)
Total	13	9	(3)	19	28	10	36	74
Operating net worth movement:
Expected return	457	65	142	664	443	55	134	632
New business strain	(199)	(44)	(29)	(272)	(174)	(57)	(35)	(266)
Other operating movement	124	(9)	(16)	99	132	(15)	100	217
Total	382	12	97	491	401	(17)	199	583

4.    Analysis of movement in PVIF (including TVOG and cost of required capital)

	2014				2013
	UK and Europe	Asia and Emerging Markets	Discontinued operations	Total	UK and Europe	Asia and Emerging Markets	Discontinued operations	Total
	£m	£m	£m	£m	£m	£m	£m	£m
Opening EEV PVIF	3,797	257	825	4,879	3,384	226	815	4,425
PVIF generated from new business:	376	73	62	511	372	90	62	524
Expected movement in PVIF	(235)	(45)	(24)	(304)	(273)	(36)	(13)	(322)
Other PVIF operating movement	24	(6)	92	110	(127)	(15)	41	(101)
Total PVIF operating movement	165	22	130	317	(28)	39	90	101
PVIF non-operating movement	(10)	(4)	146	132	450	12	(9)	453
Foreign exchange differences	(38)	12	(19)	(45)	11	(20)	(71)	(80)
Other PVIF movement	-	-	(72)	(72)	(20)	-	-	(20)
Closing EEV PVIF	3,914	287	1,010	5,211	3,797	257	825	4,879

The other PVIF movement in 2014 of negative £72m is the closing PVIF adjustment for Canada. Refer to Note 1 - Basis of preparation.

5.    PVNBP, new business contribution and margin of continuing operations

	2014			2013
	UK and Europe	Asia and Emerging Markets	Total continuing operations	UK and Europe	Asia and Emerging Markets	Total continuing operations
	£m	£m	£m	£m	£m	£m
PVNBP - Fee	17,180	300	17,480	18,715	434	19,149
PVNBP - Spread/risk and Other	155	449	604	361	465	826
PVNBP - Total	17,335	749	18,084	19,076	899	19,975
New business contribution - Fee	163	9	172	157	17	174
New business contribution - Spread/risk and Other	14	20	34	41	16	57
New business contribution - Total	177	29	206	198	33	231
PVNBP margin % - Fee	0.9	2.9	1.0	0.8	3.8	0.9
PVNBP margin % - Spread/risk and Other	9.3	4.7	5.9	11.4	3.5	6.9
PVNBP margin % - Total	1.0	4.0	1.1	1.0	3.6	1.2

6.    Monetisation profile closing PVIF¹ and new business PVIF¹ of continuing operations

	In-force							New business
	PVIF	1-5	6-10	11-15	16-20	21+		PVIF	1-5	6-10	11-15	16-20	21+
2014	£m	£m	£m	£m	£m	£m		£m	£m	£m	£m	£m	£m
UK & Europe	6,517	2,089	1,528	1,053	706	1,141		660	202	146	110	80	122
AEM	472	187	109	81	47	48		121	47	31	16	12	15
Total undiscounted	6,989	2,276	1,637	1,134	753	1,189		781	249	177	126	92	137
Total discounted	4,575	2,035	1,167	647	350	376		461	219	114	62	34	32

¹    PVIF excludes TVOG and cost of required capital.                                                                                                                                           

7.    Reconciliation of operating profit to EEV operating capital and cash generation

	UK and Europe	Standard Life Investments	Asia and Emerging Markets	Other	Discontinued operations	Total
2014	£m	£m	£m	£m	£m	£m
Operating profit/(loss) before tax	390	257	19	(62)	131	735
Tax on operating profit	(43)	(58)	1	13	(42)	(129)
Operating profit/(loss) after tax1	347	199	20	(49)	89	606
Impact of different treatment of assets and actuarial reserves	(17)	-	(12)	-	9	(20)
DAC and DIR2, intangibles, tax and other	(9)	-	4	-	(11)	(16)
Look through	83	(84)	-	-	1	-
EEV operating capital and cash generation	404	115	12	(49)	88	570
EEV operating profit after tax - PVIF	165	-	22	-	130	317
EEV operating profit/(loss) after tax	569	115	34	(49)	218	887

¹    Group operating profit after tax consists of: Group operating profit before tax of £735m, tax charge on operating profit of (£124m) and share of joint ventures' and associates' tax expense of (£5m).

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

7.    Reconciliation of operating profit to EEV operating capital and cash generation continued 

	UK and Europe	Standard Life Investments	Asia and Emerging Markets	Other	Discontinued operations	Total
2013	£m	£m	£m	£m	£m	£m
Operating profit/(loss) before tax	375	197	-	(66)	245	751
Tax on operating profit	(47)	(48)	-	11	(65)	(149)
Operating profit/(loss) after tax	328	149	-	(55)	180	602
Impact of different treatment of assets and actuarial reserves	(30)	-	(2)	-	(4)	(36)
DAC and DIR1, intangibles, tax and other	33	-	(24)	-	7	16
Look through	78	(79)	-	-	1	-
EEV operating capital and cash generation	409	70	(26)	(55)	184	582
EEV operating profit/(loss) after tax - PVIF	(28)	-	44	-	85	101
EEV operating profit/(loss) after tax	381	70	18	(55)	269	683

¹    Deferred acquisition costs (DAC) and deferred income reserve (DIR).

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

	31 December 2014	31 December 2013
	£m	£m
Net assets on an EEV basis	9,163	8,423
Present value of in-force life and pensions business net of cost of capital	(5,211)	(4,879)
EEV net worth	3,952	3,544
Adjustment of long-term debt to market value	101	100
Sterling reserves	90	55
Valuation movement in available-for-sale assets backing investment contract liabilities	5	(10)
Deferred acquisition costs net of deferred income reserve	477	423
Deferred tax differences	(4)	65
Adjustment for share of joint ventures	18	20
Other	33	30
Net assets attributable to equity holders on an IFRS basis	4,672	4,227
Valuation adjustments for IGD	(2,172)	(1,284)
External subordinated liabilities	1,541	1,861
Capital in long-term business funds	3,328	3,590
IGD regulatory capital resources1	7,369	8,394

¹    31 December 2014 based on estimated regulatory returns, 31 December 2013 based on actual regulatory returns.

9.    Time value of options and guarantees (TVOG)

	31 December  2014	31 December 2013
	£m	£m
UK and Europe	(223)	(55)
Asia and Emerging Markets	(15)	(5)
Discontinued operations	(87)	(40)
Total	(325)	(100)

UK and Europe TVOG reflects the value of shareholder exposure to the with profits policyholder guarantees. The total comprises £185m for guarantees in the HWPF and £38m for guarantees in the GWPF. The value of this exposure has increased by £168m during 2014, comprising a post-tax operating loss of £34m and post-tax non-operating loss of £134m. The operating loss includes a loss of £26m from operating assumption changes, mainly from German mortality. The non-operating loss of £134m reflects a loss of £189m from economic assumption changes, mainly due to lower yields, partly offset by a profit of £55m due to favourable market movements over the year.

TVOG in Discontinued operations and Asia and Emerging Markets, where material, is calculated using an economic scenario generator similar to that used for the UK and Europe TVOG calculation, although market observed data is not always available at all durations.

The discontinued TVOG in Canada grew by £47m, due to both market movements and new business written in the year.

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 (ESG) which projects the relevant fund under a large number of different future economic scenarios. The ESG 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).

Equity-implied and 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 implied volatilities are set out in the following tables:

Volatilities		31 December 2014			31 December 2013
		UK Sterling	Euro		UK Sterling	Euro
	Option term (years)	Swap term (years)			Swap term (years)
Swaption-implied volatilities		10	20		10	20
	10	28.2%	30.2%		17.7%	19.2%
	15	25.8%	28.2%		16.4%	18.2%
	20	23.8%	26.2%		14.9%	17.1%
	25	22.1%	n/a		13.7%	n/a
		31 December 2014			31 December 2013
Equity-implied volatilities	Option term (years)	UK equities	European equities		UK equities	European equities
	10	22.8%	20.3%		22.3%	22.8%
	15	23.9%	20.2%		22.6%	22.7%
	20	24.8%	20.7%		23.0%	23.3%
	25	26.2%	21.7%		23.9%	23.6%

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 13% for 31 December 2014 and 15% for 31 December 2013.

10.  Principal economic assumptions - deterministic calculations - covered business

	31 December 2014		31 December 2013
	In-force business	New business	In-force business	New business
	%	%	%	%
Risk-free rate:
UK / SLIL	1.86	3.01	3.01	1.74
Europe	0.54	1.94	1.94	1.32
Canada	2.23	3.16	3.16	2.32
Hong Kong	1.99	1.92	1.92	0.91
India1	7.55	-	8.01	-
China1	3.93	-	4.94	-
Corporate bond returns, excluding Canada2:
UK	2.65	3.76	3.76	2.34
Hong Kong	2.77	2.73	2.73	1.66
Total investment returns (annuities) :
UK non index-linked annuities	3.15	*	4.26	*
UK index-linked annuities	2.85	*	3.69	*
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	3.80	2.50	4.10	2.70
UK PBF	2.60	3.30	2.40	3.10
Europe HWPF	1.90	2.70	2.80	2.50
Europe PBF	1.50	2.00	1.50	1.60
SLIL	2.80	2.80	2.20	2.30
Canada	4.30	3.00	3.40	2.70
Hong Kong	2.90	2.90	2.90	2.90
Risk discount rate:
UK HWPF	5.66	5.51	7.11	4.44
UK PBF	4.46	6.31	5.41	4.84
Europe HWPF	2.44	4.64	4.74	3.82
Europe PBF	2.04	3.94	3.44	2.92
SLIL	4.66	5.81	5.21	4.04
Canada	6.53	6.16	6.56	5.02
Hong Kong	4.89	4.82	4.82	3.81
Expense inflation:
UK / SLIL	3.61	4.00	4.00	3.39
Europe (Germany)	0.84	1.60	1.60	1.87
Europe (Ireland)	1.90	2.69	2.69	2.84
Canada3	1.50	1.50	1.50	1.50
Hong Kong	2.50	2.50	2.50	2.50

¹    The PVIF and cost of required capital of the Asia joint ventures are calculated using a 'risk neutral' approach.

²    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.

³    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%.

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

For UK, Europe and SLIL, the change in the in-force business risk margins are mainly due to a change in the allowance for non-market risk. The changes in the new business risk margins are primarily due to changes in business mix and asset allocations. The impact of the changes in risk discount rates has been included in non-operating assumption changes in the EEV income statement. The amounts within these totals that relate to the changes in risk discount rate are for UK and Europe: profit £432m, for Asia and Emerging Markets: loss £7m, and for Discontinued operations: profit £89m.

11.  Sensitivity analysis - economic and non-economic assumptions

The following table shows the sensitivity of the covered business embedded value and new business contribution to different scenarios. No sensitivities are provided for Canada since the proceeds from the sale of the Group's Canadian operations are fixed.

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. Sensitivities to lower interest rates assume minimum interest rates of zero.

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.

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	Asia and Emerging Markets	Total continuing business	UK and Europe	Asia and Emerging Markets	Total continuing business
31 December 2014	£m	£m	£m	£m	£m	£m
Base Value	4,615	410	5,025	177	29	206
Risk discount rates +1%	(341)	(17)	(358)	(27)	(4)	(31)
Risk discount rates -1%	408	20	428	32	5	37
Interest returns +1%	45	(6)	39	6	1	7
Interest returns -1%	(219)	3	(216)	(16)	(2)	(18)
Fall in equity market values by 10%	(260)	(7)	(267)	(30)	-	(30)
Fall in property market values by 10%	(24)	(1)	(25)	(3)	-	(3)
Maintenance expenses -10%	176	4	180	24	1	25
Lapse rates -10%	125	10	135	20	2	22
Annuitant mortality -5%	(115)	-	(115)	(1)	-	(1)
Non-annuitant mortality -5%	8	3	11	1	-	1

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 £109m under the interest returns +1% sensitivity and (£243m) 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.

12.  EEV Methodology

As explained in Note 1 - Basis of preparation, the results of the Canadian business, including Canada non-covered business and Standard Life Investments Inc., are now reported as EEV discontinued operations. Discontinued operations non-trading adjustments include a closing adjustment to value the Canadian business at sale proceeds less estimated costs to sell. The EEV methodology below applies to the trading and non-trading results before this closing adjustment.

Covered business

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.

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

·  Standard Life Savings Limited

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

12.  EEV Methodology continued

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 JVs in India (HDFC Standard Life Insurance Company Limited) and China (Heng An Standard Life Insurance Company Limited).

Canada covered business also includes mutual funds.

Non-covered business

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

·  Within UK and Europe, 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 - Standard Life Wealth Limited, the non-covered third party business of Standard Life Investments, including Ignis

·  Within other and group corporate centre, Standard Life plc and other non life and pensions entities.

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

Transfer back of look through 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 ('look through'). 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 the time value of options and guarantees (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 160% 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 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.

12.  EEV Methodology continued

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.

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.

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.

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. For mature businesses, no credit is taken for future cost reduction programmes until the benefits have been delivered. For start-up businesses, expense over-runs are permitted where these are expected to be short-lived.

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 10 - Restructuring and corporate transaction 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 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.

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 after tax reflects the long-term investment return on the assets calculated at acquisition.

12.  EEV Methodology continued

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 after tax 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 after tax 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.

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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