Standard heads for float, but should you go with it?

Who will get what now the insurer is to go public? David Prosser has all the answers
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The Independent Online

Two years after announcing plans to demutualise and float on the London Stock Exchange, Standard Life won 98 per cent backing for its proposals on Wednesday. About 2.4 million policyholders will now receive free shares in the company.


If you had a with-profits policy with Standard Life on 30 March 2004, the day before the demutualisation was announced, that you still hold now, you will be eligible for free shares.

In addition, some customers whose policies have now matured will also be eligible, as long as those polices were still in force on 18 October last year.

Customers whose policies matured before then miss out. So do non-with-profits customers, including those of Standard Life Bank and Standard Life Healthcare.


All qualifying members will receive a basic distribution of 185 shares. The majority will also receive a variable distribution, calculated on the basis of the value of their policy, how long the policy has been in force and the type of policy it is.

Last month, Standard Life's advisers, Merrill Lynch and UBS, said they expected the shares to be priced at between 240p and 290p when the company comes to market. On that basis, the typical share allocation will be worth £1,700, based on the mid-point of the expected share price range. But this figure is skewed by some large windfalls - Standard says that about half its members will receive shares worth between £490 and £1,000.

These figures could fall if, as many analysts expect, the shares are valued below the mid-point. And some members will get much larger pay-outs. The biggest windfalls are expected to be worth in excess of £500,000.

For those who want the cash value of the shares, rather than the stock itself, Standard is setting up a low-cost share-dealing service so you can sell straight away.


Standard has not set a firm date for its flotation, though it is currently scheduled for July. Standard says that shares will be issued to members "as soon as practical" after flotation - likely to be a few days. If you sell your shares immediately, you will receive a cheque a few days later.


That depends on your view of the merits of Standard Life as an investment over the coming years. First, do you believe insurance companies such as Standard have decent prospects? And second, do you think Standard is likely to outperform its major rivals?

If the answer to the first question is no, it makes sense to take the cash on offer now. If you are confident about the insurance sector, but not so positive about Standard, there is nothing to stop you reinvesting the sales proceeds in the shares of its rivals.

Most experts think that chief executive Sandy Crombie has stopped the rot at Standard. The insurer made more profit on new business in the first quarter of this year than in the whole of 2005. It has a promising business selling self-invested personal pensions and subsidiaries are performing well.

However, many insurance analysts remain sceptical, particularly given the price at which Standard's advisers expect it to float. For example, Greig Paterson, of Keefe, Bruyette & Woods, says that Standard's operating earnings would have to grow by 50 per cent to justify a valuation at the top end of the price range.

Bruno Paulson, an analyst at Sanford C Bernstein, says that while Standard's results have improved, its target for return on embedded value, a key indicator for insurers, is still behind the rest of the sector.

Jim Wood Smith, head of research at Christows, adds: "The share prices of life assurers are highly susceptible to movements in stock markets as these affect both profits on their investments and new business flows as the confidence of savers ebbs and flows."

On the other hand, the insurance sector has been a hotbed of takeover and merger speculation this year. Standard shares could be boosted by that factor.


Not on receiving them, but you may have to pay capital gains tax when you sell. CGT is payable at 40 per cent on investment profits. In the case of Standard shares, members will pay nothing to buy the holdings, so the full value of any sale is potentially taxable, minus any dealing costs.

However, as everyone is allowed a certain amount of tax-free profit each tax year - £8,800 in 2006-7 - the majority of Standard members will not be affected by CGT, unless they have profits this year from other investments.


On 15 June, when Standard publishes its flotation prospectus, it will unveil details of a preferential share offer for members, customers and employers. They will be entitled to buy additional shares at a discount to the listing price - expected to be between 5 and 10 per cent.

Whether or not you take up the offer depends on similar factors to those mentioned above. However, since investors will have to come up with cash, many may be less keen.


Many advisers believe that the prospects for Standard Life's with-profits savings, pension and endowment policies are not good. The insurer has been forced to reduce its with-profits fund's exposure to shares, which means long-term returns are likely to be lower.

Standard Life's fund, 31 per cent invested in equities, made 16.1 per cent last year according to financial adviser BestInvest. Prudential, by comparison, made 20 per cent on its with-profits fund.

One issue stopping Standard customers moving their money is the market value reductions (MVRs) on most policies - penalties they must pay if they withdraw money. BestInvest's Keith Murphy says: "It remains to be seen whether Standard Life will do the decent thing and slash MVRs on with-profits policies."

Tom McPhail, of independent financial adviser Hargreaves Lansdown, says that Standard Life policyholders should start by checking what exit penalties apply on their plans. "If you have some time to go to maturity, switching may make sense," he argues.

Standard's road to the stock market: the highs and lows of a once-proud insurer

* 1825: Standard Life Assurance Company established in Edinburgh.

* 1925: Standard mutualises, with ownership of the insurer transferred from shareholders to members who have with-profits policies.

* 2000: Company celebrates record year for new business as stock market continues to surge towards record highs. Moody's and Standard & Poor's award Standard AAA ratings as insurer continues to top performance tables for savings, endowment and pension policies.

* April 2000: Standard narrowly defeats attempt by carpetbaggers to force it to demutualise and float on the London Stock Exchange. Insurer argues that while members would stand to receive average windfalls of up to £6,000, their interests would be better served by remaining mutual.

* 2001-2: Standard criticised for maintaining its investment funds' exposure to equities as global stock markets fall by 50 per cent.

* 2003: Following collapse of Equitable Life, the Financial Services Authority, the chief City regulator, introduces new rules requiring insurers to increase capital adequacy reserves.

* January 2004: After talks with the FSA, Standard is forced to sell £7.5bn- worth of equities at the bottom of the market. Insurer concedes it is no longer wedded to mutuality.

* 13 January 2004: Chief executive Iain Lumsden takes early retirement and is replaced by Sandy Crombie.

* 30 January 2004: Standard slashes pay-outs for fifth time in two years. Early exit penalties on some policies now at 25 per cent.

* 31 March 2004: Crombie announces Standard now believes customers and members will be best-served by demutualisation.

* 2004-5: Standard cuts 1,000 jobs and moves into losses, as Crombie restructures. Reveals much of the business taken on in previous years is loss-making.

* 31 May 2006: Members back plans for demutualisation. Standard promises to publish prospectus for stock market flotation in June.

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