Half Yearly Report - Part 2 of 5

RNS Number : 0658M
Standard Life plc
10 August 2011
 



 

 

Standard Life plc

Half Year Results 2011

Part 2 of 5

 

 

 

 

 

 

 

 

 

Standard Life plc

Half Year Results

2011

 

 

 


Section

Contents

Page

1

Business review

13

1.1

IFRS - Group

14

1.2

EEV - Group

17

1.3

Business segment performance

19


1.3.1   UK

19


1.3.2   Canada

22


1.3.3   International

24


1.3.4   Global investment management

26

1.4

Capital and cash generation

28

1.5

Risk management

32

1.6

Basis of preparation

35

2

Statement of Directors' responsibilities

37

3

International Financial Reporting Standards (IFRS)

39


IFRS primary statements

40


IFRS notes

47

4

European Embedded Value (EEV)

65


EEV primary statements

66


EEV notes

69

5

Independent auditors' review report

99

6

Supplementary information

103

6.1

Analysis of IFRS profit by segment

104

6.2

EEV and EEV operating profit

105

6.3

Reconciliation of IFRS operating profit to EEV capital and cash generation

107

6.4

Group assets under administration and net flows

108

6.5

Analysis of new business

115

6.6

Exposure to investment property and financial assets

120

6.7

Fair value hierarchy of financial instruments

123

6.8

Investment for transformation and growth

125

7

Glossary

127

8

Shareholder information

135


The Half Year Results 2011 are published on the Group's website at www.standardlife.com

 

The Directors are responsible for the maintenance and integrity of the financial information published on the website in accordance with UK legislation governing the dissemination of financial statements.

 

Access to the website is available outside the UK, where comparable information may be different.


 

 

 

 

 

 

   

1 Business review


1.1 IFRS - Group

The IFRS results demonstrate our ability to deliver high quality returns for shareholders and the ongoing dividend paying capability of the Group. We will continue to improve our operational efficiency and invest to transform and grow the business.

IFRS highlights

H1 2011

H1 2010

Movement

IFRS operating profit before tax from continuing operations

£262m

£182m1

44%

IFRS profit after tax attributable to equity holders of Standard Life plc

£199m

£182m

9%

Assets under administration

£200.0bn

£196.8bn2

2%

1    Profit from continuing operations excludes Standard Life Healthcare Limited, which was sold on 31 July 2010.

2      Comparative as at 31 December 2010.

IFRS profit

IFRS profit for the period was £234m (H1 2010: £217m). This comprised profit after tax attributable to equity holders of £199m (H1 2010: £182m) and profit attributable to non-controlling interests of £35m (H1 2010: £35m). The IFRS result includes operating and non-operating items. IFRS operating profit before tax from continuing operations increased by 44% from £182m to £262m. Non-operating losses before tax were £5m (H1 2010: profit £58m).

IFRS operating profit before tax from continuing operations

H1 2011

H1 2010


£m

£m

Fee based revenue

611

535

Spread/risk margin

207

198

Total income

818

733

Acquisition expenses

(142)

(132)

Maintenance expenses

(351)

(324)

Investment for transformation and growth

(80)

(72)

Group corporate centre costs

(20)

(30)

Capital management

37

27

India and China JV businesses

-

(20)

Group IFRS operating profit before tax from continuing operations

262

182

The key movements in IFRS operating profit before tax from continuing operations were:

·   Increased fee revenue of £76m from the strong level of net inflows and higher asset values

·   Increased spread/risk margin of £9m, due to positive impact of specific management actions in Canada, more than offsetting the impact of reduced annuity volumes in the UK

·   Increase of £8m in investment for transformation and growth in the business

·   Other expenses increased by £27m due to the less than proportionate rise in the cost of writing new business and higher costs associated with maintaining a larger book of business

Further explanations for the movements in IFRS operating profit before tax are provided below.

Group IFRS operating profit before tax increased to £262m. This was primarily due to an increase in profits in Canada to £103m (H1 2010: £62m) and in Global investment management to £67m (H1 2010: £49m).

Fee business revenue, which mainly relates to asset management charges, increased by 14% to £611m. This was due to the strong level of net inflows and also higher asset values following positive market movements mainly in the Global investment management and UK businesses.

Spread/risk margin includes net earned premiums, claims and benefits paid, net investment return using long-term assumptions and reserving changes. Spread/risk margin increased mainly due to specific management actions designed to enhance the investment yields on assets in Canada. This was partially offset by lower annuity volumes in the UK, with the prior period benefiting from a change in retirement age legislation.

Acquisition expenses are the costs we incur in writing new business. Acquisition expenses increased to £142m, reflecting the strong growth in sales volumes, particularly in the domestic and offshore businesses in Ireland. Acquisition expenses expressed as a proportion of sales improved to 130bps.

Maintenance expenses mainly relate to the ongoing costs that we incur to service and administer customer policies. These costs increased to £351m mainly due to growth in the Global investment management and International businesses. Maintenance expenses expressed as a proportion of average AUA improved to 40bps.

The improvement in both of the expense trends demonstrates the scalability of our business. Growth in new business and customer assets has led to greater levels of efficiency.

We previously said that we were targeting £100m of annual margin improvement by 2012 to be achieved through greater efficiency, improved asset mix and increasing flows to Standard Life Investments. In H1 2011, we achieved further cost efficiencies of £30m. We have now achieved total efficiency savings of £64m in relation to this 2012 target and also increased revenues from our fee based products resulting from strong flows into higher margin propositions and Standard Life Investments.

 

Investment for transformation and growth


H1 2011

H1 2010


£m

£m

Investment in operating cost base

80

72

Investment capitalised

16

5

Additional investment in joint venture businesses

23

12

Total investment for transformation and growth

119

89

We have continued to invest to transform and grow the business. This led to investment spend included in IFRS operating profit before tax increasing to £80m in H1 2011. A number of customer propositions were launched or enhanced during the period and continued investment was made to improve operational effectiveness. The total amount invested in H1 2011 was £119m (H1 2010: £89m). This includes additional investment in the India and China joint venture businesses and also capitalised investment spend that does not impact profitability in H1 2011.

Segmental analysis of IFRS operating profit

UK

UK IFRS operating profit before tax increased to £87m. Fee based revenue increased by £32m mainly due to higher fee business AUA. This was offset by a fall of £31m in the spread/risk margin. H1 2010 benefited from a reserves release of £18m and annuity volumes were lower compared to H1 2010 which benefited from a change in retirement age legislation.

Canada

Canada IFRS operating profit before tax increased to £103m, driven by a £40m increase in the spread/risk margin. H1 2011 results included specific management actions designed to enhance the investment yields on assets, leading to a £31m decrease (H1 2010: decrease £17m) in policyholder liabilities. Investment guarantee margins in the segregated funds business resulted in a charge of £nil (H1 2010: charge £24m).

International

IFRS operating profit before tax of the wholly owned businesses decreased by £9m to £19m. This was mainly due to a £6m increase in acquisition expenses, in line with the higher new business volumes in Ireland and Hong Kong. There was also a £9m increase in maintenance expenses due to the growing AUA and back book. Fee based revenue increased by 3% to £108m driven by the increase in AUA.

The joint ventures contributed an IFRS operating profit before tax of £nil (H1 2010: loss £20m) to the Group, which continues to reflect the progression of the joint venture businesses.

Global investment management

Global investment management IFRS operating profit before tax increased to £67m. This was mainly due to a rise in revenue of 23% as a result of strong third party new business flows, many of which were into higher margin products, such as GARS and UK mutual funds, and stronger market conditions. This raised the average revenue yield on fee business to 36bps (2010: 35bps), excluding the fee received following the transfer of money market funds run on a constant net asset value basis to Deutsche Bank Asset Management.


1.1 IFRS - Group continued

Other

Group corporate centre costs decreased to £25m (H1 2010: £30m) as we continued to transform our business and control our costs. H1 2011 costs included £5m of investment for transformation and growth. Other income decreased to £11m (H1 2010: £17m).

Find out more about the IFRS operating results of our businesses in Section 1.3 - Business segment performance.

IFRS non-operating (loss)/profit before tax from continuing operations


H1 2011

H1 2010


£m

£m

Short-term fluctuations in investment return and economic assumption changes

27

75

Restructuring and corporate transaction expenses

(23)

(17)

Other operating profit adjustments

(9)

-

IFRS non-operating (loss)/profit before tax from continuing operations

(5)

58

 

IFRS non-operating (loss)/profit before tax from continuing operations

IFRS non-operating loss was £5m compared with a profit of £58m in H1 2010. Short-term fluctuations in investment return and economic assumptions produced non-operating gains of £27m in H1 2011 (H1 2010: £75m). This reduction was primarily due to investment variance losses on assets backing the UK subordinated debt, which was partially offset by investment variance gains in Canada reflecting a continuing recovery in real estate markets.

Non-operating restructuring and corporate transaction expenses increased to £23m (H1 2010: £17m) due to continued investment in the Group's transformation and Solvency 2 programmes.

Assets under administration and net flows

Demand for our innovative products and services remained strong and contributed to total net inflows of £4.0bn. Within this, long-term savings net inflows were £2.8bn (H1 2010: £2.5bn). This contributed to a 2% increase in total AUA to £200.0bn and includes the impact of approximately £4bn relating to the transfer of the constant net asset value money market funds.

Of the total AUA, 83% (31 December 2010: 83%) related to fee business. Fee business AUA rose by 2% to £165.9bn (31 December 2010: £163.1bn). Spread/risk business AUA decreased by 2% to £23.0bn (31 December 2010: £23.5bn). 

Find out more about the AUA and net flows of our businesses in Section 1.3 - Business segment performance.


1.3 Business segment performance continued

1.3.1   UK continued

(31 December 2010: 37%). Spread/risk business AUA remained flat at £13.4bn with net outflows being offset by positive market and other movements.

H1 2011

H1 2010


£m

£m

Fee based business (F)

2,040

1,907

Spread/risk business (S/R)

(334)

(272)

Total UK net inflows

1,706

1,635

 

Total UK net inflows for the period increased by 4% to £1,706m, against a strong H1 2010 comparator. Within this, fee based business net inflows increased by 7% to £2,040m. Net outflows for spread/risk business increased to £334m, reflecting our strategic focus on growing fee based business.

Retail net outflows of £371m were 8% lower than H1 2010. This reflects a 34% increase in individual pension net inflows, driven by growth in our individual self invested personal pension (SIPP) customer base during the period, further strengthening our leading position within the SIPP market.

The 10% improvement in savings and investments net outflows was driven by strong mutual fund growth. H1 2009 savings and investments net outflows were impacted by our decision not to renew bulk investment bond deals.

Annuity net outflows have worsened as a result of lower new business sales compared to a strong performance in H1 2010.

Corporate net inflows of £2,077m (H1 2010: £2,039m) increased by 2%. This included very strong growth in corporate pensions net inflows, which increased to £1,265m (H1 2010: £773m). This was 64% higher than for the same period last year driven by new scheme wins in the period.

Net inflows on institutional pension business were lower against a strong comparator in H1 2010.

New business performance

 

           PVNBP £m

 

        NBC £m

 

          IRR %

Undiscounted payback (years)


H1 2011

H1 2010

H1 2011

H1 2010

H1 2011

H1 2010

H1 2011

H1 2010

Individual SIPP and other individual pensions (F)

2,237

2,173

13

14

11

11

7

7

Savings and investments (F)

1,257

954

8

4

12

10

7

8

Annuities and protection (S/R)

148

210

27

36

Infinite

Infinite

Immediate

Immediate

UK retail

3,642

3,337

48

54

21

21

5

5

Corporate pensions (F)

2,830

1,751

40

24

13

12

9

9

Institutional pensions (F)

1,674

1,842

25

25

>40

>40

<3

<3

UK corporate

4,504

3,593

65

49

19

20

6

6

UK total

8,146

6,930

113

103

20

20

5

5

Split of total









Fee business (F)

7,998

6,720

86

67

15

14

7

7

Spread/risk business (S/R)

148

210

27

36

Infinite

Infinite

Immediate

Immediate

PVNBP sales increased by 18% to £8,146m against a strong performance in H1 2010. In our retail business, PVNBP increased by 9% to £3,642m. Individual pensions sales were up 3% to £2,237m and included a 4% rise in individual SIPP sales to £1,984m (H1 2010: £1,907m). The growth in savings and investments includes an increase in mutual fund sales of 33% to £1,152m

(H1 2010: £863m) reflecting the significant growth in sales through our Wrap platform.

The growth within our corporate pensions business, where sales have increased by over 60%, has been driven by our success in winning new schemes. In addition, our enhanced trust-based pension proposition has been successful in attracting both new and existing schemes and contributed over £500m to sales in H1 2011. Alongside this growth in sales, our corporate pensions business PVNBP margin was maintained at 1.4% (H1 2010: 1.4%).

Total UK NBC increased by 10%, with a slight fall in PVNBP margin to 1.4% from 1.5% in H1 2010, reflecting the change in business mix sold in the period. The internal rate of return (IRR) remained stable at 20% and the payback period remained unchanged at 5 years.

EEV operating profit before tax

UK EEV operating profit, including HWPF time value of options and guarantees and non-covered business, increased by 17% to £222m (H1 2010: £190m). The H1 2011 profit includes the impact of a management action which reduces current and future investment expenses by £50m. Development spend remained relatively stable at £16m (H1 2010: £18m), reflecting our continuing strategic investment in developing our corporate and retail propositions, as well as our brand.

Delivering our strategy

Retail business

Our Wrap platform continued to grow significantly and at 30 June 2011 held £7.6bn AUA (31 December 2010: £6.1bn). This was partly due to a 13% increase in the number of advisers utilising the platform, with 926 adviser firms at 30 June 2011 (31 December 2010: 820). This contributed to an increase of 27% in customer numbers to 72,400 at 30 June 2011 (31 December 2010: 57,000). Following adviser feedback, we have invested in a number of enhancements to the platform including introducing a Managed Portfolio Service and developing client reporting and back-office integration functionality for advisers. We believe this customer-centric approach to introducing enhancements is one of the reasons our Wrap platform has been awarded the highest possible 'eee' rating by the Finance and Technology Research Centre (FTRC) for five consecutive years.

We are also investing significantly in the services available via Adviserzone, our award-winning adviser extranet. We have set out a clear routemap for our platform development which will see us delivering distinct platform propositions for both retail and Wrap customers through a single platform offering a common user experience.

Investment solutions are a critical part of our proposition suite. Where platforms are the mechanism for building relationships and a conduit for volume, investment solutions are the main mechanism for driving revenue whilst improving revenue yield. We continue to develop and enhance our full suite of investment solutions including MyFolio.

The launch of our direct channel online Stocks and Shares ISA in February built upon our online Active Money Personal Pension (AMPP) launch in February 2010. As a result we have continued to see strong growth in our individual SIPP customer base throughout this period. We have enhanced SIPP by widening the range of discretionary fund managers available and are now offering gold bullion as an investment option. The total number of customer accounts increased by 13% to 120,800 (31 December 2010: 107,100). Responding to adviser feedback, we continued to enhance our Active Money SIPP. New developments included offering customers the option of using their own solicitor and widening the panel of lenders for property transactions. These updates will help to ensure that our SIPP proposition remains innovative, competitive and market-leading.

In January 2011, we announced the completion of the acquisition of Focus Solutions for £49m. The integration of Focus along with threesixty provides Standard Life with a unique ability to support advisers in developing Retail Distribution Review (RDR) compliant business models in a very efficient way. This capability will also help us to enhance and grow our retail bank and Direct to Customer (D2C) propositions. We will be sharing more specifics on these developments in Q3 2011.

Corporate business

Corporate pensions business had 62% sales growth through winning new schemes, and has delivered proposition enhancement through the launch of our Trust Based Pension offering.

We launched Lifelens, our market-leading fully integrated employee-centric offering to provide employee pension and non-pension benefit solutions via the workplace. The development and implementation of the Lifelens proposition is a key part of our strategy as it will serve to both increase the acquisition of pension assets and improve retention and our ability to cross-sell. Lifelens has been well received by the market and we have already implemented two large Lifelens schemes in the first six months of the year. The outlook for our corporate business in the UK is encouraging with growth largely driven by the current focus of corporates to move away from defined benefit to defined contribution schemes and accelerated by pensions reforms and the RDR changes.

The corporate back book remains strong and is a key driver of revenue for our corporate business. We have over 36,000 schemes and in excess of 1.1 million employees enrolled.

Operational transformation

We are in the middle of our three year transformation journey and have strengthened our UK management team. Our strategy to deliver shareholder value is largely based upon the development of our integrated set of relationship front-ends - Wrap, Adviserzone and D2C - which are built on common enterprise architecture. Increased use of technology and automation is designed to deliver significantly more efficient customer and asset administration.

We are continuing to invest in our business change programmes. This year our focus is on completing proposition enhancement, particularly investment in the core Adviserzone and Lifelens platforms.

Awards won during 2011

During H1 2011, our focus on providing customer-centric propositions remained one of our key strengths and was recognised through many awards which included:

·   Money Marketing Financial Services Awards:

-   Company of the Year

-   Best SIPP Provider

·   Professional Adviser Awards:

-   Best SIPP Provider

-   Best Personal Pensions Provider


1.3 Business segment performance continued 

1.3.2   Canada

Our long-term savings and investments business in Canada offers a range of savings, retirement and insurance products. With a strong focus on the needs of our 1.4 million Canadian retail and corporate customers, we continue to build client and distributor relationships, while also introducing innovative solutions to protect clients' assets.

Financial highlights

H1 2011

H1 2010

Movement

IFRS operating profit before tax

£103m

£62m

66%

Assets under administration

£26.0bn

£25.3bn1

3%

Net flows

£99m

£92m

8%

EEV operating profit before tax

£113m

£123m

(8%)

1    Comparative as at 31 December 2010.

IFRS operating profit before tax

H1 2011

H1 2010


£m

£m

Fee based revenue

84

72

Spread/risk margin

155

115

Total income

239

187

Acquisition expenses

(39)

(33)

Maintenance expenses

(98)

(96)

Investment for transformation and growth

(17)

(16)

Capital management

18

20

Canada IFRS operating profit before tax

103

62

Operating profit before tax increased to £103m (H1 2010: £62m). Fee based revenue benefited from an increase in management charge income from higher AUA. The average revenue yield on fee business was maintained at 118bps (2010: 118bps).

Spread/risk margin increased compared with H1 2010 partly due to the impact of specific management actions designed to enhance the investment yields on assets, which have led to a £31m decrease (H1 2010: decrease £17m) in policyholder liabilities. One-off reserving changes decreased policyholder liabilities by £6m (H1 2010: increase £11m). In H1 2010, one-off reserving changes included a £24m charge relating to investment guarantee margins in the segregated funds business.

The increase in acquisition costs was primarily due to a shift in sales towards individual savings and retirement products, resulting in higher commission charges. 

There was only a slight increase in maintenance expenses despite the rise in AUA and the associated costs incurred to service and administer these assets.

We continued to invest in growing our business and delivering enhancements to our client propositions with expenditure during the period of £17m.

Assets under administration and net flows

AUA increased by £0.7bn during the period. Our fee business now accounts for 57% (31 December 2010: 55%) of total AUA and has increased by 3% in constant currency to £14.7bn. The rise in fee business AUA has been driven by a combination of positive market movements and net inflows. Spread/risk AUA decreased to £9.6bn (31 December 2010: £10.1bn).

Net inflows increased by 6% in constant currency to £99m

(H1 2010: £92m). We improved our market share in many product segments but largely due to weak markets, gross inflows in our fee business were flat. Strong sales in our retail segregated funds were offset by a decrease in mutual fund net inflows.

In our group savings and retirement fee business, net inflows decreased by 17% in constant currency to £247m (H1 2010: £293m). In our individual insurance, savings and retirement fee business, net inflows increased to £93m (H1 2010: £85m). This reflects the strength of our savings and investments propositions, our well-positioned offering and strong adviser relationships.

Our mutual funds net outflows worsened to £68m (H1 2010: £13m) due to lower sales levels. However, redemptions in mutual funds in H1 2011 were lower than last year and retention rates continue to improve.

In our spread/risk business, net outflows improved from £273m to £173m, mainly due to higher sales of annuities and lower term funds redemptions. Group savings and retirement net outflows slightly improved to £116m (H1 2010: £124m). A large part of group insurance sales consisted of future renewal premiums and as such had a marginal impact on this period's inflows, which increased by 6% in constant currency to £43m (H1 2010: £40m).

New business performance

PVNBP sales decreased by 2% in constant currency to £1,579m (H1 2010: £1,581m). Excluding a large win in 2010 for group savings and retirement, total sales have increased by 14% in constant currency.

Strong sales in our retail segregated funds, which increased by 23% in constant currency, led to an increased market share and drove our retail line sales. Individual insurance, savings and retirement increased by 24% in constant currency to £402m (H1 2010: £318m). Mutual funds sales decreased by 35% in constant currency to £120m (H1 2010: £182m).

Despite an increase in our market share, group savings and retirement sales decreased by 27% in constant currency to £571m (H1 2010: £773m), highlighting difficult market conditions. Excluding the large win in 2010, sales in this product line have increased by 3% in constant currency and our core defined contribution sales increased by 18%.

Group insurance and disability management business was again very successful, with a strong growth in market share1 and sales increased by 55% in constant currency to £486m (H1 2010: £308m).

New business contribution decreased by 5% in constant currency to £30m (H1 2010: £31m), PVNBP margin decreased to 1.9% (H1 2010: 2.0%) and internal rate of return decreased to 14% (H1 2010: 19%). This was due to a shift in the sales mix, the cost of our new retail segregated fund hedging programme and increased mutual funds net outflows. The undiscounted payback period remained stable at 7 years (H1 2010: 7 years).

EEV operating profit before tax

EEV operating profit before tax decreased by 9% in constant currency to £113m (H1 2010: £123m). This was mainly due to a reduction in back book results, as H1 2010 benefited from favourable annuity experience, and a slightly lower new business contribution in H1 2011.

Delivering our strategy

In line with our strategy, we are focused on increasing our visibility in the market. We have developed innovative solutions to meet the needs of our customers and gained access to new distribution channels.

In our group savings and retirement line, we continue to support our customers by helping them to make informed decisions about their retirement income planning. The trust application addition to our SLX platform released in the first quarter of 2011 has already enabled us to secure key accounts. It allows us to deliver a combined offering of stock plans and stock options within our regular defined contribution proposition. We have added several investment managers and new funds to our Quality and Choice Investment Program, including the successful GARS products from Standard Life Investments.

In our retail line, we expanded our successful segregated funds range with the launch of the Ideal Income Series, offering clients a guaranteed income for life by providing capital protection at maturity. In order to mitigate risks and earnings volatility related to the investment guarantees, we have implemented a dynamic hedging program to hedge movements in underlying assets and yield curve. We also introduced four new mutual funds managed by prominent third party investment advisors which will fill a gap in the investment choices offered to customers. We enhanced our distribution through an agreement with Qtrade Financial Group, an online brokerage and investment dealer. Through this agreement, Qtrade will distribute our segregated funds to their existing and future clients. In the second half of 2011, we will be offering three socially responsible investment funds managed by Qtrade to our customers and advisors.

In our group insurance line, we continue to increase our visibility in the market and to actively promote and improve our product offering.

Awards won during 2011

Highlighting our success with connecting with our customers we have been awarded the 'Outstanding Integrated Ad Campaign' award from the Web Marketing Association. This recognised our multimedia campaign 'To make a long story short', promoting our revamped member statement.

1            As at 31 March 2011.


1.3 Business segment performance continued 

1.3.3   International

Our International business offers innovative investments and savings products tailored to customer needs in different markets. Our offerings are centred around flexible investment solutions, innovative life assurance wrappers and digital capabilities. They leverage the investment expertise available through Standard Life Investments. In H1 2011, International successfully launched propositions in each of its markets which contributed to the profitable growth of market share, new business and assets. The remainder of 2011 will see this strategy continued to further exploit the opportunities offered in our International territories.

Financial highlights - wholly owned

H1 2011

H1 2010

Movement

IFRS operating profit before tax

£19m

£28m

(32%)

Assets under administration

£12.3bn

£11.1bn1

11%

Net flows

£858m

£592m

45%

EEV covered business operating profit before tax

£31m

£38m

(18%)

EEV non-covered business operating loss before tax

(£5m)

(£3m)

(67%)

Financial highlights - joint ventures (Standard Life's share)

H1 2011

H1 2010

Movement

IFRS operating profit/(loss) before tax

£nil

(£20m)

100%

Assets under administration

£1.3bn

£1.2bn1

8%

Net flows

£140m

£133m

5%

EEV covered business operating profit before tax

£4m

£10m

(60%)

1    Comparative as at 31 December 2010.  

IFRS operating profit before tax


H1 2011

H1 2010


£m

£m

Fee based revenue

108

105

Acquisition expenses

(18)

(12)

Maintenance expenses

(68)

(59)

Investment for transformation and growth

(4)

(8)

Capital management

1

2

Total wholly owned

19

 

 

19

28

India and China JV businesses

-

(20)

International IFRS operating profit before tax

19

19

8

IFRS operating profit before tax of the wholly owned businesses decreased by 32% to £19m (H1 2010: £28m). This was driven by higher strain from the growing new business and increased maintenance costs due to the growing AUA and back book. The average revenue yield across the International business fell to 196bps (2010: 212bps), reflecting the shift in sales mix across the International territories.

Fee based revenue increased by 3% to £108m (H1 2010: £105m) driven by the increase in AUA. This more than offset the expected reduced transfer of profits from the HWPF in Germany.

Acquisition expenses increased to £18m (H1 2010: £12m). This was in line with the higher new business in Ireland and Hong Kong. Maintenance expenses increased to £68m (H1 2010: £59m) due to the growing AUA and back book.

Assets under administration and net flows

AUA in the wholly owned businesses grew by £1.2bn to £12.3bn (31 December 2010: £11.1bn) due to high net inflows in the period. In Ireland, AUA increased to £4.5bn (31 December 2010: £4.2bn) for the domestic business and to £2.2bn (31 December 2010: £1.8bn) for offshore bonds. AUA in Germany rose by 5% in constant currency to £5.5bn (31 December 2010: £5.0bn). Net flows of the wholly owned businesses increased by 45% in constant currency to £858m (H1 2010: £592m). This was mainly due to strong growth in sales in Ireland. Ireland domestic business net inflows of £150m (H1 2010: £70m) increased due to higher single premium new business sales. Net flows of offshore bonds increased to £386m (H1 2010: £194m) due to higher inflows from new business, mainly relating to Wrap.

Net flows in Germany were £292m (H1 2010: £317m), an 8% decrease in constant currency. This was predominantly driven by higher levels of maturities and redemptions as the back book matures.

Our Hong Kong operation continues to deliver strong growth, with net flows up 190% in constant currency to £30m (H1 2010: £11m).  

New business performance

PVNBP sales in the wholly owned businesses increased by 42% in constant currency to £1,175m (H1 2010: £832m). In Ireland domestic business, sales increased by 59% in constant currency to £359m (H1 2010: £224m). This is due to our strong investment proposition, launch of a new pension product and legislative changes which resulted in some one-off sales benefits in 2011. We also benefited as customers moved towards financial institutions they perceived as being more secure. Offshore bonds sales were 49% higher at £477m (H1 2010: £321m) due to an improved proposition and better market conditions. In Germany, sales of £162m (H1 2010: £154m) were 5% higher than H1 2010 in constant currency driven by the launch of new propositions to revitalise our market presence.

Hong Kong performed very well and increased its market share. PVNBP sales of £177m (H1 2010: £133m) were up 41% in constant currency. This was mainly due to the distribution of the core unit linked savings product and the launch of a new product in Q4 2010 offering 300 funds on an open architecture, targeting the established affluent and high net worth customer segments.

NBC in the wholly owned businesses increased to £20m (H1 2010: £13m). This was mainly due to higher sales levels in Ireland and Hong Kong. PVNBP margin was 1.7% (H1 2010: 1.6%).

EEV operating profit before tax

EEV operating profit before tax of the wholly owned businesses, including non-covered business, decreased to £26m (H1 2010: £35m). This decrease was mainly due to a management decision to increase equity exposure in Germany.

Delivering our strategy

Germany was the first of our International businesses to launch the refreshed visual identity. The launch of the new look and feel coincided with the launch of a new proposition - a combination of three product options designed to encourage the uptake of state aided savings. The refreshed visual identity in Ireland will be launched in H2 2011.

We have also improved our product investment range by adding the GARS products, which has generated sales across Germany, and continues to be well received in Ireland. In Germany, we continue to strengthen our corporate propositions.

Standard Life Asia is now recognised as a leading provider of long-term savings and investments products through intermediaries in the Hong Kong market. The business grew its market share significantly with targeted sales and marketing activity and market-leading propositions, like the Harvest Supreme proposition.

Joint Ventures - India and China

In India and China, our focus is on increasing long-term shareholder value by delivering products that meet our customers' needs. The joint ventures contributed an IFRS operating profit before tax of £nil (H1 2010: loss £20m) to the Group, which continues to reflect the progression of the joint venture businesses and is a consequence of our ongoing investment into the development of the joint ventures.

In India, PVNBP was £212m (H1 2010: £233m), down 6% in constant currency due to regulatory changes which have impacted the whole industry. In China, sales decreased by 9% in constant currency to £49m (H1 2010: £55m). Net flows in the joint ventures increased by 8% in constant currency to £140m (H1 2010: £133m), driven by increased contributions from a strong customer base.

EEV covered business operating profit before tax for the joint ventures was £4m (H1 2010: £10m). Sales decreased by 7% in constant currency and led to a fall in NBC to £3m (H1 2010: £14m). This resulted in a PVNBP margin of 1.1% (H1 2010: 5.0%).

In India, regulatory changes that affected unit linked business were implemented from 1 September 2010 and as anticipated had a significant negative impact on sales and margins across the industry. HDFC Life managed the transition well and consequently became the leading private business in the market during Q4 2010. Within the private market the market share increased to 12%. In May 2011, HDFC Life was ranked first in the individual business sector with a market share of 14%.

Awards won during 2011

All International operations are committed to maintaining the highest level of customer service. This commitment to customer service was acknowledged during 2011 by various awards received by our operations including:

·   The German business won first place in the biggest independent broker survey (Charta Award) and was the only company to be awarded an 'Excellent' rating

·   The offshore bond business was awarded the Best International Life Product (UK) in the International Fund and Product Awards 2011

·   In India, HDFC Life was awarded the Performance Excellence Trophy in the services category at a recent national quality awards event


1.3 Business segment performance continued 

1.3.4   Global investment management

Our focus at Standard Life Investments is on delivering superior investment performance, supported by exceptional client service. Standard Life Investments operates as a global team, with an investment process underpinned by its 'focus on change' philosophy. This has proved itself to be robust and repeatable in both good and bad market conditions. Over the 12 years since its inception, Standard Life Investments has delivered a strong track record of profitable organic growth, a trend which continued during the first half of 2011.

Financial highlights

H1 2011

H1 2010

Movement

IFRS operating profit before tax

£67m

£49m

37%

Earnings before interest and tax (EBIT)

£66m

£49m

35%

EBIT margin

33%1

32%

1% point

Third party assets under management (AUM)

£71.6bn

£71.6bn2

-

Total assets under management

£157.0bn

£156.9bn2

-

Third party net inflows

£2,941m

£4,745m

(38%)

1      Excludes the £7m fee received following the transfer of the money market funds to Deutsche Bank Asset Management.

2      Comparative as at 31 December 2010.

Standard Life Investments continued to deliver robust long-term investment performance in H1 2011, despite volatile markets. Third party net inflows of institutional and wholesale business were £2.9bn (H1 2010: £4.7bn) in what have been challenging market conditions. Third party AUM remained constant at £71.6bn (31 December 2010: £71.6bn) despite the transfer of approximately £4bn of Global Liquidity Fund assets as a result of Standard Life Investments' withdrawal from constant net asset value money market funds. These underlying new business flows and a rise in average market values resulted in strong revenue growth of 23%, driving EBIT up 35% to £66m and increasing the EBIT margin up to 33%1. We continue to focus on serving existing clients and winning new clients through strong investment performance, product innovation, global distribution and high levels of customer service.

Profitability

H1 2011

H1 2010


£m

£m

Fee based revenue

193

157

Maintenance expenses

(106)

(91)

Investment for transformation and growth

(20)

(17)

Global investment management IFRS operating

profit before tax

67

 

49

Interest and exchange rate movements

(1)

-

Earnings before interest and tax (EBIT)

66

1

49

IFRS operating profit before tax increased by 37% to £67m (H1 2010: £49m). Revenue rose by 23% because third party new business flows were mainly into higher margin products, such as GARS and UK mutual funds, stronger market conditions, and the £7m fee received following the transfer of the money market funds. This raised the average revenue yield on third party AUM to 36bps1 (2010: 35bps).

Operating costs were tightly controlled while allowing for continued investment in the business to maintain our longer term growth. Maintenance expenses compared to total average AUM remained stable at 13bps (H1 2010: 13bps). EBIT increased by 35% to £66m (H1 2010: £49m) and resulted in an increased EBIT margin of 33%1 (2010: 32%).

Lower interest expense, coupled with foreign exchange gains also contributed to the increased IFRS operating profit. A £15m subordinated loan was repaid at the end of 2010, leaving the business with no gearing.

Financial market overview

Average market values in H1 2011 were substantially higher than in H1 2010. The average daily FTSE All-Share Index, for example, rose 11% between the two periods. Combined with rises in most other major world markets, this led to an increase in asset management revenues. We continue to maintain strong third party sales across institutional and wholesale customer segments.

Investment performance

Investment performance was strong during H1 2011 and we continued to deliver a robust investment performance over the longer term. 91% of funds over one year, and 78% of funds over three years, time periods outperformed their benchmark. Our mutual fund strength is shown by the proportion of eligible and actively managed funds (24 out of 29) rated A or above by Standard & Poor's in the UK.

The pipeline for institutional business is encouraging with fixed income and GARS products attracting a lot of interest, increasingly from outside the UK. There is also very positive demand for our mutual funds in the UK and for our SICAV funds in continental Europe.

Assets under management and net flows

We achieved third party net inflows of £2,941m (H1 2010: £4,745m). This represents 9% of opening third party AUM, excluding money market funds, on an annualised basis. UK mutual funds net inflows rose significantly to £1,457m (H1 2010: £713m). A notable number of new institutional clients were won in the UK and Europe during the period, increasing the institutional client base in these markets by 12%. The market for institutional mandates, where we successfully sold to in H1 2010, has been much slower. Our high overall retention rates are reflected in annualised redemptions being 13% of opening AUM.

Third party AUM was static at £71.6bn (31 December 2010: £71.6bn). The transfer of approximately £4bn of money market fund assets was offset by underlying new business flows and a rise in average market values. Third party AUM continues to represent 46% of total AUM (31 December 2010: 46%). In-house AUM slightly increased to £85.4bn (31 December 2010: £85.3bn) with favourable market movements offsetting outflows from the with profits business. As a result, total assets managed by Standard Life Investments stood at £157.0bn (31 December 2010: £156.9bn).

Delivering our strategy

On 9 May 2011, Standard Life Investments successfully launched its refreshed visual identity and brand positioning. This builds on our commitment to increasing the international nature of our business, as well as broadening the asset classes in which we excel, and helps to ensure that we present ourselves in a way that reflects our ambition, strengths and increasingly diversified business.

The refreshed brand identity will ensure communications are more consistent, with greater clarity in information provided to our clients, resulting in increased investor confidence. The refresh is supported by a major advertising campaign under the theme of 'Potential. Delivered'. This reflects our ongoing commitment to exceed our clients' expectations.

We continue to grow our share of the wholesale market in the UK, reflected in the UK mutual funds assets under management breaking through the £10bn barrier for the first time. We continue to develop our GARS product range, which has also broken the £10bn barrier, and are strengthening our alternative capabilities in areas such as private equity and real estate. We also continue to enhance our multi-manager offerings.

In the UK wholesale space we had particular success with our GARS product, which achieved a market-leading 39%1 share of 2011 sales within the absolute return sector, and with the UK Smaller Companies Fund, which achieved a 43%1 market share of 2011 sales within its relevant sector.

MyFolio has proved successful since its launch, providing new business flows into Standard Life Investments' actively managed funds. Net flows into the MyFolio range were £551m.

Our pipeline of new product initiatives is strong and we are confident that we will continue to meet the ever-changing demands of our clients through new and innovative products.

Withdrawal from money market funds

The regulatory and capital burden upon money market funds that are run on a constant net asset value (CNAV) basis is expected to rise substantially in the future. As a result, we decided to exit this sector of the industry and worked with the Board of Standard Life Investments Global Liquidity Funds plc (GLF) to develop a proposal which allowed those GLF shareholders who wish to continue having their funds managed on a CNAV basis to be able to do so in similar funds managed by Deutsche Bank Asset Management. The transfer took place at the end of May 2011 resulting in total third party AUM reducing by approximately £4bn in comparison with 31 December 2010. The impact of the transfer on our future revenue is expected to be minimal.

Awards won during 2011

Our business remains underpinned by our strong investment performance, delivered through the rigorous application of our 'focus on change' investment philosophy, and by our continuing commitment to very high levels of client service. High quality support by our client service teams, combined with strong investment performance from our fund management teams, has been recognised with the following awards in 2011:

·   'Most Innovative Asset Manager' at the Engaged Investor Trustee Awards

·   'Investment Manager of the Year' and 'DC Investment Only Provider of the Year' at the UK Pensions Awards 2011

·   At the 2011 Eurofonds - Fund Class Awards, Standard Life Investments won a special award as 'Best Asset Manager in Europe over 7 years' in the asset managers category with between 26 and 40 funds rated, including both OEICs and SICAVs

·   Five awards at the prestigious Lipper Fund Awards 2011. The funds recognised were the European Smaller Companies SICAV, the China Equities SICAV, the UK Smaller Companies Fund and the Managed Fund (two awards)

·   Standard Life UK Smaller Companies Fund named 'Best UK Small-Cap Equity Fund' at the 2011 Morning Star UK Fund Awards

·   Standard Life Investments' Global Absolute Return Strategies Fund won 'Best Absolute Return Fund' at the Professional Adviser Awards 2011

1            The market share figures are for a rolling 12 months to May 2011. Source: IMA Market Share of Gross Sales Survey.

1.4 Capital and cash generation

Our strategy remains focused on rigorous capital management and generating cash. The emphasis on capital-efficient products is important as it demonstrates our ability to write profitable new business without committing high levels of capital.

Capital and cash generation highlights


H1 2011

 FY 2010

Movement

EEV operating capital and cash generation from continuing operations

£193m

£149m1,2

30%

Group capital surplus

£3.9bn

£3.8bn3

3%

EEV

£7,518m

£7,321m

3%

IFRS equity attributable to equity holders of Standard Life plc

£3,967m

£3,903m

2%

1    Profit from continuing operations excludes Standard Life Healthcare Limited, which was sold on 31 July 2010.

2      Comparative shown as at 30 June 2010.

3      H1 2011 based on estimated regulatory returns. FY 2010 based on final regulatory returns.

Group EEV capital and cash generation


H1 2011

H1 2010


£m

£m

UK

201

187

Canada

72

73

International

64

52

Non-covered

21

(12)

Gross operating capital and cash generation from continuing operations

358

300

New business strain

(119)

(109)

Investment for transformation and growth

(46)

(42)

Operating capital and cash generation from continuing operations

193

149




Coverage of gross operating capital and cash to new business strain

3.01

2.75

Capital and cash generation enables the Group to invest in new business and profitable growth opportunities. Gross operating capital and cash generation before investment in new business and investment for transformation and growth was £358m (H1 2010: £300m).

New business strain (NBS) is a measure of the cost of selling new business. The growth in NBS was matched by the growth in new business sales volumes, resulting in the NBS margin (NBS/PVNBP) remaining unchanged at 1.1%.

The growth in gross operating capital and cash generation exceeded the increase in NBS, contributing to an increase in the coverage ratio of gross operating capital and cash to NBS, from 2.75 to 3.01. Capital and cash from management of the existing business improved by 5%.

We remain committed to our strategy of investing in capital-efficient products which deliver high capital returns and fast recovery of investment. The total internal rate of return (IRR) for new business was 16% (H1 2010: 19%) and the payback period was 6 years (H1 2010: 5 years). Find out more on new business profitability in Section 1.2 - EEV - Group.




H1 2011



H1 2010



Free surplus movement

Required capital movement

Net worth

movement

Free surplus movement

Required capital movement

Net worth movement

£m

£m

£m

£m

£m

£m

Capital and cash generation from existing business

340

(24)

316

313

(13)

300

New business strain

(149)

30

(119)

(132)

23

(109)

Covered business capital and cash generation

from new business and expected return

191

6

197

181

10

191

Covered business development expenses

(22)

-

(22)

(21)

-

(21)

Non-covered business core capital and cash generation

(2)

-

(2)

(10)

-

(10)

Core

167

6

173

150

10

160

Efficiency

(9)

-

(9)

(7)

-

(7)

Back book management

42

(13)

29

15

(19)

(4)

EEV operating capital and cash generation from continuing operations

200

(7)

193

158

(9)

149

Capital and cash generation from non-operating items

(108)

121

13

150

15

165

Total EEV capital and cash generation from continuing operations

92

114

206

308

6

314

Capital and cash generation from discontinued operations

-

-

-

 

(17)

 

-

 

(17)

Total EEV capital and cash generation

92

114

206

291

6

297

 

All figures are net of tax. Net income directly recognised in the EEV statement of financial position, including exchange differences and distributions to and injections from shareholders, is not included as these are not trading related cash flows.

In overall terms, our EEV operating capital and cash generation from continuing operations has increased to £193m (H1 2010: £149m). Capital and cash generation from existing business after new business sales was £197m and therefore the main contributor to total operating capital and cash. Capital and cash generation from back book management includes a £6m contribution from the UK pension scheme (H1 2010: negative £14m) and gains from covered business tax variances. Excluding the capital and cash from back book management activities, operating capital and cash increased by 7%.

Non-covered business core capital and cash includes a 40% increased contribution from our investment management business, which reflects increased third party EEV operating profit.

There was negative capital and cash contribution from our growth investment activities. This is reflected in our core covered business development expenses of £22m (H1 2010: £21m). Non-covered business operating capital and cash also includes an increase in investment for transformation and growth to £17m (H1 2010: £12m).

Reconciliation of IFRS operating profit to EEV operating capital and cash generation

As with EEV operating capital and cash generation, IFRS operating profit removes the impact of short-term economic volatility. Whilst there is clear alignment between IFRS operating profit and EEV operating capital and cash generation, there are differences which include:

·   (£31m) from the difference in the treatment of assets and liabilities. EEV capital and cash is more consistent with local statutory valuation bases, which for some territories and certain classes of investment liabilities are measured differently for IFRS reporting. This difference for the six months to 30 June 2011 includes the impact of adopting IFRS for local reporting in Canada and differences in the timing of recognition of operating profit items.

·   £14m from the difference in the treatment of deferred acquisition costs/deferred income recognition, intangibles, tax and other. Included in other is the impact of different methodologies in respect of expected income. In EEV operating profit this income is included on an expected return basis, but the actual fees are included in IFRS operating profit.

 

1.4 Capital and cash generation continued

Holding company capital and cash flows

In addition to the movement in capital and cash on an EEV basis, the following summary provides an analysis of holding company cash flows and capital in relation to the Group's ultimate holding company, Standard Life plc, and its overseas holding company, Standard Life Oversea Holdings Limited. The capital position is based on these companies' net assets, excluding investments in operating subsidiaries.

H1 2011

H1 2010

FY 2010


£m

£m

£m

Opening capital 1 January

665

602

602

  Dividends received from subsidiaries

338

223

286

  Additional investments in subsidiaries

(72)

(47)

(75)

  Group corporate centre costs

(25)

(30)

(54)

  Cash dividends paid to shareholders

(105)

(134)

(186)

  Other

(17)

(20)

92

Closing capital

784

594

665

Dividends

During the period, we paid the final dividend for 2010 of 8.65p per share, amounting to £197m. The Scrip dividend scheme reduced the cash required to pay the 2010 final dividend from £197m to £105m. We propose an interim dividend of 4.60p per share (H1 2010: 4.35p). This represents an increase of 5.7%, reflecting the solid progress made during the period. We will continue to apply our existing progressive dividend policy, taking account of market conditions and our financial performance. We intend to remove the Scrip dividend option and replace it with a dividend reinvestment plan (DRIP) in 2012, commencing with the final dividend for 2011. 

Capital management

Objectives and measures of Group capital

The Group's processes of capital and risk management are aligned to support our strategic objective of driving sustainable, high quality returns for our shareholders. The different measures of capital reflect the regulatory environment we operate in and the bases that we consider effective for managing the business.

Capital management policy

Matters related to the management of our capital are reserved for the Board of Standard Life plc. The scope of the liquidity and capital management policy is wide-ranging and forms one pillar of our overall management framework. It operates alongside and complements our other policies and processes, in particular our risk policies and strategic planning process, and provides a framework for effective and consistent management of capital. We continue to develop our Enterprise Risk Management framework to robustly link the processes of capital allocation, value creation and risk management.

Credit ratings

External credit ratings agencies perform independent assessments of the financial strength of companies. The current insurer financial strength ratings for Standard Life Assurance Limited (SLAL) are A1/Stable and A+/Stable from Moody's and Standard & Poor's respectively. These ratings are unchanged from those reported in the Annual Report and Accounts 2010. Standard Life Canada has a separate rating from Standard & Poor's and was upgraded in June this year from A/Stable to A+/Stable.

Solvency 2

Solvency 2 is a major European regulatory change initiative which is currently expected to implement on 1 January 2014. This date is subject to uncertainty and will not be confirmed until early 2012. However, firms will need to be ready well in advance of 1 January 2014. Solvency 2 will affect the risk and capital management, external reporting, supervision and business strategies of the European insurance industry, with knock on consequences for global markets outside of Europe. We are actively involved in the development of the new regime and participate in industry and regulatory working groups within the UK and Europe. A Solvency 2 programme has been established internally and is making good progress towards meeting Solvency 2 requirements.


Group capital surplus

H1 2011

H1 2010

FY 2010


£bn

£bn

£bn

Shareholders' capital resources

3.0

2.7

3.0

Capital resources arising from subordinated debt

1.9

1.8

1.8

SLAL long-term business funds

3.0

2.0

2.6

Group capital resources

7.9

6.5

7.4

Group capital resource requirement

(4.0)

(3.0)

(3.6)

Group capital surplus

3.9

3.5

3.8

Group solvency cover

196%

217%

203%

H1 2011 and H1 2010 figures above based on estimated regulatory returns. FY 2010 based on final regulatory returns.

In H1 2011, our capital surplus remained strong, increasing by £0.1bn to £3.9bn. Capital resources increased to £7.9bn, largely due to favourable market conditions. The quality of our capital remains strong with £6.9bn (31 December 2010: £6.4bn) of Core Tier 1 and £0.6bn (31 December 2010: £0.6bn) of Innovative Tier 1.

Group capital resources include the capital resources within the long-term business funds but the Insurance Groups Directive (IGD) limits the amount that can be recognised to the level of the capital resources requirement for that fund. This resulted in a restriction of £1.3bn (31 December 2010: £1.4bn) and a net zero contribution to the Group capital surplus.

The IGD surplus remains largely insensitive to a further 40% fall in equities from the 30 June 2011 position, with the surplus estimated to reduce by approximately £0.2bn. A 100bps rise in yields is estimated to reduce the surplus by approximately £0.1bn.

Reconciliation of key capital measures

The following diagram illustrates the key differences between regulatory, IFRS and EEV capital measures at 30 June 2011:  Diagram removed for the purposes of this announcement.  However, it can be viewed in full in the pdf document.

  


1.5 Risk management

Risk management is an integral part of the Group's corporate agenda. The Group's risk strategy statement links value and risk in a concise expression of our objectives, aligned with our corporate purpose.

The Group's corporate purpose

To drive shareholder value through being a leading, customer-centric business focused on long-term savings and investments propositions in our chosen markets.

The Group's risk strategy

We recognise the need to manage long-term value creation, cash flow and risk in a holistic manner in order to make informed decisions to create and protect value in the Group's activities.

We are proactive in understanding and managing the risks to our objectives at every level of the Group and ensuring that capital is delivered to areas where most value can be created for the risks taken.

The Group's Enterprise Risk Management Framework

We have developed and embedded an Enterprise Risk Management (ERM) framework that enables the risks of the Group to be identified, assessed, controlled and monitored consistently, objectively and holistically.

Key risks facing the Group

Market risk

Definition

The risk that arises from the Group's exposure to market movements which could result in the value of income, or the value of financial assets and liabilities, or the cash flows relating to these, fluctuating by differing amounts.

Appetite

The Group has no appetite for market risk exposures except where they arise as a consequence of core strategic activity, principally as a consequence of revenue streams being exposed to market risks.

Equity and property risk

Equity and property risk for the Group mainly relates to the risk that the value of future fund charges on unit linked funds, collective investment schemes, segregated funds and future recourse cash flow payments from the HWPF will fall - or that burnthrough costs to the shareholder arise - if the value of assets under management falls due to adverse market conditions.

There is currently no restriction on cash flows due from the HWPF. The key existing mitigants to reduce the risk of burnthrough from the HWPF include the actively managed investment policy for asset shares, the dynamic guarantee deduction framework and hedging of the cost of guarantees for certain contracts. The fund remains well capitalised and market risk mitigants continue to perform in line with expectations.

Canada has direct shareholder exposure to equity and property risks as a consequence of shareholder surplus being held in such assets. These holdings have been acquired for a number of reasons, including an expectation that such assets would increase returns to shareholders. Canada has enhanced its hedging capabilities during the period and now operates a dynamic hedging program to reduce the risk arising from the limited policyholder guarantees on segregated fund business.

The Group is also exposed to equity and property risk through the potential impact of market movements on the value of assets held in defined benefit pension schemes operated by the Group.

Fixed interest risk

Shareholder exposure to fixed interest risk arises from a number of sources but is mainly attributable to asset liability mismatches in certain portfolios of liabilities. The extent of such mismatches has been reduced over the course of the period, most notably through improvements in cash flow matching of annuities written in the UK. Mismatches in Canada arise mainly as a consequence of the difficulty in obtaining long-dated fixed income assets to match the long-term liability cash flow which gives rise to reinvestment risk.

Risk also arises as a consequence of burnthrough from the HWPF. However, as noted above, this fund remains well capitalised so burnthrough cost is low and there is currently no restriction on transfers.

The Group is also exposed to fixed interest risk through the potential impact of yield curve movements on the value of assets held in defined benefit pension schemes operated by the Group.

Currency risk

Foreign exchange risk is the risk that the value of overseas operations and profits generated by them falls in Sterling terms when Sterling appreciates against the local currency.

The principal sources of currency risk arise from the Group's investments in overseas subsidiaries and joint ventures, primarily Canada and Asia (including HDFC Life and Heng An Standard Life). Hedges exist to limit the size of the exposure relating to Canada.

The UK business also has Euro exposure as a consequence of branch business undertaken in Ireland and Germany and its investment in Standard Life International Limited. Other exposures arise largely as a consequence of holdings in overseas assets within business units and variances in charges taken from unit linked funds and collective investment schemes.

Similar to equity and property risk, the Group is also exposed to currency risk through the potential impact of market movements on the value of assets held in defined benefit pension schemes operated by the Group.

Credit risk

Definition

The risk of exposure to loss if a counterparty fails to perform its financial obligations, including failure to perform those obligations in a timely manner. It also includes the risk of a reduction in the value of assets due to a widening of mortgage, bond and swap spreads.

Appetite

The Group has an appetite for credit risk to the extent that acceptance of this risk optimises the Group risk adjusted return. However, the Group has limited appetite for significant losses arising from counterparty failures and will therefore establish robust risk limits which Group companies must adhere to.

Shareholder exposure to credit risk arises from a number of sources. In the UK business, the principal exposures are in respect of the corporate bonds held to back annuities written post-demutualisation and the assets held to back the subordinated debt liability. In Canada, the main component of credit risk arises from the use of corporate bonds and commercial mortgages to back annuities.

Credit risk also arises as a consequence of burnthrough from the HWPF, though as noted above, this fund remains well capitalised, burnthrough cost is low and there is currently no restriction on transfers. Further credit risk exposure arises from variations in the value of future fund charges on unit linked funds and collective investment schemes that are invested in corporate bonds.

In addition, credit risk arises from holding cash and cash equivalents, debt securities including overseas sovereign debt, and the reinsurance of certain insurance liabilities to various counterparties including the reinsurance of certain linked funds to external companies.

The Group is also exposed to credit risk through the potential impact of widening credit spreads or credit losses on the value of assets held in defined benefit pension schemes operated by the Group.

All credit portfolios are subject to strict limits on permissible counterparty exposures and continue to perform well despite adverse economic conditions. Where appropriate, collateralisation is used to reduce credit risk with the Group maintaining a list of collateral that is deemed acceptable. During the period the list of collateral that is considered acceptable for stock lending activity has been restricted in order to remove certain counterparties that are no longer considered to be of appropriate standing in light of changing global economic conditions.

Demographic and expense risk

Definition

The risk that arises from the inherent uncertainties as to the occurrence, amount and timing of future cash flows due to demographic and expense experience differing from that expected. For the purpose of risk management this includes liabilities of insurance and investment contracts.

Appetite

The Group has an appetite for such risks since we expect acceptance of the risk to be value additive. Appetites will be established to reflect planned business activities in line with the Group's overall strategic objectives.

The Group's principal exposures are to persistency and longevity risk, arising as a consequence of normal business activity.

Persistency

Persistency within the UK business arises mainly as a consequence of variances in the value of future fund charges on unit linked funds and future recourse cash flow payments from the HWPF. Generally the value of such charges will fall if withdrawals are higher than expected.

This risk is controlled through business retention activities and regular monitoring of persistency experience, as well as through product design.

Similar risks exist in respect of Standard Life Investment's third party assets under management and segregated funds business written by Canada.

Longevity

Longevity risk reflects the risk that annuitants live longer than expected. The principal risk to the Group arises in respect of annuity contracts written by the UK business and Canada.

The Group continues to write annuity contracts and to acquire additional risk as a consequence as we believe the business to be sufficiently profitable to justify the risks of doing so.

This risk is controlled through regular monitoring of the size of the exposure, longevity experience and control of business volumes.

The Group is also exposed to the risk that members of the defined benefit pension schemes operated by the Group live longer than expected.


1.5 Risk management continued

Liquidity risk

Definition

The risk that businesses are unable to realise investments and other assets in order to settle their financial obligations when they fall due, or can do so only at excessive cost.

Appetite

The Group has no appetite to fail to meet its liabilities as they fall due.

The Group manages and mitigates liquidity risk by employing a variety of techniques as appropriate, including:

·   Maintaining portfolios of assets that match the expected timing of payments of liabilities

·   Close monitoring and active anticipation of the level of withdrawals based on expected customer behaviour

·   Central co-ordination and management of group-wide contingency funding plans

·   Central co-ordination of strategic planning and funding requirements

·   Central monitoring, assessment and oversight of the investment of assets within the Group

·   Maintaining a portfolio (currently undrawn) of committed bank facilities

The Group also has the ability to invoke deferral terms on the majority of unit linked contracts. As at 30 June 2011 there were no funds subject to deferral.

As a result of the policies and processes established with the objective of managing exposure to liquidity risk, the Group considers the extent of liquidity risk arising from its activities to be de-minimis.

Operational and strategic risks

Definition

Operational risk is the risk of loss, or adverse consequences for the Group's business, resulting from inadequate or failed internal processes, people or systems, or from external events.

Strategic risk is the risk associated with the robustness of the strategic planning process and threats to achieving the strategy.

Appetite

The Group has an appetite for operational risks where exposures arise as a consequence of core strategic activity. However, the Group has limited appetite for large operational losses due to the likely related reputational damage and opportunity costs. The Group will seek to put effective controls in place to reduce operational risk exposures, except where the costs of such controls exceed the expected benefits.

Operational and strategic risk exposures are actively identified and managed with action planning and progress monitoring in place.

Operational risk is identified, assessed, managed and reported in a consistent and coherent way across the Group. The assessment of operational risk is linked to the objectives of each business, function or department. Assessment considers financial impact, reputational impact, customer impact and strategic impact. We measure impact of risk both before the application of controls/mitigation and post application. This ensures we are aware of control/mitigation dependencies. Where risk is considered outwith appetite, or where the control environment is considered in need of improvement, then action plans are created, maintained and delivered. These have visibility at a Group level and are actively managed.

Key operational and strategic risk themes include:

·   Management of existing processes including the identification and implementation of control improvements

·   Management of information security: control enhancement and control performance monitoring

·   Management of third party providers: identification of exposures, collaborative control enhancement and robust performance indicators

·   Projects and programmes: managing change and execution of projects through effective control and embedding business as usual controls as part of the design of future processes

·   People: identification and management of the people risks (succession planning, skilling and resource levels)

·   Delivering the strategic plan: ensuring that the risks associated with the delivery of our strategic plan are identified, assessed, understood and mitigated

Reputational risk

Appetite

The Group has an extremely low appetite for significant reputational damage or regulatory censure. This appetite statement is embedded in our Group's risk culture and is reflected in our Group's values, mission and vision.


1.6 Basis of preparation

Overview

Our Business review for the period to 30 June 2011 has been prepared in line with the Disclosure and Transparency Rules (DTR) issued by the Financial Services Authority (FSA). The DTR incorporates the requirement of the 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 statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year. Principal risks are detailed in Section 1.5 - Risk management and Note 42 of the Group's Annual Report and Accounts 2010. Under DTR 4.2.8R we are also required to make certain related party disclosures. These are contained in Note 3.13 of the IFRS financial information. To provide clear and helpful information, we have also considered the voluntary best practice principles of the Reporting statement: Operating and Financial Review (OFR) issued by the Accounting Standards Board (ASB).

The Group's condensed half year financial information have been prepared in accordance with International Financial Reporting Standards (IFRS), as endorsed by the European Union (EU). However, our Board believes that non-Generally Accepted Accounting Principles (GAAP) measures, which have been used in the Business review, together with other measures that are calculated in accordance with IFRS, are useful for both management and investors and make it easier to understand our Group's performance.

The most important non-GAAP measures in the Business review include IFRS operating profit and European Embedded Value (EEV) information. All non-GAAP measures should be read together with the Group's IFRS income statement, statement of financial position and statement of cash flows, which are presented in the IFRS financial information in Section 3 of this report.

Going concern statement

After making appropriate enquiries, the Directors have a reasonable expectation that the Company and the Group as a whole have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

IFRS and EEV reporting

The financial results, which are unaudited at the half year, are prepared on both an IFRS basis and an EEV 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. EEV measures the net assets of the business plus the present value of future profits expected to arise from in-force long-term life assurance and pensions policies. The IFRS financial results in the Business review, and in Section 3 have been prepared on the basis of the IFRS accounting policies applied by the Group in the IFRS financial statements section of the Annual Report and Accounts 2010 as amended for new standards effective from 1 January 2011, as described in Note 3.1. The EEV basis has been determined in accordance with the EEV Principles and Guidance issued in May 2004 and October 2005 by the Chief Financial Officers (CFO) Forum. The CFO Forum represents the chief financial officers of major European insurers, including Standard Life. EEV methodology has been applied to covered business, which mainly comprises the Group's long-term savings business. Non-covered business is reported on an IFRS basis. The EEV financial results in the Business review, and in Section 4 have been prepared in accordance with the EEV methodology applied by the Group in Note 4.17 for H1 2011, and in the relevant EEV methodology notes included in the Annual Report and Accounts 2010 in respect of the comparative period.

IFRS and EEV operating profit

The H1 2011 IFRS reconciliation of consolidated operating profit to profit for the period, presented in Section 3, presents profit before tax attributable to equity holders adjusted for non-operating items. The H1 2011 EEV consolidated income statement in Section 4, presents EEV profit showing both operating and non-operating items. By presenting IFRS and EEV results in this way, the Directors believe they are providing a more meaningful indication of the underlying business performance of the Group.

Forward-looking statements

This document may contain 'forward-looking statements' about certain of the Standard Life Group's current plans, goals and expectations relating to future financial conditions, performance, results, strategy and objectives. Statements containing the words: 'believes', 'intends', 'targets', 'estimates', 'expects', 'plans', 'seeks' and 'anticipates' and any other words of similar meaning are forward-looking. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which may be beyond the Group's control. As a result, the Group's actual financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward-looking statements, and persons receiving this document should not place undue reliance on forward-looking statements. The Standard Life Group undertakes no obligation to update any of the forward-looking statements in this document or any other forward-looking statements it may make.

 

 


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