A-Day and demutualisation Standard Life to lose £100m from its life and pensions pre-tax operating profit, according to its half-year figures.
The now-listed insurer says its UK life and pensions business has grown strongly over the first six months of the year, with new business contributions from pensions at £44m compared to £11m for the whole of 2005.
But it says to take account of the expected lapse in with-profits products after demutualisation, it put aside a pre-tax provision of £23m. But although Standard Life says the number of lapses have started to decline since early August, in light of the extent of the lapse overall it increased its pre-tax provision to £44m.
In addition, it says since A-Day customers have started consolidating their pensions arrangements and this has led to an increase in pensions lapses, albeit the company claims it has only borne the impact of this in recent weeks.
So the insurer has set up a pre-tax provision of £79m to cover the expected A-Day-related pension lapses, as it expects the effects of A-Day to be felt on new business records until 2007, when it believes lapse levels will return to normal.
Standard Life also says “as a result of these changes in both the demutualisation and A-Day lapse provisions, pre-tax operating profits have been reduced by £100m, or after-tax the impact is £70m”.
Despite this fall, the firm also reveals operating profit before tax for life and pensions in the UK reached £148m, with the underlying profit increasing to £155m for the first half of 2006 from £16m for the full year of 2005.
Meanwhile, its new business average premium equivalent (APE) increased 25% to £594m from £475m in the same period last year - which Standard Life claims is consistent with the focus on the more profitable segments of the market - while single premiums business increased by 52% in the first half of 2006, and regular premiums business increased by 3%.
Standard Life says the results are in line with its “business repositioning strategy to focus on higher margin single premium products”, as it says there has been a marked change in product mix leading to improved profitability.
It claims increased sales of self-invested personal pensions (sipps) and drawdown products in the first half of 2006 have helped drive this repositioning, with APE sales of sipp and drawdown products increasing by 75% to £105m.
In addition, SL says other factors which have helped increase profitability for the life and pension sector include increased sales of lower commission group pensions business and an increased trustee investment pension plan (tipp) and personal pension APE sales have increased 67% to £77m.
And Standard Life also reveals there has been an increase in underlying margins “primarily due to increased annual management charges on some individual sipp business”.
Sandy Crombie, group chief executive of Standard Life, argues the new business contribution of £91m, almost three times the value for the whole of 2005, reflects the continued success of its strategy of concentrating on higher margin products which require lower capital investment.
He adds: “We have been net winners from the heightened activity in the UK pensions market. However we have seen in recent weeks an increase in lapses and have deemed it prudent to set aside a provision until lapse levels return to normal.”
But Crombie says despite this, the company remains on track to hit “both our UK life and pensions cost-cutting target of £30m and our 2007 return on embedded value (ROEV) target of 9-10%”.
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