Interim Results

RNS Number : 7293A

Standard Life plc

06 August 2008

 



Standard Life plc 2008 Interim Results - 6 August 2008  Robust performance in difficult market conditions

Improved net flows and sales 

• Life and pensions net flows up 15% to £2.0bn

• Life and pensions PVNBP1 sales up 5% to £9.1bn

• New business contribution up 4% to £157m

Strong growth in operating profits

• EEV operating profit before tax up 51% to £534m 

• Return on embedded value up 1.9% points to 11.0%

• IFRS underlying profit before tax up 58% to £345m 

• IFRS profit before tax attributable to equity holders up 219% to £201m

Higher cash flow supporting a growing dividend

• EEV core capital and cash generation after tax up 25% to £143m 

• Interim dividend of 4.07p, representing 7% growth

A balance sheet resilient to market falls

• Group Embedded Value per share 3% lower at 277p

• Financial Groups Directive surplus 3% lower at £3.5bn

Group Chief Executive Sandy Crombie said:

'I am pleased to report that Standard Life has had a successful first half in 2008, despite more difficult market conditions.

'In our life and pensions businesses, net flows were strong, sales showed good growth and profitability was maintained. In Standard Life Investments, net inflows offset the impact of market declines so that third party funds under management remained constant. Group operating profits were well ahead and our balance sheet remains robust with strong solvency ratios maintained.

'Looking ahead, we will continue to drive further efficiency gains, whilst investing in our businesses where we identify opportunities for growth. Our innovative product set, excellence in customer service and strong distribution relationships leave us well placed for the full year.

'Reflecting our progress in the first half and our confidence about the future, the Board is increasing the interim dividend payment by 7%.'

Unless otherwise stated, all comparisons are in Sterling, all sales figures are on a PVNBP basis and all comparators are with the first six

months of 2007.

EEV operating profit	H1 2008 £m	H1 2007 £m
Covered business by region
UK	403	252
Canada	79	75
Europe	26	14
Other covered business	(16)	(6)
HWPF TVOG	8	(2)
Covered business operating profit	500	333
Covered business by source
New business contribution                  In-force business	157	151
expected return	218	201
experience variance	22	(15)
assumption changes	120	1
Other covered	(17)	(5)
Total covered business operating profit	500	333
Investment management	31	28
Banking	12	14
Healthcare	8	2
Group Corporate Centre costs	(25)	(26)
Other non-covered business	8	2
Operating profit before tax	534	353
Tax on operating profit	(157)	(108)
Operating profit after tax	377	245
Profit after tax	7	321
Diluted EEV operating EPS	17.3p	11.2p

IFRS underlying profit	H1 2008 £m	H1 2007 £m
Life and pensions by region
UK	221	91
Canada	66	64
Europe	24	19
Other	(16)	(6)
Total life and pensions underlying profit	295	168
Investment management	25	42
Banking	12	14
Healthcare	8	2
Group Corporate Centre costs	(25)	(26)
Other	30	19
Total underlying profit before tax	345	219
Tax on underlying profit	(45)	(8)
Underlying profit after tax	300	211
Profit attributable to equity holders after tax	161	57
Diluted IFRS underlying EPS	13.8p	9.7p

For more information please refer to the Basis of preparation in Section 1.8 and the IFRS pro forma reconciliation of Group underlying profit to profit for the period in Section 4 of the Interim Results 2008. 

Performing well in difficult market conditions

Standard Life has had a successful first half. The Group's European Embedded Value (EEV) operating profit before tax increased by 51% to £534m (2007: £353m) delivering a return on embedded value (RoEV) of 11.0% (2007: 9.1%). During the period we have continued to invest in profitable opportunities and have reduced the risk borne by our shareholders through active management of our balance sheet.  Life and pensions net inflows and sales have continued to rise, despite the uncertainty in world financial markets. Our continued focus on innovative 'capital lite' products has led to a further strengthening in the Group's operating capital and cash generation.  

Assets under administration

Standard Life is an asset managing business and net flows and assets under administration (AUA) are key drivers of shareholder value. Consistent with this focus, we have introduced new disclosure setting out the development of Group AUA between net flows and market movements.  AUA are gross assets that the Group administers for customers, including both those managed by the Group and those placed with third party managers.

During the period to 30 June 2008, positive net flows of £3.3bn2 were offset by negative market movements of £8.7bn due to falling equity, property and fixed interest security values.  As a result Group AUA reduced from £168.8bn to £163.4bn.

Improved net flows

The main contributors to positive net flows of £3.3bn2 were life and pensions net inflows of £2.0bn and third party investment management net inflows of £2.7bn, these being partly offset by net outflows of £0.7bn from our mortgage business.  

Net flows across our UK, European and Canadian life and pensions operations have increased by 15% to £2.0bn, with net inflows of £1.0bn in the second quarter consistent with the first quarter.

UK life and pensions net inflows decreased by 3% to £1.4bn.  Pensions inflows were £1.4bn for the first half, with £0.75bn generated in the second quarter. Excluding volatile Institutional TIP flows, net pensions flows increased by 7%, despite the adverse impact of falling stock markets on incoming transfer values. This was supported by lower lapse activity across our pensions portfolio which is within long term assumptions. Savings and Investments had strong net inflows into both Offshore Bonds and Mutual Funds, partly offset by changes in the Capital Gains Tax rules and market driven outflows from Onshore Bonds. These outflows were consistent with the short-term lapse provision for Bonds set up at the year end.  Europe net flows have fallen slightly in constant currency to £232m with lower inflows from difficult market conditions being offset by better claims and lapse experience.  In Canada, higher inflows across Group savings and retirement products led to a nine fold increase in net flows in constant currency to £304m. 

Third party net inflows into Standard Life Investments for investment products and insurance contracts were £2.7bn.  Within this total, net inflows for investment products remained resilient at £2.3bn, driven by strong segregated institutional sales.  

We have put in place a number of measures to manage our mortgage exposure during the ongoing period of difficult credit market conditions.  These led to net outflows of £0.7bn from our mortgage business.  

Resilient new business volumes and profitability

Worldwide life and pensions new business has been robust in the face of continuing economic uncertainty and market volatility with sales up 5% at £9.1bn.  We have maintained our focus on profit and growing value, with new business contribution increasing by 4% to £157m and a Group IRR of 18% (2007: 15%).

UK Financial Services

Sales levels have been solid against a strong comparative period.  Life and pensions sales levels were constant at £7.2bn while healthcare sales increased by 27% to £14m.  We continue to manage our mortgage exposure, resulting in gross mortgage lending decreasing by 54% to £728m.

New business profits generated by our UK life and pensions operations have increased by 4% to £138m.  Our focus on 'capital lite' products has also led to an increase in IRR from 15% to 20% and a decrease in payback period from 10 years to 7 years.

Individual SIPP funds under administration increased by 12% to £8.6bn (31 December 2007: £7.7bn), the impact of net inflows of £1.7bn (2007: £2.1bn) being partly offset by a market-driven reduction in underlying asset values.  Funds under administration increased by £509m in the second quarter, exceeding the £427m increase recorded in the first quarter.  During the first half of 2008, SIPP customer numbers increased by 23% to 57,500 (31 December 2007: 46,900) with average case sizes across our SIPP portfolio of £150,000 at 30 June 2008 (31 December 2007: £164,000).  The majority of sales were generated from the continued consolidation of existing pensions and our SIPP offering has proven to be resilient against the backdrop of market uncertainty.  

Individual SIPP sales of £2.1bn were 19% lower than a very strong prior year period that was significantly enhanced by heightened activity post A-day.  This principally reflects the impact of market movements on average incoming transfer values, which continue to represent the majority of total SIPP sales.  The attraction of high yielding deposit accounts offered through Standard Life Bank during the current period of market volatility, has resulted in a higher weighting of non-insured SIPP sales.  In the second half of 2008 we plan to make several enhancements to our market leading SIPP proposition, including offering a variable annuity option, accepting protected rights monies and broadening our Mutual Fund range.  We continue to expect the UK SIPP market to double in size to £100bn of assets by 2011.

Group pension sales of £1.8bn have increased by 17% compared to a strong prior year period. This reflects strong levels of new and incremental business and a large scheme won during the first quarter. Group SIPP volumes increased by 10% compared to the prior year and accounted for 28% of total Group Pensions sales. At 30 June 2008, UK Group Pensions funds under management remained constant at £15.0bn (31 December 2007: £15.0bn), the strong net inflows being offset by negative market movements.

Sales across our savings and investments portfolio increased by 19% to £1.6bn, due to the continuation of very strong Offshore Bond sales, which have more than tripled compared to the prior year.  Recent changes in the Capital Gains Tax rules have had a mixed impact across our savings and investment portfolio. Mutual Funds sold on our Wrap and Fundzone platforms have increased by 33% and Investment Bonds decreased by only 1%, supported by increased sales from the lower margin bulk deals as previously reported.

Annuity sales decreased by 2% to £252m (2007: £257m). 91% of annuity sales came from customers with maturing Standard Life pensions (2007: 95%).

At 30 June 2008, funds under administration on Standard Life's Wrap platform increased by 36% to £1.5bn (31 December 2007: £1.1bn). At the end of June 2008 there were 263 IFA firms using the platform (31 December 2007: 209 firms) and 12,900 customers (31 December 2007: 8,100 customers) with an average fund size of £113,000 (31 December 2007: £133,000).

At 30 June 2008 mortgages under management stood at £10.6bn (31 December 2007: £11.3bn), with an arrears rate of 0.24%, which is less than a fifth of the Council of Mortgage Lenders industry average at 31 March 2008.

Savings balances in our banking operations continue to increase with total savings balances at 30 June 2008 of £4.8bn (31 December 2007: £4.6bn). This total includes combined SIPP and Wrap balances of over £1 billion.

Europe 

Life and pensions sales in Europe were 28% lower than the prior year in constant currency. Irish sales have declined by 46% in constant currency, driven by decreasing property prices and a weak domestic stock market.  In Germany sales volumes were 12% lower in constant currency, reflecting changes in insurance contract law at the start of the year that impacted the whole industry. The combination of reduced sales volumes and a largely fixed cost base has resulted in a lower European new business contribution of £1m (2007: £4m) and an IRR of 8% (2007: 8%). 

Canada

Sales and new business profits within our Canadian operations continue to grow following the successful repositioning of the business. Sales have increased by 45% in constant currency to £1.2bn while new business profits have strengthened to £18m (2007: £14m) with an IRR of 21% (2007: 30%).  Sales of Group Savings and Retirement products benefited from a number of midsized mandates secured in the first quarter as well as a large defined benefit administration mandate secured in the second quarter. Stronger sales in Group Insurance reflect our continued success in the disability insurance segment.  

We have increased our retail distribution and sales capabilities and strengthened our corporate visibility in Canada, while maintaining our commitment to product innovation and profitability.  Investment in our retail operations sales force has increased and the team grown by more than 50% compared to the end of 2007. The impact of this new capability should be felt in the second half of 2008.

  Asia Pacific

Combined sales from our joint ventures in India and China and our Hong Kong operations have continued to increase throughout the first half, rising by 46% in constant currency on a PVNBP basis and by 75% on an APE basis. 

In India, sales increased by 33% in constant currency on a PVNBP basis and by 64% on an APE basis. Standard Life's share of these sales was £233m (2007: £102m). The number of financial consultants appointed by the Indian joint venture has increased to approximately 162,000 (31 December 2007: 132,000).  Our distribution reach has increased following the merger of HDFC Bank and Centurion Bank of Punjab in May.

In China, sales volumes more than doubled in constant currency to £42m on a PVNBP basis and by 118% on an APE basis. The continued success of our products, increased sales through bank distribution and the ongoing development of our footprint in existing provinces have been the key drivers behind this strong growth within our Chinese operations. We are now present in 20 cities (31 December 2007: 14 cities) and are on track to extend this to 30 cities by the year end.  

In Hong Kong, sales increased by 340% in constant currency to £18m (2007: £4m) on a PVNBP basis and by 410% on an APE basis. During the period we launched new products and have started to accept business from offshore customers in Taiwan.

Standard Life Investments

Third party funds under management at Standard Life Investments remained constant at £47.5bn (31 December 2007: £47.7bn), despite substantial market falls, and now represent 36% (31 December 2007: 33%) of total funds under management.

Total funds under management decreased by 9% compared to the year end. This predominantly reflects the annuity reinsurance transaction entered into in February 2008 which reduced funds under management by £6.7bn. Excluding the impact of this reinsurance transaction, total funds under management reduced by 4% during the period compared to a fall of 13% in the FTSE All Share index.

The majority of our 26 OEICs and Unit Trusts outperformed their respective peer groups with 11 achieving top quartile performance, 4 of which were top decile. Performance across the range was also recognised with 19 of the 24 eligible and actively managed funds rated 'A' or above by Standard and Poor's. In the year to date 13 of our 24 pooled pension funds were above median, with 5 of these in the top quartile.  The money weighted average over 3, 5, and 10 year periods continues to be comfortably above median and remains a key driver of institutional sales and pipeline business.

In May we launched our Global Absolute Return Strategies (GARS) fund to retail investors. We expect the fund will prove particularly attractive to investors who wish to benefit from positive investment returns in a variety of market conditions.  

Strong growth in operating profits

In the first half of 2008, EEV operating profit before tax increased by 51% to £534m (2007: £353m), delivering a return on embedded value of 11.0% (2007: 9.1%). In line with disclosure given in our 2007 Preliminary results, we report our RoEV under three components: core, efficiency and back book management.

Core return

Core return comprises new business contribution, expected return on in-force business, development costs for covered business3 and normalised IFRS underlying profit for non-covered business4.  Core return is reported based on the opening operating assumptions.  

Core EEV operating profit before tax increased by 7% to £393m (2007: £367m) delivering a core RoEV of 9.2% (2007: 9.5%). During the first half of 2008 we have continued to invest in our fast growing Asian operations and in our market leading SIPP, Wrap and Bond propositions, which has led to an increase in development expenses. 

Continued drive for efficiency

Efficiency comprises covered business maintenance expense variances and assumption changes. As expense assumptions are not reviewed until the year end, efficiency has had a minimal impact on RoEV of (0.1)% during the period (2007: 0.0%).  Benefits will be reflected in the year end accounts.

In March 2007 we announced the Continuous Improvement Programme to reduce underlying costs by £100m by the end of 2009.  We remain on track to deliver these cost benefits with future initiatives as part of this programme including adopting a global approach to IT, a finance transformation programme and extending the use of Six Sigma and Lean techniques to drive process improvement.   

Active back book management

We remain committed to driving increased value from the management of our back book.  This category includes all non-expense related operating variances and assumption changes for covered business plus those development costs directly related to back book management initiatives and, for non-covered business, specific costs attributed to back book management.  During the first half, back book management generated an operating profit before tax of £144m, delivering a back book management RoEV of 1.9% (2007: (0.4)%).

In February we reinsured £6.7bn of our UK immediate annuity liabilities to Canada Life International Re. This generated a one-off EEV operating profit before tax of £119m mainly due to the impact of lower risk discount rates arising from the reduction in longevity risk.

Claims levels across our pensions and with profits portfolios continue to trend downwards and are in line with our strengthened long-term assumptions. Claims levels of unit-linked bonds, driven by market volatility and recent Capital Gains Tax changes, are consistent with the short-term lapse provision set up at the year-end.

Tax variances were positive £24m, reflecting favourable experience from tax arrangements and reserve changes.

All long term assumptions are reviewed at the end of each year. 

Capital and cash generation

Central to our strategy is the writing of capital-efficient new business.  We have reduced new business strain by 14% to £131m (2007: £153m) while growing sales volumes. New business strain as a proportion of PVNBP improved to 1.5% (2007: 1.9%) and is comfortably covered by capital and cash flows from our existing business, which were constant at £263m (2007: £265m). This has contributed to the 25% increase in core EEV capital and cash flow generation to £143m (2007: £114m).

In back book management, the UK immediate annuity reinsurance transaction generated additional EEV capital and cash flows, mainly arising from releases of reserves.  

Operating capital and cash generation increased by 74% to £250m (2007: £144m).  After allowing for the adverse investment variances in the period, total EEV capital and cash generation fell by 13% to £181m (2007: £207m).

We have proposed an interim dividend of 4.07p per share. This represents growth of 7% and is consistent with the Group's progressive dividend policy.

IFRS

IFRS underlying profit before tax strengthened by 58% to £345m during the first half, due primarily to the annuity reinsurance transaction that generated profits of £105m. Adjusting for this and other one off items, normalised underlying profit was 13% higher at £247m (2007: £219m).  IFRS profit before tax attributable to equity holders increased by 219% to £201m.

As reported in our Q1 Interim Management Statement we restructured a sub fund of Standard Life Investments (Global Liquidity Funds) plc during the period. The total cost before tax to the Group associated with the restructuring was £66m5 (£40m after tax and release of provision previously recorded). £27m of the total costs related to the fair value movement on assets brought directly on to the balance sheet and is included in the underlying profit for the period. The remaining costs are associated with the volatility arising on the measurement of the subordinated debt and backing assets, and one off non-operating items and, are therefore excluded from the underlying profit. 

Balance sheet strength

As at 30 June 2008, Group Embedded Value had decreased by only 3% to £6.0bn (31 December 2007: £6.2bn), representing an embedded value per share of 277p (31 December 2007: 285p), despite the negative impact of falling financial markets.

The Financial Groups Directive (FGD) surplus of £3.5bn as at 30 June 2008 (31 December 2007: £3.6bn) has been insensitive to equity market movements, with a period end solvency cover of 206% (31 December 2007: 166%).  This insensitivity of the FGD surplus reflects the unique structure of the Group post Demutualisation as well as the impact of the hedges we have put in place.  FGD solvency is insensitive to a further 20% fall in equity markets, with the surplus reducing by less than £0.1bn. A 30% fall in equity markets would result in an FGD surplus of £2.6bn, while a 40% fall would result in a surplus of £1.9bn.

Standard Life's total investment (including third party funds) in the asset backed securities markets across both short-term treasury instruments and long-term fixed interest is approximately £6.3bn or 3.9% (31 December 2007: £7.7bn or 4.6%) of Group assets under administration, predominantly in UK securities. The overall level of asset backed securities has reduced compared to 31 December 2007 as a result of a number of securities reaching maturity. The Group has continued actively to manage its exposure to asset backed securities and the portfolio remains a high quality credit portfolio with no direct exposures to the US mortgage market, minimal exposure to leveraged structures, no current direct exposure to the Monolines and very modest exposure to credit within a Monoline wrapper.  Following the fund restructure previously reported, shareholder funds have a total exposure of £119m6 (31 December 2007: £27m) to assets within a Monoline wrapper or leveraged structures, representing 0.07% (31 December 2007: 0.02%) of Group assets under administration.

Outlook

Despite the continuing difficult market conditions, the outlook for our net flows, sales and profitability remains positive.

In the UK we remain confident about the prospects for our pensions business.  A significant proportion of the new business we write is driven by the consolidation of existing assets. Whilst this will continue to underpin future activity levels, reduced market values are depressing incoming transfer values to SIPPs and Group schemes. We have a number of enhancements planned for the second half of the year to build upon our market-leading SIPP proposition. In addition, we expect our strong Group pensions business to continue to benefit from opportunities in the defined contribution and bundled product markets, as well as from a general flight to quality. In contrast, the short-term industry outlook for sales of investment products to retail customers in the UK is challenging due to market volatility and the impact of the Capital Gains Tax changes on bonds. Overall in the UK, we remain confident in our ability to outperform the market in the profitable segments in which we operate, generating attractive rates of return on our investments.

Turning to our overseas businesses, we expect to continue the turnaround in our Canadian operations seen in the first half, with growth boosted by further improvements in our product offering, strengthened distribution and an enhanced market profile. In addition, we expect further strong growth in our Asia Pacific joint ventures. The extension of our distribution network, continued recruitment of agents, greater penetration of existing markets and continued product development will drive progress. In contrast, market conditions in Europe continue to be difficult and, in the absence of a restoration of confidence in investment markets, we expect sales growth to be significantly slower than in 2007.

Standard Life Investments is currently confronting a more difficult industry environment than for some time. Nevertheless, its bias towards institutional investors, which account for 78% of third party assets, its strong investment performance track record and proven ability to win mandates, leave us with confidence that it will continue to outperform its peer group.  

Overall, we are continuing to work to increase our core return on embedded value in addition to extracting efficiency gains and investing in those areas which offer us attractive opportunities for growth.

For a PDF of the full Interim Results, including a PDF version of this Press Release, please click here:

http://www.rns-pdf.londonstockexchange.com/rns/7293A_-2008-8-6.pdf  For further information please contact:

Institutional Equity Investors:

Gordon Aitken                                    0131 245 6799

Duncan Heath                                    0131 245 4742

Paul De'Ath                                        0131 245 9893

Retail Equity Investors:

Computershare                                  0845 113 0045

Media:

Barry Cameron                                  0131 245 6165 / 07712 486 463

Neil Bennett (Maitland)                      020 7379 5151 / 07900 000 777

Debt Investors:

Andy Townsend                                  0131 245 7260

Newswires and online publications

A conference call will take place for newswires and online publications from 8.15-9.15am. Participants should dial [phone] and quote Standard Life Media Call. The conference ID number is 801459.

Investors and Analysts

A presentation to investors and analysts will take place at 10.00am at UBS Ground Floor Conference Centre, 1 Finsbury Avenue, London. A live webcast of the presentation and the presentation slides will be available on the Group's website. In addition a replay will be available on this website later today.

There will also be a live listen only teleconference to the investor and analyst presentation at 10.00am.  Investors should dial [phone]. Callers should quote Standard Life Interim Results. The conference ID number is 57095041. A replay facility will be available for two weeks, UK Investors should call 0800 953 1533, and overseas investors should dial [phone]. The pass code is 57095041#.

Notes to Editors:

• Present value of new business premiums.

• Certain products are included in both life and pensions and investment flows. Therefore, at a Group level, an elimination adjustment is required to remove any duplication.

• Excludes development costs directly related to back book management initiatives.

• Excludes specific costs attributable to back book management.

• In our Interim Management Statement released on 30 April 2008 we reported that the expected net of tax impact of the Global Liquidity Funds restructuring would be £37m. This represented the after tax effect of £62m restructuring costs less the £10m guarantee already provided for by Standard Life plc as at 31 December 2007. Since 30 April 2008 an additional £4m cost has been recognised representing the fair value movements for the period to 30 June 2008. The total cost of £66m has been recognised by our investment management business during the period.

• At 30 June 2008	Policyholder	Other 3rd Party	Shareholder
  	£m	£m	£m
  US Sub-Prime RMBS	-	-	-
  US Alt-A	-	-	-
  CDO/CSO/CLO1	6	-	-
  Wrapped Credit	213	139	58
  Direct Monoline	-	-	-
  SIVs2	18	37	61
  Total	237	176	119

1 Total direct exposure to collateralised debt obligations (CDOs) comprises a £6m exposure to collateralised synthetic obligations (CSOs). Entire exposure to AAA rated CSO underlying collateral investment grade corporate exposure.

2 Includes Whistlejacket exposure of £11m held in Medium Term Notes (MTN) and senior notes. Other SIV exposure is either bank sponsored or Sigma (Gordian Knot).

 

END

 

 

IR FKAKNBBKKKFK