Fitch Ratings has affirmed Standard Life Assurance Limited’s (SLAL) Insurer Financial Strength (IFS) rating at ‘A+’ and Long-term Issuer Default Rating (IDR) at ‘A’. Fitch has also affirmed Standard Life plc’s (Standard Life) Long-term IDR at ‘A-‘. Standard Life is the top holding company for the Standard Life group. In addition, the agency has affirmed Standard Life’s subordinated debt at ‘BBB+’. The rating of the subordinated notes benefits from a subordinated guarantee given by SLAL. The Outlooks on the Long-term IDRs and IFS ratings are Stable.
The affirmation of Standard Life’s ratings reflects the insurer’s maintained strong competitive position within the UK pension market, its strong capitalisation and profitability as well as its modest financial leverage. In HY12, Standard Life’s pre-tax operating profit rose to GBP302m (HY11: GBP262m), benefiting from the improved profitability of the UK operations.
Standard Life is one of the leading players in the UK life and pensions market, a position achieved through continued success in the self-invested personal pensions (SIPP) markets. Standard Life’s less capital intensive product mix and low levels of investment guarantees reduces its sensitivity to financial market volatility compared with other UK life insurers.
SLAL’s earnings depend on the value and mix of its assets under management (AUM), leaving Standard Life exposed to falls in financial markets and increases in policyholder surrender rates. Managing its cost base and retaining customers is important to Standard Life’s profitability. Despite adverse market conditions, Standard Life has maintained strong net inflows of AUM over the past year, underpinning its earnings.
Standard Life’s issuance of CAD400m subordinated debt in September 2012 does not materially change the group’s credit profile. In particular, financial leverage increased only marginally as a result, and remains commensurate with the rating level.
The main driver of Standard Life’s ratings is its ability to maintain its competitive position and profitability in its key UK pensions market in the face of increasing SIPP competition and the introduction of the Retail Distribution Review (RDR). Crucial to this will be continued successful growth and development of Standard Life’s Wrap platform.
Fitch views an upgrade of Standard Life’s ratings as unlikely in the near term given the insurer’s small size and scale relative to higher rated peers.
The key rating triggers that could result in a downgrade include a failure by Standard Life to maintain its position and profitability within the UK pensions market. A leading indicator would be a failure to increase the number of independent financial advisors (IFAs) using the Wrap platform or the value of AUM that are managed via the Wrap platform.
Under the RDR, due to take effect by the start of 2013, IFAs will no longer receive sales-based commissions from insurers. Instead, they will charge fees directly to their customers. Fitch believes the RDR will lead to a shift of some customers away from IFAs, the main sales channel for Standard Life and many other UK insurers. For more details on the RDR, see Fitch’s report “UK Life – Retail Distribution Review”, available at www.fitchratings.com.