Group overview

Key performance indicators

Please refer to Basis of preparation and the Glossary of this report.

Standard Life has produced a solid performance during 2008 despite the unprecedented market turbulence which has impacted the global financial services industry. We also witnessed unparalleled intervention by governments around the world to help support the global banking system and to protect savers and investors. These conditions have resulted in both a significant reduction in asset values and reduced consumer confidence. Our strategy and capital structure have resulted in a balance sheet that is both strong and resilient.

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Financial performance

Present value of new business premiums (PVNBP) decreased by 5% to £15,679m (2007: £16,539m). Despite lower sales and associated new business contribution (NBC), we achieved increased European Embedded Value (EEV) operating profits of £933m (2007: £881m) and a return on embedded value (RoEV) of 10.9% (2007: 11.5%). The increase in operating profit was due to strong gains from our management of the back book.

Worldwide life and pensions net flows for 2008 were £2,440m (2007: £2,769m), with the strong growth in our international operations partly offsetting the impact of continued difficult market conditions in the UK. Total Group assets under administration (AUA) reduced by 7% to £156.8bn (2007: £169.0bn). This reduction compares favourably with the fall in financial markets over the same period.

International Financial Reporting Standards (IFRS) underlying profit before tax fell by 78% to £154m (2007: £714m). Excluding significant one-off transactions in both years, IFRS normalised underlying profit before tax fell by 57% to £206m (2007: £476m). The reduction is primarily due to 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 that Canadian life companies typically structure non-segregated funds, with assets backing both policyholder liabilities and the shareholder surplus. IFRS profit after tax attributable to equity holders fell by 78% to £100m (2007: £465m).

Our recently announced cash injection to the Pension Sterling Fund of approximately £100m has impacted profits in 2008. We strongly believe that the action we have taken was the right thing to do, and it reflects the importance that we attach to the long-term relationships we have with customers and business partners.

The Group capital surplus remained broadly unchanged at £3.5bn, compared to £3.6bn at 31 December 2007, despite the adverse market conditions. This demonstrates the robustness of our capital position and its relatively low sensitivity to market volatility. The insensitivity of the capital surplus reflects the structure of the Group post-demutualisation and the strategy for managing the risks of the Heritage With Profits Fund (HWPF). The strength of our capital position is further highlighted by Standard & Poor’s upgrading the credit rating for Standard Life Assurance Limited to A/Positive from A/Stable in May 2008 and then raising it again in February 2009 to A+/Stable.

Cash generation has remained strong in volatile markets and although there was a reduction in operating profit capital and cash generation from £563m to £423m, this included the impact of the cash injection to the Pension Sterling Fund. Core capital and cash generation of £303m fell only £31m from 2007 levels, despite the volatile markets. New business strain (NBS) continued to be comfortably covered more than two times by capital and cash generation from existing business. We have continued our focus on selling capital-lite products, to generate profitable new business without committing high levels of capital. This strategy aims to deliver high returns on investment to support business growth.

We have remained focused on achieving operational excellence and efficiency during a time of economic uncertainty. We announced our Continuous Improvement Programme in 2007 and promised to deliver £100m of efficiencies by the end of 2009. In 2008 we met the £100m target one year earlier than planned, and exceeded it by £3m. Following the successful completion of this programme we have now launched the next phase of efficiency savings. This has a target of achieving a further £75m of efficiency savings over the next two years. In addition, in 2008 we achieved a further £7m reduction in Group Corporate Centre costs.

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. Dividend cover in 2008 of 1.0 times compares to 2.9 times for total dividends paid in respect of 2007.

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Acquisition of Vebnet (Holdings) plc

On 10 October 2008, Standard Life made an unconditional offer to acquire 100% of the issued share capital of Vebnet (Holdings) plc (Vebnet) for a cash consideration of £26m. Vebnet has a well established position in the UK employee benefits and online reward market and has developed business activities in Europe and Asia. At 31 December 2008, Vebnet had 182 corporate clients and 340,393 employee users of its flexible benefits proposition. The transaction is consistent with Standard Life's strategy to accelerate the development of its corporate business through strengthening its customer base, opening up new routes to market and developing its existing product range.

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.

¹ 2007 net flows and present value of new business premiums (PVNBP) have been restated to reflect the inclusion of Sigma mutual funds. The 2008 net outflow impact is £217m (2007: £250m outflow). The 2008 PVNBP impact is £88m (2007: £116m).
² The new business PVNBP sales are different from those previously published in the full year new business press release issued on 28 January 2009, as they incorporate year end non-economic assumption changes.
³ The Group PVNBP percentage change figures include percentage change figures for India, which are computed based on the 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 2007 and 2008.
⁴ Net of tax.
⁵ Based on draft regulatory returns.

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