Preliminary Results 2008

RNS Number : 7370O

Standard Life plc

12 March 2009

 



For immediate release

Standard Life plc

2008 Preliminary Results

12 March 2009 

A solid performance in difficult market conditions

Operating profit resilient in difficult markets

-	EEV operating profit before tax up 6% to £933m (2007: £881m), generating a return on embedded value of 10.9% (2007: 11.5%) after making provision for customer payments to the Pension Sterling Fund

Cash flow robust with strong coverage of new business strain 

-	Core capital and cash generation after tax £303m (2007: £334m)
-	Full year dividend of 11.77p, representing 2.3% growth

Balance sheet strength maintained

-	Group Embedded Value per share of 286p (2007: 285p) stable in the face of challenging markets
-	IFRS equity per share excluding intangible assets and minority interests of 151p (2007: 148p), with IFRS profit after tax attributable to equity holders of £100m (2007: £465m)
-	Financial Groups Directive surplus of £3.3bn (2007: £3.4bn) after allowing for the payment of the final dividend

Efficiency target achieved

-	Annual efficiency target of £100m cost savings achieved one year early, and a further target of £75m set

Group Chief Executive Sir Sandy Crombie said:

'Standard Life has delivered a solid performance in 2008, against a backdrop of the challenging economic conditions in which we have been operating. 

'We have announced good profits, healthy capital and cash generation, and have achieved efficiency improvements a year ahead of target. Our capital position is among the strongest in the industry and is relatively resilient in the event of further deterioration in market conditions.

'Whilst we are pleased with this performance, our culture of continuous improvement is underlined by the next phase of efficiency savings we have set for the business today. A further £75m of annual savings are planned by the end of 2010 by driving further operational excellence, which also underpins our market-leading service to customers.

'With the outlook for world financial markets remaining difficult, we will continue to follow our proven conservative strategy, with a focus on driving efficiencies while pursuing growth to an extent consistent with the prevailing conditions and our limited appetite for capital exposure.'

Unless otherwise stated, all comparisons are in Sterling and are with the twelve months ended 31 December 2007.

EEV operating profit		2008  £m	2007  £m
Covered business by region
UK		657	606
Canada		215	178
Europe		69	26
Asia Pacific		(35)	(12)
HWPF TVOG		11	42
Covered business operating profit		917	840
Covered business by source
New business contribution   In-force business		264	345
expected return on existing business		431	401
experience variance		64	(48)
assumption changes		195	148
Other covered		(37)	(6)
Total covered business operating profit		917	840
Investment management		48	48
Banking		26	32
Healthcare		11	13
Group Corporate Centre costs		(50)	(57)
Other non-covered business		(19)	5
Operating profit before tax		933	881
Tax on operating profit		(284)	(264)
Operating profit after tax		649	617
(Loss)/profit after tax		(134)	587
Diluted EEV operating EPS		29.8p	28.3p
IFRS underlying profit	2008  £m		2007  £m
Life and pensions by region
UK	184		395
Canada	(102)		168
Europe	65		63
Asia Pacific	(35)		(12)
Total life and pensions underlying profit	112		614
Investment Management	42		83
Banking	26		32
Healthcare	11		13
Group Corporate Centre costs	(50)		(57)
Other	13		29
Total underlying profit before tax	154		714
Tax on underlying profit	100		11
Underlying profit after tax	254		725
Profit attributable to equity holders after tax	100		465
Diluted IFRS underlying EPS	11.7p		33.3p

For more information please refer to the Basis of preparation in Section 1.9 and the IFRS pro forma reconciliation of Group underlying profit to profit for the period in Section 3 of the Preliminary Results 2008.  

  Assets under administration

Standard Life is an asset managing business and net flows and assets under administration (AUA) are key drivers of shareholder value. AUA are gross assets that the Group administers for customers, including both those managed by the Group and those placed with third party managers.

At the end of December 2008 the Group had total assets under administration of £156.8bn 
(2007: £169.0bn). Positive net flows of £2.4bn across the Group included life and pensions net inflows of £2.4bn and third party investment management net inflows of £3.4bn. Consolidation adjustments [1] amounted to £1.8bn. We have managed our gross mortgage exposure within our banking operation during the current period of difficult credit market conditions, with gross mortgages under management reducing from £11.3bn to £9.7bn, a net outflow of £1.6bn during the course of the year.  

Falling equity, property and fixed interest security values have reduced assets under administration by £14.6bn during 2008. This equates to 9% of opening assets under administration and compares favourably with the reduction in financial markets over the same period.

Strong growth in operating profits

EEV operating profit before tax, excluding the impact of the cash injection into the Pension Sterling Fund announced on 11 February 2009, increased by 18% to £1,041m (2007: £881m), delivering a return on embedded value (RoEV) of 12.3% (2007: 11.5%). This is ahead of the guidance given in our Q4 new business results announcement on 28 January 2009. Including the impact of the cash injection into the Pension Sterling Fund, EEV operating profit before tax increased by 6% to £933m, delivering an RoEV of 10.9%.

We report our RoEV under three components: core, efficiency and back book management.

	Breakdown of RoEV		Breakdown of EEV  Operating profit (£m)
	2008	2007	2008	2007
Core	8.0%	10.2%	685	791
Efficiency	0.8%	1.5%	64	109
Back book management	2.1%	(0.2%)	184	(19)
RoEV	10.9%	11.5%	933	881

Core return

Core return comprises new business contribution, expected return, development costs for covered 
business [2] and normalised IFRS underlying profit for non-covered business [3,4].

Core EEV operating profit before tax was 13% lower at £685m (2007: £791m) delivering a core RoEV of 8.0% (2007: 10.2%). This has been principally driven by new business contribution, which was 23% lower at £264m (2007: £345m), due to reduced sales volumes and changes to our business mix against challenging markets. Our key new business metrics of internal rate of return (IRR) and discounted payback period were 16% (2007: 19%) and 8 years (2007: 8 years) respectively, the slight decrease in IRR having been driven by reduced asset values and product mix. The continued relative strength of these metrics reflects the benefit of our capital-lite approach.

We have continued to invest in our market leading SIPP and Wrap propositions in the UK and our fast growing Asian operations. This has led to an increase in development expenses and IFRS losses for our Asia Pacific operations, the impact of which has been partly offset by a further reduction in Group Corporate Centre costs to £50m (2007: £57m).

   Continued drive for efficiency

Efficiency comprises covered business maintenance expense variances and assumption changes. In 2008 efficiency savings contributed 0.8% to our RoEV (2007: 1.5%).

In March 2007 we announced the Continuous Improvement Programme to reduce underlying costs by £100m by the end of 2009. During 2008 we have built on the strong performance achieved in 2007, with the continued integration of UK financial services. This has enabled us to deliver the full £100m of efficiency savings one year early. The efficiency savings achieved in 2008 have been reflected in a £64m benefit to embedded value operating profit (2007: £109m). 

Following the early delivery of the Continuous Improvement Programme benefits we are announcing today the next phase of efficiency savings. This has a target of achieving a further £75m of annual efficiency savings over the next two years through operational excellence.

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 year, back book management generated an operating profit before tax of £184m (2007: loss of £19m), delivering a back book management RoEV of 2.1% (2007: (0.2%)).

In February 2008 we reinsured £6.7bn of our UK immediate annuity liabilities to Canada Life International Re. This generated a one-off benefit to EEV operating profit before tax of £119m. Other positive factors within the back book management result include a £96m EEV profit from the release of deferred annuity reserves in the UK (2007: £191m [5]) following an ongoing review of annuity data, as well as experience variances and operating assumption changes in respect of tax, mortality and morbidity. Offsetting these positive factors, we have made modest revisions to lapse and paid up assumptions, relating to UK pension and Canadian products in light of more difficult economic conditions. In the UK, a strengthening of paid up assumptions reflects the decision of a number of customers to defer payment into their pension schemes during the current volatile market conditions, with assumptions regarding longer-term lapse trends remaining broadly unchanged. Overall, lapse-related experience variances and assumption changes have reduced embedded value operating profit by £39m.  

As announced on 11 February 2009, we have made a cash injection into the Pension Sterling Fund to reverse a 4.8% valuation adjustment relating to 2008 mark to market movements that was made to the fund earlier in 2009. This injection, which has been reflected as a £108m [6] charge within 'other' experience variances, was made in light of feedback from customers and key business partners and our own review of the fund information we provided, and is consistent with our ongoing commitment to treat customers fairly.

Capital and cash generation

Overall, operating capital and cash generation amounted to £423m (2007: £563m).  

Core capital and cash generation was 9% lower at £303m (2007: £334m). Capital and cash generation from new business and the expected return from existing covered business have remained largely unchanged at £322m (2007: £324m), despite the tough economic environment and the cash impact of accelerated reserve releases in 2007. This demonstrates the resilience of our capital-lite approach to writing new business, with capital and cash generated from existing business comfortably covering new business strain by more than two times. The impact of these factors has been offset by increased development expenses in respect of our covered businesses and lower returns from cash held by Group.  

Capital and cash generated from efficiency savings amounted to £7m (2007: £20m). Capital and cash generated from back book management amounted to £113m (2007: £209m). This principally reflects the reinsurance of UK immediate annuity liabilities in February 2008 and a reserve release in respect of UK deferred annuities. These positive factors have been partly offset by the £78m post tax impact of the cash injection into the Pension Sterling Fund that we announced in February 2009.  

After allowing for adverse investment variances and other non-operating items in the period, total EEV capital and cash generation was £336m (2007: £600m).

The Board proposes a final dividend of 7.70p per share, making a total of 11.77p for 2008, an increase of 2.3%. This reflects the solid progress made during the year. Looking forward the Group will continue to apply its existing progressive dividend policy taking account of market conditions and the Group's financial performance.

IFRS

Normalised underlying profit excluding the impact of market volatility on Canadian surplus assets and reserves was £349m (2007: £432m). As highlighted in our Q4 2008 new business press release on 28 January, our IFRS profitability has been adversely affected by the weakness and volatility of investment markets during 2008. The impact of this volatility has been significant within our Canadian operations due to the way Canadian life companies typically structure non-segregated funds, with assets backing both policyholder liabilities and the shareholder surplus. Mark to market value adjustments in respect of surplus assets, coupled with reserve increases in respect of tax and guarantees have reduced Canadian normalised underlying profit by £187m compared with the prior year. Under EEV this volatility is treated as a non-operating item.

Including the impact of this volatility normalised underlying profit was £206m (2007: £476m). Within this, the UK life and pensions profit was £156m (2007: £122m). Other items impacting normalised underlying profit include bond impairments and defaults of £32m, lower management charges due to reduced asset values, and increased new business development costs incurred in respect of our growing Asian franchises.

IFRS underlying profit before tax of £154m (2007: £714m) is after a number of one-off items which are not included in the normalised underlying profit figure. In 2007 these included reserve releases of £138m in respect of PS06/14 and £143m in respect of deferred annuities as well as a strengthening of mortality reserves amounting to £137m. In 2008 these included a £105m benefit arising from the reinsurance of UK immediate annuity liabilities, the impact of which was more than offset by the £102m cash injection into the Pension Sterling Fund and total charges of £124m arising from the restructure of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc and subsequent mark to market movements in associated asset backed securities[7].

Balance sheet strength

Despite falling financial markets Group Embedded Value has increased marginally to £6,245m (31 December 2007: £6,211m), representing an embedded value per share of 286p (31 December 2007: 285p). IFRS equity excluding intangible assets and minority interests has increased to £3,295m (31 December 2007: £3,213m), representing 151p per share (31 December 2007: 148p). 

The Financial Groups Directive (FGD) surplus of £3.5bn as at 31 December 2008 (31 December 2007: £3.6bn) has been largely insensitive to market movements, with a year end solvency cover of 218% (31 December 2007: 166%). The relative 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 largely insensitive to a further 30% fall in equity markets from the position at the end of December, with the surplus maintained at £3.3bn. In the event of a 40% fall in markets from the year-end position our FGD surplus would remain strong at £2.9bn. At the end of February 2009 the FGD surplus was estimated to be £3.4bn. After allowing for the payment of the final dividend, our year end FGD surplus would be £3.3bn (2007: £3.4bn).

The Heritage With Profits Fund (HWPF) residual estate amounted to £0.5bn as at 31 December 2008 (31 December 2007: £1.5bn). The reduction in the estate over the year largely reflects both the direct and indirect effects of movements in corporate debt, property and equity markets, the impact of which has been exaggerated by technical changes in the way that realistic liabilities are calculated. The impact on the residual estate of further falls in equity markets continues to be mitigated by the hedges we have in place. The impact of most other adverse asset movements would, in the first instance, be met by policyholders with indirect impacts on shareholders via higher guarantee costs, and hence higher burnthrough cost. Shareholder exposure is also limited by the structure of the capital support mechanism set up at Demutualisation, with shareholder support being obtained by withholding the furthest out cash transfers from the HWPF to shareholders. At the end of February 2009 the HWPF residual estate was estimated to be £0.3bn.

Shareholders are exposed to debt securities which back annuity liabilities in the UK and Europe and the liability in respect of longevity risk reinsured from SLAL's HWPF. These debt securities amount to £1.5bn and comprise £0.8bn of government and government backed bonds and £0.7bn of other corporate bonds. There were no defaults on the debt securities in this portfolio in 2008, however in light of the economic conditions the provision for future defaults within the valuation of liabilities has been increased to £40m (31 December 2007: £20m), representing a weighted average default assumption into perpetuity for corporate bonds of 87bps (31 December 2007: c37bps).

Debt securities in Canadian non-segregated funds amount to £5.4bn, including £2.2bn of corporate bonds. There were no defaults within this portfolio of debt securities during 2008. We have maintained our Canadian corporate bond default assumption at 36bps while the average quality of the portfolio has increased from A to A+. The overall provision for defaults on bonds in the portfolio amounts to £90m (31 December 2007: £71m).

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 £5.3bn or 3.3% (31 December 2007: £7.7bn or 4.6%) of Group assets under administration, predominantly in UK securities. Of the total of £5.3bn, £1.3bn relates to shareholder funds, of which £1.2bn is AAA rated. The overall level of asset backed securities has reduced compared to 31 December 2007 as a result of a number of securities reaching maturity and also due to market movements. 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 Monolines and very modest exposure to credit within a Monoline wrapper. Following the restructure of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc, shareholder funds have a total exposure of £83m (31 December 2007: £27m) to assets within a Monoline wrapper or leveraged structures, representing 0.3% (31 December 2007: 0.1%) of shareholder financial assets.

Outlook

The economic environment continues to be very challenging and the outlook for markets remains uncertain.

While market conditions mean that the outlook for retail savings is likely to remain subdued, we continue to see opportunities in the profitable markets in which we operate, including group pensions and fixed income investment mandates.

As an asset managing business our revenues will inevitably be impacted by lower financial market levels. Our ongoing focus on efficiency will help mitigate the impact of this on profitability. In 2009 the Group will benefit from expense efficiencies achieved during the last year and will make a start on the next phase of delivering operational excellence, targeting a total of £75m of annual efficiency savings by 2010.

In these conditions Standard Life will continue to pursue a 'capital-lite' strategy and to operate conservatively, ensuring that balance sheet strength and cash generation remain priorities.

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

http://www.rns-pdf.londonstockexchange.com/rns/7370O_-2009-3-12.pdf  For further information please contact:

Institutional Equity Investors		Retail Equity Investors
Gordon Aitken	0131 245 6799	Computershare	0845 113 0045
Duncan Heath	0131 245 4742
Paul De'Ath	0131 245 9893
Media		Debt Investors
Barry Cameron	0131 245 6165/07712 486 463	Andy Townsend	0131 245 7260
Nicola McGowan	0131 245 4016/07872 191 341	Alan Coutts	0131 245 0201
Paul Keeble	0207 872 4481/07712 486 387
Neil Bennett (Maitland)	0207 379 5151/07900 000 777

Newswires and online publications

A conference call will take place for newswires and online publications from 8.00-9.00am. Participants should dial [phone] and quote Standard Life Preliminary Results 2008. The conference ID number is 827548.

Investors and Analysts

A presentation to investors and analysts will take place at 9.30am at Merrill Lynch Financial Centre, 2 King Edward Street, 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 9.30am. Investors in the UK should dial 0844 4936747, and overseas investors should call [phone]. Callers should quote Standard Life Preliminary Results 2008. The conference ID number is 86267817. A replay facility will be available until 25 March 2009. UK investors should call 0800 953 1533, and overseas investors should dial [phone]. The pass code is 86267817#.

  Notes to Editors:

[1]	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.
[2]	Excludes development costs directly related to back book management initiatives.
[3]	The only difference between IFRS normalised underlying profit and IFRS underlying profit for non-covered business arises within investment management. Fair value movements of assets brought directly on to the balance sheet following the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc, are included within IFRS underlying profit, but are excluded from IFRS normalised underlying profit.
[4]	Excludes specific costs attributable to back book management.
[5]	In 2007 back book management profits included a £191m benefit from improved data modelling for UK deferred annuities.
[6]	The £108m charge to embedded value operating profit arising from the cash injection into the Pension Sterling Fund is the pre-tax equivalent of the £78m post-tax charge disclosed in our RNS dated 11 February 2009, grossed up at a rate of 28%.
[7]	In our Interim Management Statement released on 30 April 2008 we reported that the expected net of tax impact of the restructuring of a sub-fund of Standard Life Investments (Global Liquidity Funds) plc 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 £101m cost has been recognised representing the fair value movements for the period to 31 December 2008. The total cost to the Group of £163m has been recognised in our investment management business (£90m) and in our UK life and pensions business (£73m). Of the total cost of £163m, £124m has been reflected within the 2008 underlying IFRS result. The cash cost to the Group was £24m before tax (£17m after tax) with the balance of the cost being due to marked-to-market movements.

 

END

 

 

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