Demutualisation

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. Standard Life was managed for the benefit of its members and aimed to maximise the returns on members' investments, while preserving appropriate levels of security.

During the 1990s, Standard Life delivered strong investment returns to its policyholders1. (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 content of its with profits fund which was designed to achieve long-term growth for policyholders. The fund took advantage of the high returns that could be obtained on equity investments compared to other assets at that time.

Factors that influenced demutualisation

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

  • A decline in stock market performance between 2001 and 2003 reduced the capital base of a number of life assurance companies, including Standard Life
  • Low inflation and low interest rates signalled lower long-term investment returns
  • With profits products became less popular
  • 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 number of people
  • In 2004, the Board decided that Standard Life’s mutual status was no longer consistent with being able to offer policyholders the prospect of increased policy payouts

Strategic review and announcement

Against this background, in 2004, the group appointed a new Chief Executive and undertook a strategic review of its business. The review was wide-ranging and examined the group's business in its entirety - in the United Kingdom and overseas - assessing the potential for operational and financial improvements, but with a particular focus on UK Life and Pensions. It was also acknowledged that the group's mutual structure, and increased regulation, imposed limitations on its ability to access additional capital and could limit opportunities for planned growth and development. This placed the group at a disadvantage to non-mutual insurers.

On 17 October 2005, the Directors of Standard Life announced that, in principle, proceeding towards demutualisation and flotation was in the best interests of the group and its policyholders and the business. This action would:

  • Realise value for with-profits policyholders
  • Reduce the business risks to which they were exposed
  • Provide access to external equity capital to develop and expand the group's business

As part of the flotation, the group expected 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 access to external equity capital which would not otherwise be available to it.

Preparation for flotation

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 UK Life and Pensions, needed to be addressed. As a result, a number of important initiatives were implemented to reposition the group, and UK Life and Pensions 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:

  • Re-pricing products and managing capital more effectively by placing more emphasis on more profitable products using less capital
  • Shifting our emphasis from regular to single premium products and reducing the number of products written with guarantees
  • Changing the commission structure on pension products
  • Diversifying the group's distribution channels
  • Reducing costs, through process efficiencies and reducing UK headcount by some 3,000
  • 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