That's Life: why great British mutuals take the road to the City

There's a long - but not necessarily noble - tradition of cash-strapped insurers who've turned themselves into plcs
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The Independent Online

Once heavyweight contenders in the UK's life and protection industry, mutuals today pack a much more feeble punch.

If, as widely expected, Standard Life floats on the stock market (see back page), it will join the annals of those formerly great British mutuals who have adopted the rigours of reporting to the City instead of being answerable solely to their members.

Norwich Union, Friends Provident and Scottish Widows have all given up their mutual status with a view to improving funding to expand their businesses.

If Standard Life adds its name to this list, only a handful of big mutual insurers will be left - including Nationwide building society and Liverpool Victoria, a friendly society. Most of the other building and friendly societies are small, with only tens of thousands - not millions - of customers. Industry specialists question whether they, too, will eventually give in to the lure of becoming a plc.

"If they seek to pocket fat windfalls in the process, senior management in the remaining mutuals might succumb to temptation," says Justin Modray of the independent financial adviser Bestinvest.

"And if customers stand to receive a healthy windfall, it's likely they'll vote 'yes' - as the benefits of mutuality [become harder to see]."

However, while the financial services industry mostly supports demutualisation, some people elsewhere are not convinced.

A recent cross-party committee of MPs scrutinised the general concept of mutuality and highlighted a lot of concerns.

Windfalls or Shortfalls?, a report released in Parliament on 7 March, concluded that previous demutualisations have had a largely negative impact on choice and financial services provision. Mutuals generally do better than their plc rivals in terms of financial performance but their "strategic direction" may "push" boards towards going public, it found.

Research for the report showed that any windfall the members may get on conversion soon disappears in lower returns and higher costs. Customers typically lose their windfalls to higher charges and less competitive rates within four years of demutualisation.

Standard Life has itself not maintained a consistent approach towards the idea of going public. Here's why:

Has Standard Life always backed demutualisation?

No. In 2000, an Australian fund manager, Fred Woollard, tried to force it to become a listed company but management argued that members would be better off as they were.

His failed attempt was backed by only 46 per cent of members - short of the 75 per cent needed.

At that point, its value was estimated at up to £18bn - and policyholders stood to gain a windfall significantly higher than the one they will get today.

What changed?

Between 2000 and 2003, the stock market slumped and wiped out much of Standard Life's reserves.

The problem was compounded when the City watchdog, the Financial Services Authority (FSA), introduced a new "realistic" accounting regime that triggered a huge share sell-off, further weakening its position.

Standard Life has since toiled to meet the new financial requirements and find new money to back any substantial growth in new business.

When's the vote?

Standard Life began mailing voting packs last Tuesday and all members and policyholders will receive one by the end of the month.

Those members who are eligible to vote can do so by filling out their forms and sending them back by 28 May. Alternatively, they can attend a special general meeting in Edinburgh on 31 May.

What happens next?

If a "yes" vote is achieved, the insurer will list on the London Stock Exchange in July. If the answer is "no", the company must return to the drawing board, and probably face renewed takever interest.

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