Standard Life could end up selling off its insurance arm, according to analysts RBC, which has suggested a number of ways investors will seek to reduce insurance exposure as the business merges with Aberdeen Asset Management.

A note from RBC seen by Citywire says as the merger between Standard Life and Aberdeen Asset Management nears completion, the former may look to shed its insurance business.

‘As the Aberdeen merger nears completion, we expect that investors will begin to focus on another transaction to further reduce insurance exposure, which we would view as positive.

‘We see three key options: acquisition of the insurer by a consolidator; sale of the annuity book; and a spin-off of the insurer through a combination with a similar insurance business,’ states the note.

RBC then goes on to detail how each of the three options would work.

If Standard Life were to sell the insurance business to a consolidator, RBC said there could be a healthy upside.

‘We analysed 23 UK closed book transactions and the average price paid was 78% embedded value (EV).

'The value we ascribe to Standard Life’s UK & Europe insurance business is 55% of the historical covered business embedded value, which suggests there could be upside to the valuation if a transaction takes place,' it said. 

In other words Standard Life could get more for the insurance business from a buyer than its current implied valuation from Standard Life’s share price.

If the annuity book were to be sold off it would release ‘£900 million back to shareholders,' RBC said.

Finally, the broker said a ‘de-merger of the entire insurance business and a merger with another Scottish pensions writer would achieve the greatest cost synergies’ of all the options.

Scot Wids bid?

RBC predicts a merger with fellow-Scotland-based insurer Scottish Widows.

‘Geographically, we see it as more likely that Standard Life and Scottish Widows (owned by Lloyds Banking Group and also based in Edinburgh) are spun off and merged.

‘Since Aberdeen currently manages the insurance assets of Scottish Widows, we expect that Lloyds is in a strong bargaining position with the new Standard Life group and it could use this to its advantage to extract a good price,’ said RBC.

A Standard Life spokesman told Citywire: ‘The pensions and savings business remains an important part of our diversified business model.’

At an analyst and investor conference in March when the deal with Aberdeen was announced, Standard Life chief executive officer, Keith Skeoch was asked about whether it was moving towards an investment house and away from being a life insurer.

‘We are – yes, you are right in terms of becoming more of a world-class investment company than a life assurer. I would argue this is a process that was put in place about 13 years ago,’ said Skeoch.

The chief executive was also asked about where the deal left the annuity business and replied the company had not ruled out selling it.

‘If we were to do something with that annuity book, at the moment, the capital that is backing that annuity book would by and large go with it.

‘So we are just sitting here being patient. If at some point interest rates rise significantly and that annuity book becomes more attractive, and most importantly were to deliver value for shareholders, then we might think about doing something.

‘So there is no change to what we have said about that in the short run,’ he said.