Insurers are up for grabs

... but carpetbaggers won't be making a killing this time

Well, it certainly seems as though the Pru's purchase of Scottish Amicable is focusing interest on mutual insurance companies. The ink was barely dry on my last article when the Australian mutual insurer AMP expressed an interest in the UK mutual company NPI - the one with the squirrel advertisements. AMP was one of the under-bidders for Scottish Amicable, so it is no surprise to find it is still in the market for a UK acquisition.

NPI was swift to deny any interest in being gobbled up by a competitor, but it looks as though the frenetic activity that characterised the restructuring of the building society movement is about to become a feature of the mutual insurance industry.

If there is any surprise, it must be that this has taken so long to come to pass. Several years ago the actuaries Bacon & Woodrow published a report suggesting nearly half of Britain's insurers were too cost-inefficient to survive. In a survey of more than 100 companies, only 10 had expenses ratios that would allow them to remain competitive in the new era of full disclosure. As many as 40 were deemed as being unlikely to survive. But so far, only a handful have succumbed to predators.

What the Scottish Amicable deal has exposed is that mutual insurance companies are likely to find it more difficult to reward members through flotation or remaining with the status quo than by allowing themselves to be taken over by a larger competitor.

The difference between the amount Scottish Amicable could promise its policyholders through a flotation and the figure they eventually received from the Pru was a factor of over four times. A number of directors of mutual insurance companies will have reflected upon the outcome of this particular tussle and will be rather more coy over promising untold riches through relinquishing mutual status while still remaining independent.

There is an alternative, of course - remain mutual. Building societies that have elected to hold the faith are eating into their profits by paying better rates to savers and charging less for mortgages.

This is, after all, why they were created in the first place. For building societies the benefits to members are easy to demonstrate. But it is less easy to deliver recognisable value in this way to your policyholders if you are a mutual insurance company.

Paying bigger bonuses is the obvious means of returning value to the ultimate owners of the business, but it takes many years of better profits performance for the benefits of remaining with a mutual company to show up in the statistics. Also, with-profits returns are largely reliant on good performance. Although efficient administration will make a difference to the amount a mutual company can pay its policyholders, the equation is far more complex than is the case with a building society.

We can expect more mergers and takeovers as the Bacon & Woodrow predictions become fact. Many mutual insurers are just too small to go it alone. The big operators, on the other hand, are likely to decide a quote is the best way forward - very much the case as with the larger building societies. Already Norwich Union, the UK's number two mutual, is taking the flotation route. If Standard Life, the biggest mutual insurer in Europe, were to relinquish mutual status, the writing would be well and truly on the wall.

This is not a peculiarly British phenomenon. AMP has announced it will go public in Australia, and policyholders in Colonial, another Australian mutual insurer, expect to receive the equivalent of around pounds 1,300 of free shares each. Given the number of policies Colonial writes in the UK, the largesse will be travelling halfway round the world.

Cynically, there are suggestions that flotation is a way of ensuring the existing management hold onto their jobs with vastly enhanced financial rewards - particularly through share options. Recent building society legislation demands that these new public companies should not be immune from takeover. The same might apply to insurance companies.

I shall nurture the insurance policies I have with mutual companies in case I become eligible for an added bonus. Taking out fresh policies in the hope of free shares is hardly a practical option, though. A with- profits endowment policy is a real, long-term commitment - not comparable with placing money with a building society.

The percentage benefit from a takeover or share issue is likely to be relatively small. Still, if you need to take out a life assurance policy, it might be worth checking the performance record of some of the mutual companies.

Remember, though, that the name "mutual" in a company's title does not necessarily mean it is owned by its policyholders.

Abbey National took over Scottish Mutual some years ago. The name remains though the company is no longer Scottish or Mutual.

Brian Tora is chairman of the investment strategy committee of the stockbrokers Greig Middleton, and may be contacted on 0171-392-4000.

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