Final Results - Part 4 of 5

RNS Number : 4306Z

Standard Life plc

07 March 2013

Standard Life plc

Preliminary Results 2012

Part 4 of 5

Section 3 - European Embedded Value (EEV)

EEV consolidated income statement

For the year ended 31 December 2012

		2012	2011
	Notes	£m	£m
Covered business
UK and Europe		799	550
Canada		317	324
Asia and Emerging Markets		14	15
Covered business EEV operating profit	3.2(a)	1,130	889

UK and Europe		41	67
Standard Life Investments¹	3.6(b)	62	69
Group corporate centre costs		(47)	(50)
Other	3.6(c)	5	14
Non-covered business EEV operating profit		61	100
Consolidation adjustment for different accounting bases²	3.11	(75)	-
EEV operating profit before tax		1,116	989

EEV non-operating items
Long-term investment return and tax variances		498	70
Effect of economic assumption changes		(106)	(500)
Impairment of intangible assets		-	(5)
Restructuring costs		(114)	(73)
Other EEV non-operating items		(18)	(13)
Consolidation adjustment for different accounting bases²	3.11	(42)	58
EEV non-operating profit/(loss) before tax		218	(463)
EEV profit before tax		1,334	526
Tax attributable to:
EEV operating profit		(240)	(265)
EEV non-operating items		(42)	108
Total EEV profit after tax		1,052	369

¹Standard Life Investments non-covered EEV operating profit of £62m (2011: £69m) represents operating profit of £145m (2011: £125m) after excluding profits of £83m (2011: £56m) which have been generated by life and pensions covered business. Standard Life Investments EEV operating profit therefore represents third party non-covered EEV operating profit. Refer to Note 3.6(b) - Standard Life Investments EEV operating profit before tax and Note 3.17 - EEV methodology.

²This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 3.1 - Basis of preparation and Note 3.17 - EEV methodology.

EEV earnings per share (EPS)

For the year ended 31 December 2012

	2012	2011
EEV operating profit after tax (£m)¹	876	724

Basic EPS (pence)	37.3	31.5
Weighted average number of ordinary shares in issue (millions)	2,351	2,301

Diluted EPS (pence)²	37.0	31.3
Weighted average number of ordinary shares on a diluted basis (millions) ²	2,369	2,314

¹EEV operating profit before tax of £1,116m (2011: £989m) less attributed tax on EEV operating profit of £240m (2011: £265m).

²2011 restated for revision to number of shares. Refer to the IFRS financial information Note 2.5 - Earnings per share.

EEV consolidated statement of comprehensive income

For the year ended 31 December 2012

		2012	2011
	Notes	£m	£m
EEV profit after tax		1,052	369
Fair value losses on cash flow hedges¹		(1)	-
Actuarial (losses)/gains on defined benefit pension schemes¹		(97)	121
Effect of limit on defined benefit pension schemes' surpluses¹		27	(209)
Exchange differences on translating foreign operations²		(86)	(69)
Net investment hedge¹		18	13
Aggregate equity holder tax effect of items recognised in comprehensive income¹		102	27
Other		(1)	-
Other comprehensive expense for the year		(38)	(117)
Total comprehensive income for the year attributable to equity holders	3.7	1,014	252

¹Consistent with the IFRS consolidated statement of comprehensive income.

²Exchange differences primarily relate to Canada (negative £51m), India (negative £15m) and Europe (negative £15m).

EEV consolidated statement of financial position

As at 31 December 2012

		31 December 2012	31 December 2011
	Notes	£m	£m
Covered business
Free surplus		940	651
Required capital		1,348	1,296
Net worth		2,288	1,947

Present value of in-force		5,073	4,423
Cost of required capital		(648)	(583)
Total embedded value of covered business	3.2(c)	6,713	5,787

Non-covered business
UK and Europe		514	393
Standard Life Investments		255	256
Group corporate centre		640	650
Other		16	253
Total net assets of non-covered business	3.6(a)	1,425	1,552

Consolidation adjustment for different accounting bases¹		-	89

Total Group embedded value	3.7	8,138	7,428

Equity
Share capital		236	235
Shares held by trusts		(7)	(19)
Share premium reserve		1,110	1,110
Retained earnings on an IFRS basis		1,437	1,030
Other reserves		1,579	1,605
Additional retained earnings on an EEV basis		3,783	3,467
Total equity		8,138	7,428

¹This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 3.17 - EEV methodology.

EEV per share

As at 31 December 2012

	31 December 2012	31 December 2011
Total Group embedded value (£m)	8,138	7,428

EEV per share (pence)¹	343	316
Diluted closing number of ordinary shares in issue (millions)¹	2,373	2,354

¹2011 restated for revision to number of shares. Refer to the IFRS financial information Note 2.5 - Earnings per share.

Notes to the EEV financial information

3.1 Basis of preparation

The European Embedded Value (EEV) basis results have been prepared in accordance with the EEV Principles and Guidance issued in May 2004 by the CFO Forum of European Insurance Companies and the Additional Guidance issued in October 2005 and the Revised Interim Transitional Guidance issued in September 2012. EEV reports the value of business in-force based on a set of best estimate assumptions, allowing for the impact of uncertainty inherent in future assumptions, the cost of holding required capital and the value of free surplus. The total profit recognised over the lifetime of a policy is the same as under International Financial Reporting Standards (IFRS) but the timing of recognition of profits is different.

EEV includes the net assets of the businesses that are owned by equity holders of Standard Life plc (the Company) plus the present value of future profits expected to arise from in-force long-term insurance policies (PVIF) where these future profits are attributable to equity holders under the Scheme of Demutualisation (the Scheme) or from sales of new business since 10 July 2006.

The opening and closing EEV numbers, and therefore the profit arising in the period, for the covered business are determined on an after-tax basis. The tax assumptions are based upon the best estimate of the actual tax expected to arise. Profit before tax is derived by grossing up profit after tax at the long-term rate of corporation tax appropriate to each territory. While for some territories this rate does not equate to the actual effective rate of tax used in the calculation of after-tax profits, it provides a consistent grossing-up basis upon which to compare results from one year to another and is in line with the Group's expectation of the rate of tax applicable to business sold after demutualisation.

A detailed description of EEV methodology is provided in Note 3.17. There have been no significant changes to EEV methodology from that adopted in the previous reporting period, except as noted below. Events after the reporting period are described in Note 3.18.

Covered business

A detailed description of EEV covered business is provided in Note 3.17 - EEV methodology.

No allowance has been made for the change in reserving or required capital bases anticipated under Solvency 2. This approach is in accordance with the Revised Interim Transitional Guidance for Embedded Value Reporting issued by the CFO Forum in September 2012.

Segmentation

In June 2012, changes were announced in the way the Group will manage its businesses. German and Irish onshore businesses, previously reported in the International segment, have been combined with the UK to create UK and Europe. The other components of International now form Asia and Emerging Markets. The IFRS reportable segments have been changed for the year ended 31 December 2012, as explained in IFRS financial information Note 2.2(b) - Segmental analysis - Reportable segments.

EEV covered business segments have been amended and reflect the new IFRS reportable segments.

For EEV covered business, Heritage With Profits Fund Time Value of Options and Guarantees (HWPF TVOG) has previously been disclosed separately from UK and International segments, since an element of HWPF TVOG relates to German and Irish onshore business. HWPF TVOG is now included within the UK and Europe segment for EEV reporting.

EEV non-covered business segments have also been amended to change the UK segment to UK and Europe.

In order to be consistent with the revised IFRS reportable segment names, Global investment management has been renamed Standard Life Investments within the EEV financial information.

All comparative amounts have been restated to allow more meaningful comparison with the prior year. Group totals are not affected by these reclassifications.

Canada subordinated debt

As explained in Note 3.11 - Market value of subordinated liabilities within covered business, the Standard Life Assurance Company of Canada, which is included within EEV covered business, issued subordinated debenture notes on 21 September 2012.

During December 2012, subordinated liabilities which had previously been issued by Canada to a non-covered entity within the Group were fully redeemed. As a result of this redemption, the consolidation adjustment for different accounting bases in the EEV consolidated statement of financial position is no longer required and is therefore nil as at 31 December 2012. Refer to Note 3.11 for the impact of the redemption on the EEV consolidated income statement for the year ended 31 December 2012.

Group subordinated debt

As explained in Note 3.11 - Market value of subordinated liabilities within covered business, Standard Life plc issued subordinated debenture notes during December 2012. As explained in Note 3.17 - EEV Methodology, these new subordinated liabilities are held by a non-covered entity within the Group and are valued within EEV on an IFRS basis at amortised cost.

3.1 Basis of preparation continued

Assets designated as available-for-sale under IFRS

The Group has designated certain financial assets used to back subordinated liabilities and investment contract liabilities as available-for-sale (AFS) under IFRS accounting. As explained in Note 3.17 - EEV Methodology, where these assets are held by an EEV covered business entity and back investment contract liabilities that are accounted for under local solvency regulations on an amortised cost basis, then the assets are also included within EEV on an amortised cost basis. Where AFS assets are used to back subordinated liabilities that are accounted for at market value, they are included within EEV at market value.

Impact of UK budget changes announced on 21 March 2012

The Finance Act 2012 reduced the UK corporation tax rate to 24% with effect from 1 April 2012 and to 23% with effect from 1 April 2013. The reduction to 23% has been included within our best estimate assumptions for UK corporation tax as at 31 December 2012.

In the 2012 Autumn statement, the UK Government announced its intention to further reduce the rate of UK corporation tax to 21% in 2014. However, this reduction is subject to legislation being enacted in future years and, in accordance with our previous approach, has not been included within the best estimate assumptions as at 31 December 2012.

The new UK tax regime for UK life companies is effective from 1 January 2013. The basis of the regime will move from the FSA regulatory return to the statutory accounts. The deferred tax position of Standard Life Assurance Limited (SLAL) has been updated to reflect the new regime. The transition to the new regime does not have a material impact on SLAL's deferred tax position.

Legal claim

As described in the IFRS financial information Note 2.13 - Provisions and contingent liabilities, a judgment handed down on 1 February 2012 in the Commercial Court in London found in favour of SLAL in its claim against the insurers of its 2008/2009 professional indemnity policy in relation to the Standard Life Pension Sterling Fund. SLAL received a cash receipt including interest and reimbursement of legal fees.

An appeal was subsequently made by the insurers. Given that the judgment was under appeal, a risk existed that SLAL would be required to return the cash received or a portion of the cash received to the insurers and therefore a provision was recognised by the Group in respect of the cash received.

On 18 December 2012, the Court of Appeal handed down a judgment upholding the decision of the Commercial Court, dismissing the insurers' appeal and finding in favour of SLAL. In addition, SLAL was awarded its costs in the appeal. In January 2013, SLAL received notification from the lawyers acting for the insurers that they would not seek leave to appeal to the Supreme Court. The Group has released the provision in the consolidated IFRS financial statements for the year ended 31 December 2012.

In the EEV financial statements for the year ended 31 December 2012, a benefit of £96m is included within UK and Europe other experience variances within EEV operating profit before tax in respect of the legal claim.

3.2 Segmental analysis - covered business

(a) Segmental EEV income statement

This Note provides an analysis of EEV covered business as defined in Note 3.17 - EEV methodology.

		UK and Europe	Canada	Asia and Emerging Markets	Total
12 months to 31 December 2012	Notes	£m	£m	£m	£m
Contribution from new business	3.3	261	45	33	339
Contribution from in-force business:
Expected return on existing business		220	155	20	395
Experience variances	3.4	285	295	(10)	570
Operating assumption changes	3.5	56	(164)	(7)	(115)
Development expenses		(24)	(16)	(23)	(63)
Expected return on free surplus		1	2	1	4
EEV operating profit before tax		799	317	14	1,130

Investment return and tax variances		355	128	15	498
Effect of economic assumption changes		(235)	118	11	(106)
Restructuring costs		(99)	(2)	(2)	(103)
EEV profit before tax		820	561	38	1,419

EEV attributed tax		(189)	(135)	(4)	(328)

EEV profit after tax		631	426	34	1,091

(a) Segmental EEV income statement

An analysis of EEV profit after tax by territory is provided in Note 3.9 - Analysis of covered business EEV PVIF and net worth movements (net of tax).

EEV operating profit before tax for covered business is calculated using the expected long-term investment return which is based on opening economic assumptions. Investment variances, the effect of economic assumption changes and other EEV non-operating items are excluded from EEV operating profit and are reported as part of total EEV profit.

The £4m higher contribution from new business primarily reflects a £36m increase from UK and Europe, offset by reductions of £28m in Canada and £4m in Asia and Emerging Markets. The overall PVNBP margin was broadly unchanged at 1.8% (2011: 1.7%).

The expected return on existing business of £395m is £45m lower than 2011, primarily due to lower opening risk discount rates.

Details of experience variances and operating assumption changes are provided in Note 3.4 - Experience variances and Note 3.5 - Operating assumption changes.

Development costs were £11m lower in total. The £18m reduction in UK and Europe is consistent with the overall reduction in UK operating expenses. The £5m increase in Asia and Emerging Markets development costs mainly arises from increased investment spend to expand our operations into new markets.

The £4m expected return on free surplus reflects the relatively low expected returns currently available on cash assets within free surplus. The figure is net of interest payments on subordinated debt liabilities.

Investment return and tax variances generated a total profit of £498m. Of this, the UK and Europe profit of £355m included a gain of £499m from higher than expected investment returns on annuity and unitised business and a £132m gain from lower TVOG in the HWPF and GWPF (German With Profits Fund). This was partly offset by a loss of £244m, in excess of the return that is included in the expected return on free surplus, arising from differences in movements of subordinated debt liabilities and the assets that are backing the subordinated debt. The £128m profit in Canada includes a £93m gain from increases in the value of surplus property assets.

Effect of economic assumption changes was an overall loss of £106m. Changes to the long-term corporation tax rate in the UK and the impact of the new UK life tax regime resulted in an overall profit of £40m. Refer to Note 3.1 - Basis of preparation. Similarly, a reduction in the assumed long-term tax rate in Canada generated a profit of £25m. Lower risk free rates were the main driver for both a profit of £279m from lower risk discount rates, which is explained in Note 3.13, and for a loss of £333m from the use of lower future assumed investment returns. In addition, changes to the inflation assumption in Canada created a loss of £103m.

Restructuring costs primarily represent the covered business costs associated with a number of restructuring programmes including Solvency 2 and the Retail Distribution Review. EEV restructuring costs include associated impacts on PVIF and cost of required capital.

		UK and Europe	Canada	Asia and Emerging Markets	Total
12 months to 31 December 2011	Notes	£m	£m	£m	£m
Contribution from new business	3.3	225	73	37	335
Contribution from in-force business:
Expected return on existing business		276	144	20	440
Experience variances	3.4	36	118	(6)	148
Operating assumption changes	3.5	59	(8)	(18)	33
Development expenses		(42)	(14)	(18)	(74)
Expected return on free surplus		(4)	11	-	7
EEV operating profit before tax		550	324	15	889

Investment return and tax variances		44	41	(15)	70
Effect of economic assumption changes		(321)	(181)	2	(500)
Restructuring costs		(55)	(3)	(1)	(59)
EEV profit before tax		218	181	1	400

EEV attributed tax		(64)	(45)	-	(109)

EEV profit after tax		154	136	1	291

3.2 Segmental analysis - covered business continued

(b) Segmental analysis of movements in EEV

	UK and Europe	Canada	Asia and Emerging Markets	Total
12 months to 31 December 2012	£m	£m	£m	£m
Opening EEV	3,733	1,712	342	5,787

EEV profit after tax	631	426	34	1,091
Internal capital transfers	(257)	236	32	11
Transfer back of surplus to Standard Life Investments	(60)	(2)	-	(62)
Transfer back of mutual funds net worth	(3)	(3)	-	(6)
Actuarial losses on defined benefit pension schemes	(12)	(11)	-	(23)
Foreign exchange differences	(16)	(49)	(16)	(81)
Aggregate tax effect of items not recognised in income statement	-	4	-	4
Other	(7)	-	(1)	(8)
Closing EEV	4,009	2,313	391	6,713

	UK and Europe	Canada	Asia and Emerging Markets	Total
12 months to 31 December 2011	£m	£m	£m	£m
Opening EEV	3,995	1,758	318	6,071

EEV profit after tax	154	136	1	291
Internal capital transfers	(385)	(116)	43	(458)
Transfer back of surplus to Standard Life Investments	(39)	(2)	-	(41)
Transfer back of mutual funds net worth	19	(5)	-	14
Actuarial (losses)/gains on defined benefit pension schemes	8	(42)	-	(34)
Foreign exchange differences	(15)	(30)	(21)	(66)
Aggregate tax effect of items not recognised in income statement	-	12	-	12
Other	(4)	1	1	(2)
Closing EEV	3,733	1,712	342	5,787

	UK and Europe	Canada	Asia and Emerging Markets	Total
12 months to 31 December 2012	£m	£m	£m	£m
Analysis of EEV
Free surplus	722	(103)	32	651
PVIF	2,919	1,229	275	4,423
Required capital	199	1,059	38	1,296
Cost of capital	(107)	(473)	(3)	(583)
Opening EEV	3,733	1,712	342	5,787

Analysis of EEV
Free surplus	457	437	46	940
PVIF	3,418	1,351	304	5,073
Required capital	243	1,061	44	1,348
Cost of capital	(109)	(536)	(3)	(648)
Closing EEV	4,009	2,313	391	6,713

	UK and Europe	Canada	Asia and Emerging Markets	Total
12 months to 31 December 2011	£m	£m	£m	£m
Analysis of EEV
Free surplus	960	226	16	1,202
PVIF	2,947	1,061	269	4,277
Required capital	182	813	36	1,031
Cost of capital	(94)	(342)	(3)	(439)
Opening EEV	3,995	1,758	318	6,071

Analysis of EEV
Free surplus	722	(103)	32	651
PVIF	2,919	1,229	275	4,423
Required capital	199	1,059	38	1,296
Cost of capital	(107)	(473)	(3)	(583)
Closing EEV	3,733	1,712	342	5,787

3.3 Analysis of new business contribution

The following table sets out the premium volumes and contribution from new business written by the life and related businesses, consistent with the definition of new business set out in Note 3.17 - EEV methodology.

New business contribution (NBC) and the present value of new business premium (PVNBP) margins are shown after the effect of required capital.

	Fee (F) -Spread/risk (S/R)	NBC	Single premiums	Annualised regular premiums	PVNBP	PVNBP multiplier¹	PVNBP margin²
12 months to 31 December 2012	Fee (F) -Spread/risk (S/R)	£m	£m	£m	£m	PVNBP multiplier¹	%
Individual pensions	F	5	3,085	78	3,347	3.4	0.1
Savings and investments	F	23	1,756	23	1,958	8.8	1.2
Annuities	S/R	71	462	-	462	-	15.3
Protection	S/R	-	-	-	1	-	15.8
Retail		99	5,303	101	5,768	4.6	1.7
Corporate pensions	F	51	892	535	3,397	4.7	1.5
Institutional pensions	F	99	3,896	2	3,897	0.5	2.5
Corporate		150	4,788	537	7,294	4.7	2.1
UK		249	10,091	638	13,062	4.7	1.9
Europe		12	637	40	1,105	11.7	1.1
UK and Europe		261	10,728	678	14,167	5.1	1.8
Fee	F	16	1,545	57	2,555	17.7	0.6
Spread/risk	S/R	29	208	52	1,029	15.8	2.8
Canada		45	1,753	109	3,584	16.8	1.3
Wholly owned	F	20	776	41	1,020	6.0	1.9
Joint ventures		13	76	104	522	4.3	2.6
Asia and Emerging Markets		33	852	145	1,542	4.8	2.2
Total covered business		339	13,333	932	19,293	6.4	1.8

¹ The PVNBP multiplier is calculated as the total of PVNBP less single premiums, divided by annualised regular premiums.

² PVNBP margins are calculated as the ratio of NBC to PVNBP and are based on the underlying unrounded numbers.

3.3 Analysis of new business contribution continued

	Fee (F) -Spread/risk (S/R)	NBC	Single premiums	Annualised regular premiums	PVNBP	PVNBP multiplier¹	PVNBP margin²
12 months to 31 December 2011	Fee (F) -Spread/risk (S/R)	£m	£m	£m	£m	PVNBP multiplier¹	%
Individual pensions	F	12	3,598	99	3,936	3.4	0.3
Savings and investments	F	15	1,973	24	2,151	7.4	0.7
Annuities	S/R	58	312	-	312	-	18.6
Protection	S/R	-	-	-	1	-	5.2
Retail		85	5,883	123	6,400	4.2	1.3
Corporate pensions	F	60	1,889	620	4,607	4.4	1.3
Institutional pensions	F	59	3,027	1	3,028	1.0	2.0
Corporate		119	4,916	621	7,635	4.4	1.6
UK		204	10,799	744	14,035	4.3	1.5
Europe		21	658	37	1,070	11.1	1.9
UK and Europe		225	11,457	781	15,105	4.7	1.5
Fee	F	38	1,216	33	1,695	14.5	2.2
Spread/risk	S/R	35	306	61	1,233	15.2	2.9
Canada		73	1,522	94	2,928	15.0	2.5
Wholly owned	F	30	909	49	1,205	6.0	2.5
Joint ventures		7	82	100	500	4.2	1.4
Asia and Emerging Markets		37	991	149	1,705	4.8	2.2
Total covered business		335	13,970	1,024	19,738	5.6	1.7

¹ The PVNBP multiplier is calculated as the total of PVNBP less single premiums, divided by annualised regular premiums.

² PVNBP margins are calculated as the ratio of NBC to PVNBP and are based on the underlying unrounded numbers.

3.4 Experience variances

	UK and Europe	Canada	Asia and Emerging Markets	Total
12 months to 31 December 2012	£m	£m	£m	£m
Lapses	(7)	-	(8)	(15)
Maintenance expenses	(6)	11	-	5
Mortality and morbidity	(5)	-	1	(4)
Tax	13	23	1	37
Other	290	261	(4)	547
Total	285	295	(10)	570

Canada expense variances of £11m reflect actual expenses being lower than expected.

Positive tax variances of £13m in UK and Europe and £23m in Canada arise from reconciliations to actual tax and changes in actuarial provisions.

The overall total of £547m of other variances includes £453m of gains from previously announced management actions. These consist of £96m in UK and Europe from the professional indemnity insurance claim; £119m variances in the HWPF TVOG primarily reflecting the benefit of asset strategy changes in the HWPF as well as improved modelling of German business; £90m in Canada from revised modelling of future cash flows, primarily for segregated fund business; and £148m in Canada from the sale of properties and a renegotiation of an existing reinsurance arrangement.

UK and Europe other variances also include a £67m profit from management actions that resulted in the use of higher investment returns for annuities.

For the 12 months to 31 December 2011, other UK variances include a profit of £50m from the impact of a management action to reduce current and future investment expenses. Other Canada variances mainly arise from the impact of management actions to enhance investment yields on assets.

	UK and Europe	Canada	Asia and Emerging Markets	Total
12 months to 31 December 2011	£m	£m	£m	£m
Lapses	(42)	-	(6)	(48)
Maintenance expenses	(5)	-	1	(4)
Mortality and morbidity	3	-	1	4
Tax	46	72	1	119
Other	34	46	(3)	77
Total	36	118	(6)	148

3.5 Operating assumption changes

	UK and Europe	Canada	Asia and Emerging Markets	Total
12 months to 31 December 2012	£m	£m	£m	£m
Lapses	(3)	(53)	(7)	(63)
Maintenance expenses	23	(22)	-	1
Mortality and morbidity	7	50	1	58
Tax	-	-	-	-
Other	29	(139)	(1)	(111)
Total	56	(164)	(7)	(115)

Canada lapse assumption losses of £53m arise from the impact of assuming higher surrenders within Group pension business, reflecting recent experience.

Expense assumption profits of £23m in UK and Europe and losses of £22m in Canada are mainly due to changes in investment related income and expenses.

The £50m gains from mortality assumption changes in Canada mainly relate to annuities, consistent with recent experience.

UK and Europe other assumption changes produced a profit of £29m. This included a £12m profit from a reduction in GWPF TVOG from revised operating assumptions, along with £14m from changes to UK valuation assumptions.

The adverse £139m other assumption changes in Canada include losses of £45m from the decision to impose a minimum inflation rate on expenses; £17m from a reduction in expected fee income from our existing group savings and retirement contracts; and £72m from assuming that we will earn lower fee income on the funds invested from future deposits.

For the 12 months to 31 December 2011, most of the £139m loss from mortality assumptions in Canada reflects the impact of revised industry-standard mortality improvement rates. The £57m other assumption changes in Canada includes a £109m profit from various changes in asset allocation strategies, including the benefits of management actions aimed at enhancing the investment yield on assets. This was partly offset by a loss of £62m from a reduction in expected fee income in our group savings and retirement products.

	UK and Europe	Canada	Asia and Emerging Markets	Total
12 months to 31 December 2011	£m	£m	£m	£m
Lapses	25	34	(12)	47
Maintenance expenses	5	40	(3)	42
Mortality and morbidity	(14)	(139)	-	(153)
Tax	1	-	-	1
Other	42	57	(3)	96
Total	59	(8)	(18)	33

3.6 Non-covered business

Non-covered business EEV operating profit is represented by operating profit¹ as adjusted for Standard Life Investments look through profits and the return on mutual funds which are recognised in covered business. Refer to Note 3.17 - EEV methodology.

(a) Segmental analysis - non-covered business

	UK and Europe	Standard Life Investments	Other including group corporate centre	Total non-covered business
12 months to 31 December 2012	£m	£m	£m	£m
Opening EEV net assets	393	256	903	1,552
EEV profit/(loss) after tax	58	43	(51)	50
Transfer back of net worth from covered business	3	62	3	68
Foreign exchange differences	-	(3)	(2)	(5)
Internal capital transfers	(2)	(106)	97	(11)
Distributions to equity holders	-	-	(331)	(331)
Other	62	3	37	102
Closing EEV net assets	514	255	656	1,425

The transfer back of net worth from covered business represents the transfer of profits and losses in relation to the Group's investment management business, the UK mutual funds business (within UK and Europe non-covered, Standard Life Savings Limited) and the Canada mutual funds business (within other non-covered), necessary to reconcile the opening and closing EEV net assets. For further detail refer to Note 3.17 - EEV methodology - Transfer back of net worth from covered business.

The £62m other movement in the UK and Europe EEV net assets mainly relates to the change in the UK non-covered pension scheme of negative £44m (2011: negative £51m) and the associated deferred tax asset of positive £98m (2011: positive £15m). The £37m other movements in other including group corporate centre mainly relate to gains from the net investment hedge and the reserves credit for share-based payment schemes.

For the 12 months to 31 December 2011, the £164m other movements in other including group corporate centre predominantly relate to the £141m issue of share capital other than in cash in relation to the Scrip dividend paid by the Company.

The Company operated a Scrip dividend scheme for dividends paid until the end of 2011. Investors taking part in the Scrip scheme received their dividend entitlement in the form of new shares issued in lieu of cash dividends. For the 12 months ended 31 December 2011, dividends paid comprise £141m settled by the issue of shares under the Scrip scheme and £162m paid in cash.

	UK and Europe	Standard Life Investments	Other including group corporate centre	Total non-covered business
12 months to 31 December 2011	£m	£m	£m	£m
Opening EEV net assets	271	256	678	1,205
EEV profit/(loss) after tax	37	51	(54)	34
Transfer back of net worth from covered business	(19)	41	5	27
Foreign exchange differences	-	(6)	3	(3)
Internal capital transfers	136	(88)	410	458
Distributions to equity holders	-	-	(303)	(303)
Other	(32)	2	164	134
Closing EEV net assets	393	256	903	1,552

¹ Refer to Note 2.1 (b) - Accounting policies - Operating profit in the IFRS financial information.

(b) Standard Life Investments EEV operating profit before tax

Standard Life Investments non-covered business profits are included in EEV on a look through basis. This means that the profits from Standard Life Investments which are generated from life and pensions business are allocated to covered business. Therefore, the difference between third party non-covered business EEV operating profit before tax of £62m (2011: £69m) and operating profit for the Standard Life Investment business of £145m (2011: £125m) is the profit allocated to covered business.

	12 months to 31 December 2012	12 months to 31 December 2011
	£m	£m
Standard Life Investments third party non-covered business EEV operating profit before tax	62	69
Third party related covered business EEV operating profit before tax	56	32
Total third party business EEV operating profit before tax	118	101

Other covered business EEV operating profit before tax	27	24
Standard Life Investments operating profit before tax	145	125

Total Standard Life Investments EEV operating profit allocated to covered business of £83m (2011: £56m) consists of third party related covered business EEV operating profit of £56m (2011: £32m) and other covered business EEV operating profit of £27m (2011: £24m).

Third party related covered business EEV operating profits relate to products actively marketed and sold to third parties through Standard Life Investments distribution channels. If these profits are added to the Standard Life Investments third party non-covered business EEV operating profits of £62m (2011: £69m), there are £118m (2011: £101m) of total third party related profits for Standard Life Investments.

The proportion of Standard Life Investments operating profit before tax generated from third parties reflects new business flows into higher margin third party products and outflows from captive products.

	12 months to 31 December 2012	12 months to 31 December 2011
	£m	£m
Canada non-life subsidiaries	1	6
Mutual funds transferred to covered business	(6)	(7)
Canada non-life subsidiaries excluding transfers to covered business	(5)	(1)

Standard Life plc income	8	6
Other	2	9
Other non-covered business EEV operating profit before tax	5	14

Canada non-life subsidiaries are included within the Canada segment of the IFRS financial statements.

Included within other are the head office costs relating to the Asia and Emerging Markets businesses. These costs are included within the Asia and Emerging Markets segment of the IFRS financial statements.

3.7 EEV reconciliation of movements in consolidated statement of financial position

	12 months to 31 December 2012	12 months to 31 December 2011
	£m	£m
Opening EEV	7,428	7,321

Total comprehensive income for the period attributable to equity holders	1,014	252
Distributions to equity holders	(331)	(303)
Issue of share capital other than in cash	1	141
Shares acquired by employee trusts	(5)	(7)
Reserves credit for employee share-based payment schemes	25	24
Aggregate tax effect of items recognised directly in equity	6	-
Closing EEV	8,138	7,428

3.8 Reconciliation of EEV net assets to IFRS net assets

	31 December 2012	31 December 2011
	£m	£m
Net assets on an EEV basis	8,138	7,428
Present value of in-force life and pensions business net of cost of capital	(4,425)	(3,840)
EEV net worth	3,713	3,588

Adjustment of long-term debt to market value	77	(44)
Canada marked to market adjustment	(19)	(19)
Deferred acquisition costs net of deferred income reserve	382	350
Deferred tax differences	129	123
Adjustment for share of joint ventures	22	24
Consolidation adjustment for different accounting bases¹	-	(89)
Other	51	28
Net assets attributable to equity holders on an IFRS basis	4,355	3,961

¹ This adjustment reflects the removal of accounting differences for the Canada subordinated liability as explained in Note 3.17 - EEV methodology.

Reconciling items are shown net of tax where appropriate.

3.9 Analysis of covered business EEV PVIF and net worth movements (net of tax)

(a) Total

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2012	£m	£m	£m	£m	£m
Opening EEV	651	1,296	1,947	3,840	5,787
Contribution from new business	(325)	109	(216)	481	265
Contribution from in-force business:
Expected return on existing business	(1)	43	42	263	305
Expected return transfer to net worth	634	(66)	568	(568)	-
Experience variances	360	(61)	299	134	433
Operating assumption changes	84	(3)	81	(172)	(91)
Development expenses	(53)	-	(53)	4	(49)
Expected return on free surplus	3	-	3	-	3
EEV operating profit after tax	702	22	724	142	866
Investment return and tax variances	22	11	33	353	386
Effect of economic assumption changes	(264)	46	(218)	136	(82)
Restructuring costs	(78)	-	(78)	(1)	(79)
EEV profit after tax	382	79	461	630	1,091
Internal capital transfers	11	-	11	-	11
Transfer back of surplus to Standard Life Investments	(62)	-	(62)	-	(62)
Transfer back of mutual funds net worth	(6)	-	(6)	-	(6)
Actuarial losses on defined benefit pension schemes	(23)	-	(23)	-	(23)
Foreign exchange differences	(9)	(27)	(36)	(45)	(81)
Aggregate tax effect of items not recognised in income statement	4	-	4	-	4
Other	(8)	-	(8)	-	(8)
Closing EEV	940	1,348	2,288	4,425	6,713

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2011	£m	£m	£m	£m	£m
Opening EEV	1,202	1,031	2,233	3,838	6,071
Contribution from new business	(290)	64	(226)	484	258
Contribution from in-force business:
Expected return on existing business	(1)	40	39	294	333
Expected return transfer to net worth	684	(85)	599	(599)	-
Experience variances	52	2	54	58	112
Operating assumption changes	(33)	2	(31)	49	18
Development expenses	(58)	-	(58)	-	(58)
Expected return on free surplus	5	-	5	-	5
EEV operating profit after tax	359	23	382	286	668
Investment return and tax variances	159	94	253	(206)	47
Effect of economic assumption changes	(512)	181	(331)	(50)	(381)
Restructuring costs	(41)	(17)	(58)	15	(43)
EEV profit/(loss) after tax	(35)	281	246	45	291
Internal capital transfers	(458)	-	(458)	-	(458)
Transfer back of surplus to Standard Life Investments	(41)	-	(41)	-	(41)
Transfer back of mutual funds net worth	14	-	14	-	14
Actuarial losses on defined benefit pension schemes	(34)	-	(34)	-	(34)
Foreign exchange differences	(6)	(17)	(23)	(43)	(66)
Aggregate tax effect of items not recognised in income statement	12	-	12	-	12
Other	(3)	1	(2)	-	(2)
Closing EEV	651	1,296	1,947	3,840	5,787

3.9 Analysis of covered business EEV PVIF and net worth movements (net of tax) continued

(b) UK and Europe continued

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2012	£m	£m	£m	£m	£m
Opening EEV	722	199	921	2,812	3,733

Contribution from new business	(162)	24	(138)	340	202
Contribution from in-force business:
Expected return on existing business	(1)	4	3	166	169
Expected return transfer to net worth	419	1	420	(420)	-
Experience variances	116	5	121	98	219
Operating assumption changes	10	-	10	30	40
Development expenses	(22)	-	(22)	4	(18)
EEV operating profit after tax	360	34	394	218	612
Investment return and tax variances	(40)	3	(37)	313	276
Effect of economic assumption changes	(170)	8	(162)	(19)	(181)
Restructuring costs	(75)	-	(75)	(1)	(76)
EEV profit after tax	75	45	120	511	631
Internal capital transfers	(257)	-	(257)	-	(257)
Transfer back of surplus to Standard Life Investments	(60)	-	(60)	-	(60)
Transfer back of mutual funds net worth	(3)	-	(3)	-	(3)
Actuarial losses on defined benefit pension schemes	(12)	-	(12)	-	(12)
Foreign exchange differences	(1)	(1)	(2)	(14)	(16)
Other	(7)	-	(7)	-	(7)
Closing EEV	457	243	700	3,309	4,009

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2011	£m	£m	£m	£m	£m
Opening EEV	960	182	1,142	2,853	3,995

Contribution from new business	(175)	20	(155)	326	171
Contribution from in-force business:
Expected return on existing business	(1)	6	5	201	206
Expected return transfer to net worth	450	-	450	(450)	-
Experience variances	(22)	1	(21)	50	29
Operating assumption changes	(8)	1	(7)	47	40
Development expenses	(32)	-	(32)	-	(32)
Expected return on free surplus	(3)	-	(3)	-	(3)
EEV operating profit after tax	209	28	237	174	411
Investment return and tax variances	223	(3)	220	(189)	31
Effect of economic assumption changes	(229)	10	(219)	(28)	(247)
Restructuring costs	(39)	(17)	(56)	15	(41)
EEV profit/(loss) after tax	164	18	182	(28)	154
Internal capital transfers	(385)	-	(385)	-	(385)
Transfer back of surplus to Standard Life Investments	(39)	-	(39)	-	(39)
Transfer back of mutual funds net worth	19	-	19	-	19
Actuarial gains on defined benefit pension schemes	8	-	8	-	8
Foreign exchange differences	(1)	(1)	(2)	(13)	(15)
Other	(4)	-	(4)	-	(4)
Closing EEV	722	199	921	2,812	3,733

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2012	£m	£m	£m	£m	£m
Opening EEV	(103)	1,059	956	756	1,712

Contribution from new business	(101)	76	(25)	60	35
Contribution from in-force business:
Expected return on existing business	-	37	37	81	118
Expected return transfer to net worth	151	(67)	84	(84)	-
Experience variances	246	(62)	184	39	223
Operating assumption changes	74	(3)	71	(196)	(125)
Development expenses	(12)	-	(12)	-	(12)
Expected return on free surplus	2	-	2	-	2
EEV operating profit/(loss) after tax	360	(19)	341	(100)	241
Investment return and tax variances	59	7	66	31	97
Effect of economic assumption changes	(94)	38	(56)	146	90
Restructuring costs	(2)	-	(2)	-	(2)
EEV profit after tax	323	26	349	77	426
Internal capital transfers	236	-	236	-	236
Transfer back of surplus to Standard Life Investments	(2)	-	(2)	-	(2)
Transfer back of mutual funds net worth	(3)	-	(3)	-	(3)
Actuarial losses on defined benefit pension schemes	(11)	-	(11)	-	(11)
Foreign exchange differences	(7)	(24)	(31)	(18)	(49)
Aggregate tax effect of items not recognised in income statement	4	-	4	-	4
Closing EEV	437	1,061	1,498	815	2,313

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2011	£m	£m	£m	£m	£m
Opening EEV	226	813	1,039	719	1,758

Contribution from new business	(42)	36	(6)	61	55
Contribution from in-force business:
Expected return on existing business	-	33	33	75	108
Expected return transfer to net worth	168	(85)	83	(83)	-
Experience variances	75	4	79	10	89
Operating assumption changes	(26)	1	(25)	19	(6)
Development expenses	(10)	-	(10)	-	(10)
Expected return on free surplus	8	-	8	-	8
EEV operating profit/(loss) after tax	173	(11)	162	82	244
Investment return and tax variances	(63)	99	36	(6)	30
Effect of economic assumption changes	(280)	171	(109)	(27)	(136)
Restructuring costs	(2)	-	(2)	-	(2)
EEV profit/(loss) after tax	(172)	259	87	49	136
Internal capital transfers	(116)	-	(116)	-	(116)
Transfer back of surplus to Standard Life Investments	(2)	-	(2)	-	(2)
Transfer back of mutual funds net worth	(5)	-	(5)	-	(5)
Actuarial losses on defined benefit pension schemes	(42)	-	(42)	-	(42)
Foreign exchange differences	(5)	(13)	(18)	(12)	(30)
Aggregate tax effect of items not recognised in income statement	12	-	12	-	12
Other	1	-	1	-	1
Closing EEV	(103)	1,059	956	756	1,712

3.9 Analysis of covered business EEV PVIF and net worth movements (net of tax) continued

(d) Asia and Emerging Markets

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2012	£m	£m	£m	£m	£m
Opening EEV	32	38	70	272	342

Contribution from new business	(62)	9	(53)	81	28
Contribution from in-force business:
Expected return on existing business	-	2	2	16	18
Expected return transfer to net worth	64	-	64	(64)	-
Experience variances	(2)	(4)	(6)	(3)	(9)
Operating assumption changes	-	-	-	(6)	(6)
Development expenses	(19)	-	(19)	-	(19)
Expected return on free surplus	1	-	1	-	1
EEV operating profit/(loss) after tax	(18)	7	(11)	24	13
Investment return and tax variances	3	1	4	9	13
Effect of economic assumption changes	-	-	-	9	9
Restructuring costs	(1)	-	(1)	-	(1)
EEV profit/(loss) after tax	(16)	8	(8)	42	34
Internal capital transfers	32	-	32	-	32
Foreign exchange differences	(1)	(2)	(3)	(13)	(16)
Other	(1)	-	(1)	-	(1)
Closing EEV	46	44	90	301	391

	Free surplus	Required capital	Net worth	PVIF net of cost of capital	Total
12 months to 31 December 2011	£m	£m	£m	£m	£m
Opening EEV	16	36	52	266	318

Contribution from new business	(73)	8	(65)	97	32
Contribution from in-force business:
Expected return on existing business	-	1	1	18	19
Expected return transfer to net worth	66	-	66	(66)	-
Experience variances	(1)	(3)	(4)	(2)	(6)
Operating assumption changes	1	-	1	(17)	(16)
Development expenses	(16)	-	(16)	-	(16)
EEV operating profit/(loss) after tax	(23)	6	(17)	30	13
Investment return and tax variances	(1)	(2)	(3)	(11)	(14)
Effect of economic assumption changes	(3)	-	(3)	5	2
EEV profit/(loss) after tax	(27)	4	(23)	24	1
Internal capital transfers	43	-	43	-	43
Foreign exchange differences	-	(3)	(3)	(18)	(21)
Other	-	1	1	-	1
Closing EEV	32	38	70	272	342

3.10 Time value of options and guarantees (TVOG)

	31 December 2012	31 December 2011
	£m	£m
UK and Europe	(156)	(280)
Canada	(58)	(29)
Asia and Emerging Markets	(7)	(12)
Total	(221)	(321)

The UK and Europe TVOG reflects the value of shareholder exposure to with profits policyholder guarantees. The total at 31 December 2012 comprises £137m for guarantees in the HWPF (2011: £251m) and £19m for guarantees in the GWPF (2011: £29m). The value of this exposure has reduced by £124m during 2012. This arose from a post-tax operating gain of £97m mainly from asset changes and modelling improvements, and favourable non-operating movements of £27m.

The increase in the Canada TVOG of £29m has mainly arisen within retail fee business and reflects the increased cost of guarantees from the business written in 2012.

3.11 Market value of subordinated liabilities within covered business

	31 December 2012	31 December 2011
	£m	£m
UK and Europe	(1,207)	(1,005)
Canada	(260)	(341)
Total	(1,467)	(1,346)

Subordinated liabilities within EEV covered business are based on the market value of the debt. The free surplus shown in Note 3.2(c) - Segmental analysis - Covered business - Segmental analysis of opening and closing EEV is net of these liabilities.

UK and Europe subordinated liabilities include Euro denominated subordinated guaranteed bonds. The increase in UK and Europe subordinated liabilities mainly reflects reduced market yields during 2012.

The Standard Life Assurance Company of Canada issued subordinated debenture notes with a principal value of CA$400m on 21 September 2012, as described in Note 2.17 to the IFRS financial information. The EEV market value liability of this at 31 December 2012 was £260m.

Previously issued Canada subordinated liabilities with a face value of CA$400m were fully redeemed during December 2012. These had a market value liability at 31 December 2011 of £341m. Redeeming this liability at par generated a pre-tax profit of £75m within Canada's other operating variances. There is a fully offsetting £75m loss within other non-covered EEV operating profit before tax, reflecting the lower value received on redemption by Group non-covered business. In addition, this redemption also generated a pre-tax loss of £72m within Canada's other operating variances due to a loss of tax relief on interest payments. Market value fluctuations in 2012 up to the date of redemption led to an EEV non-operating loss before tax of £42m.

Standard Life plc issued £500m of Sterling subordinated notes during December 2012. These liabilities are included within EEV non-covered business at their IFRS valuation. For details of the Group subordinated liabilities refer to Note 2.17 to the IFRS financial information.

The impact of market value fluctuations in subordinated liabilities within covered business are reflected in non-operating profit as shown in Note 3.2(a) - Segmental EEV income statement.

3.12 PVIF monetisation profile

The following tables show the PVIF emergence on a discounted and undiscounted basis along with a reconciliation to the total closing PVIF and the PVIF net of cost of capital impact from new business.

(a) PVIF emergence

In-force business
	PVIF	Cash emerging during years (£m)
At 31 December 2012	£m	1-5	6-10	11-15	16-20	20+
UK and Europe	5,494	1,806	1,246	857	570	1,015
Canada	4,488	522	500	457	428	2,581
Asia and Emerging Markets	445	195	109	63	38	40
Total undiscounted	10,427	2,523	1,855	1,377	1,036	3,636
Total discounted	5,294	2,198	1,278	736	428	654

3.12 PVIF monetisation profile continued

(a) PVIF emergence continued

New business
	PVIF		Cash emerging during years (£m)
At 31 December 2012	£m	1-5	6-10	11-15	16-20	20+
UK and Europe	537	167	117	87	62	104
Canada	253	25	39	32	28	129
Asia and Emerging Markets	117	57	26	14	10	10
Total undiscounted	907	249	182	133	100	243
Total discounted	539	224	130	77	47	61

(b) Reconciliation to closing PVIF

In-force business	Reconciliation of discounted PVIF
	PVIF	TVOG	Total
At 31 December 2012	£m	£m	£m
UK and Europe	3,574	(156)	3,418
Canada	1,409	(58)	1,351
Asia and Emerging Markets	311	(7)	304
Total	5,294	(221)	5,073

See also Note 3.2(c) - Segmental analysis - covered business - Segmental analysis of opening and closing EEV.

New business	Reconciliation of discounted PVIF
	PVIF	Cost of capital	TVOG	Total
At 31 December 2012	£m	£m	£m	£m
UK and Europe	354	(12)	(2)	340
Canada	102	(12)	(30)	60
Asia and Emerging Markets	83	(1)	(1)	81
Total	539	(25)	(33)	481

See also Note 3.9 - Analysis of covered business EEV PVIF and net worth movements (net of tax).

As outlined in Note 3.1 - Basis of preparation, with the exception of changes arising from the introduction of a new UK life insurance tax regime, the Group's EEV results do not include any allowance for changes to the reserving or required capital bases anticipated under future reporting or regulatory regimes. The PVIF monetisation profile therefore excludes changes anticipated under Solvency 2.

3.13 Principal economic assumptions - deterministic calculations - covered business

(a) Gross investment returns and expense inflation

	UK HWPF/PBF¹	Europe HWPF/PBF¹	Canada	SLIL²	Hong Kong
At 31 December 2012	%	%	%	%	%
Gross investment returns
Risk free	1.74	1.32	2.32	1.74	0.91
Corporate bonds	2.34³	n/a	⁴	n/a	1.66
Equities	4.74	4.32	8.60	4.74	3.91
Property	3.74	3.32	8.60	3.74	n/a

Other
Expense inflation:	3.39		1.50⁵	3.39	2.50
Germany		1.87
Ireland		2.84

¹ Proprietary Business Fund (PBF) denotes the equity holder owned fund in SLAL.

² SLIL denotes Standard Life International Limited, part of Asia and Emerging Markets.

³ Excludes corporate bond returns on annuities. For annuities in UK equity holder owned funds, the overall investment return, after allowing for assumed defaults, is 3.81% for annuities that are level or subject to fixed escalations and 3.06% for annuities where escalations are linked to a price index.

⁴ With the exception of AFS assets used to back investment contract liabilities at amortised cost, current holdings are assumed to yield in future years the earned rate for the year preceding the valuation and future reinvestments are assumed to be in a mixture of government and corporate bonds. For AFS assets used to back investment contract liabilities at amortised cost, yields are calculated at acquisition and subsequent changes are ignored.

⁵ 1.50% in 2013. The rate in subsequent years is based on a moving 30-year bond yield less a 2% deduction, with a floor of 1.50%.

	UK HWPF/PBF¹	Europe HWPF/PBF¹	Canada	SLIL²	Hong Kong
At 31 December 2011	%	%	%	%	%
Gross investment returns
Risk free	1.93	1.83	2.17	1.93	1.09
Corporate bonds	2.99³	n/a	⁴	n/a	3.41
Equities	4.93	4.83	8.60	4.93	4.09
Property	3.93	3.83	8.60	3.93	n/a

Other
Expense inflation:	3.37		0.00⁵	3.37	2.50
Germany		1.85
Ireland		2.74

¹ Proprietary Business Fund (PBF) denotes the equity holder owned fund in SLAL.

² SLIL denotes Standard Life International Limited, part of Asia and Emerging Markets.

³ Excludes corporate bond returns on annuities. For annuities in UK equity holder owned funds, the overall investment return, after allowing for assumed defaults, is 4.20% for annuities that are level or subject to fixed escalations and 2.73% for annuities where escalations are linked to a price index.

⁴Current holdings are assumed to yield in future years the earned rate for the year preceding the valuation. Future reinvestments are assumed to be in a mixture of government and corporate bonds.

⁵0.00% in 2012. The rate in subsequent years is based on a moving 30-year bond yield less a 3% deduction.

(b) Risk discount rates - in-force business

	UK HWPF	UK PBF¹	Europe HWPF	Europe PBF¹	Canada	SLIL²	Hong Kong
At 31 December 2012	%	%	%	%	%	%	%
Risk margin - in-force business
Risk margin before cost of capital adjustment:
Market risk	1.90	1.80	0.70	1.30	4.00	1.60	1.40
Non-market risk	2.60	1.00	1.80	0.60	1.50	1.00	1.50
Total	4.50	2.80	2.50	1.90	5.50	2.60	2.90
Cost of capital adjustment	-	(0.50)	-	(0.60)	(1.60)	(0.20)	-
Risk margin after cost of capital adjustment	4.50	2.30	2.50	1.30	3.90	2.40	2.90

Risk discount rates - in-force business
Risk free	1.74	1.74	1.32	1.32	2.32	1.74	0.91
Risk margin	4.50	2.30	2.50	1.30	3.90	2.40	2.90
Risk discount rate³	6.24	4.04	3.82	2.62	6.22	4.14	3.81

¹ Proprietary Business Fund (PBF) denotes the equity holder owned fund in SLAL.

² SLIL denotes Standard Life International Limited, part of Asia and Emerging Markets.

³ Using the value of in-force business as weights, the average risk discount rates for UK and Europe were 5.03% and 3.09% respectively.

	UK HWPF	UK PBF¹	Europe HWPF	Europe PBF¹	Canada	SLIL²	Hong Kong
At 31 December 2011	%	%	%	%	%	%	%
Risk margin - in-force business
Risk margin before cost of capital adjustment:
Market risk	1.90	1.90	0.70	1.50	3.20	1.80	1.60
Non-market risk	2.60	0.90	1.30	0.80	3.50	0.70	1.50
Total	4.50	2.80	2.00	2.30	6.70	2.50	3.10
Cost of capital adjustment	-	(0.10)	-	(1.00)	(2.20)	(0.20)	-
Risk margin after cost of capital adjustment	4.50	2.70	2.00	1.30	4.50	2.30	3.10

Risk discount rates - in-force business
Risk free	1.93	1.93	1.83	1.83	2.17	1.93	1.09
Risk margin	4.50	2.70	2.00	1.30	4.50	2.30	3.10
Risk discount rate³	6.43	4.63	3.83	3.13	6.67	4.23	4.19

¹ Proprietary Business Fund (PBF) denotes the equity holder owned fund in SLAL.

² SLIL denotes Standard Life International Limited, part of Asia and Emerging Markets.

³ Using the value of in-force business as weights, the average risk discount rates for UK and Europe were 5.55% and 3.42% respectively.

Changes in market risk margins generally arise from changes in the mix of business and asset allocations.

3.13 Principal economic assumptions - deterministic calculations - covered business continued

(b) Risk discount rates - in-force business continued

In Canada, the 2012 risk margin also reflects the impact of the relative movements in the returns assumed on equities and property compared to risk free, as well as the changes in market risk resulting from the revised modelling of cash flows as described in Note 3.4 - Experience variances.

The increased market risk resulting from the revised modelling in Canada resulted in a 0.1% increase in the risk margin. This resulted in a loss of £32m which is included within the Canada operating experience variances as reported in Note 3.2(a) - Segmental analysis - covered business - Segmental EEV income statement.

The impact of the other changes in risk discount rates has been included in the effect of economic assumption changes shown in Note 3.2(a). The amounts within these totals that relate to the changes in risk discount rate are for UK and Europe: profit £144m, for Canada: profit £135m.

	UK HWPF	UK PBF¹	Europe HWPF	Europe PBF¹	Canada	SLIL²	Hong Kong
12 months to 31 December 2012	%	%	%	%	%	%	%
Risk margin - new business
Risk margin before cost of capital adjustment:
Market risk	2.00	1.90	2.10	1.70	2.90	1.60	1.40
Non-market risk	0.50	1.10	1.20	0.60	0.80	0.60	1.50
Total	2.50	3.00	3.30	2.30	3.70	2.20	2.90
Cost of capital adjustment	-	(0.40)	-	(0.60)	(1.00)	(0.10)	-
Risk margin after cost of capital adjustment	2.50	2.60	3.30	1.70	2.70	2.10	2.90

Risk discount rates - new business
Risk free³	1.93	1.93	1.83	1.83	2.17	1.93	1.09
Risk margin	2.50	2.60	3.30	1.70	2.70	2.10	2.90
Risk discount rate⁴	4.43	4.53	5.13	3.53	4.87	4.03	3.99

¹ Proprietary Business Fund (PBF) denotes the equity holder owned fund in SLAL.

² SLIL denotes Standard Life International Limited, part of Asia and Emerging Markets.

³ As the new business contribution is calculated using start of period economic assumptions, the risk free rates shown here represent market yields at 31 December 2011.

⁴ Using the value of in-force for new business as weights, the average risk discount rates for UK and Europe were 4.52% and 3.60% respectively.

	UK HWPF	UK PBF¹	Europe HWPF	Europe PBF¹	Canada	SLIL²	Hong Kong
12 months to 31 December 2011	%	%	%	%	%	%	%
Risk margin - new business
Risk margin before cost of capital adjustment:
Market risk	2.00	2.10	1.80	1.90	1.10	1.70	1.40
Non-market risk	0.90	0.90	1.30	1.30	1.20	0.70	1.50
Total	2.90	3.00	3.10	3.20	2.30	2.40	2.90
Cost of capital adjustment	-	(0.20)	-	(2.00)	(0.30)	(0.20)	-
Risk margin after cost of capital adjustment	2.90	2.80	3.10	1.20	2.00	2.20	2.90

Risk discount rates - new business
Risk free³	3.49	3.49	2.96	2.96	3.29	3.49	2.10
Risk margin	2.90	2.80	3.10	1.20	2.00	2.20	2.90
Risk discount rate⁴	6.39	6.29	6.06	4.16	5.29	5.69	5.00

¹ Proprietary Business Fund (PBF) denotes the equity holder owned fund in SLAL.

² SLIL denotes Standard Life International Limited, part of Asia and Emerging Markets.

³ As the new business contribution is calculated using start of period economic assumptions, the risk free rates shown here represent market yields at 31 December 2010.

⁴Using the value of in-force for new business as weights, the average risk discount rates for UK and Europe were 6.30% and 4.19% respectively.

(d) Asia and Emerging Markets - joint ventures

The PVIF and cost of required capital of the Asian joint ventures are calculated using a 'risk neutral' approach whereby projected investment returns and discount rates are based on risk free rates. The risk free rates used were:

	31 December 2012	31 December 2011
	%	%
India	8.41	8.55
China	3.93	3.89

As a result of this risk neutral approach there is no requirement to hold a market risk margin within the risk discount rate.

Non-market risk has been allowed for via a specific deduction to PVIF, based on a non-market risk 'cost of capital' approach. This has reduced the PVIF of the India and China JV businesses at 31 December 2012 by £25m (31 December 2011: £25m). Similarly, the 2012 pre-tax NBC has been reduced by £6m (2011: £7m) as an allowance for non-market risk.

3.14 Principal economic assumptions - stochastic calculations

The level of TVOG is generally calculated using a stochastic projection. This requires an economic scenario generator (ESG) which projects the relevant fund under a large number of different future economic scenarios. A detailed description of the methodology applied in the relevant funds is provided in Note 3.17 - EEV methodology.

Characteristics of ESG used for HWPF and GWPF TVOG calculations - UK and Europe

The ESG simulates future economic environments in a market-consistent manner. The outputs of the ESG include:

· Cash account index

· Gross redemption yield term structure

· Equity total return index

· Property total return index

· Gilt total return index

· Corporate bond total return index

· Equity dividend yields

· Property rental yields

· Price inflation

· Earnings inflation

The ESG allows option-pricing techniques to be used to value TVOG.

Parameters used in ESG

Cash and bond returns

These variables are calibrated using government strips.

Inflation

This variable is calibrated based on the relationship between real and nominal yield curves.

Equity returns

The volatility of equity returns is calibrated to the market prices of a range of FTSE 100 and Dow Jones Euro Stoxx options.

Property returns

As there is no liquid property option market, a best estimate of property return volatility is used. The property volatility is estimated from adjusted Investment Property Databank UK data.

Dividend and rental yields

Dividend yields are derived from current market observable yields (FTSE All Stocks for UK and Euro Stoxx 50 for Europe).

Rental yields are derived from rental income on our actual portfolio of property (with a three month lag).

3.14 Principal economic assumptions - stochastic calculations continued

Swaption-implied volatilities

The implied volatility is that required in order that the price of the option calculated via the Black Scholes Formula equals the market price of that option.

The model swaption-implied volatilities are set out in the following table (please note the different displayed Swap Terms for UK and Euro):

	31 December 2012		31 December 2011
UK Sterling	Swap term (years)		Swap term (years)
Option term (years)	10	15	10	15
10	17.1%	17.0%	19.1%	17.1%
15	15.3%	15.3%	17.7%	16.1%
20	14.1%	14.0%	16.0%	14.6%
25	13.1%	13.0%	14.6%	13.4%

	31 December 2012		31 December 2011
Euro	Swap term (years)		Swap term (years)
Option term (years)	15	20	15	20
10	18.9%	18.7%	20.2%	19.8%
15	18.7%	18.1%	19.4%	18.6%
20	17.4%	16.5%	17.6%	16.6%
25	16.0%	n/a	16.3%	n/a

Equity-implied volatilities

The implied volatility is that required in order that the price of the option calculated via the Black Scholes Formula equals the market price of that option.

The model equity-implied volatilities are set out in the following table:

UK equities
Term (years)	31 December 2012	31 December 2011
10	26.1%	26.2%
15	26.4%	26.7%
20	26.8%	27.4%
25	27.7%	28.4%

European equities
Term (years)
10	24.2%	27.9%
15	24.1%	27.9%
20	24.6%	28.6%
25	24.8%	28.9%

Property-implied volatilities

The implied volatilities have been set as best estimate levels of volatility based on historic data.

For the UK and Europe, the model is calibrated to property-implied volatility of 15% for 31 December 2012 and 15% for 31 December 2011.

Note 3.10 - Time value of options and guarantees (TVOG) also shows the value of TVOG in Canada and Asia and Emerging Markets, which are in addition to the UK and Europe TVOG. Where material, these values are also calculated using ESG similar to that used for the HWPF and GWPF TVOG calculations, although market observed data is not always available at all durations.

3.15 Foreign exchange

The principal exchange rates applied are:

Local currency: £	Closing 31 December 2012	Average to 31 December 2012	Closing 31 December 2011	Average to 31 December 2011
Canada	1.619	1.591	1.582	1.584
Europe	1.233	1.231	1.197	1.152
India	89.061	84.877	82.529	75.027
China	10.127	10.017	9.782	10.378
Hong Kong	12.599	12.331	12.070	12.499

3.16 Sensitivity analysis - economic and non-economic assumptions

The tables below show the sensitivity of the covered business embedded value and NBC to different scenarios.

Sensitivities tested were:

· 1% increase and decrease in risk discount rates

· Interest rates 1% higher and lower than base case, with consequential changes in fixed interest asset values, reserving assumptions, risk discount rates and investment returns on equities and properties

· 10% fall in market value of equity assets

· 10% fall in market value of property assets

· 10% decrease in maintenance expenses (a 10% sensitivity on a base expense assumption of £10 p.a. would represent an expense assumption of £9 p.a.). Where there is a look through into service company expenses, the fee charged by the service company is unchanged while the underlying expense decreases.

· 10% decrease in lapse rates (a 10% sensitivity on a base lapse assumption of 5% p.a. would represent a lapse rate of 4.5% p.a.)

· 5% decrease in both mortality and morbidity rates for annuitant and non-annuitant policies

· EEV results assuming only prescribed minimum capital (where economic capital has been used in the EEV calculations)

Sensitivities to higher and lower assumed equity and property risk premiums in future investment earnings have not been calculated, as the effect of the risk premium is removed in setting the market risk margin in the risk discount rate. Demographic sensitivities represent a standard change to the assumptions for all products. Different products will be more or less sensitive to the change and impacts may partially offset one another.

Embedded value - covered business

	UK and Europe	Canada	Asia and Emerging Markets	Total
31 December 2012	£m	£m	£m	£m
Embedded value	4,009	2,313	391	6,713
Risk discount rates +1%	(294)	(212)	(13)	(519)
Risk discount rates -1%	347	272	14	633
Interest returns +1%	24	29	1	54
Interest returns -1%	(85)	(85)	(4)	(174)
Fall in equity market values by 10%	(186)	(60)	(10)	(256)
Fall in property market values by 10%	(21)	(45)	(1)	(67)
Maintenance expenses -10%	151	111	5	267
Lapse rates -10%	131	39	10	180
Annuitant mortality -5%	(86)	(47)	-	(133)
Non-annuitant mortality -5%	12	37	2	51
Prescribed minimum capital	-	158	-	158

The UK and Europe sensitivity numbers above include the movement in HWPF and GWPF TVOG. The HWPF and GWPF TVOG movement has a material impact only under the interest returns sensitivities, where it contributes £68m under the interest returns +1% sensitivity and (£168m) under the interest returns -1% sensitivity. This is a reduced sensitivity movement compared to the HWPF and GWPF TVOG sensitivity for the year ended 31 December 2011, under which HWPF and GWPF TVOG contributed £111m under the interest returns +1% sensitivity and (£391m) under the interest returns -1% sensitivity. The reduction is due to the lower starting value of the HWPF and GWPF TVOG liability and the impact of asset strategy changes and improved modelling during 2012.

3.16 Sensitivity analysis - economic and non-economic assumptions continued

New business contribution

	UK and Europe	Canada	Asia and Emerging Markets	Total
12 months to 31 December 2012	£m	£m	£m	£m
New business contribution	261	45	33	339
Risk discount rates +1%	(33)	(21)	(4)	(58)
Risk discount rates -1%	40	26	5	71
Interest returns +1%	2	(10)	(1)	(9)
Interest returns -1%	(9)	14	-	5
Fall in equity market values by 10%	(22)	(10)	(1)	(33)
Fall in property market values by 10%	(3)	(1)	-	(4)
Maintenance expenses -10%	18	11	1	30
Lapse rates -10%	16	12	3	31
Annuitant mortality -5%	(4)	-	-	(4)
Non-annuitant mortality -5%	-	7	-	7
Prescribed minimum capital	-	5	-	5

The UK and Europe sensitivity numbers above include the movement in the GWPF TVOG. There is no new business in the HWPF TVOG. The GWPF TVOG movement has a material impact only under the interest returns sensitivities, where it contributes £2m under the Interest returns +1% sensitivity and (£10m) under the interest returns -1% sensitivity. The comparative GWPF TVOG sensitivity movements for the year ended 31 December 2011 were £1m under the interest returns +1% sensitivity and (£4m) under the interest returns -1% sensitivity.

3.17 EEV methodology

Covered business

For the purposes of EEV reporting, a distinction is drawn between covered business to which EEV methodology is applied and non-covered business where results and balances are based on those determined under IFRS and included in the IFRS financial statements, unless otherwise stated.

The Group's covered business is its life assurance and pensions businesses in the UK and Europe (UK, Germany including Austria and Ireland onshore), Canada and Asia and Emerging Markets (SLIL, Hong Kong and the India and China JV businesses), as well as the current and future profits and losses from Standard Life Investments arising on its management of funds relating to the life and pensions businesses.

UK and Europe covered business also includes:

· Non-insured self invested personal pension (SIPP) business

· Those elements of Wrap business that are contained within a long-term product wrapper, i.e. bonds, SIPPs and mutual funds

· Mutual funds sold by the UK business

· The Group's Germany branch of Standard Life Assurance Limited (SLAL)

· The Group's Ireland branch of SLAL

Canada covered business also includes mutual funds.

Asia and Emerging Markets covered business consists of:

· The Group's offshore bond and International Offshore Savings and Investment business, which is sold by Standard Life International Limited (SLIL)

· The Group's business in Hong Kong (Standard Life (Asia) Limited)

· The Group's share of results in the JV in India, HDFC Standard Life Insurance Company Limited, at 26% for the 12 months to 31 December 2012 (2011: 26%)

· The Group's share of results in the JV in China, Heng An Standard Life Insurance Company Limited, at 50% for the 12 months to 31 December 2012 (2011: 50%)

Non-covered business

The Group's non-covered business predominantly consists of the third party business of Standard Life Investments, Standard Life plc, the non-covered business of Standard Life Savings Limited, other non-life and pensions entities and the Group's UK pension scheme.

Non-covered business EEV operating profit is represented by operating profit as adjusted for Standard Life Investments look through profits and the return on mutual funds which are recognised in covered business.

Segmentation

Under the EEV Principles and Guidance we are required to provide business classifications which are consistent with those used for the primary statements. In the IFRS financial statements the Group's reportable segments have been identified in accordance with the way in which the Group is structured and managed, as required under IFRS 8. The EEV segmentation has been prepared in a consistent manner, whilst also distinguishing between covered and non-covered business.

Transfer back of net worth from covered business

Covered business includes the profits and losses arising from non-covered businesses providing investment management and other services to the Group's life and pensions businesses. As a result, the profits and losses on an IFRS basis have been removed from the relevant non-covered segments (Standard Life Investments, UK and Europe non-covered and other non-covered) and are instead included within the EEV results of the covered businesses.

The capitalised values of the future profits and losses from such service companies are included in the opening and closing embedded value for the relevant businesses, but the net assets remain within the relevant non-covered businesses. A transfer of profits from the covered business to the non-covered business is deemed to occur in order to reconcile the profits and losses arising in the financial period within each segment with the opening and closing EEV net assets.

Value of in-force covered business

The value of future equity holders' cash flows is calculated for each material business unit on an after-tax basis, projected using best estimate future assumptions as described in the EEV methodology.

Allowance is made for external reinsurance and reinsurance within the Group. The cash flows include the profits and losses arising in Group companies providing investment management and other services where these relate to covered business. This is referred to as the 'look through' into service company expenses.

The projected cash flows are discounted to the valuation date using a risk discount rate which is intended to make sufficient allowance for the risks associated with the emergence of these cash flows, other than those risks allowed for elsewhere in the EEV calculations. In particular, a deduction is made from the present value of the best estimate cash flows to reflect the risks associated with the existence of financial options and guarantees, this deduction being assessed using stochastic techniques as described in the EEV methodology.

Free surplus

The free surplus is the market value of any assets allocated to, but not required to support, the in-force covered business at the valuation date. In the UK, this comprises the market value of the assets in the equity holders' fund, plus the value of the equity holders' interests in the surplus of the long-term fund, after appropriate allowance for tax, less the required capital supporting the covered business.

For some assets and liabilities where market value is not the normal basis for accounting, the free surplus is restated to market value, adjusted as required to allow for the present value of any tax which would become payable if the assets were realised.

Allowance for risk

Under the EEV Principles and Guidance, risks within the covered business are allowed for in the following ways:

· Application of risk discount rates to projected cash flows, which are derived by adding a risk margin to a risk free rate

· Holding of required capital for the covered business, determined by reference to both regulatory requirements and internal economic capital assessments

· Allowing for TVOG

Risk discount rates

Under the EEV methodology, a risk discount rate is required to calculate the present value of expected future distributable profits as a single value at a particular date. The risk discount rate comprises a risk free rate which reflects the time value of money and a risk margin allowing for the risk that experience in future years may differ from that assumed. In particular, a risk margin is added to allow for the risk that expected additional returns on certain asset classes are not achieved.

Risk discount rates have been determined as the risk free government bond yield plus a risk margin. The risk margins have been determined for market risk and non-market risk separately. For market risk, we have opted for an approach whereby the risk margin is determined such that PVIF (excluding the allowance for TVOG) calculated using expected 'real world' asset returns equates with PVIF calculated using 'risk neutral' investment returns and discount rates. In this way, the benefits of assuming higher than risk free returns on future cash flows are offset by using a higher discount rate. However, when returns above the risk free rate arise from the additional returns available from investing in illiquid assets, namely corporate bonds and mortgages, where they are matched to appropriate liabilities, these are not offset in determining the discount rate. Allowance has then been made for non-market risk by applying stress tests to PVIF using our internal capital model, and quantifying an additional risk margin based on the results of the stress tests.

3.17 EEV methodology continued

The main elements of non-market risk which are stress tested are lapse, mortality, expense and credit risk assumptions. Benefits of diversification between risk types are allowed for in deriving the risk margins in line with our internal capital model.

Separate risk discount rates have been calculated for in-force and new business and for the principal geographic segments (UK, Germany, Ireland onshore, SLIL, Canada and Hong Kong). Within the UK and Europe, separate risk margins are calculated for profits emerging on policies inside the HWPF (regardless of whether these profits emerge directly from the HWPF or by inter-fund arrangements) and on policies that are in equity holder owned funds. For HWPF policies, there is a significant inter-fund arrangement in respect of mortality surpluses on annuities. The HWPF risk margin anticipates diversification benefits including the annuity mortality risk, since the overall capital structure also benefits from this diversification.

The risk margins are also reduced to allow for any cost of required capital (excluding double taxation cost) which is already reflected within the EEV.

Market risk margins are reviewed at each valuation date, allowing for changes in risk profile arising from movements in asset mix. Non-market risk margins are reviewed in detail once a year.

The values of the risk discount rates used for this reporting period are provided in Note 3.13 - Principal economic assumptions - deterministic calculations - covered business.

Within the EEV results for the India and China JV businesses, PVIF and cost of required capital are calculated using a 'risk neutral' approach, whereby projected investment returns and discount rates are based on risk free rates. As a result, there is no need for an additional market risk margin in the discount rate. Non-market risk is deducted directly from PVIF using a 'cost of capital' approach on the risk capital arising from the key sources of non-market risk. For the India and China JV businesses, this methodology would give a similar result to the methodology used in the UK, Europe, Canada and Hong Kong, since the calibration of a risk discount rate would have allowed for the market and non-market risks.

Required capital

Required capital represents the amount of assets over and above those required to back the liabilities in respect of the covered business whose distribution to equity holders is restricted. As a minimum, this will represent the capital requirement of the local regulator.

The levels of required capital are reviewed in detail at least once a year.

We have set required capital to be the higher of regulatory capital and our own internally assessed risk-based capital requirement. In determining the required capital for the purposes of assessing EEV, the Group excludes any capital which is provided by the existing surplus in the HWPF, as this capital is provided by policyholders. Any required capital in excess of that provided by the existing surplus in the HWPF would need to be provided by assets in the equity holders' funds. As part of the annual assessment, projections of the expected surplus in the HWPF, on best estimate assumptions, are carried out to assess whether this is sufficient to cover the level of required capital in respect of the HWPF. Required capital used in the EEV is also net of any capital that is assumed to be available from subordinated liabilities.

The levels of required capital in the current EEV calculations are therefore as follows:

· UK and Europe (business in HWPF) - no capital requirement in excess of statutory reserves or asset shares is valued in the EEV

· UK and Europe (business in equity holder owned funds) - 100% of EU minimum regulatory capital, which is higher in aggregate than Standard Life's internal risk-based capital requirement

· Canada - the level of required capital is taken as 170% of minimum continuing capital and surplus requirements (MCCSR)

· India, China and Hong Kong - required capital is based on the local statutory capital requirements

The cost of required capital has been calculated using assumptions consistent with those used in the value of in-force (VIF) calculations.

Time value of financial options and guarantees (TVOG)

TVOG represents the potential additional cost to equity holders where a financial option exists which affects policyholder benefits and is exercisable at the option of the policyholder.

UK and Europe - HWPF

The main source of TVOG in the Group EEV arises from the HWPF. Under the terms of the Scheme, equity holder cash flows from the HWPF are held back if required to cover HWPF liabilities on the Financial Services Authority realistic or regulatory basis. This option for the UK, Germany and Ireland results in the loss of cash flows when the HWPF has insufficient assets to pay guaranteed policy benefits. The main options and guarantees within the HWPF in respect of UK and Europe business relate to with profits business and include minimum guaranteed rates of return.

The value of TVOG arising from the HWPF at any point in time will be sensitive to:

· The level of the residual estate (working capital in the HWPF)

· Investment conditions in terms of bond yields, equity and property values, and implied market volatility

· The investment profile of the assets backing the applicable policies, the residual estate and non profit business in the fund at the time TVOG is calculated

The level of TVOG has been calculated by a model which projects the HWPF under a large number of different future economic scenarios. Particular features of this calculation are:

· The projected economic scenarios and the methodology used to discount equity holder cash flows are based on
market-consistent assumptions

· The total cost includes an allowance for non-market risk

· Changes in policyholder behaviour are allowed for according to the particular economic scenario

· Changes in management actions, including the dynamic guarantee deductions, are allowed for according to the particular economic scenario, such actions being expected to be consistent with the way that the HWPF will be managed in future as described in the Scheme and in the Principles and Practices of Financial Management (PPFM)

· Each projection allows for the gradual release of the residual estate over time to policyholders where there are sufficient funds

UK and Europe - other

Most with profits business written post demutualisation is managed in a number of new with profits funds. For the present reporting period, the only significant volumes of this type of new business have arisen in Germany. These policies have guarantees relating to benefits available on the policy maturity date, some of which increase each year with the addition of bonuses.

Equity holder assets are at risk if the resources of these with profits funds are insufficient to pay the guaranteed benefits. The level of TVOG has been calculated using stochastic techniques. TVOG has reduced both NBC and closing PVIF for Germany.

An adjustment is made within free surplus to allow for the potential cost of a selection of guaranteed annuity benefits on unit linked and smoothed-managed business within Germany.

Canada

The main options and guarantees within the Canada business are in respect of minimum investment returns, guaranteed maturity and death benefits, and vested bonuses, which apply to certain investment and insurance contracts. TVOG has reduced both NBC and closing PVIF for Canada.

Asia and Emerging Markets

TVOG in the Asia businesses within Asia and Emerging Markets arises from guarantees and options given to with profits business written in India and China.

Other economic assumptions

The assumed investment returns reflect our estimates of expected returns on principal asset classes, and are, in general, based on market conditions at the date of calculation of the EEV.

The inflation rates assumed are, in general, based on the market implied long-term price inflation plus a margin to allow for salary inflation.

The Group's offshore business, which is sold by SLIL, is included within Asia and Emerging Markets results but has the same other economic assumptions as UK covered business.

Details of the assumptions used for this reporting period are provided in Note 3.13 - Principal economic assumptions - deterministic calculations - covered business.

Non-economic assumption changes

Non-economic assumptions for the main classes of business, including most expense assumptions, are reviewed on an annual basis.

3.17 EEV methodology continued

Expense assumptions

Expense assumptions on a per policy basis have been derived based on an analysis of management expenses performed by each business, and are split between acquisition and maintenance assumptions.

In determining future expenses in relation to covered business, no allowance has been made in the EEV or NBC for any allocation of group corporate centre costs.

Development expenses represent specific expenses incurred which are considered temporary in nature and are not expected to occur again.

Costs related to restructuring have been excluded from the EEV results where it has been agreed that these costs are to be met by the HWPF and therefore would not form part of the surplus cash flows.

Investment management expenses are also allowed for, and the assumptions for these reflect the actual investment expenses of Standard Life Investments in providing investment management services to the life and pensions businesses rather than the investment fees actually charged.

Restructuring costs are consistent with those identified in the Group operating profit adjustments. Refer to the IFRS financial information Note 2.3 - Administrative expenses for further detail. In addition, restructuring costs for covered business include associated impacts on PVIF and cost of required capital.

Acquisition costs used within the calculation of NBC reflect the full acquisition expenses incurred in writing new business in the period.

Expenses - pension schemes

Pension schemes have been included in accordance with International Accounting Standard (IAS) 19 Employee Benefits and IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements.

Other non-economic experience assumptions

Assumptions are made in respect of future levels of mortality, morbidity, premium terminations, option take-up, surrenders and withdrawals. The assumptions reflect our best estimates of the likely future experience, and are based on recent experience and relevant industry data, where available.

Annuitant mortality assumptions use a combination of base mortality rates, which are generally set by reference to recent experience, and expected future changes in mortality. The latter uses company-specific considerations, along with data provided by the Continuous Mortality Investigation Bureau in the UK and the Canadian Institute of Actuaries in Canada.

Assumptions regarding option take-up, surrenders and withdrawals are assumed to vary, where appropriate, according to the investment scenario under consideration when deriving TVOG, to reflect our best estimate of how policyholder behaviour may vary in such circumstances.

New business

Definition of new business

New business includes new policies written during the period and some increments to existing policies.

For the UK, classification as new or existing business is determined using the approach used for the published new business figures as follows:

· New recurrent single premium business is classified as new regular premium business to the extent that it is deemed likely to renew

· Department for Work and Pensions rebates are deemed to be new single premiums

· Pensions vesting into annuity contracts under existing group defined benefits contracts are not included as new business

· Pensions vesting under other group contracts and individual pensions are included as new business

· Products substituted due to the exercise of standard contract terms are not deemed to be new business

· All increments and indexations to existing policies, including new members, and increments and indexations paid by existing members of group schemes, are deemed to be new business

For Germany, new business comprises new contracts written into the equity holder owned funds during the period (with the exception of vesting annuities for tax layer 1 deferred annuities sold before September 2009). NBC for Germany is calculated assuming a specific level of future premium indexation. Similarly, it is assumed that premiums on 'low start' policies increase at the end of the low start period.

For Ireland, new business is determined as follows:

· New contracts written during the period are included as new business

· New premiums on recurrent single premium contracts are included as new business

· Pensions vesting into annuity contracts under existing group defined benefits contracts are not included as new business

· Pensions vesting under other group contracts and individual pensions are included as new business

· All increments and indexations to existing policies, including new members, and increments and indexations paid by existing members of group schemes, are deemed to be new business

For Canada, business is deemed to be new business if a contract has been issued during the reporting period. NBC also includes the value of renewal premiums for a new contract, where the renewal premiums are (i) contractual, (ii) non-contractual but reasonably predictable, or (iii) recurrent single premiums that are pre-defined and reasonably predictable.

The present value of future net income attributable to renewal premiums on existing group pension and savings contracts, including those from new members, is not included as new business. Since all deposits (new and renewal) in individual segregated funds business attract a new business/first year commission, this business is treated as new business for EEV purposes.

For the Asia businesses, new business is defined as that arising from the sale of new contracts during the reporting period. The value of new business includes the value of expected renewals on those new contracts.

New business contribution (NBC)

The contribution generated by new business written during the period is the present value of the projected stream of after-tax distributable profit from that business. NBC before tax is calculated by grossing up the contribution after tax at the full corporation tax rate for UK business and at other equivalent rates of tax for other countries. NBC is calculated as at the end of the reporting period.

The economic assumptions used are those at the start of the reporting period, and the non-economic assumptions are those at the end of the reporting period. An exception to this approach is annuity business in the UK and Ireland where, to ensure consistency between the economic assumptions used in NBC and those used in pricing the business and in the calculation of mathematical reserves, the economic assumptions used are the average rates for each quarter during the reporting period, and the asset allocations are those used in the pricing basis.

Present value of new business premiums (PVNBP)

New business sales are expressed as PVNBP. The PVNBP calculation is equal to total single premium sales received in the period plus the discounted value of regular premiums expected to be received over the term of the new contracts, and is expressed at the point of sale. The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate NBC, except that PVNBP is discounted using the relevant opening risk free rate rather than the risk discount rate.

Tax

The opening and closing EEV numbers for covered business are determined on an after-tax basis. The tax assumptions used are based upon the best estimate of the actual tax expected to arise. EEV attributable tax and EEV profit before tax are derived by grossing up EEV profit after tax at the long-term rate of corporation tax appropriate to each territory. While for some territories this rate does not equate to the actual effective rate of tax used in the calculation of EEV after-tax profits, it provides a consistent grossing-up basis upon which to compare results from one year to another and is in line with the Group's expectation of the rate of tax applicable to new business.

During 2009, a loan was made to the HWPF by the Company, repayment of which is contingent on the emergence of recourse cash flows and surplus in the HWPF (contingent loan agreement). A transfer to equity holders was then made to transfer the remaining unallocated surplus to equity holders without equity holder tax arising. As a result of this, the market risk associated with unallocated surplus was reduced. Future transfers to equity holders from the HWPF will, in the first instance, take the form of repayments under the contingent loan agreement. The actual effective tax rate on these transfers to equity holders will move towards the standard rate of corporation tax as the contingent loan reduces.

For non-covered business, attributed tax is consistent with the IFRS financial statements, unless otherwise stated.

3.17 EEV methodology continued

Assets designated as available-for-sale under IFRS

The Group has designated certain financial assets used to back subordinated liabilities and investment contract liabilities as available-for-sale (AFS) under IFRS accounting.

Where AFS assets are held by an EEV covered business entity and these assets are used to back investment contract liabilities accounted for under local solvency regulations at amortised cost, then the assets are also included within EEV on an amortised cost basis and EEV operating profit reflects the long-term investment return on the assets calculated at acquisition.

Where AFS assets are held by an EEV covered business entity and these assets are used to back subordinated liabilities which are accounted for in EEV at market value, then the assets are also included within EEV on a market value basis. EEV operating profit reflects the long-term investment return on the assets and unrealised gains and losses are included within EEV non-operating profit.

Where AFS assets are held by an EEV non-covered entity, unrealised gains and losses do not impact EEV profit and are recorded within the EEV consolidated statement of comprehensive income.

Subordinated liabilities

The liabilities in respect of the UK subordinated debt plus the subordinated debt issued by Canada form part of covered business and have been deducted at market value within EEV.

For Canada, previously issued subordinated liabilities were owned by a non-covered subsidiary of the Group, where the asset was valued on an amortised cost basis. Total Group EEV was adjusted to exclude the difference between the market value and the amortised cost value. During the year ended 31 December 2012, the subordinated liability was fully redeemed and the consolidation adjustment for different accounting bases is therefore no longer required.

For non-covered business, no adjustment is made to the IFRS valuation of debt.

Foreign exchange

Embedded value and other items within the statement of financial position denominated in foreign currencies have been translated to Sterling using the appropriate closing exchange rates. NBC and other items within the income statement have been translated using the appropriate average exchange rates. Gains and losses arising from foreign exchange differences on consolidation are presented separately within the EEV consolidated statement of comprehensive income. Details of the exchange rates applied are provided in Note 3.15 - Foreign exchange.

3.18 Events after the reporting period

On 27 February 2013, the Group announced that it had entered into an agreement with Newton Management Limited to acquire its private client division with assets under management of £3.6bn. The consideration of up to £83.5m will be ultimately contingent on the value of assets under management transferred to, and retained by, the Group. The transaction is expected to complete within seven months subject to completion conditions being satisfied.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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