RSS feedsStandard Life has long been regarded as a sleeping giant of the financial services industry: defiantly mutual, it underperformed several of its rivals in terms of profitability, despite managing billions of pounds more in investments.
But all of that changed when the firm finally succumbed to demutualisation and floated on the London Stock Exchange last summer. Since then, its share price has soared from a launch price of 230p to 325p at time of going to press. And brokers forecast a rise to as much as 430p by the end of 2008. Perhaps not surprisingly, the change in fortunes has coincided with a dramatic increase in sales, particularly in the investments division. But, just as importantly, it has coincided with another significant event – the arrival of finance director David Nish, who joined from ScottishPower in November last year.
Since joining, Nish has played a key role in the group’s transformation – his experience of taking ScottishPower through its transition to a listed company would clearly have been an asset. (As we were going to press, ScottishPower was formally delisting following its acquisition by Spanish energy company Iberdrola.)
Nish believes that Standard Life is in a similar situation today that ScottishPower found itself in during the 1990s. “There are similarities with the 1990s energy sector, where public sector utilities were being privatised and there was a need to introduce different methods of improving growth and developing business,” he says.
“We have started focusing on efficiency [and] growth. There is also a lot of focus on adding value and performance. If you look at the mutual environment there is quite a different method of decision-making. In the plc world, you must be more focused on share price, value for customers and [delivering value] for investors. You may be discussing a decision about customer options and products, but what you must also be asking is, what is the value in this decision? We went through a similar phase in ScottishPower.”
As a result, there are plans for a further reduction in staff and business costs, which will add up to a saving of £100m a year by 2009. In addition, there have also been a number of departures – including that of FD Alison Reed – and arrivals among senior management, of which Nish was one.
Altered images
But the process was never going to be easy. Standard Life used to have an image
as a rather reserved Edinburgh institution, with an entrenched and conservative
workforce. It’s clear that the board recognised Nish’s experience with handling
difficult transitions from the public sector to the private sector as key to the
future success of the company. And his appointment went down well in the City.
But they are not out of the woods just yet. With private equity continually on the hunt for new targets and M&A activity at an all-time high, Standard Life must be wary. The business could be seen as vulnerable – profit is behind that of many in its peer group and consolidation is always a distinct possibility.
“There is a need to improve and to improve quickly. We need to increase the speed at which we do things and realise that we can actually give up the past while holding on to those things that work,” he says. “The most important thing we can do is get on with our work and keep improving the company and its performance.
“There isn’t much we can do to prevent a takeover if it comes, but the best form of defence is to ensure we have a highly efficient, profitable business with excellent growth and sound future potential. That is why we are focusing on driving value and performance.”
Profits up
It seems to be working. New business contribution (the value of all future
cashflows attributable to the shareholder from new business) has increased from
a loss of £117m in 2004 to a profit of £205m in 2006. The return on embedded
value has more than doubled since 2004, while cash generation has risen from a
loss of £17m in 2005 to a profit of £262m in 2006. Overall, the business
returned a pre-tax profit of £453m and produced a dividend of 5.4p. An improving
result, but some way behind rivals such as, say, Aviva.
Analyst views are also improving. Somewhat indifferent to the business initially, many have warmed to it in recent months, with JP Morgan Cazenove stating that Nish was leading “a significant cultural shift” in Standard Life’s use of capital. Others have said that the projected share price is expected to top 400p by the end of the year. The additional value will make the firm a much stronger and less vulnerable business.
It is clear that Nish is at the core of these changes and his title as group finance director is significant in that he has a remit stretching across all of Standard Life’s portfolio of businesses, including Standard Life Bank and its rapidly expanding Standard Life Investments business.
Indeed, Nish spends much of his time talking to brokers and selling Standard Life to the City. In the spring, he and chief executive Sandy Crombie spent ten days talking to investors in the US, where the company has a large shareholder base.
“What we do at these meetings is talk the shareholders’ language and bring the outside world into the business. Investors need to know that our constant thought is how to bring value to the business and make it grow. We are always trying to connect everything to a value. You may examine some idea and think, ‘Will that add 10p to the share price?’ and then go ahead with it if you think it is going to work and make an immediate improvement in the share price. I’ve always found that people tend to understand the implications of an action if you put it in those kind of terms and give it a value.”
Nish is looking at ways of using the company’s existing, fairly dormant, capital to fund expansion and growth. “We are in the process of asset-gathering at the moment. Our principal asset is our property and we need to look at how to take capital out of property and develop other areas of the business. We have the assurance type business, but also, increasingly, healthcare and investment management products, and we can use some of the released capital to expand and develop these sectors,” he says.
Nish speaks enthusiastically about the transparency that a listing provides, in particular the need to constantly review and monitor all aspects of the business to ensure it is not only compliant but functioning efficiently. The audit, he says, can be a useful tool in highlighting issues that may need to be addressed, and he sees a close relationship with the auditor – Standard Life is a long-time client of PricewaterhouseCoopers, where Nish used to be a partner – as essential to running a successful plc.
Dynamic management
Nish is not one to rest on his laurels. He understands that a major plc needs a
dynamic management able to analyse and understand the shifting needs of the
marketplace and respond accordingly. “I believe we will be writing a lot less
traditional life business in future. We are one of the biggest annuity providers
in the UK and we have had to adjust to major changes in the market, not least
because so many people are living longer and living healthier lives, so the
basis for many of the previous investment decisions may no longer work. We have
to make sure we are responding effectively to these changes.
“Take pensions. Most [pensions] used to die with the individual, and all of the costs and liabilities for a firm such as Standard Life were based on that presumption. Now, most people use various means to keep their pension, albeit in a different form and probably not an annuity. There is the option of income draw-down, for example, where individuals can remove the capital, at a loss of some of the tax relief, but be left with a lump sum which is transferable to an heir.
“One of our most successful products in the last year has been the growth of Self-Invested Pension Plans (SIPPs) which, I believe, show a growing sophistication among our customer base who are demanding greater flexibility and control over their investments and understand more fully the options available to them. What this means for Standard Life is that our business is changing and we must change with it to reflect society and the needs of our customers.”
Part of that change will be an increase of choice. He says that the company’s product mix will increase so that individuals are given a far greater choice than a single product such as a pension or a life policy. “Everyone wants flexibility and access, and we are building these features into our products and services,” he says.
Since joining Standard Life, Nish has clearly had his hands full. He describes the process of demutualisation as very similar to joining a new company in its first year of operations. “Everything has to be examined, reviewed and understood as if the business had just begun,” he says. “That isn’t to say that the heritage and history of Standard Life is thrown out, but it must be as effective and efficient as possible to compete in the current marketplace.”
So, while electricity and assurance aren’t obvious bedfellows, running a successful plc has similarities regardless of industry. Nish’s experience of transforming organisations into listed companies is far more important to chief executive Sandy Crombie than whether he understands the intricacies of the life assurance industry.
But it seems that Nish has also ticked that particular box. Having been a member of the government’s pensions taskforce between 2004 and 2005, he clearly understands the technicalities well.
With a sound understanding of pensions and annuities, substantial experience of business transformation and the respect of his peers, his board, the City and analysts, it would appear that Nish has all of the boxes ticked.
It goes a long way to explain why many are tipping him for the chief executive role when, as expected, Crombie stands down in the next two or three years.
