Standard Life 'strong enough to ride out further 40% fall in stock markets'

Published on Thursday 30 October 2008 20:34

STANDARD Life moved yesterday to counter fears that it would have to follow the banks in going cap in hand to the government to bolster its finances.

The company revealed that its capital surplus had dropped by just 3 per cent to 3.4 billion at the end of September – during the height of the financial storm – a fall of only 100 million over the previous three months.

Publishing its third-quarter results, Standard Life boasted that it could even ride out a further 40 per cent fall in the already depressed stock markets.

The reassurance over the former mutual's financial position came as it disclosed that its worldwide life and pensions sales were virtually flat at 12.4bn in the nine months to the end of September.

Standard Life's shares fell in early trading yesterday, but as analysts examined the details, they staged a rally, closing up 13p or 6.5 per cent at 213p.

To accompany the results, the company published figures which it claimed proved that if equity markets were to fall a further 40 per cent, it would still have a capital surplus of 1.9bn. That is more than the 1.3bn capital surplus reported this week by insurer Aviva and the 1.4bn held by Prudential. Both of these institutions have had to deny fears that they could have to follow banks such as Royal Bank of Scotland and HBOS in seeking government cash.

Standard Life finance director David Nish yesterday declined to comment on how far the markets would have to fall before the company would be forced to raise additional capital. He said: "What you have there is figure (3.4bn] and that's without any management action being taken."

Nish maintained that the company could take a range of measures, such as selling equities, to boost its capital position. He added: "There's a whole suite of actions we could go through before you even consider fundraising."

Nish said the company also put in place a hedging strategy three years ago that further protected the group from equity volatility.

And he explained that the structure the group had adopted when it demutualised in 2006 meant it was largely insulated from equity-price movements. Under the terms of what it calls its Heritage With Profits fund, policyholders agreed to bear the entire risk posed by falling equity prices, in return for Standard Life's shareholders taking on the annuity risk.

Unveiling details of their performance to September, Standard Life blamed retail investor panic and declining asset values for the figure of 12.4bn for new business sales, which was 200m under market forecasts.

The figures were hit by a larger than expected fall in the UK market – almost 80 per cent of its business – which declined by 5 per cent to 9.8bn. Chief executive Sandy Crombie said the markets were "volatile and may remain that way for some time" leading retail customers to opt to invest in safe havens, such as cash.

Besides retail investors fleeing from risk, the company predicted new business from institutional investors was still likely to grow. Nish said that while safe-haven products did carry lower margins, the company expected customers to transfer to higher margin products later and there would be "no material impact to long-term profitability".

Standard Life continued to make gains in Canada, where sales rose 32 per cent to 1.6bn and Asia, where its Chinese, Indian and Hong Kong businesses rose 31 per cent.