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Demutualisation of Standard Life

Since 1925, The Standard Life Assurance Company ("Standard Life") operated as a mutual assurance company. As a mutual, it had no shareholders and its members were its policyholders. As a mutual company, Standard Life was managed for the benefit of its members and its business was operated so as to maximise the returns on members’ investments, whilst preserving appropriate levels of security. Standard Life is Europe’s largest mutual assurance company.

During the 1990s, Standard Life delivered strong investment returns to its policyholders^1. (¹ Statements contained in this website regarding past trends, performance or activities should not be taken as a representation or indication that such trends, performance or activities will continue in the future.) This was principally achieved through the high equity-backing ratio of its with profits business which was designed to achieve long-term growth for policyholders, taking advantage of the high returns to be obtained on equity investments compared to other assets in the prevailing economic conditions at that time.

Since 2000, a number of significant changes had occurred, for example:

• A significant decline in stock market performance between 2001 and 2003 served to reduce the capital base of a number of life assurance companies, including Standard Life;
  
  
• Low inflation and low interest rates contributed to the prospect of lower long-term investment returns;
  
  
• With profits products were no longer as popular in the group’s main UK business as they were;
  
  
• With profits investors had declined as a proportion of the group’s total customer base. As with profits investors effectively bore all of the business risks of the group, the overall risks of the business were being carried by a progressively smaller group of people; and
  
  
• In 2004, the Board decided that Standard Life was no longer able to offer policyholders the prospect of additional financial benefits in the form of increased policy payouts (“benefits of mutuality”).
  

Against the background of these significant changes, in the early part of 2004, the group appointed a new Group Chief Executive and undertook a strategic review of its business. The strategic review was wideranging and examined the group’s business in its entirety, both in the United Kingdom and overseas, assessing the potential for a number of operational and financial improvements, but with a particular focus on UKL&P. It was also acknowledged that the group’s mutual structure, and the increased regulation to which it was subject, imposed limitations on its ability to access additional capital and could limit opportunities for planned growth and development, placing the group at a disadvantage to insurance companies which did not have such a structure.

As a result, the Directors considered a number of options for addressing this situation, culminating in the announcement on 17 October 2005, following a detailed assessment of such options, that they were satisfied that, in principle, proceeding towards demutualisation and flotation was in the best interests of the group and its policyholders and the business as it would realise value for with-profits policyholders, reduce the business risks to which they were exposed and provide access to external equity capital to develop and expand the group’s business. As part of the flotation, the group expects to raise capital to enable it to support and grow its business and to take advantage of market opportunities. Demutualisation and flotation gave the Standard Life group access to external equity capital which would not otherwise be available to it.

Note.

As stated above, the strategic review assessed the potential for operational and financial improvements across the group’s business units. This review concluded that the group had a fundamentally good portfolio of businesses but profitability, particularly in UKL&P, needed to be addressed. As a result, a number of important initiatives have been implemented to reposition the group, and UKL&P in particular, to secure a platform for improved profitability and capital strength. During 2004 and 2005, the group made significant progress through a combination of:

• Repricing products and managing the group’s capital more effectively by placing more emphasis on more profitable products using less capital, shifting from regular to single premium products (single premium products in the three months ended 31 March 2006 accounted for 54% of total APE compared to 39% in the same period in FY 2005) and by reducing the number of products written with guarantees;
  
  
• Changing the commission structure on pension products in an effort to improve profitability;
  
  
• Diversifying the group’s distribution channels;
  
  
• Reducing costs, primarily through process efficiencies and reducing headcount by some 3,000 jobs in the United Kingdom;
  
  
• Lowering investment risk and capital requirements by reducing exposure to equity assets backing Standard Life's with profits business;
  
  
• Improving financial strength through the issue of subordinated debt capital totalling £815 million;
  
  
• Focusing the group’s business units on profit generation; and
  
  
• Strengthening the management team (a new Chief Executive Officer of Life & Pensions, UK & Europe was appointed in 2004 and a new Chief Financial Officer in 2005).