Standard Life turns page, rolls with changes: A year after sale, firm improves rating, makes profit

May 29, 2006

Standard Life Insurance Company of Indiana has much to celebrate as it passes the one-year anniversary of its sale to Capital Assurance Corp.

Profitability, a rating upgrade and product launches all are among the positives the company can tout since it gained new life and left behind old owner Standard Management Corp. last June.

Standard Life notched a $15.8 million profit last year, due mostly to a gain from the sale of its life insurance business. Subtract that, though, and it still managed a profit of around $3 million even though it operated at a loss when Kentucky-based Capital Assurance took over.

"We accomplished, financially, what we set out to do the first year," Capital Assurance CFO Angela Ohlmann said.

Even so, plenty of challenges remain. The annuity seller competes in a brutal market and sports a rating that-while improved-presents a competitive disadvantage. But Ohlmann said the company heads into year two moving in the right direction.

"What we signed up for is what we got to a large extent, and we feel like we've started to gain some momentum in changing things to suit our business plan," she said.

Fast transformation

Change happened quickly for the venerable life insurer, which dates back to 1934. Capital Assurance and Carmel-based Standard Management closed the $80 million sale of Standard Life on June 9.

That same day, the New Jersey-based ratings firm A.M. Best Co. upgraded its financial strength measure for Standard Life from B to B+. Best analysts liked the new owner's narrow focus.

Standard Management had been working on a switch from financial to health care services when it completed the sale. Capital Assurance, which was created by insurance industry veteran John Franco to buy Standard Life, has eyes only for financial services.

"Their focus is to manage the life insurance company, to improve its capital position ... where the previous management had been distracted by other operations," said Steven Faulks, a senior financial analyst with Best.

The sale also boosted Standard Life by resolving a huge IOU from its former parent. The insurer had loaned Standard Management more than $20 million, a figure that drew concern from regulators in both Indiana and Florida.

Once that debt disappeared, Florida regulators let the company resume selling products in their state. That proved beneficial.

Standard Life did $2 million in business there last year. That makes Florida one of its most productive states, trailing only California, Michigan and Ohio, according to the latest quarterly report filed with the Indiana Department of Insurance.

The company also trimmed surrender benefits-the money it pays to people who end their policies prematurely-more than $17 million and reworked its investment portfolio.

Risky assets like real estate joint ventures and below-investment-grade bonds went back to Standard Management as part of the deal. Capital replaced them with a focus on long-term bonds.

"The company has done a real good job with its outside asset managers to rebalance that portfolio," Faulks said. "They've made the balance sheet a little more conservative, more in line with what a life insurance company usually has."

The company also narrowed its focus in the financial services arena. It decided to sell only annuities and to aim for a younger, pre-retirement market.

"They're very simple products for the consumer to understand, and they're where we want to be from a financial standpoint," Ohlmann said.

Standard Life will launch two new products in June, deferred annuities dubbed "Total Command" and "Total Command Flex." Ohlmann thinks the company has found a unique niche to exploit by offering customers more flexibility than they're used to with an annuity.

Customers can choose which features they want to build into their annuity instead of paying for a bunch they don't need. They also have options for how long they want to lock into an interest rate.

"Any bets, if you will, they want to make with the interest rate environment, they get to make that selection and we just invest behind their choice," Ohlmann said.

While Standard Life simplified its product line and sold its insurance business, it has no plans to change its operating locations, according to Ohlmann. Capital Assurance is headquartered in Prospect, Ky., but it rents space for Standard Life from Standard Management, and that will continue.

Hurdles to go

Despite its list of accomplishments, Standard Life still faces formidable challenges. More than 1,000 life insurance companies do business in the U.S. market and most also offer annuities, noted Lew Derrickson, managing partner for Northwestern Mutual Financial Network in Indiana.

Best also cited the crowded market in its report on Standard Life. The ratings firm declared that Standard Life will be challenged to maintain growth "due to intense competition from other large life insurance carriers and from other players, such as mutual funds and banks."

Companies that lack an A-level financial strength rating compete at a disadvantage. Annuities are long-term products, Derrickson noted, and customers look to a rating as a sign of long-term stability.

"Without the upgrade, you're not going to get your A-level financial reps selling your product," he added.

Best shifted Standard Life from a vulnerable category to a secure rating with last year's upgrade. The new rating means it has a good ability-as opposed to just fair-to meet policyholder obligations.

Faulks said he wants to review the company's rating and make a decision on whether to adjust it by the June 9 anniversary of its last upgrade. The Best ratings committee will pore over Standard Life's balance sheet, its operating performance and its business profile and decide whether to affirm, upgrade or downgrade.

The ratings firm wants to see steady progress in all three areas before deciding whether to kick Standard Life's rebirth celebration up another notch.

"You need to see top-line growth as well as bottom-line growth," Faulks said.
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