A handout for millions when a mutual insurer floats

Norwich Union's decision to head for the stock market should mean pounds 2bn in shares for policyholders - at least pounds 500 each, reports Nic Cicutti
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Norwich Union this week became the first of the UK's mutual insurance companies to announce plans to float on the Stock Exchange, entitling 2.9 million policyholders to a shares handout. The decision, taken after a year's review of the insurer's options, follows the rush by most large building societies, including the Halifax, Woolwich and Alliance & Leicester, to become banks.

As with the building societies, Norwich Union plans to sweeten the deal for policyholders by offering them shares in the company when it floats next year. The insurer refused to give details of its plans, which it intends to unveil ahead of a ballot and meeting of members next Spring. However, the flotation will involve giving policyholders a parcel of shares each and raising extra capital from the stock market.

Experts believe the company will be worth between pounds 4bn and pounds 4.5bn, with members receiving about pounds 2bn in shares. Norwich Union said last week that it intends to give each policyholder a basic allocation of shares, with an extra amount depending on the scale of a member's savings with the company. Based on estimates of a pounds 2bn payout to policyholders, this would mean a basic allocation about pounds 500 worth of shares each.

Among policyholders qualifying for shares are those with life and term assurance cover, both with-profits and unit-linked policyholders, personal pensions and annuity holders. Qualifying members will be given the right to buy an additional amount of shares at a preferential price. Those not benefiting will be the company's motor, household and other general insurance policyholders, 600,000 health and medical insurance members, unit trust and PEP investors.

Others who will lose out are the 10,000-15,000 members whose policies nature between now and March next year, when voting takes place. The company said last week that those individuals will receive an extra, unspecified bonus to their funds to take this into account. It may be possible for some policyholders to extend the life of their policies until after the vote.

Beale Dobie, which deals in second-hand endowment policies, said the flotation means that anyone considering surrendering their policies should think again. By selling them on the second-hand market, policyholders will retain the right to shares on flotation. Conversely, anyone hoping to buy a traded endowment to gain from the free shares is wasting their money.

Norwich Union's decision to float was not a surprise. Despite its claims of uniqueness, most industry analysts believe its move is likely to be followed by many other mutual insurers.

Companies tipped to follow suit, or be taken over by larger banks or already-listed insurers, include Friends Provident, believed to be up for sale at present, Scottish Provident, Scottish Widows, Scottish Amicable and NPI. All have repeatedly stated that they have no intention of abandoning mutuality, as has Standard Life, the largest mutual insurer in Europe. However, observers point to the way that building societies were stressing their commitment to the mutual ideal two or three years ago. Earlier this year, Standard Life admitted that a senior employee had been seconded by the company to examine the implications of demutualising.

Prospective "carpetbaggers" hoping to benefit from any expected flotation or takeover should bear in mind that setting up a pension scheme or taking out life cover is a much longer-term proposition than the simple act of opening a building society account. It costs money and the potential gain from a shares handout is unlikely to be worth the costs of setting up and then discontinuing a policy.

The greatest irony is that Norwich Union is among a large number of mutual life insurers serving their policyholders better than conventional insurance companies owned by outside shareholders.

An analysis for the Independent by John Chapman, a former senior official at the Office of Fair Trading, shows that at the top of performance league tables, mutuals outnumber proprietary companies by a wide margin. They also represent a minority of insurers at the bottom, where many of the poor performers are proprietary companies.

The excellent performance of mutuals raises fundamental questions about whose interests are being served by the trend towards abandoning this long established form of ownership.

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