ScotAm's pounds 1.6bn bonanza
Insurers: Nic Cicutti on how Pru's strike could enrich policyholders
Saturday 29 March 1997
The Prudential bid, which is being recommended by the ScotAm board to members, brings to an end three months of bitter arguments over the future of the Glasgow-based company.
If the deal goes through, with-profits policyholders will receive a combination of cash and payments from the Pru for surrendering the independence for their company. Legal hold-ups mean the payments will probably not be made until October.
The deal is worth an average of pounds 1,400 per member. The exact amount will be based on the value of individuals' policies to date and it is possible that many will receive far less.
However, it is possible to make rough assumptions as to how the distribution will take place. Some pounds 600m of the deal, worth about pounds 550 in cash on average, with a further pounds 470m, some pounds 430, will be paid in bonuses to people's policies. This means that the amount added to policies will have the chance to roll up and earn extra interest. The final pounds 500m slice will come when policies mature.
No sooner had the Scottish Amicable board announced its acceptance of the Pru offer, leaving Abbey National and AMP, the Australian insurance giant as disappointed also-rans, than attention switched to the next mutual likely to fall under the hammer. Up to now, when a mutual insurer was taken over, the bidder has paid a small "goodwill" fee for the company itself. In addition, shareholders in the bidding company paid a further sum, based on a percentage of the assumed future profits of the mutual's life fund.
Because most of the profits of the mutual go to policyholders already, this has meant that, unlike building societies, mutual insurance companies were never likely to pay out vast cash or free share bonanzas.
Prudential's bid has changed all that. The Pru bid is only costing its shareholders pounds 485m, with its policyholders stumping up an additional pounds 365m for the firm. The extra pounds 720m comes from the unlocking of ScotAm's own life fund.
This is possible because the Pru is offering an additional pounds 1.3bn financial support, to come from its own life fund, which will help ScotAm meet obligations to its policyholders without straining its own reserves.
Two things become apparent as a result of this deal. The first is that the goodwill payable for ScotAm is considerably higher than those paid on all previous occasions.
There is a hunger among some insurers to build a strong base among firms which service the growing independent financial advice sector. There are plenty of financial services providers out there measuring up potential targets, not least AMP and Abbey National, the two spurned suitors this time round.
The second is that any future bid for an insurer will in all likelihood adopt a variant, where possible, of the Pru's "unlocking" tactic. Mutual insurance company rules say that their board is under no obligation to put details of an approach for the firm to policyholders. Indeed, this was the strategy adopted by ScotAm last year, when it chose to ignore contacts from the Pru on two occasions. No longer.
Such a position is sustainable only as long as the offer could realistically be said to give few benefits to policyholders.
However, should any board in future refuse to put an offer that might pay benefits worth as much as ScotAm's members will receive, lynchings are the likeliest outcome.
For more than two years, a number of companies in the same sector have been touted as potential takeover targets. They include NPI, Scottish Life, Scottish Provident, Scottish Widows, Friends Provident, Standard Life, Equitable Life and National Mutual Life. As expected, they have stressed their commitment to mutuality. Some, particularly Standard Life and Scottish Mutual, have the potential to maintain a stand-alone stance. Others less so.
For all of them, however, the odds are shortening on their continuation as mutuals into the new millennium. In the event of a takeover - from the right insurer - many policyholders stand to gain thousands.
The lessons of this week are that it is possible to make thousands from a takeover, even with a pension plan or an endowment policy. The bet must be that several of the firms on our table are unlikely to make it to the finishing line.
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