Standard Life is being 'transformed' but what lies ahead?

Published on Friday 3 September 2010 17:13

OUTSIDE Standard Life's headquarters on Lothian Road in Edinburgh, employees were taking in the news. They had expected job cuts, but the announcement that 600 would be going under chief executive David Nish's "transformation" programme still came as a shock.

The figure might have been swamped a day later by Royal Bank of Scotland pulling the plug on 3,500 jobs, but unlike the bank, Standard Life was supposed to have stood strong through the financial maelstrom. Worse for Edinburgh was the fact that Standard Life was cutting 480 jobs in the capital, whereas at RBS the impact on its Scottish employees would be largely neutral.

The company may have spent four years as a big player on the FTSE 100 index, but the problems Nish and his "director of transformation", Sandie Begbie, had to address were that the firm is still too "mutual-esque" - too many long-standing employees earning big salaries and not contributing much to the bottom line.

Plus the ground under the UK's insurance firms is shifting dramatically. Down at the Gyle, where Aegon UK has its headquarters, a 25 per cent slash and burn of its costs is set to result in 600 to 1,000 job cuts, while the firm focuses its business on the "at retirement" market and corporate pensions at the behest of its parent company in The Hague. The shakedown at Aegon is being led by chief operating officer Adrian Grace, who was parachuted into the firm by group chief executive Alex Wynaendts.

News of the "transformations" at the two firms sparked the rumour mill - that both may be preparing for a sale. The insurance industry's stalking horse is Clive Cowdery, whose Resolution vehicle is set to build an insurance group with assets of 10 billion by 2013. The firm's main business is Friends Provident, led by the cheerful Australian Trevor Matthews. Resolution's deal to buy Axa's life business for 2.75bn and merge it with Friends was given the green light by the Financial Services Authority last week and will be complete mid-month, but the firm is hungry for more. Resolution has also been linked to the ongoing saga of insurer Aviva, which fended off the rude advances of rival RSA which offered 5bn to buy the firm's general insurance business. Jon Hack, Resolution's acquisitions specialist, hinted he might be interested in buying any parts of Aviva RSA didn't like.

In Edinburgh, most will remember Matthews as having a parting of ways with Standard Life after he was snubbed for the top job. Instead Nish would replace the firm's retiring chief executive, Sir Sandy Crombie, and Matthews went to the then ailing Friends.

Eamonn Flanagan, an analyst with Shore Capital, believes Matthews would love to get his hands back on Standard Life. Not only would it be personal, but the businesses have been circling each other for years. In 2007 Standard Life walked away from a deal to buy Cowdery's previous vehicle - confusingly also called Resolution. And Standard Life would also come with an asset management firm - Standard Life Investments - which Resolution is known to covet.

"It makes sense from Resolution's point of view," says Flanagan. "Trevor Matthews knows more about Standard Life than anybody in the market. They do know each other very well - Standard Life bid for the old Resolution - and Standard Life does provide Resolution with fund management which Resolution doesn't have at the moment. And it's the right size in terms of getting to its target of 10bn embedded value."

The trouble with Standard Life is its share price is low - making it ripe for the picking. "The shares are cheaper than Legal & General or Aviva - we like them but they are still very much the old-style annuity company, very big balance sheets and highly capital-intensive," says Flanagan. "It is remarkably cheap stock given that a lot of hypothetical risk other companies like the Pru and L&G have don't exist in Standard Life." He believes SLI is also undervalued. "It is not reflected in the share price," he says.

But it is not just Resolution that might like a bit of Standard Life. As companies carve up their businesses between old-fashioned legacy insurance business - which is Cowdery and Matthews' plan - others such as Axa are future-proofing their business against regulatory changes coming in 2012.

Flanagan says Standard Life would be attractive to both Friends Provident and Axa - and the two could divide up the parts of the business they are each focusing on. "Standard Life could be targeted and broken up where the legacy, old-fashioned capital-intensive business is stripped out of the capital-lite, sexy go-forward businesses that Axa would look at."

Meanwhile Aegon would also be a juicy morsel for Resolution, although the firm's spokeswoman insists that Aegon's parent company recently ruled out a sale and is committed to keeping the Aegon UK business in Edinburgh.

But industry watchers have put a two-year limit on the success of Aegon UK's slimming plan and then it will be sold.

Flanagan is not convinced by the firm's demurrals. "Well the minute you say you are for sale the price drops ten per cent. And it is bad for staff morale - if you tell everyone you are up for sale, people leave."

But last week's events at Standard Life came as no great surprise to life industry insiders watching the main players scramble to work out how best to respond to the changes in the industry. The most notable challenge is posed by the retail distribution review (RDR), changing the way in which financial advice is paid for and provided. Once the RDR comes into force in 2013 insurers will no longer be able to pay commission to advisers selling their products, in an effort to improve transparency and ensure advice is genuinely whole-of-market.

As the commission model is phased out IFAs are moving from transaction-based business to fee-based services where the emphasis will be on generating recurring revenues by offering a quality service to existing clients. The consensus is that such changes will force insurers to evolve their propositions too, with a shift from product sales to service.

Graeme Mitchell, managing director of Lowland Financial in Galashiels, says all insurers face the same problem - but with few reaching firm conclusions.

"They used to be all about getting new business, with no emphasis on retaining existing business. Insurers are still trying to increase their market share, but if the IFA focus is going to be on existing clients there will be no new business to win," he says.

Standard Life is among the insurers focusing on its wrap, developed four years ago. Wraps allow advisers to put all of their clients' assets on to one "platform", meaning they can manage their clients' needs in one place. The precise definition of wraps can vary, but what does seem certain is that they will become central to the post-2012 world.

Tom Munro, director of IFA Tom Munro Financial Solutions, is one of many IFAs now eschewing product providers in favour of wraps such as Nucleus, Transact and Novia that allow him to transact everything online, buy funds at discounts and offer a better service to his clients.

"After RDR wraps will be used by all advisers, as product providers cannot remunerate advisers after this date," Munro says. "Advisers who have still to transform their businesses by the end of 2012 to meet the RDR deadline can no longer offer a service after this date without a wrap platform, which in my view is the only medium that meets the FSA's requirements on transparency and costs, and more importantly it provides a service clients relate and have access to."

This suggests Standard Life's wrap development means it is well placed to tackle the challenge of 2012 and beyond, but other insurers have been slower to respond, says Munro.

"Some are in the process, but in terms of market share, they are far behind the more established players. Product providers have been quiet of late, no doubt coming to terms with the fact they can no longer ‘buy business' by offering high front-end commissions to certain advisers beyond 2012, which time and time again prove detrimental to fund performance and flexibility."

Getting established in the wrap market is far from straightforward, however. Iain Wishart, owner of Wishart Wealth Management in Edinburgh, says Standard Life's wrap has not had the market penetration it would have wanted. "The former head Trevor Matthews, now at Friends Provident, signed a deal for the technology with New Zealand firm FNZ so Standard Life doesn't own the technology that drives the wrap," Wishart notes. "As there was zero exclusivity FNZ then signed a deal to provide wrap services for Axa."

There is also a potential stumbling block over pricing, he adds. "The Standard Life wrap charging structure is complex and not fully unbundled. It will have a challenge on its hands to make its wrap more consumer-friendly, especially given that it doesn't own its own wrap technology."

While staking all on a successful wrap proposition may be perceived as a gamble, David Ferguson, chief executive of Edinburgh-based Nucleus, an adviser-owned independent wrap, believes the insurance companies doing nothing are taking the greatest risk.

"The bigger gamble is being taken by those meandering along without any clear strategy. RDR is a once-in-a-lifetime change in the way the industry is regulated. Some of Standard Life's peers have decided not to develop wraps - we will be able to reflect in the future on whether or not life companies were right to enter that space."

In that sense Standard Life has a clear strategy, says Ferguson - now it has to ensure it succeeds. "It comes down to how well it executes the strategy. It has more direction than some of its peers."

But that strategy involves streamlining the business further, as reflected in the job cuts announced last week. And Ferguson believes the shift in the balance of power away from insurers in the IFA market would put growing pressure on providers to be more efficient.