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Standard Life plc - Annual Report and Accounts 2007
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Group overview

Financial highlights 2007 2006 Movement
New business PVNBP1,2,3 £16,423m £14,599m 13%
New business contribution4 £345m £205m 68%
PVNBP margin4,5 2.1% 1.4% 0.7% points
EEV operating profit before tax4 £881m £614m 43%
Return on embedded value4 11.5% 8.9% 2.6% points
Diluted EEV operating EPS4 28.3p 20.7p 37%
IFRS underlying profit before tax4 £714m £540m 32%
IFRS profit after tax4 £576m £579m (1%)
EEV £6,211m £5,608m 11%
Investment total funds under management £143.4bn £132.1bn 9%
Group capital resources6 £9.2bn £7.9bn 16%
Group EEV capital and cash generation4,7 £600m £262m 129%
Full year dividend per share8 11.5p 5.4p 6.5%

Generating sustainable, high quality returns for our shareholders and building valuable customer relationships

Group RoEV: 7.4% in 05 (note 4); 8.9% in 06 (note 4); 11.5% in 07We have delivered strong results and significant progress against our key targets in 2007 - our first full year as a listed company following demutualisation in 2006. Our target for return on embedded value (RoEV) set out at the time of our initial public offering (IPO) in July 2006 was to increase RoEV to between 9% and 10% in 2007 and increase it further in subsequent years. Our RoEV for 2007 at 11.5% has exceeded our target range, with an increase of 2.6% points from 8.9% in 2006.

EEV operating profit before tax for the year increased by 43% to £881m. EEV operating profit before tax: £395m in 05 (note 4); £614m in 06 (note 4); £886m in 07We choose to analyse our EEV operating profit before tax in the three components which reflect the focus of our business effort - core9, efficiency10 and back book management11. Our core profits were £791m compared to £550m in 2006, boosted by the continued strong improvement in worldwide life and pensions new business contribution (NBC) which increased by 68% to £345m. Our efficiency profits rose from £95m to £109m, reflecting the ongoing review of our cost base as part of our Continuous Improvement Programme (CIP) and other initiatives. Back book management returns improved from a loss of £31m in 2006 to a loss of £19m in 2007, reflecting efforts made to reduce future risks, particularly in respect of lapses, mortality and morbidity, and to identify areas of value to the shareholder as a result of data cleansing, modelling improvements and the adoption of PS06/14 'Prudential changes for insurers'12.

The increase in NBC reflects not only the 13% increase in worldwide sales volumes but also improvements in margins and product mix, which are demonstrated by the increase in the PVNBP margin from 1.4% to 2.1%. The improvement in margins across all of our key global business operations was due to the enhanced profitability and capital efficiency of our products coupled with a more favourable product mix. Our UK life and pensions business achieved a new business margin of 2.1%, rising from 1.5% in 2006 and exceeding our target of 2.0% for 2008, whilst delivering an internal rate of return (IRR) of 20%. In addition, our diversified distribution channels and award winning customer service also continue to deliver strong results. We achieved a 37% improvement in diluted EEV operating earnings per share (EPS) to 28.3p.

IFRS underlying profit before tax increased by 32% to £714m. During the year we paid dividends totalling £197m to shareholders, made up of a final dividend for 2006 of £114m (5.4p per share) and an interim dividend for 2007 of £83m (3.8p per share). We have proposed a final dividend for 2007 of 7.7p per share, approximately £167m in total, to be paid in May 2008. Dividends in relation to the 2007 financial year including the interim would therefore be 11.5p per share or £250m in total. This represents an implied growth of 6.5% and continues the Group's progressive dividend policy. Dividend cover in 2007 of 2.9 times compares to 2.2 times for our first dividend paid in May 2007 in respect of our performance after demutualisation from the period 10 July 2006 to 31 December 2006. Dividend cover is calculated as IFRS underlying profit after tax and minority interest divided by the current year interim dividend plus the proposed final dividend.

Delivering capital efficiency and generating cash

Group EEV cash generation: (-£17m) in 05; £262m in 06 (note 4); £605m in 07The Group's financial strength is reflected by the improvement in capital and cash generation in 2007 and the increase in our regulatory capital resources as at 31 December 2007. EEV capital and cash generation after tax in total has increased by 129% to £600m mainly due to the release of reserves arising from the improved modelling of deferred annuities, the implementation of PS06/14, and the improvements in new business strain (NBS) and expected return. We have reduced NBS by 26% to £225m while growing sales volumes by 13%, reducing the NBS margin to 1.4% from 2.2% in 2006. In addition, the expected capital and cash flows from existing business of £549m (2006: £436m) were more than double NBS, demonstrating our commitment to capital lite products. Greater capital efficiency means that we are better equipped to continue with product development and innovation for future growth. Our regulatory capital resources have increased from £7.9bn to £9.2bn, giving solvency cover of 166% of capital resources requirements. The reduction from 176% in 2006 reflects a relative increase in the capital resources requirement. In addition, the residual estate of the Heritage With Profits Fund (HWPF) at 31 December 2007 was £1.5bn compared with £1.3bn in 2006. We continue to focus on ways to increase the value of our Group and become more capital efficient. On 14 February 2008, we announced that we had reinsured more than half of our pre demutualisation UK immediate annuity portfolio to Canada Life International Re, a subsidiary of Great-West Lifeco. This amounts to £6.7bn of UK immediate annuity liabilities and significantly reduces the longevity risk exposure for our shareholders. The transaction will also have the effect of releasing capital and cash from reserves and reducing capital requirements. We also expect there to be a one off increase in embedded value operating profit before tax of at least £100m in 200813.

Leveraging our investment management expertise and performance

Our investment management business, Standard Life Investments, generated a 19% increase in IFRS underlying profit before tax to £83m (2006: £70m). Worldwide third party net new business for our investment management business was up 23% to £7.9bn. Standard Life Investments' total funds under management (FUM) have increased by 9% to £143.4bn including a 24% increase in third party funds under management to £47.7bn. Our money weighted average investment performance was well above median for all time periods from 1 year to 10 years and remains in the top quartile over 3 and 5 years.

Standard Life Investments FUM: 95.7 (Group FUM), 47.7 (3rd party FUM), £143.4bn (total) in 07; 93.6 (Group FUM), 38.5 (3rd party FUM), £132.1bn (total) in 06; 89.7 (Group FUM), 29.1 (3rd party FUM), £118.8bn (total) in 05

Driving for operational excellence

As part of our aim to drive for operational excellence, we have reduced expenses to create a more efficient business. Maintaining Group Corporate Centre (GCC) costs in 2007 at the pre demutualisation level of £58m in 2005 was one of the specific targets we communicated at the time of the IPO in July 2006. We have succeeded in meeting this target by reducing GCC costs to £57m (2006: £89m). At the time of flotation we also announced that we would reduce UK life and pensions expenses by £30m by the end of 2007. We have achieved these cost efficiencies, reducing expenses by £31m, excluding the cost of new products launched since 2005, including Wrap.

Last year we announced a Continuous Improvement Programme to reduce underlying costs by a further £100m, net of growth, by the end of 2009. In the second half of 2007 we achieved savings of £27m, compared with a target of £15m. In 2007 we also established a UK financial services division which integrates our UK life and pensions, banking and healthcare businesses and will help drive synergies across the Group and deliver higher profitability. We also continue to take a group-wide approach to the sourcing for key processes and to product development, including increased use of shared services. Through efficiency and productivity we said that we would achieve a reduction in the underlying headcount requirement to service our existing levels of business by around 1,000 by 2009. At 31 December 2007 Group headcount was 10,379, a reduction of 362 from 31 December 2006, despite the creation of 210 additional jobs from the investment in UK SIPP and Wrap.

1 The PVNBP new business sales are different from those previously published in the full year new business press release issued on 30 January 2008 as they incorporate year end non-economic assumption changes.
2 The 2007 PVNBP figures include £848m of mutual funds sales. The 2006 PVNBP figures have been restated to reflect the inclusion of mutual funds of £336m.
3 The Group PVNBP percentage change figures include percentage change figures for India which are computed based on the percentage movement in the new business of HDFC Standard Life Insurance Company Limited as a whole to avoid distortion due to changes in the Group's shareholding in the joint venture during 2006 and 2007.
4 Prior year results are shown on a pro forma basis.
5 PVNBP margins are NBC divided by PVNBP expressed as a percentage based on the underlying unrounded numbers.
6 Group capital resources are based on draft regulatory returns.
7 Net of tax.
8 The implied growth for the dividend per share is calculated on a pro rata dividend of 5.4p paid in May 2007 in respect of our post demutualisation performance in 2006.
9 Core includes new business contribution, expected return and development costs for covered business excluding those development costs directly related to back book management initiatives and, for non-covered business, IFRS underlying profit excluding specific costs attributable to back book management.
10 Efficiency includes covered business maintenance expense variances and assumption changes.
11 Back book management 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 attributable to back book management.
12 For further detail on PS06/14 please refer to Note 29 of the financial statements Insurance contract liabilities, non-participating investment contract liabilities, participating investment contract liabilities and reinsurance assets in the IFRS financial statements.
13 The expected one off benefit to pre tax embedded value operating profit has been calculated on the basis of the EEV methodology used by Standard Life as at the end of 2007.

Please refer to the basis of preparation section in the business review and the glossary.