Half-year Report - Part 2 of 4

RNS Number : 3373N

Standard Life plc

08 August 2017

 

Standard Life plc

Half year results 2017

Part 2 of 4

Contents

1.	Management report	1
	Financial and business performance
	Standard Life Investments
	Pensions and Savings
	India and China
	Risk management
	Basis of preparation
2.	Statement of Directors' responsibilities	11
3.	Independent review report from our External auditors	12
4.	Financial information	13
	IFRS condensed consolidated primary statements
	Notes to the IFRS condensed consolidated financial information
5.	Supplementary information	47
	5.1 Alternative performance measures
	5.2 Financial ratios
	5.3 Assets under administration and net flows
	5.4 Standard Life Investments assets under management and net flows
	5.5 Assets under administration by reporting segment
6.	Glossary	55
7.	Shareholder information	59

The Half year results 2017 are published on the Group's website at www.standardlife.com/hyresults

The Half year 2017 press release is also published on www.standardlife.com

1. Management report

Growing revenue and financial discipline driving profit and returns to shareholders

Key performance indicators	H1 2017	H1 2016
Assets under administration (AUA)1	£361.9bn	£357.1bn
Net flows	(£3.7bn)	£0.9bn
Operating profit	£362m	£341m
Underlying cash generation	£256m	£254m
Operating return on equity	15.5%	13.8%
Cost/income ratio	62%	62%
Interim dividend per share	7.00p	6.47p
Other financial highlights	H1 2017	H1 2016
IFRS profit after tax attributable to equity holders	£292m	£226m
Basic earnings per share	14.8p	11.5p

¹    Comparative as at 31 December 2016.

Certain measures, such as operating profit, are not defined under IFRS and are therefore termed alternative performance measures (APMs). Further details on APMs are included in Supplementary information in Section 5.

Standard Life has delivered a strong performance in the first half of 2017 with fee based revenue up 5% and operating profit up 6%. We continue to see the benefits of targeted investments to further our diversification agenda, the success of our newer investment solutions and the ongoing focus on operational efficiency. This has allowed us to grow assets, profits, cash flows and returns to shareholders.

With the proposed merger with Aberdeen Asset Management (Aberdeen) on track for completion on 14 August 2017 we are ready to accelerate the pace of strategic delivery as we open the next chapter of our transformation to a diversified world-class investment company. The proposed merger remains subject to final approval at a Court hearing scheduled for 11 August 2017.

The combined leadership team of Standard Life and Aberdeen has been working well together to ensure 'Day 1' readiness. We are well placed to continue to meet changing client and customer needs globally, and to generate growing and sustainable returns for our shareholders.

Creating a diversified world-class investment company

Our ambition is to create a diversified world-class investment company: a global business that manages, administers and advises on investments for our customers and clients.

Our business model is simple. We attract assets by meeting the investment needs of our customers and clients. This includes individual investors in our mutual funds and pensions and savings products, as well as financial advisers, employers and a wide range of institutional clients. By growing the assets we look after for our clients and customers, we aim to grow revenue which, combined with tight cost control, allows us to grow our profits.

Our business is well positioned for the global trends that are shaping the savings and investments landscape. This means we are able to invest for the future to continue to meet the needs of our customers and clients, and to generate growing and sustainable returns for our shareholders.

Growth in assets driving increase in fee based revenue

Assets under administration (AUA) increased by 1% to £361.9bn. Gross inflows were resilient at £20.7bn (H1 2016: £21.8bn) but redemptions increased to £24.4bn (H1 2016: £20.9bn) largely driven by GARS.

Fee based revenue increased by 5% to £836m (H1 2016: £794m), benefiting from asset growth and the diversity of our growth channels with revenue from these channels up 7% to £616m (H1 2016: £577m). Revenue from mature books was broadly stable at £220m (H1 2016: £217m).

Outlook

While optimism across financial markets has increased it is clear that the uncertainty that accompanies economies, markets and politics has remained, including the ongoing Brexit negotiations. This will continue to reinforce the global trends that are shaping the savings and investment landscape. The combined Standard Life Aberdeen business will be even better placed to both take advantage of the opportunities and to deal with the challenges that these trends present.

As we continue to benefit from our strong long-term relationships with a broad and well diversified range of clients and customers, the slowdown in gross inflows which we have seen in the first half of the year is expected to ease as we progress with the merger integration. We also expect to benefit from strong demand for our retail platforms and improving investment performance.

Targeted investments to further our diversification agenda, together with a continued focus on operational efficiency, will increase our pace of strategic delivery. This will help us to continue to meet changing client and customer needs, and generate growing and sustainable returns for our shareholders.

In India, HDFC Life announced in July 2017 that its Board of Directors approved proceeding with an initial public offering (IPO), with Standard Life offering up to 5.43% and HDFC Limited offering up to 9.57% of HDFC Life's equity shares representing, in aggregate, up to 15% of the paid-up equity share capital of HDFC Life. The IPO is subject to relevant regulatory and other necessary approvals.

The proposed merger with Aberdeen will create the UK's largest active asset manager and the second largest in Europe.

We expect the proposed merger to accelerate our strategy to create a world-class investment company with compelling benefits including:

·  Highly complementary investment capabilities with improved choice and service to clients

·  Being positioned to meet global demand for next generation investment solutions

·  Global distribution with enhanced proximity to clients

·  Scale to invest, attract talent and deliver value for clients

·  Truly diversified business and compelling financial benefits

Our people are ready and eager to begin the next chapter in our transformation to a diversified world-class investment company.

AUA and net flows

The increase in AUA from £357.1bn to £361.9bn was driven by positive market movements and investment returns.

AUA	H1 2017 £bn	FY 2016 £bn
Growth	244.0	237.6
Mature	103.5	104.9
Other	14.4	14.6
Total AUA	361.9	357.1

Gross inflows remained resilient at £20.7bn (H1 2016: £21.8bn) but redemptions increased to £24.4bn (H1 2016: £20.9bn). This resulted in total net outflows of £3.7bn (H1 2016: net inflows £0.9bn) of which £3.4bn relates to our mature books which are in long-term run-off.

Standard Life Investments growth channels experienced net outflows of £4.6bn (H1 2016: net inflows £1.7bn) largely due to net outflows of £5.6bn (H1 2016: net inflows £0.3bn) from our GARS product following a period of weak short-term investment performance in 2016. Short-term investment performance improved in 2017.

Excluding GARS, Wholesale net inflows doubled to £1.8bn (H1 2016: £0.9bn). Net outflows for Institutional excluding GARS were £0.6bn (H1 2016: net inflows £0.3bn) as we saw a slowdown in investor activity globally.

Pensions and Savings growth channels net inflows increased by 39% to £4.3bn (H1 2016: £3.1bn), driven by strong demand for our Wrap and Elevate adviser platforms and growing contributions into existing Workplace schemes.

Net flows	H1 2017 £bn	H1 2016 £bn
Standard Life Investments growth	(4.6)	1.7
Pensions and Savings growth	4.3	3.1
Eliminations and other growth	(0.3)	(0.7)
Total growth channels	(0.6)	4.1
Standard Life Investments third party strategic partner life business	(1.4)	(1.4)
Pensions and Savings mature fee	(1.5)	(1.5)
Pensions and Savings spread/risk	(0.5)	(0.5)
Total mature books	(3.4)	(3.4)
Associate and joint venture life businesses	0.3	0.2
Total net flows	(3.7)	0.9

Further information on AUA and net flows are included in the Supplementary information section of this report. See p15, p26 and p27 for further details on operating profit and reconciliation of operating profit to IFRS profit

Profitability

Operating profit before tax increased by £21m and IFRS profit after tax attributable to equity holders of Standard Life plc increased by £66m.

Operating profit before tax

Operating profit increased by 6% to £362m. Higher fee based revenue was partially offset by increased operating expenses associated with the growth of our business and an expected reduction in spread/risk margin. Operating profit benefited by approximately £15m from lower average Sterling exchange rates in H1 2017 compared to H1 2016.

Operating profit	H1 2017 £m	H1 2016 £m
Fee based revenue	836	794
Spread/risk margin	49	63
Total operating income	885	857
Total operating expenses	(581)	(566)
Capital management	5	13
Share of associates' and joint ventures' profit before tax	53	37
Operating profit before tax	362	341

Fee based revenue

Fee based revenue increased by 5% to £836m (H1 2016: £794m) driven by higher average asset levels including the benefit of exchange rate movements and the acquisition of Elevate. Average fee revenue yield reduced mainly due to the change in the composition of the underlying assets in Standard Life Investments, and the growing proportion of newer style propositions in Pensions and Savings.

Fee based revenue from our growth channels increased by 7% to £616m (H1 2016: £577m) and accounts for 74% of total fee based revenue.

Fee based revenue	H1 2017 £m	H1 2016 £m
Growth	616	577
Mature	220	217
Total fee based revenue	836	794

Spread/risk margin

Spread/risk margin decreased by £14m to £49m. H1 2016 included a £22m benefit from an acceleration of payments from our main with profits fund relating to changes to the Scheme of Demutualisation in response to the transition to Solvency II. This reduction was partly offset by the impact of favourable mortality experience, including a £7m reserve release in respect of overseas annuitants.

Total operating expenses

Operating expenses increased by 3% to £581m (H1 2016: £566m) mainly as a result of continuing to grow the 1825 business, the acquisition of Elevate in Q4 2016, and the impact of exchange rate movements.

The cost/income ratio, which is calculated on a rolling 12-month basis and includes our share of associates' and joint ventures' (JVs) profit before tax, remained stable at 62% (FY 2016: 62%). Excluding 1825 and Elevate, absolute expenses fell which helped to reduce the cost/income ratio to 60% (FY 2016: 61%).

Capital management and share of associates' and joint ventures' profit before tax

The contribution from capital management decreased by £8m to £5m. This was impacted by lower expected returns across the pension scheme surplus and assets backing subordinated debt due to lower yields at the start of 2017. Our share of profit from associates and JVs continued to grow, driven by higher profit from HDFC Life of £27m (H1 2016: £17m) which was partly due to the increased percentage ownership. Profit from HDFC Asset Management rose to £20m (H1 2016: £16m).

Operating return on equity

Operating return on equity increased to 15.5% (H1 2016: 13.8%) reflecting higher profits in the period and a lower tax charge.

Operating return on equity continues to be diluted by the impact of the c£1bn pension scheme surplus. Excluding the impact of the pension scheme, operating return on equity increased to 20.6% (H1 2016: 17.0%).

IFRS profit¹

IFRS profit increased to £292m (H1 2016: £226m) driven by favourable short-term fluctuations in investment return and economic assumption changes, higher fee based revenue and a lower tax charge.

Non-operating loss before tax

Short-term fluctuations in investment return and economic assumption changes generated a profit of £55m (H1 2016: loss £17m) including the benefit from a narrowing of credit spreads. Restructuring and corporate transaction expenses increased to £61m (H1 2016: £36m) and included £39m of expenses related to the proposed merger with Aberdeen.

Other operating profit adjustments in H1 2017 includes a £24m impairment relating to the proposed sale of our wholly owned Hong Kong insurance company to our Chinese life joint venture company, Heng An Standard Life.

Total tax expense

The total tax expense attributable to equity holders' profit was £23m (H1 2016: £49m). This consisted of £31m (H1 2016: £69m) related to operating items and a credit of £8m (H1 2016: credit £20m) for non-operating items. The effective tax rate was 7%² (H1 2016: 17%²) compared to a UK corporation tax rate of 19.25% (H1 2016: 20%). The low effective tax rate is driven by a one-off deferred tax impact due to a revised transfer pricing approach for our business in Germany, tax paid by joint ventures being included in pre-tax profit and certain UK insurance profits being taxed at a lower rate.

Other

Other represents the share of associates' and joint ventures' tax expense of £7m (H1 2016: £5m).

IFRS profit1	H1 2017 £m	H1 2016 £m
Operating profit before tax	362	341
Non-operating loss before tax	(40)	(61)
Total tax expense	(23)	(49)
Other	(7)	(5)
Total IFRS profit	292	226

Analysis of non-operating loss before tax	H1 2017 £m	H1 2016 £m
Short-term fluctuations in investment return and economic assumption changes	55	(17)
Restructuring and corporate transaction expenses	(61)	(36)
Other operating profit adjustments	(34)	(8)
Non-operating loss before tax	(40)	(61)

Underlying cash generation

Underlying cash generation of £256m (H1 2016: £254m) was stable compared to the 6% rise in operating profit before tax due to higher capital expenditure and the inclusion of dividends from our associates and joint ventures which were up by £4m to £12m rather than their increased profits which were up by £16m to £53m.

Reconciliation of underlying cash generation	H1 2017 £m	H1 2016 £m
Underlying performance	362	341
Associates and JVs adjustment	(41)	(29)
Current tax on underlying performance	(47)	(53)
DAC/DIR adjustment	(6)	(3)
Fixed and intangible assets adjustment	(12)	(2)
Underlying cash generation	256	254

Solvency II capital surplus³

We are strongly capitalised with a Solvency II capital surplus (Investor view) of £3.5bn (FY 2016: £3.3bn) representing a solvency cover of 220% (FY 2016: 214%). We disclose an Investor view of our solvency position as this provides insight into the solvency capital provided by equity and debt investors.

The Solvency II Investor view capital surplus of £3.5bn would change by £0.2bn or less following a:

·  20% rise or fall in equities, or

·  100bps rise or fall in fixed interest yields, or

·  50bps rise or fall in credit spreads

The Regulatory view solvency cover prescribed by Solvency II regulations is 182% (FY 2016: 177%). The Regulatory view capital surplus excludes £0.5bn (FY 2016: £0.2bn) of capital in subsidiaries that is not deemed to be freely transferrable around the Group. The Regulatory view solvency cover is diluted by the inclusion of £0.8bn (FY 2016: £1.2bn) of capital requirements for with profits funds and our defined benefit pension scheme. These capital requirements are covered in full by capital resources in those funds and therefore are not being supported by investor capital.

	30 June 20173				31 December 20163
Reconciliation of Standard Life Investor view and Regulatory view	Investor view £bn	Less unrecognised capital £bn	Add with profits funds and pension scheme £bn	Regulatory view £bn	Investor view £bn	Less unrecognised capital £bn	Add with profits funds and pension scheme £bn	Regulatory view £bn
Own funds	6.4	(0.5)	0.8	6.7	6.2	(0.2)	1.2	7.2
Solvency capital requirement (SCR)	(2.9)	-	(0.8)	(3.7)	(2.9)	-	(1.2)	(4.1)
Solvency II capital surplus	3.5	(0.5)	-	3.0	3.3	(0.2)	-	3.1
Solvency cover	220%			182%	214%			177%
1    After tax attributable to equity holders of Standard Life plc. For further details on our IFRS results, see the Group's IFRS condensed consolidated income statement on p13. 2    Tax expense attributable to equity holders' profits divided by profit before tax expense attributable to equity holders' profits. Includes profit attributable to non-controlling interests. 3    30 June 2017 based on draft regulatory returns. 31 December 2016 based on final regulatory returns. The transitional measure on technical provisions has not been recalculated at 30 June 2017.

Liquidity management

Standard Life plc, the Group holding company, holds substantial cash and liquid resources. At 30 June 2017, Standard Life plc held £327m (H1 2016: £346m) of cash and short-term debt securities, £300m (H1 2016: £301m) of bonds and £202m (H1 2016: £198m) of holdings in pooled investment funds managed by Standard Life Investments.

Dividends received from subsidiaries consisted of £180m (H1 2016: £170m) from Standard Life Assurance Limited, our principal insurance company and £120m (H1 2016: £107m) from Standard Life Investments.

We continue to maintain a strong liquidity position and this was again shown in internal stress testing undertaken during H1 2017.

In May 2017 we extended the maturity date of our syndicated revolving credit facility by a further year to 2022. This £400m facility is held as part of our contingency funding plans and is currently undrawn.

Standard Life plc cash and liquid resources	H1 2017 £m	H1 2016 £m
Opening 1 January	900	1,012
Dividends received from subsidiaries	300	277
Cash dividends paid to shareholders	(263)	(243)
Cash investments in associates and JVs	-	(177)
Cash investments in subsidiaries	-	(18)
Other1	(108)	(6)
Closing 30 June	829	845

¹    Includes £56m of transactions related to the acquisition of shares by the Employee Share Trust and £18m of expenses relating to the proposed merger.

Dividends

Dividend policy

Our progressive dividend policy is to grow the annual dividend from the prior year pence per share payment at a rate that is sustainable over the medium term.

Following completion of the proposed merger with Aberdeen, the combined group intends to adopt a progressive dividend policy with the base dividend being Standard Life's 2016 full year dividend of 19.82p per share.

Proposed dividend

We propose an interim dividend for 2017 of 7.00p per ordinary share which is an increase of 8.2%. This will be paid on 18 October 2017 to shareholders on the register at close of business on the record date of 8 September 2017.

If the merger completes as expected prior to the record date, the dividend will be paid on the revised number of shares. This would equate to a cash payment of an estimated £207m.

The dividend is strongly supported by underlying cash generation. At 30 June 2017 Standard Life plc held £0.8bn of cash and liquid resources and £1.5bn of distributable reserves.

How the dividend is funded

External dividends are funded from the cumulative dividend income that Standard Life plc receives from its subsidiaries. To provide some protection against fluctuations in subsidiary dividends, Standard Life plc holds a buffer of distributable cash and liquid resources. This buffer is dynamic and takes into account expected future subsidiary dividend flows and the risks to those dividends.

Business performance

Our reportable segments have been identified in accordance with the way that we are structured and managed.

Analysis of operating profit²

	Standard Life Investments		Pensions and Savings		India and China3		Other4		Eliminations5		Total
	H1 2017 £m	H1 2016 £m	H1 2017 £m	H1 2016 £m	H1 2017 £m	H1 2016 £m	H1 2017 £m	H1 2016 £m	H1 2017 £m	H1 2016 £m	H1 2017 £m	H1 2016 £m
Fee based revenue	429	431	461	407	7	10	-	-	(61)	(54)	836	794
Spread/risk margin	-	-	49	63	-	-	-	-	-	-	49	63
Total operating income	429	431	510	470	7	10	-	-	(61)	(54)	885	857
Total operating expenses	(259)	(271)	(350)	(313)	(7)	(12)	(26)	(24)	61	54	(581)	(566)
Capital management	-	-	7	12	-	-	(2)	1	-	-	5	13
Share of associates' and joint ventures' profit before tax	20	16	-	-	33	21	-	-	-	-	53	37
Operating profit before tax	190	176	167	169	33	19	(28)	(23)	-	-	362	341
Underlying adjustments	-	-	-	-	-	-	-	-	-	-	-	-
Underlying performance	190	176	167	169	33	19	(28)	(23)	-	-	362	341
Share of associates' and joint ventures' tax expense	(5)	(5)	-	-	(2)	-	-	-	-	-	(7)	(5)
Non-operating items	(19)	(16)	47	(37)	(24)	-	(44)	(8)	-	-	(40)	(61)
Total tax expense	(30)	(32)	(11)	(28)	-	-	18	11	-	-	(23)	(49)
Profit for the period attributable to equity holders of Standard Life plc	136	123	203	104	7	19	(54)	(20)	-	-	292	226

²    Operating profit is IFRS profit before tax adjusted to remove the impact of short-term market driven fluctuations in investment return and economic assumption changes, restructuring and corporate transaction costs, amortisation and impairment of intangible assets acquired in business combinations, gain or loss on the sale of a subsidiary, associate or joint venture and other one-off items which are not indicative of the long-term operating performance of the Group.

³    Our India and China business segment consists of our life associate in India, HDFC Life; our life joint venture in China, Heng An Standard Life; and our wholly owned business in Hong Kong. The results of our Indian asset management associate business, HDFC Asset Management Company (HDFC AMC), are included in the Standard Life Investments segment.

⁴    Other primarily relates to corporate centre costs and head office related activities.

⁵    Eliminations primarily relate to revenue and expenses included in both the Pensions and Savings business and Standard Life Investments. Therefore, at a Group level an elimination adjustment is required to remove intra Group impacts.

Standard Life Investments

AUM and net flows

AUM decreased by 1% to £275.2bn (FY 2016: £277.9bn). Net outflows from our GARS products and the run-off of our mature books, were both largely offset by positive market movements.

Growth channels

Gross inflows across our growth channels decreased to £11.7bn (H1 2016: £15.7bn) while net outflows stood at £4.6bn (H1 2016: net inflows £1.7bn).

GARS flows were largely driven by lower demand following a period of weak short-term investment performance in 2016. Despite this GARS attracted gross inflows of £2.9bn (H1 2016: £6.1bn) while net outflows amounted to £5.6bn (H1 2016: net inflows £0.3bn). Wholesale GARS net outflows of £2.4bn (H1 2016: net outflows £1.3bn), were lower relative to the second half of 2016 (net outflows £2.6bn) as short-term investment performance and hence sentiment improved. GARS delivered a return of 4.4%¹ in the year to 30 June 2017. Institutional GARS net outflows were £3.2bn (H1 2016: net inflows £1.6bn).

Growth channel flows excluding GARS

Wholesale gross inflows excluding GARS grew by 9% to £5.0bn (H1 2016: £4.6bn) with good demand across our range of funds, as investor sentiment and our investment performance improved. Net inflows doubled to £1.8bn (H1 2016: £0.9bn). We remain well placed in this market with a top 10 gross sales position² in the UK wholesale market for 25 consecutive quarters with a share of gross sales of 4.3%³ (FY 2016: 4.7%). In terms of net sales, our ranking was 39th³ (FY 2016: 30th).

Institutional gross inflows excluding GARS, were lower at £3.4bn (H1 2016: £4.5bn) as we saw a slowdown of investor activity globally. This reduction in gross inflows was partly offset by £0.2bn reduction in outflows. Net outflows were £0.6bn (H1 2016: net inflow £0.3bn).

Although we saw net outflows in the period, our Institutional channel remains well positioned for the future with strong consultant support for our increasingly broad product suite which strives to ensure we remain aligned with the changing investment needs of clients globally. This includes our Integrated Liability Plus Solution (ILPS) for small and medium-sized defined benefit pension schemes which now stands at over £0.4bn in AUM with 46 clients from 9 different consultants less than 18 months after launch.

Mature books

Our mature books business, which is in long-term natural run-off, saw overall net outflows of £2.8bn (H1 2016: £2.2bn), with net outflows of £1.4bn (H1 2016: £1.4bn) from the assets managed on behalf of Phoenix Group and net outflows of £1.4bn (H1 2016: £0.8bn) from the life insurance books we manage for Standard Life Group.

Investment performance

Performance in the first half of 2017 was strong with 82% of money weighted growth channel assets ahead of benchmark year-to-date. This performance represents the consistent application of our long-term investment philosophy - Focus on Change. Markets have become more fundamental based rather than being driven by sentiment following the macro-economic and geopolitical events of 2016, leading to improved opportunities for active asset selection. Performance over one year has improved to 85% of money weighted growth channel assets ahead of benchmark, and longer term remains strong over three and five years at 74% and 85% (H1 2016: one year 29%, three years 85%, five years 84%).

Further information on AUM and net flows are included in the Supplementary information section of this report

Flows and AUM	Gross inflows			Net flows			AUM
	H1 2017 £bn	H1 2016 £bn		H1 2017 £bn	H1 2016 £bn		H1 2017 £bn	FY 2016 £bn
Institutional4	5.1	8.5		(3.8)	1.9		84.4	87.0
Wholesale4	6.2	6.7		(0.6)	(0.4)		51.1	50.1
Wealth	0.4	0.5		(0.2)	0.2		6.8	6.8
Total growth channels	11.7	15.7		(4.6)	1.7		142.3	143.9
Standard Life Group	1.7	1.9		(1.4)	(0.8)		90.2	90.2
Phoenix Group	-	-		(1.4)	(1.4)		42.7	43.8
Total strategic partner life business - mature books	1.7	1.9		(2.8)	(2.2)		132.9	134.0
Total	13.4	17.6		(7.4)	(0.5)		275.2	277.9

Growth channel flows and AUM excluding GARS	Gross inflows			Net flows			AUM
	H1 2017 £bn	H1 2016 £bn		H1 2017 £bn	H1 2016 £bn		H1 2017 £bn	FY 2016 £bn
Institutional4	3.4	4.5		(0.6)	0.3		54.5	53.9
Wholesale4	5.0	4.6		1.8	0.9		39.0	35.1
Wealth	0.4	0.5		(0.2)	0.2		6.8	6.8
Total growth channels excluding GARS	8.8	9.6		1.0	1.4		100.3	95.8

¹    Gross performance (offer-to-offer) based on the £, institutional pooled pension portfolio.

²    Source: Pridham market report Q1 2017.

³    Source: Investment Association Q1 2017.

⁴    During 2016 Ignis funds were merged into Standard Life Investments funds and are now reported within Institutional and Wholesale. Comparative figures have been restated.

Profitability

Operating profit before tax increased by 8% to £190m following careful management of the cost base and strong performance from our Indian asset management associate. Operating return on equity increased to 39.9% (H1 2016: 34.6%).

Total fee based revenue was broadly flat at £429m with the impact of net outflows being offset by favourable foreign exchange and market movements combined with a robust performance from our mature business. The average revenue yield on growth AUM decreased to 51bps (FY 2016: 53bps) as a result of the change in the composition of the underlying assets. Average revenue yield for mature books remained flat at 16bps (FY 2016: 16bps).

Growth and mature channels	Fee based revenue			Fee revenue yield
	H1 2017 £m	H1 2016 £m		H1 2017 bps	FY 2016 bps
Institutional	172	181		41	43
Wholesale	128	126		69	68
Wealth	24	24		72	73
Total growth channels	324	331		51	53
Standard Life Group	73	66		16	16
Phoenix Group	32	34		15	16
Total strategic partner life business	105	100		16	16
Total	429	431		33	34

The cost/income ratio improved to 57% (FY 2016: 58%) as a result of careful cost management, with operating expenses decreasing by 4% to £259m. This demonstrates our ability to continue expanding our investment capabilities and maintaining global reach while exercising financial discipline.

EBITDA, which is closely aligned with operating profit, increased to £195m. Our EBITDA margin remained in line with the 2016 full year at 45% (H1 2016: 42%).

Total IFRS profit¹ increased by 11% to £136m (H1 2016: £123m).

Non-operating items in H1 2017 included costs of £7m to complete the integration of Ignis and £4m relating to the proposed Aberdeen merger.

Profitability	H1 2017 £m	H1 2016 £m
Fee based revenue	429	431
Operating expenses	(259)	(271)
Share of associates' profit before tax	20	16
Operating profit before tax	190	176
Interest, depreciation and amortisation	5	6
EBITDA	195	182
Reversal of interest, depreciation and amortisation	(5)	(6)
Non-operating items	(19)	(16)
Tax expense2	(35)	(37)
Total IFRS profit1	136	123

¹    After tax attributable to equity holders of Standard Life plc.

²    Tax expense includes share of associates' tax expense.

Pensions and Savings

AUA and net flows

Pensions and Savings AUA increased by 4% to £189.3bn (FY 2016: £181.5bn). Net inflows of £2.3bn were more than double H1 2016, driven by record growth channel inflows which increased by 39% to £4.3bn.

Growth channels

UK Retail

UK Retail AUA increased by 10% to £69.5bn (FY 2016: £62.9bn), reflecting strong net inflows which increased by 70% to £3.4bn (H1 2016: £2.0bn) and positive market movements.

Gross inflows increased by 63% to £6.7bn (H1 2016: £4.1bn) driven by strong demand for our Wrap and Elevate platforms. This included the benefit from growth in the pension market, boosted by individuals looking to take advantage of high defined benefit transfer values available in the market moving to products providing the flexibility offered by drawdown and pensions freedoms. Total assets in our drawdown propositions increased by 11% to £18.2bn (FY 2016: £16.4bn) reflecting both net inflows and positive market movements.

The Elevate platform was acquired in October 2016 and in the eight months since acquisition its AUA has grown from £11.1bn to £12.1bn. The broad market appeal of Elevate complements our existing Wrap platform which is focused on the wealth management market. Together our platforms have combined AUA of £49.2bn¹, an increase of 11% (FY 2016: £44.2bn).

Retail gross outflows increased to £3.3bn (H1 2016: £2.1bn), representing 5% of opening AUA (H1 2016: 5%), as the size of our proposition grows and customers make use of drawdown functionality.

UK Workplace

UK Workplace AUA increased by 4% to £39.0bn (FY 2016: £37.4bn), with net inflows of £0.8bn. We continue to benefit from growing contributions into existing schemes which provide a steady long-term source of growth. Our success in attracting new flows through auto enrolment has resulted in a 7% increase in regular premiums to £1.6bn. Regular premiums account for 73% of Workplace inflows.

Our Workplace business continues to be a source of growth for our retail channels with £1.1bn of assets transferring to those channels in H1 2017.

Europe growth fee

Europe growth AUA of £11.9bn is up 6% on FY 2016 benefiting from foreign exchange, market movements, and net inflows of £0.1bn.

Mature books

UK mature Retail

UK mature Retail AUA increased slightly to £34.6bn (FY2016: £34.3bn). Net outflows increased by £0.3bn to £1.5bn as a result of higher market levels and an expected rise in maturities from a small category of life insurance products. Net outflows included £0.2bn of transfers to our Active Money Personal Pension product (within our growth channels).

Spread/risk

Spread/risk AUA decreased by 4% to £15.5bn (FY 2016: £16.1bn). Net outflows from scheduled annuity payments were £0.5bn (H1 2016: £0.5bn).

Europe mature fee

Europe mature fee includes our German with profits book which was closed to new business in April 2015. AUA increased by 1% to £10.2bn with net inflows of £0.1bn (H1 2016: £0.1bn).

Further information on AUA and net flows are included in the Supplementary information section of this report

Flows and AUA	Gross inflows			Net flows			AUA
	H1 2017 £bn	H1 2016 £bn		H1 2017 £bn	H1 2016 £bn		H1 2017 £bn	FY 2016 £bn
UK Retail1	6.7	4.1		3.4	2.0		69.5	62.9
UK Workplace	2.2	2.0		0.8	0.8		39.0	37.4
Europe growth fee1	0.6	0.7		0.1	0.3		11.9	11.2
Total growth channels	9.5	6.8		4.3	3.1		120.4	111.5
UK mature Retail	0.3	0.4		(1.5)	(1.2)		34.6	34.3
Spread/risk	0.1	0.1		(0.5)	(0.5)		15.5	16.1
Europe mature fee	0.4	0.3		0.1	0.1		10.2	10.1
Conventional with profits	-	-		(0.1)	(0.4)		0.5	0.6
Total mature books	0.8	0.8		(2.0)	(2.0)		60.8	61.1
Assets not generating revenue from products	-	-		-	-		8.1	8.9
Total Pensions and Savings	10.3	7.6		2.3	1.1		189.3	181.5

¹    Platform AUA of £49.2bn (FY 2016: £44.2bn) which relates to Wrap, Elevate and Fundzone comprises of £46.5bn (FY 2016: £41.7bn) reported within UK Retail and £2.7bn (FY 2016: £2.5bn) relating to Wrap International Bond reported within Europe growth fee.

Operating profit

Pensions and Savings operating profit before tax decreased by £2m to £167m (H1 2016: £169m). Strong fee based revenue growth was offset by an expected reduction in the spread/risk margin and the increased operating expenses associated with the growth of our business.

UK

UK operating profit increased by £3m to £154m (H1 2016: £151m). H1 2016 included a £18m spread/risk margin benefit from the transition to Solvency II. Excluding this, UK operating profit increased by £21m.

Fee based revenue

UK fee based revenue increased by £47m to £368m (H1 2016: £321m). Fee based revenue benefited from higher asset levels due to strong net inflows within our growth channels together with positive market movements. The acquisition of Elevate and our continued focus on the growth of our financial advice business, 1825, has enabled us to further diversify our sources of revenue, contributing £26m to the growth in revenue.

UK fee based revenue	Fee based revenue			Fee revenue yield
	H1 2017 £m	H1 2016 £m		H1 2017 bps	FY 2016 bps
Workplace	95	91		51	54
Retail	144	106		45	48
UK growth channels	239	197		47	50
UK mature books	129	124		75	77
Total UK fee based revenue	368	321		54	58

Average fee revenue yield reduced to 54bps (FY 2016: 58bps) reflecting the impact of changes to business mix, including the growing proportion of newer style propositions, and the fact that some elements of revenue do not rise in line with market related AUA growth.

Spread/risk margin

UK spread/risk margin decreased by £4m to £51m. H1 2016 benefited from an £18m payment from our main with profits fund relating to changes to the Scheme of Demutualisation in response to the transition to Solvency II. This reduction was partly offset by the asset and liability benefit in H1 2017 of £17m (H1 2016: £16m) and the impact of favourable mortality experience, including a £7m reserve release in respect of overseas annuitants.

Operating expenses

UK operating expenses increased by £34m to £272m. The acquisition of Elevate and the growth of 1825 increased operating expenses by £29m. Investment expenses payable to Standard Life Investments of £47m increased by £6m, in line with higher AUA.

The cost/income ratio rose to 63% (FY 2016: 62%). Excluding Elevate and 1825, the cost/income ratio reduced to 59% (FY 2016: 60%) reflecting our continued focus on financial discipline.

Europe

Europe operating profit decreased by £5m to £13m. The H1 2016 spread/risk result included the benefit of a £4m payment from our main with profits fund relating to changes to the Scheme of Demutualisation in response to the transition to Solvency II.

Operating return on equity

Operating return on equity increased to 14.2% (H1 2016: 11.7%) as a result of a lower operating tax charge. Excluding the impact of the c£1bn pension scheme surplus, operating return on equity was 25.7% (H1 2016: 17.5%).

Total IFRS profit¹

Pensions and Savings total IFRS profit increased by £99m to £203m mainly due to favourable investment variances including the benefit from a narrowing of credit spreads. There were also reductions in restructuring and corporate transaction expenses and the tax expense. The tax expense includes a deferred tax impact due to a revised transfer pricing approach for our business in Germany. This led to a one-off release of deferred tax in Germany, with a partially offsetting increase to the deferred tax expense in the UK.

The Financial Conduct Authority's thematic review into the sale of non-advised annuities showed that a portion of annuity sales that we made since July 2008 did not adequately explain to customers that they may have been eligible for an enhanced annuity. We made a provision of £175m in our FY 2016 accounts for the costs that we may incur in relation to this and we continue to work with the FCA to ensure the successful and timely completion of this exercise.

Profitability	UK			Europe			Pensions and Savings
	H1 2017 £m	H1 2016 £m		H1 2017 £m	H1 2016 £m		H1 2017 £m	H1 2016 £m
Fee based revenue	368	321		93	86		461	407
Spread/risk margin	51	55		(2)	8		49	63
Total operating income	419	376		91	94		510	470
Operating expenses	(272)	(238)		(78)	(75)		(350)	(313)
Capital management	7	13		-	(1)		7	12
Operating profit before tax	154	151		13	18		167	169
Underlying adjustments	-	-		-	-		-	-
Underlying performance	154	151		13	18		167	169
Non-operating items2	42	(32)		5	(5)		47	(37)
Total tax expense	(61)	(16)		50	(12)		(11)	(28)
Total IFRS profit1	135	103		68	1		203	104

¹    After tax attributable to equity holders of Standard Life plc.

²    Non-operating items primarily relate to short-term fluctuations in investment return and economic assumption changes of £59m (H1 2016: (£10m)) and restructuring and corporate transaction expenses of (£9m) (H1 2016: (£26m)).

India and China

AUA and net flows

Total AUA increased by 13% to £5.2bn (FY 2016: £4.6bn) reflecting favourable market movements, including the benefit from a lower Sterling exchange rate. HDFC Life AUA increased to £3.9bn (FY 2016: £3.4bn).

Heng An Standard Life (HASL) AUA was £0.6bn (FY 2016: £0.6bn) and Hong Kong increased to £0.7bn (FY 2016: £0.6bn).

Net inflows for our associate and joint venture life businesses increased to £274m (H1 2016: £164m). Net inflows for HDFC Life were up by 77% to £225m, partly due to the increased percentage ownership from 26% to 35% in April 2016. Net inflows in HASL rose to £49m (H1 2016: £36m).

Profitability

Operating profit before tax rose to £33m (H1 2016: £19m) with HDFC Life up £10m to £27m (H1 2016: £17m), including a £3m benefit from our increased percentage ownership. HASL operating profit increased to £6m (H1 2016: £4m). Both our associate and joint venture life businesses continue to benefit from growth in premium income. The operating profit in Hong Kong was £nil (H1 2016: operating loss £2m).

In March 2017 we announced the proposed sale of Standard Life (Asia) Limited (SLA), our wholly owned Hong Kong insurance business to HASL, our Chinese joint venture, subject to regulatory and other approvals being obtained in Mainland China and Hong Kong. The proposed transaction supports our goal to pursue a wider China and Hong Kong strategy leveraging the position we have built through SLA and our interest in HASL. The strengths of HASL and SLA are complementary, with the proposed transaction enhancing HASL's current skills and services while improving the distribution model and range of products of SLA. Upon the completion of the transaction, SLA would become a wholly owned subsidiary of HASL.

The total IFRS profit after tax attributable to equity holders of Standard Life plc was £7m (H1 2016: £19m). H1 2017 includes a non-operating impairment loss of £24m relating to the proposed sale of our wholly owned Hong Kong insurance company to HASL.

Profitability	H1 2017 £m	H1 2016 £m
HDFC Life	27	17
Heng An Standard Life	6	4
Hong Kong	-	(2)
Operating profit before tax	33	19
Share of associates' and joint ventures' tax expense	(2)	-
Non-operating items	(24)	-
Total IFRS profit	7	19

Note: Results are presented on the basis of Standard Life ownership percentages during 2017 and do not include the 40% share in HDFC Asset Management which is included in the results for Standard Life Investments. HDFC Life ownership was 26% until the end of April 2016 and then 35% from May 2016, HASL ownership is 50% and Hong Kong is 100%.

Creating shareholder value in India

In India, HDFC Life announced in July 2017 that its Board of Directors approved proceeding with an initial public offering (IPO), with Standard Life offering up to 5.43% and HDFC Limited offering up to 9.57% of HDFC Life's equity shares representing, in aggregate, up to 15% of the paid-up equity share capital of HDFC Life. The IPO is subject to relevant regulatory and other necessary approvals.

Following the failure to obtain the requisite regulatory approvals to complete the proposed merger between HDFC Life and Max Life Insurance Company Limited by way of a scheme of arrangement, the parties have confirmed they will not be pursuing the transaction any further via the proposed scheme.

Risk management

Our approach to risk management, delivered through our Enterprise Risk Management (ERM) Framework, remains well embedded in the business and enables us to respond pre-emptively to risks which the Group is exposed to. We are continually looking to raise standards in our risk management as we build a world-class investment company.

Pages 38-41 of our Annual report and accounts 2016 details 13 principal risks which the Group is exposed to. These risks are: Investment Performance; Customer and Client Preferences and Demand; Political Change; Regulatory Change; Strategic Transition and Delivery; Customer and Client Outcomes; IT Failure and Security, including cyber risk; Outsourcer Relationship Management; Change Management; Talent Management; Market Risk; Counterparty Risk and Longevity Risk.

The principal risks currently facing the Group and those that we believe the Group will be exposed to in the second half of 2017 remain the same as those outlined in the Annual report and accounts 2016. However, there have been some further developments within some of our principal risks since publication of the Annual report and accounts 2016 and they are outlined below.

Key developments in relation to our principal risks

Notwithstanding the compelling strategic rationale for the proposed merger with Aberdeen the merger and integration process will heighten our exposure to Strategic Transition and Delivery risk. The Group's success post-merger will be dependent on the ability of its leadership team to integrate the two businesses in an orderly manner without material dis-synergies. There will be numerous challenges associated with the integration and it will be important to manage effectively any known or unanticipated risks. An analysis of the key risks which may impact on the Group, such as asset outflows and operational and cultural integration, were outlined in the prospectus published by Standard Life plc in May 2017.

Markets remain at or near recent highs but continue to be sensitive to geopolitical uncertainty. Delivering superior long-term investment performance through active management is a key priority for attracting and retaining customers and clients. Therefore, maintaining focus on managing investment performance following the proposed merger and during the integration period is essential.

Political uncertainties remain, particularly in relation to the establishment of a minority government following the recent UK General Election and negotiations for the UK's exit from the EU. We continue to engage with key UK and EU policymakers, however, we recognise there is a risk that as a result of negotiations the operating model of our business may need to change to allow us to continue to service our customers and clients, and to distribute products in Europe. Actions are underway and plans are in place to manage the consequences of the negotiations to ensure continuity of service to our customers and clients. Detailed contingency planning and strong risk management will be important in order to achieve the best outcome for our customers, clients and shareholders during and after the UK's exit from the EU.

Effectively managing conduct risk remains a key focus for the Group. As highlighted in our Annual report and accounts 2016, we will be using procedures agreed with the FCA to review our non-advised annuity sales to Standard Life pension customers from July 2008 to identify whether our customers received sufficient information about enhanced annuity options. Work to date has been focused on the set up of the review and, subject to external dependencies, we expect this review to begin in H2 2017. A robust operational and oversight function has been embedded within the review which operates in accordance with our established ERM Framework. This has a primary focus on conduct risk and putting things right for customers affected. We continue to work with the FCA to ensure the timely and successful completion of this exercise.

We maintain heightened vigilance around growing global cyber threats and continue to enhance our cyber defence capabilities in response to this changing risk environment. Whilst not impacting Standard Life directly, in response to the international ransomware attacks widely reported in May, we took steps to communicate with our people, our customers, clients and our regulator to give comfort that we have appropriate controls in place.

Basis of preparation

Overview

Our Management report for the period to 30 June 2017 has been prepared in line with the Disclosure Guidance and Transparency Rules (DTR) issued by the FCA. The DTR incorporates the requirement of the European Union (EU) Transparency Directive for all UK listed companies to report their half year results in accordance with IAS 34 Interim Financial Reporting. Under DTR 4.2.7R, the Group is required to provide at least an indication of important events that have occurred during the first six months of the financial year, and their impact on the financial information, and a description of the principal risks and uncertainties for the remaining six months of the financial year. Principal risks and uncertainties are included in the Risk management section of the Management report and Note 41 of the Group's Annual report and accounts 2016. Under DTR 4.2.8R the Group is also required to make certain related party disclosures. These are contained in Note 4.17 of the IFRS condensed consolidated financial information. To provide clear and helpful information, we have also considered the voluntary best practice principles of the Guidance on the Strategic report issued by the Financial Reporting Council in 2014. We have also considered the European Securities and Markets Authority (ESMA) guidelines on alternative performance measures issued in October 2015.

The Group's International Financial Reporting Standards (IFRS) condensed consolidated half year financial information has been prepared in accordance with IAS 34 Interim Financial Reporting, as endorsed by the European Union (EU). However, our Board believes that alternative performance measures (APMs), which have been used in the Management report, are also useful for both management and investors.

The most important APMs in the Management report include operating profit and underlying cash generation.

All APMs should be read together with the Group's IFRS condensed consolidated income statement, IFRS condensed consolidated statement of financial position and IFRS condensed consolidated statement of cash flows, which are presented in the Financial information section of this report.

Further details on alternative performance measures, financial ratios and assets under administration are included in the Supplementary information section of this report

Going concern

After making enquiries, the Directors are satisfied that the Group has and will maintain sufficient resources to enable it to continue operating for at least 12 months from the date of approval of the Half year results and therefore considered it appropriate to adopt the going concern basis of accounting in preparing the interim financial information.

IFRS reporting

The financial results, which are unaudited at the half year are prepared on an IFRS basis. All EU-listed companies are required to prepare consolidated financial statements using IFRS issued by the International Accounting Standards Board (IASB) as endorsed by the EU. The IFRS financial results in the Management report and in Section 4 have been prepared on the basis of the IFRS accounting policies applied by the Group in the Annual report and accounts 2016 as amended for new standards effective from 1 January 2017, as described in Note 4.1 - Accounting policies.

Operating profit

The H1 2017 pro forma reconciliation of consolidated operating profit to IFRS profit for the period, presented in Section 4 of this report, presents profit before tax expense attributable to equity holders adjusted for non-operating items. Further details on the calculation of Group operating profit is presented in Note 4.7. Operating profit reporting provides further analysis of the results reported under IFRS and the Directors believe it helps to give shareholders a fuller understanding of the performance of the business by identifying and analysing non-operating items.

Forward-looking statements

This document may contain certain 'forward-looking statements' with respect to Standard Life's plans and its current goals and expectations relating to its future financial condition, performance, results, strategy and objectives. For example, statements containing words such as 'may', 'will', 'should', 'continue', 'aims', 'estimates', 'projects', 'believes', 'intends', 'expects', 'plans', 'pursues', 'seeks', 'targets' and 'anticipates', and words of similar meaning, may be forward-looking. By their nature, all forward-looking statements involve risk and uncertainty because they are based on information available at the time they are made, including current expectations and assumptions, and relate to future events and circumstances which may be or are beyond Standard Life's control, including among other things: UK domestic and global political, economic and business conditions (such as the United Kingdom's exit from the European Union); market related risks such as fluctuations in interest rates and exchange rates, and the performance of financial markets generally; the impact of inflation and deflation; experience in particular with regard to mortality and morbidity trends, lapse rates and policy renewal rates; the impact of competition; the timing, impact and other uncertainties associated with future acquisitions or combinations undertaken by Standard Life (including the proposed merger with Aberdeen) and/or within relevant industries (including in connection with any post-transaction integration); default by counterparties; information technology or data security breaches; natural or man-made catastrophic events; the failure to attract or retain necessary key personnel; the policies and actions of regulatory authorities; and the impact of changes in capital, solvency or accounting standards, and tax and other legislation and regulations in the jurisdictions in which Standard Life and its affiliates operate as well as other factors described in the Risk management sections of this Management report and in the Annual report and accounts 2016. These may for example result in changes to assumptions used for determining results of operations or re-estimations of reserves for future policy benefits. As a result, Standard Life's actual future financial condition, performance and results may differ materially from the plans, goals, strategy and expectations set forth in the forward-looking statements. Persons receiving this document should not place undue reliance on forward-looking statements. Standard Life undertakes no obligation to update any of the forward-looking statements contained in this document or any other forward-looking statements it may make. Past performance is not an indicator of future results and the results of Standard Life in this document may not be indicative of, and are not an estimate, forecast or projection of, Standard Life's future results.

 

END

 

 

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