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Standard Life Aberdeen-Phoenix deal puts Scottish Widows back in play: analysts

Standard Life Aberdeen Plc's surprise announcement the group will exit the life insurance market and reinvent itself as a capital-light asset manager, increases its chances of retaining its £109 billion Scottish Widows Group Ltd. mandate, according to analysts.

Shore Capital analyst Eamonn Flanagan told S&P Global Market Intelligence the £3.24 billion sale of the group's insurance business to smaller rival Phoenix Group Holdings, formally announced Feb. 23, constituted a "great move for SLA [Standard Life Aberdeen]," while RBC Capital Markets analyst Gordon Aitken suggested in a note the sale "may enable SLA to continue to manage" a Scottish Widows mandate which currently accounts for nearly 17% of its assets under management.

Lloyds Banking Group Plc said Feb. 15 it would pull the mandate Aberdeen Asset Management has managed since 2014, citing competition between Standard Life and Lloyds' own insurance offerings. It was the group's single largest client. According to unconfirmed media reports on Feb. 17 and 18, secret talks over a merger of the life insurance operations of Lloyds and SLA, involving £300 billion AUM, were terminated in late-2017 due to a disagreement over the ownership structure of the new venture, and the collapse of these talks contributed to Lloyds' decision to review the Scottish Widows mandate.

Driven by buoyant markets, SLA's assets under management and administration rose by 1% to £655 billion in full-year results for 2017 announced Feb. 23. Outflows improved slightly but remained high at £31 billion (from £37 billion in 2016), 4.8% of assets under management and administration at the start of 2017. Operating expenses, rising 7.6% to £2 billion, outpaced revenues which rose 3.8% to £2.9 billion, though these were compounded by integration costs following Aberdeen's £11 billion merger with Standard Life announced in March 2017.

The sale is expected to close in the third quarter of 2018, pending a mid-April shareholder vote and regulatory approval, but integrating the two groups will take between two and four years, Phoenix Group CEO Clive Bannister said in a Feb. 23 analyst presentation.

'More cash in hand'

Phoenix, which specializes in purchasing closed insurance books, acquired both Abbey Life and AXA Wealth in 2016. The integration of both took "about 15 months to do" said Phoenix Life CEO Andy Moss.

The SLA acquisition is a "monster deal for Phoenix" which will increase its assets to £240 billion from £75 billion and endow it with "serious critical mass in the legacy life world" but test its integration abilities, Flanagan wrote in a note. Phoenix's aggregate cash flows will increase by £5.5 billion, £4.5 billion of them from 2023 onwards, said Flanagan.

SLA co-CEO Keith Skeoch told analysts on Feb. 23 the company was "very much shifting [from] a capital-heavy life insurance company to a capital light fee-based world class investment company," with more cash on hand from moving from Solvency II to Capital Requirements Directive, or CRD, IV as a regulatory regime. SLA had "simplified" its business and is balance sheet, said Skeoch.

SLA Chairman Sir Gerry Grimstone, who announced he will step down by the end of 2019, said the sale continued a "transformation" which had begun in 2010 with the sale of Standard Life Bank to Barclays Plc and continued with the 2014 sale of its Canadian business to Manulife Financial Corp.

SLA will continue to manage the assets of the insurance business sold to Phoenix, and will have "right of first refusal to be asset manager of choice of the assets Phoenix brings on in the future," said SLA Group CFO William Ratray in the presentation.

On the Scottish Widows mandate, SLA co-CEO Martin Gilbert said SLA was re-tendering for the business and "deeply embedded" with the pension and investment firm. "... We've got very good performance numbers. ... We've got a year to see whether they select us or select someone else to manage those assets going forward," he said.

Gilbert said Aberdeen was fully aware of the implications the competition clause in its contract with Lloyds when it merged with Standard Life. Selling SLA's insurance business, he said, "obviously doesn't make the situation any worse."

In terms of seeking new sources of AUM, Gilbert said opportunistic acquisitions of other asset managers were unlikely "over the short to medium term."