Half Yearly Report - Part 4 of 5

RNS Number : 9312J

Standard Life plc

14 August 2012

Standard Life plc

Half Year Results 2012

Part 4 of 5

4 European Embedded Value (EEV)

EEV consolidated income statement

For the six months ended 30 June 2012

		6 months 2012	6 months 2011	Full year 2011
	Notes	£m	£m	£m
Covered business
UK		204	229	450
Canada		211	113	324
International		43	35	104
HWPF TVOG		107	(11)	11
Covered business EEV operating profit	4.2(a)	565	366	889

UK		19	4	67
Global investment management¹	4.6(b)	34	27	69
Group corporate centre costs		(20)	(25)	(50)
Other	4.6(c)	6	4	14
Non-covered business EEV operating profit		39	10	100
EEV operating profit before tax		604	376	989

EEV non-operating items
Long-term investment return and tax variances		161	(11)	70
Effect of economic assumption changes		136	108	(500)
Impairment of intangible assets		-	(7)	(5)
Restructuring costs²		(43)	(23)	(73)
Other EEV non-operating items		(6)	(4)	(13)
Consolidation adjustment for different accounting bases³		(70)	(8)	58
EEV non-operating profit/(loss) before tax		178	55	(463)
EEV profit before tax		782	431	526
Tax attributable to:
EEV operating profit		(119)	(96)	(265)
EEV non-operating items		(38)	(14)	108
Total EEV profit after tax		625	321	369

¹ Global investment management non-covered EEV operating profit of £34m (six months ended 30 June 2011: £27m; 12 months ended 31 December 2011: £69m) represents operating profit of £68m (six months ended 30 June 2011: £67m; 12 months ended 31 December 2011: £125m) after excluding profits of £34m (six months ended 30 June 2011: £40m; 12 months ended 31 December 2011: £56m) which have been generated by life and pensions covered business. Global investment management EEV operating profit therefore represents third party non-covered EEV operating profit. Refer to Note 4.6(b) - Global investment management EEV operating profit before tax and Note 4.17 - EEV methodology.

² Refer to IFRS financial information Note 3.3 - Administrative expenses. The £73m of restructuring costs in 2011 also include additional impacts to required capital and PVIF following the termination of an internal reinsurance agreement.

³ This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 4.17 - EEV methodology.

EEV earnings per share (EPS)

For the six months ended 30 June 2012

	6 months 2012	6 months 2011	Full year 2011
EEV operating profit after tax (£m)¹	485	280	724

Basic EPS (pence)	20.7	12.3	31.5
Weighted average number of ordinary shares in issue (millions)	2,344	2,279	2,301

Diluted EPS (pence)	20.7	12.3	31.4
Weighted average number of ordinary shares on a diluted basis (millions)	2,346	2,282	2,304

¹EEV operating profit before tax of £604m (six months ended 30 June 2011: £376m; 12 months ended 31 December 2011: £989m) less attributed tax on EEV operating profit of £119m (six months ended 30 June 2011: £96m; 12 months ended 31 December 2011: £265m).

EEV consolidated statement of comprehensive income

For the six months ended 30 June 2012

		6 months 2012	6 months 2011	Full year 2011
	Notes	£m	£m	£m
EEV profit after tax		625	321	369
Actuarial (losses)/gains on defined benefit pension schemes¹		(168)	(37)	121
Effect of limit on defined benefit pension schemes' surpluses¹		65	(29)	(209)
Exchange differences on translating foreign operations²		(54)	26	(69)
Net investment hedge¹		6	(6)	13
Aggregate equity holder tax effect of items recognised in comprehensive income¹		102	20	27
Other		-	1	-
Other comprehensive expense for the period		(49)	(25)	(117)
Total comprehensive income for the period attributable to equity holders	4.7	576	296	252

¹Consistent with the IFRS consolidated statement of comprehensive income.

² Exchange differences primarily relate to Canada (negative £23m), Europe (negative £17m) and India (negative £11m).

EEV consolidated statement of financial position

As at 30 June 2012

		30 June 2012	30 June 2011	31 December 2011
	Notes	£m	£m	£m
Covered business
Free surplus		646	965	651
Required capital		1,436	1,151	1,296
Net worth		2,082	2,116	1,947

Present value of in-force		4,868	4,462	4,423
Cost of required capital		(638)	(492)	(583)
Total embedded value of covered business	4.2(c)	6,312	6,086	5,787

Non-covered business
UK		440	324	393
Global investment management		255	268	256
Group corporate centre		507	575	650
Other		251	226	253
Total net assets of non-covered business	4.6(a)	1,453	1,393	1,552

Consolidation adjustment for different accounting bases¹		37	39	89

Total Group embedded value	4.7	7,802	7,518	7,428

Equity
Share capital		236	233	235
Shares held by trusts		(5)	(16)	(19)
Share premium reserve		1,110	1,063	1,110
Retained earnings on an IFRS basis		1,074	1,051	1,030
Other reserves		1,578	1,636	1,605
Additional retained earnings on an EEV basis		3,809	3,551	3,467
Total equity		7,802	7,518	7,428

¹This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 4.17 - EEV methodology.

EEV per share

As at 30 June 2012

	30 June 2012	30 June 2011	31 December 2011
Total Group embedded value (£m)	7,802	7,518	7,428

EEV per share (pence)	331	324	317
Diluted closing number of ordinary shares in issue (millions)	2,354	2,319	2,344

Notes to the EEV financial information

4.1 Basis of preparation

The European Embedded Value (EEV) basis results have been prepared in accordance with the EEV Principles and Guidance issued in May 2004 by the CFO Forum of European Insurance Companies and the Additional Guidance issued in October 2005 and the Interim Transitional Guidance issued in September 2011. EEV reports the value of business in-force based on a set of best estimate assumptions, allowing for the impact of uncertainty inherent in future assumptions, the cost of holding required capital and the value of free surplus. The total profit recognised over the lifetime of a policy is the same as under International Financial Reporting Standards (IFRS) but the timing of recognition of profits is different.

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

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

A detailed description of EEV methodology is provided in Note 4.17. There have been no significant changes to EEV methodology from that adopted in the previous reporting period, except as noted below.

The half year EEV supplementary financial statements have been reviewed but not audited. The EEV supplementary financial statements for the year ended 31 December 2011 were approved on 13 March 2012. The report of the auditors on that financial information was unqualified.

Covered business

A detailed description of EEV covered business is provided in Note 4.17 - EEV methodology.

With the exception of UK life insurance tax changes as described below, the regulatory basis for setting actuarial reserves and required capital has been calculated assuming the continuation of current regimes. Therefore, no allowance has been made for the change in reserving or required capital bases anticipated under Solvency 2. This approach is in accordance with the Interim Transitional Guidance for Embedded Value Reporting issued by the CFO Forum in September 2011.

Segmentation

Within the EEV segmental analysis, UK operations primarily comprise life and pensions, UK non-covered mutual funds business and the non-covered UK pension scheme. UK non-covered business is shown within Note 4.6 - Non-covered business.

Impact of UK Budget changes announced on 21 March 2012

The Finance Act 2012, which was enacted on 17 July 2012, reduced the UK corporation tax rate to 24% with effect from 1 April 2012 and to 23% with effect from 1 April 2013. The reduction to 23% has been included within our best estimate assumptions for UK corporation tax as at 30 June 2012.

The 2012 Budget statement also announced the Government's intention to make a further reduction in the rate of UK corporation tax in 2014. However, this reduction is subject to legislation being enacted in future years and, in accordance with our previous approach, has not been included within the best estimate assumptions as at 30 June 2012.

The Finance Act 2012 introduces a new UK life insurance tax regime, effective from 1 January 2013. The new regime moves the tax basis from the FSA regulatory return to the statutory accounts. Insurers are required to calculate a transitional amount as at 31 December 2012 to make the step change to the accounts basis. The new regime requires insurers to use an acceptable commercial method to allocate product cash flows to tax business type. UK EEV after tax results include an estimate of the impact of transition to the new regime, based on the 30 June 2012 position. There is not a material impact on the valuation of existing tax assets and liabilities. There is no change required to the long-term best estimate rate applicable to the UK business as a result of the new life tax regime.

4.2 Segmental analysis - covered business

(a) Segmental EEV income statement

This Note provides an analysis of EEV covered business as defined in Note 4.17 - EEV methodology.

		UK	Canada	International	HWPF TVOG	Total
6 months to 30 June 2012	Notes	£m	£m	£m	£m	£m
Contribution from new business	4.3	126	26	26	-	178
Contribution from in-force business:
Expected return on existing business		100	80	22	-	202
Experience variances	4.4	(6)	111	5	107	217
Operating assumption changes	4.5	-	-	-	-	-
Development expenses		(10)	(8)	(12)	-	(30)
Expected return on free surplus		(6)	2	2	-	(2)
EEV operating profit before tax		204	211	43	107	565
Investment return and tax variances		69	(2)	32	62	161
Effect of economic assumption changes		19	146	3	(32)	136
Restructuring costs		(34)	(1)	(2)	-	(37)
EEV profit before tax		258	354	76	137	825
EEV attributed tax		(58)	(88)	(17)	(32)	(195)
EEV profit after tax		200	266	59	105	630

An analysis of EEV profit after tax by territory is provided in Note 4.9 - Analysis of covered business EEV PVIF and net worth movements (net of tax).

EEV operating profit before tax for covered business is calculated using the expected long-term investment return which is based on opening economic assumptions. Investment variances, the effect of economic assumption changes and other EEV non-operating items are excluded from EEV operating profit and are reported as part of total EEV profit.

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

The £12m higher contribution from new business primarily reflects a £13m increase from the UK, where PVNBP margins grew from 1.4% to 1.8%.

The expected return on existing business has fallen by £21m primarily due to lower opening risk discount rates.

Details of experience variances and operating assumption changes are provided in Note 4.4 - Experience variances and Note 4.5 - Operating assumption changes.

The £12m of development expenses in International include £3m that reflect the costs of developing the joint venture businesses to build future growth, and £6m within the Hong Kong and Ireland offshore businesses supporting their strategic growth plans.

The negative £6m expected return on free surplus in the UK reflects the relatively low expected returns currently available on cash assets within free surplus, along with a higher expected increase in the value of subordinated debt liabilities relative to the expected return on the assets backing subordinated debt liabilities.

Investment return and tax variances generated a total profit of £161m. Of this, the UK profit of £69m included a gain of £131m from higher than expected investment returns on annuity and unitised business. This was partly offset by a loss of £38m, in excess of the return that is included in the expected return on free surplus, arising from differences in movements of subordinated debt liabilities and the assets that are backing the subordinated debt. Better than expected investment returns were the main contributors to the £32m profit in International and the £62m profit from HWPF TVOG.

Effect of economic assumption changes was an overall profit of £136m. Changes to the long-term corporation tax rates in the UK and the impact of the new UK life insurance tax regime resulted in an overall profit of £43m. Refer to Note 4.1 - Basis of preparation. Decreases in the market valuation of the Canada subordinated liabilities created a profit within covered business of £70m, but this is offset within the overall Group EEV profit by a consolidation adjustment for different accounting bases. Lower risk free rates were the main driver for both a profit of £224m from lower risk discount rates, which is explained in Note 4.13, and for a loss of £265m from the use of lower future assumed investment returns. In addition, lower inflation assumptions gave a profit of £28m.

Restructuring costs primarily represent the covered business costs associated with a number of restructuring programmes including Solvency 2 and the Retail Distribution Review.

		UK	Canada	International	HWPF TVOG	Total
6 months to 30 June 2011	Notes	£m	£m	£m	£m	£m
Contribution from new business	4.3	113	30	23	-	166
Contribution from in-force business:
Expected return on existing business		122	74	27	-	223
Experience variances	4.4	18	9	(3)	(11)	13
Operating assumption changes	4.5	-	-	(3)	-	(3)
Development expenses		(16)	(6)	(10)	-	(32)
Expected return on free surplus		(8)	6	1	-	(1)
EEV operating profit/(loss) before tax		229	113	35	(11)	366

Investment return and tax variances		(133)	122	(5)	5	(11)
Effect of economic assumption changes		43	36	(8)	37	108
Restructuring costs		(15)	(1)	(1)	-	(17)
EEV profit before tax		124	270	21	31	446
EEV attributed tax		(31)	(70)	(4)	(8)	(113)
EEV profit after tax		93	200	17	23	333

		UK	Canada	International	HWPF TVOG	Total
12 months to 31 December 2011	Notes	£m	£m	£m	£m	£m
Contribution from new business	4.3	204	73	58	-	335
Contribution from in-force business:
Expected return on existing business		242	144	54	-	440
Experience variances	4.4	12	118	7	11	148
Operating assumption changes	4.5	31	(8)	10	-	33
Development expenses		(33)	(14)	(27)	-	(74)
Expected return on free surplus		(6)	11	2	-	7
EEV operating profit before tax		450	324	104	11	889

Investment return and tax variances		41	41	(19)	7	70
Effect of economic assumption changes		(173)	(181)	105	(251)	(500)
Restructuring costs		(53)	(3)	(3)	-	(59)
EEV profit/(loss) before tax		265	181	187	(233)	400
EEV attributed tax		(66)	(45)	(56)	58	(109)
EEV profit/(loss) after tax		199	136	131	(175)	291

4.2 Segmental analysis - covered business continued

(b) Segmental analysis of movements in EEV

	UK	Canada	International	HWPF TVOG	Total
6 months to 30 June 2012	£m	£m	£m	£m	£m
Opening EEV	3,459	1,712	867	(251)	5,787

EEV profit after tax	200	266	59	105	630
Internal capital transfers	(194)	135	38	-	(21)
Transfer back of surplus to Standard Life Investments	(23)	-	(2)	-	(25)
Transfer back of mutual funds net worth	(1)	(1)	-	-	(2)
Actuarial losses on defined benefit pension schemes	-	(10)	-	-	(10)
Foreign exchange differences	-	(21)	(28)	-	(49)
Aggregate tax effect of items not recognised in income statement	-	4	-	-	4
Other	(1)	(1)	-	-	(2)
Closing EEV	3,440	2,084	934	(146)	6,312

	UK	Canada	International	HWPF TVOG	Total
6 months to 30 June 2011	£m	£m	£m	£m	£m
Opening EEV	3,657	1,758	732	(76)	6,071

EEV profit after tax	93	200	17	23	333
Internal capital transfers	(352)	-	25	-	(327)
Transfer back of surplus to Standard Life Investments	(25)	(2)	(2)	-	(29)
Transfer back of mutual funds net worth	18	(2)	-	-	16
Actuarial losses on defined benefit pension schemes	-	(8)	-	-	(8)
Foreign exchange differences	-	10	17	-	27
Aggregate tax effect of items not recognised in income statement	-	2	-	-	2
Other	-	1	-	-	1
Closing EEV	3,391	1,959	789	(53)	6,086

	UK	Canada	International	HWPF TVOG	Total
12 months to 31 December 2011	£m	£m	£m	£m	£m
Opening EEV	3,657	1,758	732	(76)	6,071

EEV profit/(loss) after tax	199	136	131	(175)	291
Internal capital transfers	(376)	(116)	34	-	(458)
Transfer back of surplus to Standard Life Investments	(36)	(2)	(3)	-	(41)
Transfer back of mutual funds net worth	19	(5)	-	-	14
Actuarial (losses)/gains on defined benefit pension schemes	-	(42)	8	-	(34)
Foreign exchange differences	-	(30)	(36)	-	(66)
Aggregate tax effect of items not recognised in income statement	-	12	-	-	12
Other	(4)	1	1	-	(2)
Closing EEV	3,459	1,712	867	(251)	5,787

	UK	Canada	International	HWPF TVOG	Total
6 months to 30 June 2012	£m	£m	£m	£m	£m
Analysis of EEV
Free surplus	686	(103)	68	-	651
PVIF	2,683	1,229	762	(251)	4,423
Required capital	169	1,059	68	-	1,296
Cost of capital	(79)	(473)	(31)	-	(583)
Opening EEV	3,459	1,712	867	(251)	5,787

Analysis of EEV
Free surplus	532	-	114	-	646
PVIF	2,802	1,439	773	(146)	4,868
Required capital	185	1,173	78	-	1,436
Cost of capital	(79)	(528)	(31)	-	(638)
Closing EEV	3,440	2,084	934	(146)	6,312

	UK	Canada	International	HWPF TVOG	Total
6 months to 30 June 2011	£m	£m	£m	£m	£m
Analysis of EEV
Free surplus	930	226	46	-	1,202
PVIF	2,637	1,061	655	(76)	4,277
Required capital	159	813	59	-	1,031
Cost of capital	(69)	(342)	(28)	-	(439)
Opening EEV	3,657	1,758	732	(76)	6,071

Analysis of EEV
Free surplus	594	299	72	-	965
PVIF	2,703	1,127	685	(53)	4,462
Required capital	167	919	65	-	1,151
Cost of capital	(73)	(386)	(33)	-	(492)
Closing EEV	3,391	1,959	789	(53)	6,086

	UK	Canada	International	HWPF TVOG	Total
12 months to 31 December 2011	£m	£m	£m	£m	£m
Analysis of EEV
Free surplus	930	226	46	-	1,202
PVIF	2,637	1,061	655	(76)	4,277
Required capital	159	813	59	-	1,031
Cost of capital	(69)	(342)	(28)	-	(439)
Opening EEV	3,657	1,758	732	(76)	6,071

Analysis of EEV
Free surplus	686	(103)	68	-	651
PVIF	2,683	1,229	762	(251)	4,423
Required capital	169	1,059	68	-	1,296
Cost of capital	(79)	(473)	(31)	-	(583)
Closing EEV	3,459	1,712	867	(251)	5,787

4.3 Analysis of new business contribution

The following table sets out the premium volumes and contribution from new business written by the life and related businesses, consistent with the definition of new business set out in Note 4.17 - EEV methodology.

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

	Fee (F) - Spread/risk (S/R)	NBC	Single premiums	Annualised regular premiums	PVNBP	PVNBP multiplier¹	PVNBP margin²
6 months to 30 June 2012	Fee (F) - Spread/risk (S/R)	£m	£m	£m	£m	PVNBP multiplier¹	%
Individual pensions	F	10	1,735	45	1,895	3.6	0.6
Savings and investments	F	12	872	15	990	7.9	1.2
Annuities	S/R	36	200	-	200	-	17.8
Protection	S/R	-	-	-	1	-	14.8
Retail		58	2,807	60	3,086	4.7	1.9
Corporate pensions	F	30	566	320	1,995	4.5	1.5
Institutional pensions	F	38	1,953	-	1,953	-	2.0
Corporate		68	2,519	320	3,948	4.5	1.7
UK		126	5,326	380	7,034	4.5	1.8
Fee	F	9	642	33	1,268	19.0	0.7
Spread/risk	S/R	17	103	26	512	15.7	3.3
Canada		26	745	59	1,780	17.5	1.5
Wholly owned	F	19	676	35	979	8.7	1.9
Joint ventures		7	49	52	284	4.5	2.5
International		26	725	87	1,263	6.2	2.0
Total covered business		178	6,796	526	10,077	6.2	1.8

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

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

	Fee (F) -Spread/risk (S/R)	NBC	Single premiums	Annualised regular premiums	PVNBP	PVNBP multiplier¹	PVNBP margin²
6 months to 30 June 2011	Fee (F) -Spread/risk (S/R)	£m	£m	£m	£m	PVNBP multiplier¹	%
Individual pensions	F	13	2,045	56	2,237	3.4	0.6
Savings and investments	F	8	1,144	15	1,257	7.5	0.6
Annuities	S/R	27	147	-	147	-	18.7
Protection	S/R	-	-	-	1	-	3.0
Retail		48	3,336	71	3,642	4.3	1.3
Corporate pensions	F	40	1,226	389	2,830	4.1	1.4
Institutional pensions	F	25	1,673	1	1,674	1.0	1.5
Corporate		65	2,899	390	4,504	4.1	1.4
UK		113	6,235	461	8,146	4.1	1.4
Fee	F	18	638	20	892	12.7	2.0
Spread/risk	S/R	12	149	34	687	15.8	1.7
Canada		30	787	54	1,579	14.7	1.9
Wholly owned	F	20	847	42	1,175	7.8	1.7
Joint ventures		3	49	50	261	4.2	1.1
International		23	896	92	1,436	5.9	1.6
Total covered business		166	7,918	607	11,161	5.3	1.5

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

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

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

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

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

4.4 Experience variances

	UK	Canada	International	HWPF TVOG	Total
6 months to 30 June 2012	£m	£m	£m	£m	£m
Lapses	(4)	-	(11)	-	(15)
Maintenance expenses	(5)	9	(1)	-	3
Mortality and morbidity	4	-	2	-	6
Tax	10	2	(4)	-	8
Other	(11)	100	19	107	215
Total	(6)	111	5	107	217

The £11m adverse lapse experience within International mainly arises from a £5m loss within the joint venture businesses. The remainder of the variances are spread across the German, Ireland and Hong Kong businesses.

Other UK variances of negative £11m reflect the impact of fund switches and a reduction in our expected fee income in our corporate business.

Canada other variances of £100m includes a gain of £112m from revised modelling of future cash flows primarily for segregated fund business. This amends the projection of future expenses, lapses, premium renewals and fee income.

The other International variance of £19m includes a £15m gain from increased expected fee income in Germany.

The HWPF TVOG other variance of £107m primarily reflects the benefit of asset strategy changes in the HWPF as well as improved modelling of German business.

For the 12 months to 31 December 2011, other UK variances included a profit of £50m (six months ended 30 June 2011: £50m) from the impact of a management action to reduce current and future investment expenses.

4.4 Experience variances continued

	UK	Canada	International	HWPF TVOG	Total
6 months to 30 June 2011	£m	£m	£m	£m	£m
Lapses	(14)	-	1	-	(13)
Maintenance expenses	(8)	(4)	2	-	(10)
Mortality and morbidity	5	-	-	-	5
Tax	(14)	15	-	-	1
Other	49	(2)	(6)	(11)	30
Total	18	9	(3)	(11)	13

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

4.5 Operating assumption changes

	UK	Canada	International	HWPF TVOG	Total
6 months to 30 June 2012	£m	£m	£m	£m	£m
Lapses	-	-	(1)	-	(1)
Maintenance expenses	-	-	1	-	1
Mortality and morbidity	-	-	-	-	-
Tax	-	-	-	-	-
Other	-	-	-	-	-
Total	-	-	-	-	-

In general, operating assumptions for the main classes of business, including most expense and other non-economic assumptions, are reviewed on an annual basis. The impact of this review will be reflected in the full year results. The main exception is India where the joint venture reviews assumptions as part of its 31 March year end. These assumption changes are reflected in the Group's EEV results at 30 June 2012.

For the 12 months to 31 December 2011, most of the £139m loss from mortality assumptions in Canada reflects the impact of revised industry-standard mortality improvement rates. The £57m other assumption changes in Canada includes a £109m profit from various changes in asset allocation strategies, including the benefits of management actions aimed at enhancing the investment yield on assets. This was partly offset by a loss of £62m from a reduction in expected fee income in our group savings and retirement products.

	UK	Canada	International	HWPF TVOG	Total
6 months to 30 June 2011	£m	£m	£m	£m	£m
Lapses	-	-	(5)	-	(5)
Maintenance expenses	-	-	-	-	-
Mortality and morbidity	-	-	-	-	-
Tax	-	-	-	-	-
Other	-	-	2	-	2
Total	-	-	(3)	-	(3)

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

4.6 Non-covered business

Non-covered business EEV operating profit is represented by operating profit¹ as adjusted for Standard Life Investments (global investment management) look through profits and the return on mutual funds which are recognised in covered business. Refer to Note 4.17 - EEV methodology.

(a) Segmental analysis - non-covered business

	UK	Global investment management	Other including group corporate centre	Total non-covered business
6 months to 30 June 2012	£m	£m	£m	£m
Opening EEV net assets	393	256	903	1,552

EEV profit/(loss) after tax	39	24	(16)	47
Transfer back of net worth from covered business	1	25	1	27
Foreign exchange differences	-	(2)	(3)	(5)
Internal capital transfers	(2)	(49)	72	21
Distributions to equity holders	-	-	(216)	(216)
Other	9	1	17	27
Closing EEV net assets	440	255	758	1,453

The transfer back of net worth from covered business represents the transfer of profits and losses in relation to the Group's investment management business, the UK mutual funds business (within UK non-covered, Standard Life Savings Limited) and the Canada mutual funds business (within other non-covered), necessary to reconcile the opening and closing EEV net assets. For further detail refer to Note 4.17 - EEV methodology, under consolidation adjustments.

The Company operated a Scrip dividend scheme for dividends paid until the end of 2011. Investors taking part in the Scrip scheme received their dividend entitlement in the form of new shares issued in lieu of cash dividends. For the six months ended 30 June 2011, dividends paid comprise £92m (12 months ended 31 December 2011: £141m) settled by the issue of shares under the Scrip scheme, and £105m (12 months ended 31 December 2011: £162m) paid in cash.

The other movement in the UK EEV net assets mainly relates to the change in the UK non-covered pension scheme of negative £91m (six months ended 30 June 2011: negative £58m; 12 months ended 31 December 2011: negative £51m) and the associated deferred tax of positive £99m (six months ended 30 June 2011: positive £18m; 12 months ended 31 December 2011: positive £15m).

	UK	Global investment management	Other including group corporate centre	Total non-covered business
6 months to 30 June 2011	£m	£m	£m	£m
Opening EEV net assets	271	256	678	1,205

EEV (loss)/profit after tax	(1)	22	(27)	(6)
Transfer back of net worth from covered business	(18)	29	2	13
Foreign exchange differences	-	(1)	-	(1)
Internal capital transfers	112	(38)	253	327
Distributions to equity holders	-	-	(197)	(197)
Other	(40)	-	92	52
Closing EEV net assets	324	268	801	1,393

¹Refer to Accounting policy (jj) in the Annual Report and Accounts 2011.

4.6 Non-covered business continued

(a) Segmental analysis - non-covered business continued

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

(b) Global investment management EEV operating profit before tax

Global investment management non-covered business profits are included in EEV on a look through basis. This means that the profits from global investment management which are generated from life and pensions business are allocated to covered business. Therefore, the difference between third party non-covered business EEV operating profit before tax of £34m (six months ended 30 June 2011: £27m; 12 months ended 31 December 2011: £69m) and operating profit for the global investment management business of £68m (six months ended 30 June 2011: £67m; 12 months ended 31 December 2011: £125m) is the profit allocated to covered business.

	6 months 2012	6 months 2011	Full year 2011
	£m	£m	£m
Global investment management third party non-covered business EEV operating profit before tax	34	27	69
Third party related covered business EEV operating profit before tax	20	18	32
Total third party business EEV operating profit before tax	54	45	101

Other covered business EEV operating profit before tax	14	22	24
Global investment management operating profit before tax	68	67	125

Total global investment management EEV operating profit allocated to covered business of £34m (six months ended 30 June 2011: £40m; 12 months ended 31 December 2011: £56m) consists of third party related covered business EEV operating profit of £20m (six months ended 30 June 2011: £18m; 12 months ended 31 December 2011: £32m) and other covered business EEV operating profit of £14m (six months ended 30 June 2011: £22m; 12 months ended 31 December 2011: £24m).

Third party related covered business EEV operating profits relate to products actively marketed and sold to third parties through global investment management distribution channels. If these profits are added to the global investment management non-covered business EEV operating profits of £34m (six months ended 30 June 2011: £27m; 12 months ended 31 December 2011: £69m), there are £54m (six months ended 30 June 2011: £45m; 12 months ended 31 December 2011: £101m) of total third party related profits for global investment management.

The year-on-year increase in the proportion of global investment management operating profit before tax generated from third parties is due to new business flows into higher margin third party products, outflows from captive products and a refinement of cost allocations.

	6 months 2012	6 months 2011	Full year 2011
	£m	£m	£m
Canada non-life subsidiaries	1	-	6
Mutual funds transferred to covered business	(3)	(2)	(7)
Canada non-life subsidiaries excluding transfers to covered business	(2)	(2)	(1)

Standard Life plc income	4	1	6
Other	4	5	9
Other non-covered business EEV operating profit before tax	6	4	14

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

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

4.7 EEV reconciliation of movements in consolidated statement of financial position

	6 months 2012	6 months 2011	Full year 2011
	£m	£m	£m
Opening EEV	7,428	7,321	7,321

Total comprehensive income for the period attributable to equity holders	576	296	252
Distributions to equity holders	(216)	(197)	(303)
Issue of share capital other than in cash	1	92	141
Shares acquired by employee trusts	(2)	(4)	(7)
Shares distributed by employee trusts	1	(1)	-
Reserves credit for employee share-based payment schemes	12	11	24
Aggregate tax effect of items recognised directly in equity	2	-	-
Closing EEV	7,802	7,518	7,428

4.8 Reconciliation of EEV net assets to IFRS net assets

	30 June 2012	30 June 2011	31 December 2011
	£m	£m	£m
Net assets on an EEV basis	7,802	7,518	7,428
Present value of in-force life and pensions business net of cost of capital	(4,230)	(3,970)	(3,840)
EEV net worth	3,572	3,548	3,588

Adjustment of long-term debt to market value	(57)	(17)	(44)
Canada marked to market adjustment	(19)	(21)	(19)
Deferred acquisition costs net of deferred income reserve	373	342	350
Deferred tax differences	98	89	123
Adjustment for share of joint ventures	21	33	24
Consolidation adjustment for different accounting bases¹	(37)	(39)	(89)
Other	42	32	28
Net assets attributable to equity holders on an IFRS basis	3,993	3,967	3,961

¹ This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 4.17 - EEV methodology.

Reconciling items are shown net of tax where appropriate.

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

(a) Total

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
6 months to 30 June 2012	£m	£m	£m	£m	£m
Opening EEV	651	1,296	1,947	3,840	5,787

Contribution from new business	(153)	46	(107)	247	140
Contribution from in-force business:
Expected return on existing business	-	21	21	134	155
Expected return transfer to net worth	326	(34)	292	(292)	-
Experience variances	28	35	63	100	163
Operating assumption changes	(1)	-	(1)	1	-
Development expenses	(23)	-	(23)	-	(23)
Expected return on free surplus	(4)	-	(4)	-	(4)
EEV operating profit after tax	173	68	241	190	431
Investment return and tax variances	(46)	43	(3)	128	125
Effect of economic assumption changes	(47)	44	(3)	105	102
Restructuring costs	(27)	-	(27)	(1)	(28)
EEV profit after tax	53	155	208	422	630
Internal capital transfers	(21)	-	(21)	-	(21)
Transfer back of surplus to Standard Life Investments	(25)	-	(25)	-	(25)
Transfer back of mutual funds net worth	(2)	-	(2)	-	(2)
Actuarial losses on defined benefit pension schemes	(10)	-	(10)	-	(10)
Foreign exchange differences	(3)	(15)	(18)	(31)	(49)
Aggregate tax effect of items not recognised in income statement	4	-	4	-	4
Other	(1)	-	(1)	(1)	(2)
Closing EEV	646	1,436	2,082	4,230	6,312

	Free Surplus	Required capital	Net worth	PVIF net of cost of capital	Total
6 months to 30 June 2011	£m	£m	£m	£m	£m
Opening EEV	1,202	1,031	2,233	3,838	6,071

Contribution from new business	(149)	30	(119)	244	125
Contribution from in-force business:
Expected return on existing business	(1)	19	18	148	166
Expected return transfer to net worth	341	(43)	298	(297)	1
Experience variances	28	(13)	15	(5)	10
Operating assumption changes	-	-	-	(3)	(3)
Development expenses	(24)	-	(24)	-	(24)
EEV operating profit/(loss) after tax	195	(7)	188	87	275
Investment return and tax variances	(83)	112	29	(39)	(10)
Effect of economic assumption changes	6	9	15	67	82
Restructuring costs	(14)	-	(14)	-	(14)
EEV profit after tax	104	114	218	115	333
Internal capital transfers	(327)	-	(327)	-	(327)
Transfer back of surplus to Standard Life Investments	(29)	-	(29)	-	(29)
Transfer back of mutual funds net worth	16	-	16	-	16
Actuarial losses on defined benefit pension schemes	(8)	-	(8)	-	(8)
Foreign exchange differences	4	6	10	17	27
Aggregate tax effect of items not recognised in income statement	2	-	2	-	2
Other	1	-	1	-	1
Closing EEV	965	1,151	2,116	3,970	6,086

(b) UK and HWPF TVOG

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
6 months to 30 June 2012	£m	£m	£m	£m	£m
Opening EEV	686	169	855	2,353	3,208

Contribution from new business	(65)	10	(55)	152	97
Contribution from in-force business:
Expected return on existing business	-	2	2	76	78
Expected return transfer to net worth	189	(2)	187	(187)	-
Experience variances	30	2	32	46	78
Development expenses	(7)	-	(7)	-	(7)
Expected return on free surplus	(6)	-	(6)	-	(6)
EEV operating profit after tax	141	12	153	87	240
Investment return and tax variances	6	-	6	95	101
Effect of economic assumption changes	(57)	4	(53)	43	(10)
Restructuring costs	(25)	-	(25)	(1)	(26)
EEV profit after tax	65	16	81	224	305
Internal capital transfers	(194)	-	(194)	-	(194)
Transfer back of surplus to Standard Life Investments	(23)	-	(23)	-	(23)
Transfer back of mutual funds net worth	(1)	-	(1)	-	(1)
Other	(1)	-	(1)	-	(1)
Closing EEV	532	185	717	2,577	3,294

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
6 months to 30 June 2011	£m	£m	£m	£m	£m
Opening EEV	930	159	1,089	2,492	3,581

Contribution from new business	(71)	9	(62)	147	85
Contribution from in-force business:
Expected return on existing business	(1)	3	2	90	92
Expected return transfer to net worth	194	(2)	192	(192)	-
Experience variances	8	(1)	7	(2)	5
Development expenses	(12)	-	(12)	-	(12)
Expected return on free surplus	(6)	-	(6)	-	(6)
EEV operating profit after tax	112	9	121	43	164
Investment return and tax variances	(59)	(2)	(61)	(35)	(96)
Effect of economic assumption changes	(18)	1	(17)	77	60
Restructuring costs	(12)	-	(12)	-	(12)
EEV profit after tax	23	8	31	85	116
Internal capital transfers	(352)	-	(352)	-	(352)
Transfer back of surplus to Standard Life Investments	(25)	-	(25)	-	(25)
Transfer back of mutual funds net worth	18	-	18	-	18
Closing EEV	594	167	761	2,577	3,338

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

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
6 months to 30 June 2012	£m	£m	£m	£m	£m
Opening EEV	(103)	1,059	956	756	1,712
Contribution from new business	(42)	27	(15)	35	20
Contribution from in-force business:
Expected return on existing business	-	18	18	42	60
Expected return transfer to net worth	75	(34)	41	(41)	-
Experience variances	(2)	34	32	52	84
Development expenses	(6)	-	(6)	-	(6)
Expected return on free surplus	1	-	1	-	1
EEV operating profit after tax	26	45	71	88	159
Investment return and tax variances	(59)	41	(18)	16	(2)
Effect of economic assumption changes	9	40	49	61	110
Restructuring costs	(1)	-	(1)	-	(1)
EEV profit/(loss) after tax	(25)	126	101	165	266
Internal capital transfers	135	-	135	-	135
Transfer back of mutual funds net worth	(1)	-	(1)	-	(1)
Actuarial losses on defined benefit pension schemes	(10)	-	(10)	-	(10)
Foreign exchange differences	-	(12)	(12)	(9)	(21)
Aggregate tax effect of items not recognised in income statement	4	-	4	-	4
Other	-	-	-	(1)	(1)
Closing EEV	-	1,173	1,173	911	2,084

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
6 months to 30 June 2011	£m	£m	£m	£m	£m
Opening EEV	226	813	1,039	719	1,758

Contribution from new business	(20)	17	(3)	25	22
Contribution from in-force business:
Expected return on existing business	-	16	16	39	55
Expected return transfer to net worth	84	(43)	41	(41)	-
Experience variances	17	(11)	6	-	6
Development expenses	(5)	-	(5)	-	(5)
Expected return on free surplus	5	-	5	-	5
EEV operating profit/(loss) after tax	81	(21)	60	23	83
Investment return and tax variances	(25)	114	89	1	90
Effect of economic assumption changes	25	8	33	(5)	28
Restructuring costs	(1)	-	(1)	-	(1)
EEV profit after tax	80	101	181	19	200
Transfer back of surplus to Standard Life Investments	(2)	-	(2)	-	(2)
Transfer back of mutual funds net worth	(2)	-	(2)	-	(2)
Actuarial losses on defined benefit pension schemes	(8)	-	(8)	-	(8)
Foreign exchange differences	2	5	7	3	10
Aggregate tax effect of items not recognised in income statement	2	-	2	-	2
Other	1	-	1	-	1
Closing EEV	299	919	1,218	741	1,959

(d) International

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
6 months to 30 June 2012	£m	£m	£m	£m	£m
Opening EEV	68	68	136	731	867

Contribution from new business	(46)	9	(37)	60	23
Contribution from in-force business:
Expected return on existing business	-	1	1	16	17
Expected return transfer to net worth	62	2	64	(64)	-
Experience variances	-	(1)	(1)	2	1
Operating assumption changes	(1)	-	(1)	1	-
Development expenses	(10)	-	(10)	-	(10)
Expected return on free surplus	1	-	1	-	1
EEV operating profit after tax	6	11	17	15	32
Investment return and tax variances	7	2	9	17	26
Effect of economic assumption changes	1	-	1	1	2
Restructuring costs	(1)	-	(1)	-	(1)
EEV profit after tax	13	13	26	33	59
Internal capital transfers	38	-	38	-	38
Transfer back of surplus to Standard Life Investments	(2)	-	(2)	-	(2)
Foreign exchange differences	(3)	(3)	(6)	(22)	(28)
Closing EEV	114	78	192	742	934

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
6 months to 30 June 2011	£m	£m	£m	£m	£m
Opening EEV	46	59	105	627	732

Contribution from new business	(58)	4	(54)	72	18
Contribution from in-force business:
Expected return on existing business	-	-	-	19	19
Expected return transfer to net worth	63	2	65	(64)	1
Experience variances	3	(1)	2	(3)	(1)
Operating assumption changes	-	-	-	(3)	(3)
Development expenses	(7)	-	(7)	-	(7)
Expected return on free surplus	1	-	1	-	1
EEV operating profit after tax	2	5	7	21	28
Investment return and tax variances	1	-	1	(5)	(4)
Effect of economic assumption changes	(1)	-	(1)	(5)	(6)
Restructuring costs	(1)	-	(1)	-	(1)
EEV profit after tax	1	5	6	11	17
Internal capital transfers	25	-	25	-	25
Transfer back of surplus to Standard Life Investments	(2)	-	(2)	-	(2)
Foreign exchange differences	2	1	3	14	17
Closing EEV	72	65	137	652	789

4.10 Time value of options and guarantees (TVOG)

	30 June 2012	30 June 2011	31 December 2011
	£m	£m	£m
UK and Europe HWPF	(146)	(53)	(251)
Canada	(73)	(21)	(29)
International	(32)	(16)	(41)
Total	(251)	(90)	(321)

UK and Europe HWPF TVOG reflects the value of shareholder exposure to the policyholder guarantees within the HWPF. The value of this exposure has reduced by £105m during 2012. This arose from a post-tax operating gain of £82m mainly from asset changes and modelling improvements, and favourable non-operating movements of £23m.

The increase in the Canada TVOG of £44m has mainly arisen with Retail Fee business, and reflects the increased cost of guarantees from the business written in 2012 along with the adverse impact of market movements.

4.11 Market value of subordinated liabilities within covered business

	30 June 2012	30 June 2011	31 December 2011
	£m	£m	£m
UK	(1,052)	(1,797)	(1,005)
Canada	(286)	(297)	(341)
Total	(1,338)	(2,094)	(1,346)

Subordinated liabilities within EEV covered business are based on the market value of the debt. The free surplus shown in Note 4.2(c) - Segmental analysis - covered business - Segmental analysis of opening and closing EEV is net of these liabilities.

UK subordinated liabilities include Euro denominated subordinated guaranteed bonds. The increase in the UK subordinated debt liability of £47m since 31 December 2011 mainly reflects reduced market yields. The £55m decrease in the Canada subordinated liability since 31 December 2011 is due to an increase in the credit spread used to derive the market value.

The impact of these movements in subordinated liabilities are reflected in non-operating profit in UK and Canada as shown in Note 4.2(a) - Segmental EEV income statement. For Canada, this has been offset by the Group EEV consolidation adjustment in respect of the Canadian subordinated liability, as shown in the EEV consolidated income statement.

4.12 PVIF monetisation profile

The following tables show the PVIF emergence on a discounted and undiscounted basis along with a reconciliation to the total closing PVIF and the PVIF net of cost of capital impact from new business.

(a) PVIF emergence

In-force business
	PVIF	Cash emerging during years (£m)
At 30 June 2012	£m	1-5	6-10	11-15	16-20	20+
UK	4,354	1,501	1,021	695	458	679
Canada	5,188	521	552	524	497	3,094
International	1,146	380	260	161	117	228
Total undiscounted	10,688	2,402	1,833	1,380	1,072	4,001
Total discounted	5,119	2,105	1,233	712	425	644

New business
	PVIF	Cash emerging during years (£m)
At 30 June 2012	£m	1-5	6-10	11-15	16-20	20+
UK	243	75	56	42	29	41
Canada	124	24	15	12	11	62
International	95	36	22	12	10	15
Total undiscounted	462	135	93	66	50	118
Total discounted	278	123	65	38	23	29

(b) Reconciliation to closing PVIF

In-force business	Reconciliation of discounted PVIF
	PVIF	TVOG	Total
At 30 June 2012	£m	£m	£m
UK and HWPF TVOG	2,802	(146)	2,656
Canada	1,512	(73)	1,439
International	805	(32)	773
Total	5,119	(251)	4,868

See also Note 4.2(c) - Segmental analysis - covered business - Segmental analysis of opening and closing EEV.

New business	Reconciliation of discounted PVIF
	PVIF	Cost of capital	TVOG	Total
At 30 June 2012	£m	£m	£m	£m
UK	156	(4)	-	152
Canada	58	(5)	(18)	35
International	64	(2)	(2)	60
Total	278	(11)	(20)	247

See also Note 4.9 - Analysis of covered business EEV PVIF and net worth movements (net of tax).

As outlined in Note 4.1 - Basis of preparation, with the exception of changes arising from the introduction of a new UK life insurance tax regime, the Group's EEV results do not include any allowance for changes to the reserving or required capital bases anticipated under future reporting or regulatory regimes. The PVIF monetisation profile therefore excludes changes anticipated under Solvency 2.

4.13 Principal economic assumptions - deterministic calculations - covered business

(a) Gross investment returns and expense inflation

	UK HWPF/PBF¹	Canada	Europe HWPF/PBF¹	Europe offshore²	Hong Kong
At 30 June 2012	%	%	%	%	%
Gross investment returns
Risk free	1.71	1.99	1.58	1.71	0.92
Corporate bonds	2.57³	⁴	n/a	n/a	3.23
Equities	4.71	8.60	4.58	4.71	3.92
Property	3.71	8.60	3.58	3.71	n/a
			-
Other
Expense inflation:	3.12	⁵		3.12	2.50
Germany			1.64
Ireland			2.53

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

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

³ Excludes corporate bond returns on annuities. For annuities in UK equity holder owned funds, the overall investment return, after allowing for assumed defaults, is 3.96% for annuities that are level or subject to fixed escalations and 2.48% for annuities where escalations are linked to a price index.

⁴ Current holdings are assumed to yield in future years the earned rate for the year preceding the valuation. Future reinvestments are assumed to be in a mixture of government and corporate bonds.

⁵ 0.000% in 2012. The rate in subsequent years is based on a moving 30-year bond yield less a 3% deduction.

4.13 Principal economic assumptions - deterministic calculations - covered business continued

(a) Gross investment returns and expense inflation continued

	UK HWPF/PBF¹	Canada	Europe HWPF/PBF¹	Europe offshore²	Hong Kong
At 30 June 2011	%	%	%	%	%
Gross investment returns
Risk free	3.45	3.30	3.02	3.45	1.52⁶
Corporate bonds	4.12³	⁴	n/a	n/a	2.64⁶
Equities	6.45	8.60	6.02	6.45	4.52⁶
Property	5.45	8.60	5.02	5.45	n/a

Other
Expense inflation:	4.09	⁵		4.09	2.50⁶
Germany			2.43
Ireland			3.15

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

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

³ Excludes corporate bond returns on annuities. For annuities in UK equity holder owned funds, the overall investment return, after allowing for assumed defaults, is 4.93% for annuities that are level or subject to fixed escalations and 3.99% for annuities where escalations are linked to a price index.

⁴ Current holdings are assumed to yield in future years the earned rate for the year preceding the valuation. Future reinvestments are assumed to be in government bonds.

⁵ 0.645% in 2011. The rate in subsequent years is based on a moving 30-year bond yield less a 3% deduction.

⁶ For Hong Kong, the following 31 December 2010 assumptions were used within the 30 June 2011 EEV income statement: risk free rate 2.10%, corporate bond return 3.22%, equity return 5.10% and expense inflation 2.50%.

	UK HWPF/PBF¹	Canada	Europe HWPF/PBF¹	Europe offshore²	Hong Kong
At 31 December 2011	%	%	%	%	%
Gross investment returns
Risk free	1.93	2.17	1.83	1.93	1.09
Corporate bonds	2.99³	⁴	n/a	n/a	3.41
Equities	4.93	8.60	4.83	4.93	4.09
Property	3.93	8.60	3.83	3.93	n/a

Other
Expense inflation:	3.37	⁵		3.37	2.50
Germany			1.85
Ireland			2.74

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

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

³ Excludes corporate bond returns on annuities. For annuities in UK equity holder owned funds, the overall investment return, after allowing for assumed defaults, is 4.20% for annuities that are level or subject to fixed escalations and 2.73% for annuities where escalations are linked to a price index.

⁴ Current holdings are assumed to yield in future years the earned rate for the year preceding the valuation. Future reinvestments are assumed to be in a mixture of government and corporate bonds.

⁵ 0.000% in 2012. The rate in subsequent years is based on a moving 30-year bond yield less a 3% deduction.

(b) Risk discount rates - in-force business

	UK HWPF	UK PBF¹	Canada	Europe HWPF	Europe PBF¹	Europe offshore²	Hong Kong
At 30 June 2012	%	%	%	%	%	%	%
Risk discount rates - in-force business
Risk free	1.71	1.71	1.99	1.58	1.58	1.71	0.92
Risk margin	4.50	2.50	4.40	2.00	1.40	2.10	3.10
Risk discount rate³	6.21	4.21	6.39	3.58	2.98	3.81	4.02

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

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

³ Using the value of in-force business as weights, the average risk discount rates for UK and Europe are 5.19% and 3.29% respectively.

	UK HWPF	UK PBF¹	Canada	Europe HWPF	Europe PBF¹	Europe offshore²	Hong Kong
At 30 June 2011	%	%	%	%	%	%	%
Risk discount rates - in-force business
Risk free	3.45	3.45	3.30	3.02	3.02	3.45	1.52⁴
Risk margin	3.60	2.90	3.50	3.60	2.90	2.90	2.90⁴
Risk discount rate³	7.05	6.35	6.80	6.62	5.92	6.35	4.42⁴

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

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

³ Using the value of in-force business as weights, the average risk discount rates for UK and Europe are 6.75% and 6.26% respectively.

⁴ For Hong Kong, the following 31 December 2010 assumptions were used within the 30 June 2011 EEV income statement: risk free rate 2.10%, risk margin 2.90% and risk discount rate 5.00%.

	UK HWPF	UK PBF¹	Canada	Europe HWPF	Europe PBF¹	Europe offshore²	Hong Kong
At 31 December 2011	%	%	%	%	%	%	%
Risk discount rates - in-force business
Risk free	1.93	1.93	2.17	1.83	1.83	1.93	1.09
Risk margin	4.50	2.70	4.50	2.00	1.30	2.30	3.10
Risk discount rate³	6.43	4.63	6.67	3.83	3.13	4.23	4.19

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

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

³ Using the value of in-force business as weights, the average risk discount rates for UK and Europe are 5.55% and 3.51% respectively.

Risk margins have been updated at 30 June 2012 to reflect the impact of market movements. Allowances for non-market risk are unchanged from those used at 31 December 2011 - these are reviewed once a year and any changes will be reflected in the 2012 full year results.

In Canada, the 30 June 2012 risk margin also reflects the impact of the relative movements in the returns assumed on equities and property compared to risk free, as well as the changes in market risk resulting from the revised modelling of cash flows as described in Note 4.4 - Experience variances.

The increased market risk resulting from the revised modelling in Canada resulted in a 0.1% increase in the risk margin. This resulted in a loss of £33m which is included within the Canada operating experience variances as reported in Note 4.2(a) - Segmental analysis - covered business - Segmental EEV income statement.

The impact of the other changes in risk discount rates has been included in the effect of economic assumption changes shown in Note 4.2(a). The amounts within these totals that relate to the changes in risk discount rate are for UK: profit £94m, for Canada: profit £109m, and for International: profit £21m. These profits reflect the impact of lower risk discount rates which are mainly driven by reductions in risk free rates during 2012.

4.13 Principal economic assumptions - deterministic calculations - covered business continued

	UK HWPF	UK PBF¹	Canada	Europe HWPF	Europe PBF¹	Europe offshore²	Hong Kong
6 months to 30 June 2012	%	%	%	%	%	%	%
Risk discount rates - new business
Risk free³	1.93	1.93	2.17	1.83	1.83	1.93	1.09
Risk margin	3.10	2.80	2.50	3.30	2.20	2.20	3.10
Risk discount rate⁴	5.03	4.73	4.67	5.13	4.03	4.13	4.19

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

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

³ As the new business contribution is calculated using start of period economic assumptions, the risk free rates shown here represent market yields at 31 December 2011.

⁴ Using the value of in-force for new business as weights, the average risk discount rates for UK and Europe are 4.76% and 4.06% respectively.

	UK HWPF	UK PBF¹	Canada	Europe HWPF	Europe PBF¹	Europe offshore²	Hong Kong
6 months to 30 June 2011	%	%	%	%	%	%	%
Risk discount rates - new business
Risk free³	3.49	3.49	3.29	2.96	2.96	3.49	2.10
Risk margin	2.30	2.90	2.70	2.30	2.90	2.90	2.90
Risk discount rate⁴	5.79	6.39	5.99	5.26	5.86	6.39	5.00

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

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

³ As the new business contribution is calculated using start of period economic assumptions, the risk free rates shown here represent market yields at 31 December 2010.

⁴ Using the value of in-force for new business as weights, the average risk discount rates for UK and Europe are 6.31% and 6.00% respectively.

	UK HWPF	UK PBF¹	Canada	Europe HWPF	Europe PBF¹	Europe offshore²	Hong Kong
12 months to 31 December 2011	%	%	%	%	%	%	%
Risk discount rates - new business
Risk free³	3.49	3.49	3.29	2.96	2.96	3.49	2.10
Risk margin	2.90	2.80	2.00	3.10	1.20	2.20	2.90
Risk discount rate⁴	6.39	6.29	5.29	6.06	4.16	5.69	5.00

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

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

³ As the new business contribution is calculated using start of period economic assumptions, the risk free rates shown here represent market yields at 31 December 2010.

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

(d) International - Asia

The PVIF and cost of required capital of the India and China joint venture (JV) businesses are calculated using a 'risk neutral' approach whereby projected investment returns and discount rates are based on risk free rates. The risk free rates used were:

	30 June 2012	30 June 2011	31 December 2011
	%	%	%
India	8.30	8.38	8.55
China	3.93	3.88	3.89

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

Non-market risk has been allowed for via a specific deduction to the PVIF, based on a non-market risk 'cost of capital' approach. This has reduced the PVIF of the India and China JV businesses at 30 June 2012 by £23m (30 June 2011: £26m; 31 December 2011: £25m). Similarly, the 2012 pre-tax NBC for the six months ended 30 June 2012 has been reduced by £3m (six months ended 30 June 2011: £4m; 12 months ended 31 December 2011: £7m) as an allowance for non-market risk.

4.14 Principal economic assumptions - stochastic calculations

The level of TVOG is generally calculated using a stochastic projection. This requires an economic scenario generator (ESG) which projects the relevant fund under a large number of different future economic scenarios. A detailed description of the methodology applied in the relevant funds is provided in Note 4.17 - EEV methodology.

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

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

· Cash account index

· Gross redemption yield term structure

· Equity total return index

· Property total return index

· Gilt total return index

· Corporate bond total return index

· Equity dividend yields

· Property rental yields

· Price inflation

· Earnings inflation

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

Parameters used in ESG

Cash and bond returns

These variables are calibrated using repo rates and government strips.

Inflation

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

Equity returns

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

Property returns

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

Dividend and rental yields

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

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

Swaption-implied volatilities

The implied volatility is that required in order that the price of the option calculated via the Black-Scholes Formula equals the market price of that option.

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

	30 June 2012		30 June 2011		31 December 2011
UK Sterling	Swap term (years)		Swap term (years)		Swap term (years)
Option term (years)	10	15	10	15	10	15
10	17.6%	15.8%	14.4%	13.9%	19.1%	17.1%
15	16.5%	15.1%	14.1%	13.6%	17.7%	16.1%
20	15.0%	13.7%	13.3%	12.8%	16.0%	14.6%
25	13.7%	12.5%	12.5%	12.0%	14.6%	13.4%

	30 June 2012		30 June 2011		31 December 2011
Euro	Swap term (years)		Swap term (years)		Swap term (years)
Option term (years)	15	20	15	20	15	20
10	19.6%	19.0%	14.8%	14.4%	20.2%	19.8%
15	18.8%	17.9%	14.5%	13.9%	19.4%	18.6%
20	17.0%	16.0%	13.2%	12.6%	17.6%	16.6%
25	15.8%	n/a	12.3%	n/a	16.3%	n/a

4.14 Principal economic assumptions - stochastic calculations continued

Equity-implied volatilities

The implied volatility is that required in order that the price of the option calculated via the Black-Scholes Formula equals the market price of that option.

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

UK equities
Term (years)	30 June 2012	30 June 2011	31 December 2011
10	27.2%	23.2%	26.2%
15	27.4%	25.0%	26.7%
20	27.9%	26.2%	27.4%
25	28.9%	27.4%	28.4%

European equities
Term (years)	30 June 2012	30 June 2011	31 December 2011
10	25.5%	24.2%	27.9%
15	25.4%	25.5%	27.9%
20	26.1%	26.2%	28.6%
25	26.4%	26.8%	28.9%

Property-implied volatilities

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

For the UK, the model is calibrated to a property-implied volatility of 15% for 30 June 2012, 15% for 31 December 2011 and 15% for 30 June 2011.

Note 4.10 - Time value of options and guarantees (TVOG) also shows the values of TVOG in Canada and International, which are in addition to HWPF TVOG. Where material, these values are also calculated using ESG similar to that used for the HWPF TVOG calculation.

4.15 Foreign exchange

The principal exchange rates applied are:

Local currency: £	Closing 30 June 2012	Average to 30 June 2012	Closing 30 June 2011	Average to 30 June 2011	Closing 31 December 2011	Average to 31 December 2011
Canada	1.599	1.590	1.549	1.576	1.582	1.584
Europe	1.236	1.215	1.107	1.146	1.197	1.152
India	87.574	82.833	71.768	72.615	82.529	75.027
China	9.966	9.981	10.378	10.564	9.782	10.378
Hong Kong	12.166	12.259	12.492	12.578	12.070	12.499

4.16 Sensitivity analysis - economic and non-economic assumptions

The sensitivities specified by the EEV Principles and Guidance are reported in the year end results. These are not updated for half year reporting.

4.17 EEV methodology

Covered business

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

The Group's covered business is its life assurance and pensions businesses in the UK, Canada and International (Germany including Austria, Ireland, Hong Kong and the India and China JV businesses), as well as the current and future profits and losses from Standard Life Investments arising on its management of funds relating to the life and pensions businesses.

UK covered business also includes:

· Non-insured self invested personal pension (SIPP) business

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

· Mutual funds sold by the UK business

Canada covered business also includes mutual funds.

International covered business consists of:

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

· The Group's Ireland branch of SLAL

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

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

· The Group's share of results in the JV in India, HDFC Standard Life Insurance Company Limited, at 26% for the six months ended 30 June 2012 (during the 12 months ended 31 December 2011: 26%)

· The Group's share of results in the JV in China, Heng An Standard Life Insurance Company Limited, at 50% for the six months ended 30 June 2012 (during the 12 months ended 31 December 2011: 50%)

Non-covered business

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

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

Segmentation

Under the EEV Principles and Guidance we are required to provide business classifications which are consistent with those used for the primary statements. In the IFRS financial statements the Group's reportable segments have been identified in accordance with the way in which the Group is structured and managed, as required under IFRS 8. The EEV segmentation has been prepared in a consistent manner, whilst also distinguishing between covered and non-covered business. HWPF TVOG is disclosed separately in EEV, as explained in Note 4.2(a) - Segmental analysis - covered business - Segmental EEV income statement.

Consolidation adjustments

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

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

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

Value of in-force covered business

The value of future equity holders' cash flows is calculated for each material business unit on an after-tax basis, projected using best estimate future assumptions as described in the EEV methodology.

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

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

Free surplus

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

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

4.17 EEV methodology continued

Allowance for risk

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

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

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

· Allowing for TVOG

Risk discount rates

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

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

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

Separate risk discount rates have been calculated for in-force and new business and for the principal geographic segments (UK, Germany, Ireland domestic, Ireland offshore, Canada and Hong Kong). Within the UK and Europe, separate risk margins are calculated for profits emerging on policies inside the HWPF (regardless of whether these profits emerge directly from the HWPF or by inter-fund arrangements) and on policies that are in equity holder owned funds. For HWPF policies, there is a significant inter-fund arrangement in respect of mortality surpluses on annuities. The HWPF risk margin anticipates diversification benefits including the annuity mortality risk, since the overall capital structure also benefits from this diversification.

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

Market risk margins are reviewed at each valuation date, allowing for changes in risk profile arising from movements in asset mix. Non-market risk margins are reviewed in detail once a year.

The values of the risk discount rates used for this reporting period are provided in Note 4.13 - Principal economic assumptions - deterministic calculations - covered business.

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

Required capital

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

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

We have set required capital to be the higher of regulatory capital and our own internally assessed risk-based capital requirement. In determining the required capital for the purposes of assessing EEV, the Group excludes any capital which is provided by the existing surplus in the HWPF, as this capital is provided by policyholders. Any required capital in excess of that provided by the existing surplus in the HWPF would need to be provided by assets in the equity holders' funds. As part of the annual assessment, projections of the expected surplus in the HWPF, on best estimate assumptions, are carried out to assess whether this is sufficient to cover the level of required capital in respect of the HWPF. Required capital used in the EEV is also net of any capital that is assumed to be available from subordinated liabilities.

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

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

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

· Canada - the level of required capital is taken as 175% of minimum continuing capital and surplus requirements (MCCSR)

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

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

Time value of financial options and guarantees (TVOG)

TVOG represents the potential additional cost to equity holders where a financial option exists which affects policyholder benefits and is exercisable at the option of the policyholder.

UK and Europe - HWPF

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

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

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

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

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

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

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

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

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

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

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

UK and Europe - other

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

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

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

Canada

The main options and guarantees within the Canada business are in respect of minimum investment returns, guaranteed maturity and death benefits, and vested bonuses, which apply to certain investment and insurance contracts. TVOG has reduced both NBC and closing PVIF for Canada.

Asia

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

4.17 EEV methodology continued

Other economic assumptions

The assumed investment returns reflect our estimates of expected returns on principal asset classes, and are, in general, based on market conditions at the date of calculation of the EEV.

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

The Group's offshore business, which is sold by SLIL, is included within International results but has the same other economic assumptions as UK covered business.

Details of the assumptions used for this reporting period are provided in Note 4.13 - Principal economic assumptions - deterministic calculations - covered business.

Non-economic assumption changes

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

Expense assumptions

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

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

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

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

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

Restructuring costs for covered and non-covered business are consistent with those identified in the Group operating profit adjustments and primarily represent costs in relation to a number of restructuring programmes including Solvency 2. Refer to the IFRS financial information Note 3.3 - Administrative expenses for further detail. Restructuring costs in 2011 also include the impact on free surplus, required capital, cost of required capital and PVIF arising from the termination of the internal reinsurance agreement between SLAL and SLIF.

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

Expenses - pension schemes

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

Other non-economic experience assumptions

Assumptions are made in respect of future levels of mortality, morbidity, premium terminations, option take-up, surrenders and withdrawals. The assumptions reflect our best estimates of the likely future experience, and are based on recent experience and relevant industry data, where available.

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

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

New Business

Definition of new business

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

For the UK, classification as new or existing business is determined using the approach used for the published new business figures as follows:

· New recurrent single premium business is classified as new regular premium business to the extent that it is deemed likely to renew

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

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

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

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

· All increments and indexations to existing policies, including new members, and increments and indexations paid by existing members of group schemes, are deemed to be new business

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

For Ireland, new business is determined as follows:

· New contracts written during the period are included as new business

· New premiums on recurrent single premium contracts are included as new business

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

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

· All increments and indexations to existing policies, including new members, and increments and indexations paid by existing members of group schemes, are deemed to be new business

For Canada, business is deemed to be new business if a contract has been issued during the reporting period. NBC also includes the value of renewal premiums for a new contract, where the renewal premiums are (i) contractual, (ii) non-contractual but reasonably predictable, or (iii) recurrent single premiums that are pre-defined and reasonably predictable.

The present value of future net income attributable to renewal premiums on existing group pension and savings contracts, including those from new members, is not included as new business. Since all deposits (new and renewal) in individual segregated funds business attract a new business/first year commission, this business is treated as new business for EEV purposes.

For the Asia businesses, new business is defined as that arising from the sale of new contracts during the reporting period. The value of new business includes the value of expected renewals on those new contracts.

New business contribution (NBC)

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

The economic assumptions used are those at the start of the reporting period, and the non-economic assumptions are those at the end of the reporting period. An exception to this approach is annuity business in the UK and Ireland where, to ensure consistency between the economic assumptions used in NBC and those used in pricing the business and in the calculation of mathematical reserves, the economic assumptions used are the average rates for each quarter during the reporting period, and the asset allocations are those used in the pricing basis.

Present value of new business premiums (PVNBP)

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

4.17 EEV methodology continued

Tax

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

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

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

Subordinated liabilities

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

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

Foreign exchange

Embedded value and other items within the statement of financial position denominated in foreign currencies have been translated to Sterling using the appropriate closing exchange rates. NBC and other items within the income statement have been translated using the appropriate average exchange rates. Gains and losses arising from foreign exchange differences on consolidation are presented separately within the EEV consolidated statement of comprehensive income. Details of the exchange rates applied are provided in Note 4.15 - Foreign exchange.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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