LONDON (Reuters) - Insurer Standard Life SL.L has reinsured 6.7 billion pounds of its annuity liabilities, it said on Thursday, reducing the financial risk posed by Britons living longer and boosting 2008 profit.
Shares in the group, previously the UK insurer with the largest exposure to longevity risk, were up 1.9 percent at 211.25 pence at 12:27 p.m., having earlier touched 216p.
The deal with Canada Life International Re, a unit of Great-West Lifeco (GWO.TO), is the biggest of its kind in Britain to date and covers more than half Standard Life’s total annuity liabilities of around 12 billion pounds.
The move is expected to boost the insurer’s embedded value operating profit by at least 100 million pounds this year.
It should also allow Standard Life to release cash from its reserves in 2008 — an amount it said would be around the same “order of magnitude” as the 100 million rise in profit — and to reduce the amount of capital regulators require it to hold.
Analysts welcomed the deal, saying it would cut shareholder longevity risk by 40 percent — below the 50 percent implied by the transfer as Standard Life has retained risky annuities.
But it eases a major concern for Standard Life which as one of the largest UK pension providers consequently a top annuity player, faced a growing risk to profits as people live longer.
“The announcement that Standard Life is to reinsure more than half of its annuity book to Canada Life Re is extremely good news, in our view,” Panmure analysts said in a morning research note, upgrading the stock to “buy”.
“It significantly reduces the mortality risk and sensitivity to mortality assumption changes going forward.”
At the end of 2006, the sensitivity of Standard Life’s embedded value — a measure of worth for insurers — to a 5 percent strengthening of mortality assumptions was 94 million pounds. After the deal, that drops to 55 million pounds.
Other industry watchers said the deal, at a crunch time for the markets, could be perceived as a sign of capital weakness, but Finance Director David Nish dismissed any suggestion of capital stress — even before the agreement was struck.
He said the insurer would use the capital freed up through the deal, effective from Thursday, to take advantage of other “profitable opportunities”, including variable annuities — more flexible retirement products that are popular in the United States yet still a nascent category in Britain.
Standard Life said it did not pay a fee to offload the risks. Though technically a reinsurance contract, the arrangement was effectively a bulk annuity deal, as it is transferring the corresponding assets as well as the liabilities, leaving Canada Life to bet on rising returns on assets.
Thursday’s deal relates to individual life annuities written just prior to the insurer’s demutualisation in 2006. These policies left shareholders bearing the brunt of the longevity risk, but without a share in the investment upside.
Newer annuity business, still mostly from existing pension policyholders taking out annuities, leaves shareholders with longevity risk but they also benefit from investment margins.
A Standard Life spokesman said there were currently no plans to seek deals for the remainder and newer portion of its annuity book, but said the option could not be ruled out.
Standard Life is due to report full-year results next month.
Editing by Erica Billingham