STANDARD Life's rivals are tipped to follow its lead in offloading "longevity risk" – commitments to policyholders who are living longer – after the insurer announced the largest transfer of annuity liabilities by a UK company.
The former mutual yesterday revealed that it had reinsured £6.7 billion of its UK annuity liabilities from 300,000 individual policy holders to Canada Life, a subsidiary of Great-West Lifeco.
The annuities, from the Heritage With Profits Fund, rep
resent more than half of Standard Life's total annuity liabilities of £12bn.
Analysts welcomed the deal, which dramatically cuts Standard Life's exposure to the risks posed by increased longevity, and boosts its embedded value by £100 million. Shares opened 3 per cent higher yesterday, closing up 1 per cent at 209.5p.
The company took the decision to offload the risk because pensioners are living longer than providers had assumed when the annuities were written, potentially forcing additional money to be set aside to cover the extra payments. While the risk to Standard Life shareholders had been documented, and it was thought to be working on a deal, the scale surprised the market. Initially Standard Life expected it would have to sell the annuity risk in several tranches.
Panmure Gordan analyst Barrie Cornes said comments by Standard Life that multiple players competed with Canada Life for the deal would probably spur other UK players into action. Swiss Re and Axa have previously been linked with a deal.
Cornes said: "Clearly from what Standard is saying, there is an opening-up market of companies to take these risks, so you can probably see the likes of Legal & General, the Pru (Prudential] and Aviva looking down this route if they're not already."
Cornes, who upgraded Standard Life to a 'buy' rating yesterday, said that before the credit crunch the mortality risk was "the number one issue" for analysts, questioning how insurers would deal with the issue.
Standard Life will transfer £6.7bn of assets to Canada Life, which like other reinsurers, takes a different view of the mortality risk to the wider market. Standard Life insisted there would be no change for policyholders and no job cuts as a result of the deal. It will continue to administer the policies, maintaining the relationship with the pensioners.
The deal is a boost for shareholders, who bore the risk of any change to lifespan assumptions.
Standard Life said the deal would boost its embedded value operating profit by "at least" £100m this year, release cash from reserves and reduce its capital requirements.
Chief executive Sandy Crombie said: "It substantially reduces pure longevity risk while providing a significant increase to embedded value, a release of cash and a reduction in capital requirements," Crombie said.
"It creates capacity to broaden our innovative product range and take advantage of the profitable opportunities available to us."
Standard Life's deal is the largest of its type by a UK insurer. In 2006, Equitable Life transferred £4.6bn worth of assets, also to Canada Life, while Resolution Life offloaded a £2.2bn annuity book to the same company in 2005.
The full article contains 522 words and appears in The Scotsman newspaper.
