14th Feb 2008 07:01
Standard Life plc14 February 2008 Standard Life reinsures £6.7bn of annuity liabilities14 February 2008 • Standard Life has reinsured £6.7bn of UK immediate annuity liabilities, more than half of its total £12bn1, to Canada Life International Re, a wholly-owned subsidiary of Great-West Lifeco. • Longevity risk exposure for shareholders significantly reduced. • An expected one-off positive impact on embedded value operating profit of at least £100m2 and release of cash from reserves in 2008 along with a reduction in capital requirements. • Benefits the Heritage With Profits Fund (HWPF) through an enhancement of the residual estate. • Standard Life retains the relationship and servicing for all our annuitant customers. Group Chief Executive Sandy Crombie said: "I am delighted to announce this transaction with Great-West which deliversbenefits to our shareholders and the policyholders in our Heritage With ProfitsFund. It is consistent with our strategy of improving risk adjusted returns forthe group, while crystallising value in the Heritage With Profits Fund estatefor the benefit of with-profits policyholders. Importantly, Standard Liferetains the relationship and servicing for all our annuitant customers. "This transaction is believed to be the largest of its kind in the UK, andfollows a full analysis of the strategic options for our annuity book and acompetitive tender process. "It substantially reduces pure longevity risk while providing a significantincrease to embedded value, a release of cash and a reduction in capitalrequirements. It creates capacity to broaden our innovative product range andtake advantage of the profitable opportunities available to us." Standard Life has a large back book of annuity business in the UK predatingdemutualisation in July 2006. The book primarily consists of existing StandardLife pensions customers who, on retirement, took out an annuity product with us.Following demutualisation, shareholders bear the longevity risk onpre-demutualisation business while investment risk is borne by the Heritage WithProfits Fund. Standard Life conducted a comprehensive review of the options to managelongevity exposure within our annuity book in the context of our overall riskprofile. This review concluded that the best return to shareholders andwith-profits policyholders would be achieved by reinsuring a major block of thebusiness that predated our demutualisation. The transaction has taken the form of a 'single premium' reinsurance structureand has resulted in the transfer of £6.7 billion of Standard Life's total £12bn1UK immediate annuity liability. The effective date of the transaction is 14thFebruary 2008. The tranche of business that has been reinsured relates toindividual life immediate annuities written prior to demutualisation, whichreside within the Heritage With Profits Fund. The remaining blocks of StandardLife's UK immediate annuity portfolio that have not been affected by thistransaction comprise group annuity policies, with profits annuities, Irishannuities, and the reversionary element of joint life annuities. The transaction is expected to deliver a number of financial benefits,including: • An expected one-off increase in pre-tax embedded value operating profit of at least £100m2 in 2008. This reflects the reduction in the risk discount rate used to discount futureshareholder cashflows. This amount is after sharing the underlying benefit fromthe transaction with with-profits policyholders and is after allowing for theloss of lookthrough margin to Standard Life Investments. • A release of cash from reserves in 2008. • A significant reduction in the sensitivity of our EEV and IFRS profits to longevity risk. In the case of EEV, the sensitivity of the UK's year-end 2006 embedded value toa 5% strengthening of mortality assumptions has been reduced by approximately£40m, from £94m pre-transaction to £55m post-transaction. • A reduction in Pillar 2 capital requirements3. • An enhancement to the Heritage With Profits Fund estate and a reduction in its exposure to risk. Reducing our longevity exposure provides greater capacity to broaden ourinnovative product range and take advantage of the profitable opportunitiesavailable to us. For new annuity business written by Standard Life since demutualisation,shareholders bear longevity risk but also benefit from investment margins.Conversions from Standard Life pension policyholders currently account for over90% of our annuity sales. Standard Life will continue to administer all the business being reinsured andas a result the transaction will have no impact on the service provided toannuity customers. Impact on With Profits Policyholders in the Heritage With Profits Fund Under the scheme of Demutualisation that came into effect at IPO, with-profitspolicyholders are protected from exposure to longevity risk via a reinsurancearrangement, through which this exposure has been transferred to shareholders ofStandard Life plc. The terms of the reinsurance transaction were arrived at with due considerationfor our ongoing obligations to our with-profits policyholders under the TreatingCustomers Fairly initiative and our Principles and Policies of FinancialManagement. The longevity risk protections currently afforded to ourwith-profits policyholders will not be affected by this transaction.Furthermore, this transaction benefits the Heritage With Profits Fund byenhancing its estate. Great-West Lifeco Inc. Canada Life International Re Limited was established in Ireland in 2001. It isa wholly owned subsidiary of The Great-West Life Assurance Company and is fullyregulated by the Irish Financial Regulator. The Great-West Life AssuranceCompany is the largest operating company of Great-West Lifeco Inc., which has acurrent market capitalisation of around £14bn (C$28bn) and had assets underadministration of over £200bn (C$400bn) at 30 September 2007. The Great-WestLife Assurance Company is rated 'AA' by Standard and Poor's Corporation and 'A+'by A.M Best Company. For further information please contact: Institutional Equity Investors: Gordon Aitken 0131 245 6799Duncan Heath 0131 245 4742 Retail Equity Investors: Computershare 0845 113 0045 Media: Barry Cameron 0131 245 6165 / 07712 486 463Neil Bennett (Maitland) 020 7379 5151 / 07900 000 777 Debt Investors: Andy Townsend 0131 245 7260 Notes to Editors: 1. The total UK immediate annuity liability of £12bn includes £0.3bn in respect of Irish immediate annuities and excludes total deferred annuity liabilities of approximately £1.5bn. 2. The expected one-off benefit to pre-tax embedded value operating profit has been calculated on the basis of the European Embedded Value (EEV) methodology used by Standard Life as at the end of 2007. 3. Pillar 2 refers to the level of capital that a company calculates it should hold under regulatory Internal Capital Assessments (ICA). 4. There will be a conference call today for investors and analysts at 9.00am (UK time) hosted by David Nish, Group Finance Director, and Evelyn Bourke, Managing Director of Finance for UK Financial Services. Dial in telephone number +44 (0)20 7162 0125. Callers should quote Standard Life call. A recording of this call will be available for replay for one week by dialing +44 (0)20 7031 4064 (access code 785016). This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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