It's been an eventful fortnight in the history of Standard Life Aberdeen. On 15th February Scottish Widows announced that it had decided to withdraw £109bn of its money from the manager - effectively closing its account. On Friday last week, SLA announced the sale of its insurance business to Phoenix Group in a £3bn deal. Since the reason given by Scottish Widows for its decision was a degree of discomfort in having most of its assets managed by the captive manager of another life company, there was a certain pathos in the subsequent news that Standard Life would no longer actually be an insurance company - coming so soon as it did after Widows' announcement.

There is no suggestion that the sale of Standard Life's insurance business to Phoenix was directly related to the earlier Widows' announcement and it is difficult to imagine a reversal of that decision now that the sale of SLA's insurance business has been announced. But the background to both these announcements does rather illuminate some of the strategic dilemmas faced by insurers and asset managers as they seek to define themselves in the new regulatory era. News last weekend that Widows' decision followed failed talks with SLA last year, aimed at building an independent joint venture to cover the insurance business of both Standard Life and Widows' parent Lloyds Banking Group, infers that one or both firms had been having existential thoughts for some time.

Some observers have said that Widows' decision calls into question the rationale between last year's merger between Aberdeen and Standard Life.  When Aberdeen acquired Scottish Widows Investment Partners in 2013 SWIP held total assets under management of £135bn - a figure which puts real perspective on the impact of Widows' announcement, involving as it did £109bn. It is worthwhile revisiting the logic behind both the SLA-Aberdeen merger last year and the SWIP-Aberdeen deal four years ago.  

Back then, there was widespread agreement that the 2013 deal represented a synergistic and opportune alignment of two managers with differing strengths: Aberdeen, with its exceptional range of retail and EM based funds - but perhaps not quite able to offer the institutional or UK capabilities of others; SWIP with its core institutional portfolio of life company and DB pensions assets. Led by a CEO with a fantastic record in acquisition based growth, the deal would also address Aberdeen's slight imbalance towards the equity asset class, whilst strengthening its UK and institutional credibility. Moreover SWIP's vendor, Lloyds Banking Group, even allowed it to open up a distribution channel for the combined manager's range of funds within its UK branch network.  With an eye on longer term trends in the investment market, SWIP's Infrastructure and Property funds promised to add a significant real asset dimension to Aberdeen's capabilities. At the time, the deal created the UK's largest listed pure play investments firm and the largest in Europe in the publicly traded category.

The 2013 prospectus included some interesting insights into the centrality of LBG and Widows to the deal's logic. Martin Gilbert, Aberdeen's CEO characterised it as a "strategic relationship" as opposed to an acquisition in the traditional sense, and the prospectus went on to refer to, "a long term, strategic asset management relationship, whereby Aberdeen manages assets on behalf of Lloyds".

Fast forward three and a half years and this time shareholders from both sides were voting on the proposed acquisition of Aberdeen by Standard Life, in a £3.8bn deal which would create a manager-insurer with a value of £11bn. The transaction subsequently created one of Europe's largest listed manager groups, with assets under administration of £670bn and offices in 50 cities around the globe.

On the face of it, this was another complementary deal, which would leverage Standard Life's relative strength in a variety of developed markets with Aberdeen's equities, LatAm and Asian capabilities. Aberdeen would also have access to the growing and strategically important Indian market and presumably any cost savings gained from the tie-up could be passed onto the Group's efforts in the highly competitive US market, to name but one.

But there were other, more defensive motivations at play for both companies. Both had experienced significant outflows in their flagship funds in the two preceding years: Aberdeen in its Asian equities franchise, Standard Life in its absolute return strategy, GARS. Moreover, many analysts agreed that the tie-up represented an attempt to bolster each firm's defences against what by now had become a wave of competition from passive investing providers (Interactive Investor reported that in 2017 50% of all new SIPP sales fell to passive strategies). Cost savings from the acquisition would come in at around £200m - could these be passed to investors who might be considering cheaper, passive strategies elsewhere?

It's now clear that at the time of the SL/Aberdeen tie-up, plans were being formulated about the future of life insurance at all of the companies involved and these included talks between LBG and SLA almost immediately following the SLA merger.  A new entity was to have been created with a fairly even equity split between Standard Life Aberdeen and Lloyds, with over £300bn in assets under management.   The failure of these talks appears to have directly led to the withdrawal of Widows' funds.

The dilemma faced by all life insurers (in the Solvency 2 era at least) is whether they should embrace spread-based products in which their own risk is bound up with the success or otherwise of investments or, like Standard Life and a growing list of other insurers, focus upon lower margin unit-linked business - and in doing so, attempt to reap the benefits of a widely projected growth in long term personal savings markets.  This second approach places the insurer much more in the retail and wholesale asset management space and requires strong platform capabilities - of which Standard Life Aberdeen operates three. Workplace pensions and DC offerings place the insurer in key growth markets but require quite significant economies of scale and multiple distribution channels. This is especially the case for insurers in the UK, where the unit-linked market is more mature than in continental Europe.

For many insurers there are no easy alternatives to this unit-linked based approach. The open-annuity market in the UK is rebounding following the 2015 pensions reform and sales are once again increasing, however the appetite for returning to this segment at a number of life companies has been dented by a number of miss-selling reviews and continued scrutiny by regulatory bodies.  2012's introduction of fee based financial advice in the Retail Distribution Review eroded the appetite of some insurers to build out their personal annuities ranges, since those with smaller pension pots are less likely to seek and identify annuities based retirement plans.  Self-selection risk, wherein those with a higher risk of mortality are less likely to select an annuity to fund their retirement is a category which insurers have found difficult to model and brings additional longevity risks. Likewise, with-profits business is perceived by insurance executives as difficult to grow. The problems experienced ten or fifteen years ago in W-P, which led to the closure of all but a few large businesses remain fresh in the memory, whilst the Prudential's UK product, PruFund, is perceived by some as now having an almost insurmountable preeminence in the category. The equity release mortgage market is growing rapidly but some insurers have shied away due to its complexity and potentially high levels of competition from specialist providers, whilst capital guaranteed savings products have also fallen away in recent years, with AXA and LV among others withdrawing products from the market place, citing increased regulation as their reason for doing so.

By contrast, the bulk annuities market, although highly profitable and growing strongly in the UK, represents the other end of the strategic spectrum for insurers and is the definition of long duration, capital heavy business which can be quite dependent upon successfully sourcing large volumes of scarce, high grade credit assets with which to back liability streams. Posting the sort of capital and collateral associated with bulks has been a key reason for the exit of Standard Life, Prudential UK, Aegon and others from this market and the associated infrastructure costs of managing such a complex balance sheet are significant.  When the Pru closed its annuities business to new business in 2016, group CFO Nic Nicandrou commented, "It's a lot of work when we can successfully deploy that capital elsewhere".

There was a nod to the strategic dilemmas faced by insurers by Standard Life Aberdeen's Chair on its announcement of Friday's deal with Phoenix: "This transaction completes our transformation to a capital light investment business, a process which started in 2010 with the sale of Standard Life Bank...the sale of our Canadian business and the merger last year (with Aberdeen)".

Everything leading to Friday's announcement fits Standard Life's evolution from a mutual-owned, capital intensive annuities provider, to a capital light, savings-based insurer - and now pure play investment manager. Faced with Solvency 2 and a wave of prudential regulation across the financial services industry in the post-crisis environment, it long ago made a strategic decision to take this path by closing its large annuities fund to new business, then partially selling it.  

The trouble is, the investment management industry faces challenges of its own and the story line which led to these decisions suggests that there are no easy answers to the dilemmas faced by either life insurers or asset managers...