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Standard Life’s Canadian disposal is credit negative, says Fitch Ratings

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Standard Life's decision to sell its Canadian business and return most of the proceeds to shareholders will weaken the group's credit profile by reducing diversification and removing a key source of earnings, says Fitch Ratings.

The impact will be mitigated by a reduction in longevity and credit risk as the group's business model moves towards that of an asset manager, rather than a traditional insurance company.
 
The division being sold focuses on the relatively high-margin fixed annuities sector, while Standard Life's UK operations are dominated by its savings and pensions business, particularly in self-invested personal pensions.
 
The Canadian business accounted for around a third of the group's operating profit in 2013. The sale will therefore reduce geographical and business diversification, and reduce profitability. This increases the risk for creditors, while shareholders accrue most of the benefit through the return of GBP1.75bn of the GBP2.2bn sale price, Fitch says.
 
The disposal of the Canadian unit will have some benefits for the credit profile. It will reduce the group's exposure to the risk that annuity holders will outlive expectations, and to the credit risk associated with assets used to back these annuities. But these benefits will not offset the loss of diversification. Profitability will also be more closely tied to the level of financial markets, as earnings from unit-linked pension savings are driven by fees based on the value of assets under management, Fitch says.
 
One other tangential benefit could be to reduce uncertainty about the impact of the incoming Solvency II regime. We believe the Canadian regulatory regime will ultimately be treated as equivalent to the EU's for Solvency II purposes. But Canada is not actively seeking Solvency II equivalence and, if it were not granted, Standard Life's Canadian operations could have faced significantly higher capital requirements under continued ownership by an EU-headquartered parent.
 
Fitch does not rate Standard Life, which said late on Wednesday that it is selling the Canadian business to a subsidiary of Manulife Financial Corp.

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