12th Mar 2008 07:01
Standard Life plc12 March 2008 Standard Life plc 2007 Preliminary Results - 12 March 2008 Record results beating operational and profitability targets for 2007 Strong outperformance lays the foundations for further growth Financial Highlights: • EEV operating profit before tax up 43% to £881m (2006: £614m), with diluted EEV operating EPS up 37% to 28.3p (2006: 20.7p) • Return on embedded value increased by 2.6% pts to 11.5% (2006: 8.9%) • EEV capital and cash generation after tax up 129% to £600m (2006: £262m) • Group EEV up 11% to £6,211m (31 December 2006: £5,608m), equivalent to 285p per share (2006: 258p) • New business contribution before tax up 68% to £345m (2006: £205m) • PVNBP1 margin increased by 0.7% pts to 2.1% (2006: 1.4%) • IFRS underlying profit before tax up 32% to £714m (2006: £540m), with diluted IFRS underlying EPS up 53% to 33.3p (2006: 21.8p) • IFRS profit before tax attributable to equity holders up 12% to £509m (2006: £453m) • Full year dividend of 11.5p, implying growth of 6.5% Group Chief Executive Sandy Crombie said: "Standard Life has delivered a very strong set of results in its first full yearas a listed company. We have beaten all our profitability and efficiencytargets for 2007 and achieved record sales, a platform which we will build uponfor further growth in years to come. "Our distinctive 'capital lite' approach to designing and distributing productshas allowed us to more than double the capital and cash generated in thebusiness. "Against an uncertain economic backdrop we have made a good start to 2008 andare working to improve our core profitability. Our confidence is based on ourexpertise in managing assets, industry-leading customer service and on-goinginitiatives to improve efficiency." EEV operating profit 2007 Pro forma 2006 £m £mCovered business by regionUK 606 372Canada 178 163Europe 26 45Other (12) (8)HWPF TVOG 42 44 Covered business operating profit 840 616 Covered business by sourceNew business contribution 345 205 In-force business expected return 401 392 experience variance (48) 122 assumption changes 148 (58)Other covered (6) (45) Total covered business operating profit 840 616 Investment management 48 42Banking 32 38Healthcare 13 12Group Corporate Centre costs (57) (89)Other 5 (5) Operating profit before tax 881 614 Tax on operating profit (264) (185) Operating profit after tax 617 429 Diluted EEV operating EPS 28.3p 20.7p IFRS underlying profit 2007 Pro forma 2006 £m £mLife and pensions by regionUK 395 230Canada 168 168Europe 63 108Other (12) (9) Total life and pensions underlying profit 614 497 Investment Management 83 70Banking 32 38Healthcare 13 12Group Corporate Centre costs (57) (89)Other 29 12Total underlying profit before tax 714 540 Tax on underlying profit 11 (66) Underlying profit after tax 725 474 Diluted IFRS underlying EPS 33.3p 21.8p Basis of preparation The results for the year ended 31 December 2006 have been calculated usingassumptions to show the results which would have been attributable toshareholders had the Company been owned by shareholders under the terms of theScheme of Demutualisation (the Scheme) throughout the year. The Scheme did nottake effect until 10 July 2006. For further information please refer to thebasis of preparation in section 1.7 of the full Preliminary Results document. Profitability targets exceeded In 2007, European Embedded Value (EEV) operating profit before tax increased by43% to £881m (2006: £614m), delivering a return on embedded value (RoEV) of11.5% (2006: 8.9%) that has significantly exceeded the 9-10% target set for theyear. This strong increase in RoEV has been driven by growth in new businessprofitability, the successful achievement of our cost efficiency targets and aresilient performance from our investment management business. Going forward, we intend to report our RoEV under three key components: core,efficiency and back book management. This categorisation is in line with how wefocus our business effort and the key value drivers. We have seen animprovement in each component during the year, with core rising by 2.1% pointsto 10.2% in 2007. Breakdown of RoEV 2007 2006 MovementCore 10.2% 8.1% 2.1%Efficiency 1.5% 1.2% 0.3%Back book management (0.2%) (0.4%) 0.2%RoEV 11.5% 8.9% 2.6% Core return Core comprises new business contribution, expected return on in-force business,development costs for covered business2 and IFRS underlying profit fornon-covered business3. The core RoEV of 10.2% in 2007 (2006: 8.1%) demonstratesthe strength of our business model. 2007 was a record-breaking year for new business volumes. Worldwide PVNBPincreased by 13% to £16.4bn (2006: £14.6bn), driven by strong growth in our UK,European and Asia Pacific joint venture life and pensions operations. Worldwideinvestment net inflows in our investment management business increased by 39% to£6.4bn (2006: £4.6bn) and gross mortgage lending increased by 22%. This strong growth and a continued shift towards both improved new business costefficiencies and a more profitable product mix have led to a further increase innew business margin to 2.1% (2006: 1.4%). Our UK life and pensions operationshave produced a margin of 2.1%, beating the 2008 margin target of 2.0% one yearearly. The 68% increase in new business contribution to £345m (2006: £205m) andreduced Group Corporate Centre costs have been the key drivers behind the 44%increase in our core result to £791m (2006: £550m). All efficiency targets exceeded Efficiency comprises covered business maintenance expense variances andassumption changes. We have exceeded each of the three cost efficiency targets that were set for theyear: • We targeted a reduction in Group Corporate Centre costs to the pre-demutualisation level of £58m. We successfully reduced these costs to £57m in 2007 from £89m in the prior year. As highlighted above, this has been reflected in our core return. • We have reduced UK life and pensions expenses by £31m compared to 2005 levels, exceeding the target of £30m which we set at the time of demutualisation. This reduction in the UK cost base excludes the cost of new products launched since flotation, including Wrap. • At our Preliminary Results last year we announced a Continuous Improvement Programme to reduce underlying costs by a further £100m by the end of 2009. In 2007 we achieved savings of £27m compared with a target of £15m. A key initiative was the establishment of a UK financial services division which integrated our UK life and pensions, banking and healthcare operations. This will help drive future synergies across the Group and deliver higher profitability. The achievement of our cost savings targets in respect of UK covered businessalong with additional efficiency initiatives across our Canadian and Europeanoperations have been reflected in a £109m benefit to embedded value operatingprofit during the year (2006: £95m benefit) arising from maintenance expenseexperience variances and operating assumption changes. Looking ahead, we remain on track to deliver against the remaining cost savingstargets of our Continuous Improvement Programme. Active back book management We are committed to driving increased value from management of our back book.This category includes all non-expense related operating variances andassumption changes for covered business plus those development costs directlyrelated to back book management initiatives and, for non-covered business,specific costs attributed to back book management. In total, management of ourin-force book had a negative financial impact of £19m (2006: negative £31m), andreduced RoEV by 0.2% points. We have significantly strengthened our persistency assumptions in the UK andEurope. Adverse lapse experience and strengthened operating assumptions havereduced embedded value operating profit by £249m (2006: £266m charge), after anoffsetting positive effect in Canada. Lapse trends across our pensions and with profits life portfolios reflecting thechanges resulting from A-day and demutualisation have now been established. Asa consequence we have considered it prudent to strengthen our lapse assumptionsup to the level of our current experience. In recent months, and in line with the industry, we have experienced an upturnin lapse activity in UK onshore unit-linked bonds, reflecting concerns about theoutlook for commercial property, general market volatility and uncertaintyregarding capital gains tax proposals. We have therefore significantlystrengthened onshore unit-linked bond long-term lapse assumptions and have setup a short-term provision to cover the current period of uncertainty untillonger-term lapse trends have been established. We have strengthened our mortality assumptions across our UK and Canadianoperations by £100m to reflect a more prudent view of future improvements inlife expectancy. Significantly, on 14 February 2008 we reinsured £6.7bn of UKimmediate annuity liabilities. As outlined at the time, this transaction willdeliver a one-off increase in embedded value operating profit of at least £100m4and a release of cash from reserves in 2008, a significant reduction inlongevity risk for shareholders, a reduction in our capital requirements and anenhancement to the Heritage With Profits Fund estate. A review of UK group deferred annuity data and valuation methodology resulted ina £191m net benefit to embedded value operating profit. The review of bulkbuy-out annuities and group deferred annuities arising from discontinued finalsalary schemes mainly written during the 1970s and 1980s identified that thereserves proved to be overly prudent when considered in light of the improveddata and the more precise modelling now available. Other positive variances include £42m arising from the reduction in the HeritageWith Profits Fund time value of options and guarantees (HWPF TVOG). A differentiated capital and cash generative strategy A central component of our strategy is to write capital-efficient new business.We have reduced new business strain by 26% to £225m (2006: £303m) while growingsales volumes by 13%. New business strain as a proportion of PVNBP has improvedto 1.4% (2006: 2.2%) and was comfortably covered by capital and cash flows fromour existing business, which increased by 26% to £549m (2006: £436m). Thesefactors have contributed to the 176% increase in EEV capital and cash flowgeneration from our core operating activities of £334m (2006: £121m). Including back book management, where we have been able to accelerate theemergence of cash from future years and efficiency, total EEV capital and cashflow generation increased 129% to £600m (2006: £262m). We have proposed a final dividend of 7.7p per share, making a total dividend of11.5p per share for 2007. This represents implied growth of 6.5%, consistentwith the Group's progressive dividend policy. Balance sheet strength At the end of 2007, Group embedded value had increased by 11% to £6,211m (2006:£5,608m) or to 285p per share (2006: 258p per share) in spite of volatilefinancial markets during the latter half of the year. Within the Heritage With Profits Fund (HWPF), an extensive hedging program wasestablished at the time of demutualisation to help stabilise the balance sheetimpact of guarantees incorporated in certain with profits contracts. The use ofequity options and futures, and interest rate swaps, helps mitigate theotherwise adverse consequences that falling equity prices or declines inlong-term interest rates would have on the fund because of these guarantees. Thestrategy had its first real test during the market volatility and weakness thatcharacterised the latter part of 2007 and it proved extremely helpful inprotecting the fund's estate. The residual estate of the HWPF at 31 December2007 was £1.5bn (2006: £1.3bn). Standard Life's total investment (including third party funds) in the assetbacked securities markets across both short-term treasury instruments andlong-term fixed interest is approximately £7.7bn or 5.4% of total funds undermanagement, predominantly in UK securities. Active management has resulted in ahigh quality credit portfolio with no direct exposures to the US mortgagemarket, minimal exposure to leveraged structures, no current direct exposure tothe Monolines and very modest exposure to credit within a Monoline wrapper. Thecredit ratings underlying the Monoline wrapper are either AA or A rated with noexposure to the US or leveraged structures. Shareholder funds have a totalexposure of £27m5 to these assets or 0.02% of total funds under management. A provision of £10m has been set up in respect of a guarantee to an associatefor one cash fund to maintain the pricing structure for investors in the fundgiven current liquidity conditions. The investments backing this fund areprincipally AAA rated, and accordingly could, if necessary, be taken on balancesheet without a deterioration in the overall credit quality of the Group'sinvestments. Increased IFRS profit Underlying profit before tax on an IFRS basis increased by 32% to £714m (2006:£540m). Underlying profits in both 2006 and 2007 were impacted by significantone-off items. In 2007 these included reserve releases following the adoptionof PS06/14 (Prudential changes for insurers) and in respect of UK deferredannuity business, the effects of which were partly offset by strengthenedmortality assumptions in the UK and Canada. In 2006 one-off items included SIPPand deferred annuity reserve releases of £53m in the UK and profits onexceptional German sales of £51m. Excluding one-off items, underlying profit before tax increased by 7% to £476m(2006: £443m), reflecting increased investment management charges and thereduction in Group Corporate Centre costs to 2005 levels. The positive impactof these factors was partially offset by new business development costs whichwere incurred in respect of our Wrap, offshore bond and recently launchedStandard Life Wealth business. Outlook Having beaten our RoEV target in 2007, and despite an uncertain economicbackground, we are working to increase our core return on embedded value, aidedby continued improvement in volumes, mix and product profitability. The reinsurance of UK immediate annuities will deliver a one-off increase inembedded value operating profit of at least £100m in 2008. In addition, weexpect to benefit from further efficiency gains in 2008 and are on track todeliver the £100m of annual efficiency savings by 2009 announced last year. Our confidence in continuing profitable growth is based on our key strengths ofexpertise in managing assets, industry-leading customer service and on-goinginitiatives to improve efficiency. Paste the following link into your web browser to download the PDF document related to this announcement: http://www.rns-pdf.londonstockexchange.com/rns/8975p_-2008-3-12.pdf For further information please contact: Institutional Equity Investors:Gordon Aitken 0131 245 6799Duncan Heath 0131 245 4742 Retail Equity Investors:Computershare 0845 113 0045 Media:Barry Cameron 0131 245 6165 / 07712 486 463Neil 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 from8.00-9.00am. Participants should dial 020 7162 0125 and quote Standard LifePreliminary Results. The conference ID number is 785538. Investors and Analysts A presentation to investors and analysts will take place at 9.30am at UBS GroundFloor Conference Centre, 1 Finsbury Avenue, London. A live webcast of thepresentation and the presentation slides will be available on the Group'swebsite. 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 analystpresentation at 9.30am. UK investors should dial 0800 6942586, and overseasinvestors should dial +44 1452 567098. Callers should quote Standard LifePreliminary Results. The conference ID number is 36889487. A replay facilitywill be available for two weeks on +44 1452 550000. The pass code is 36889487#. Notes to Editors: 1. Present value of new business premiums. 2. Excludes development costs directly related to back book management initiatives. 3. Excludes specific costs attributable to back book management. 4. 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. 5.As at 31 December 2007 Shareholder Policyholder Policyholder Unit-Linked Participating Third Party Total £m £m £m £m £mUS Sub-Prime RMBS - - - - -US Alt-A - - - - -CDO/CSO/CLO1 - - 6 - 6Wrapped Credit2 22 25 201 178 426Direct Monoline3 - - - 3 3SIVs4 5 17 32 71 125Total 27 42 239 252 560% Asset backed securities 0.4% 0.5% 3.1% 3.3% 7.3%% Total funds under management 0.02% 0.03% 0.17% 0.18% 0.39% 1 Entire Exposure to AAA rated CSO underlying collateral investment grade corporate exposure. 2 Post Balance Sheet re-structuring of annuity book in February 2008 resulted in reduction to wrapped credit of £120m to give total exposure of £306m. No underlying exposure to US credit. 3 Exposure of $5m nominal CDS to AMBAC at 31 December 2007. This has been sold since the year end. 4 Includes Whistlejacket exposure of £15m held in Medium Term Notes (MTN) and senior notes. Other SIV exposure is either bank sponsored or Sigma (Gordian Knot). This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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