shareholder exposure to longevity risk, UK insurer Standard Life
(Standard) has accepted a bid from Canadian insurer Great-West
Lifeco’s reinsurance unit, Canada Life International Re, to
reinsure £6.7 billion ($13.2 billion) of its UK immediate annuity
liabilities. “This transaction is believed to be the largest of its
kind in the UK, and follows a full analysis of the strategic
options for our annuity book and a competitive tender process,”
said Standard’s group chief executive, Sandy
Crombie.
The block of business reinsured – more than half of Standard’s
annuity liabilities – relates to individual life immediate
annuities residing in its Heritage With Profits Fund (HWPF) written
prior to its demutualisation in July 2006. Following
demutualisation, shareholders bear the longevity risk on
pre-demutualisation business; investment risk is borne by the HWPF.
For new annuity business written by Standard since its
demutualisation, shareholders bear longevity risk but also benefit
from investment margins.
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The remaining blocks of Standard’s UK immediate annuity portfolio
that have not been affected by this transaction comprise group
annuity policies, with-profits annuities, Irish annuities and the
reversionary element of joint life annuities. Standard’s remaining
blocks represent liabilities totalling £5.3 billion. Standard will
continue to administer all the business being reinsured.
“It [the transaction] substantially reduces pure longevity risk
while providing a significant increase to embedded value, a release
of cash and a reduction in capital requirements,” stressed Crombie.
“It creates capacity to broaden our innovative product range and
take advantage of the profitable opportunities available to
us.”
For Standard, one immediate benefit of the transaction will be what
it estimates to be a one-off increase in its pre-tax profit of £100
million in 2008. This profit reflects the reduction in the risk
discount rate used to calculate future shareholder cash flows and
was calculated after taking into account the underlying benefit
from the transaction that is shared with with-profits policyholders
and after allowing for the loss of operating margin incurred by the
insurer’s investment unit, Standard Life Investments.
The transaction will also result in a significant reduction in the
sensitivity of Standard’s European embedded value (EEV) and
international reporting standards profits to longevity risk. In the
case of EEV, the sensitivity of the UK’s year-end 2006 embedded
value to a 5 percent strengthening of mortality assumptions has
been reduced by about £40 million, from £94 million pre-transaction
to £55 million post-transaction.
