Comment: ScotAm should go to the highest bidder

The Scottish Amicable board was already covered in the brown stuff and now it is digging itself even deeper into the ground. Denying 1.1 million policyholders an opportunity to consider an offer from Abbey National that is almost certainly better than the one made by their own board is neither friendly nor, to borrow another phrase popular among life companies, equitable.

Since it would only take 50 of the 1.1 million to requisition a special general meeting, the board could quickly find itself forced by a vote to put the Abbey proposal to members anyway. Any one of the three City investment trusts that have bought up portfolios of ScotAm policies could force a vote.

Unless there is a change of heart soon, it will be hard to avoid the conclusion that this head in the sand attitude has as much to do with the pounds 14m incentive package the board is proposing for itself as with the financial arithmetic of the competing proposals.

The problem for ScotAm in beating an outside bidder is the special way in which mutual insurers traditionally operate. Building societies do not distribute their profits to members, and have built up huge and valuable reserves. There are therefore plenty of funds to bribe members to vote in favour of conversion. But mutual insurers hand their profits to their policyholders as they go along, as bonuses, and keep back only the working capital needed to run the business, leaving little in the way of a slush fund.

So how does ScotAm find pounds 75m up front to compensate its policyholders for giving up their ownership of the organisation, plus another pounds 200m on flotation?

It is hard to be precise about where the money will come from, in the absence of the detailed documentation, which will show how Swiss Re and Securitas will acquire their proposed 20 per cent stake in the business. But you cannot get something for nothing. The likeliest explanation is that much of the payments will be financed by future policyholders, who will receive lower bonuses.

In other words, ScotAm appears to be doing no more than promising to pay future profits from its life business up front. There is no money to pay anything for goodwill.

It is this that gives an outsider such as Abbey National an almost unbeatable advantage. Abbey believes there is synergy with its own business, and says it is worth its while paying pounds 400m in goodwill. (The other pounds 700m- pounds 1bn in its offer simply replaces working capital and cannot be distributed to policyholders.)

To persuade members to accept its own plan, the ScotAm board is promising to make the company more efficient after demutualisation, and therefore more valuable when it is eventually floated on the Stock Exchange.

But this is largely the same management that has piloted the company down the league tables of returns to policyholders in the last few years, so the claim has to be taken with a large pinch of salt. Having publicly admitted that it no longer favours mutuality, ScotAm now has no alternative but to auction itself off to the highest bidder.

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