Outlook: Standard Life's weakness amid all that strength

Nationwide survey; BT retail
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The Independent Online

It was another day of triumphalism for the actuaries of Edinburgh yesterday as Standard Life wheeled out what it billed as the strongest performance in its history. That's not the only superlative Europe's largest mutual life assurance company was able to boast. At 61 per cent, its growth in new premiums in the year to the middle of November was better than its nearest UK rival by a factor of around three, and on the industry measure of "annual premium equivalent", which is meant to iron out the distorting effect of single premium business, the company surpassed even the record set by Prudential a couple of years back. All this against the backdrop of a declining stock market, which has inclined many to give up saving altogether.

Scott Bell, Standard's managing director, naturally attributes his success to mutual ownership, and to the company's capital strengths, which have been given a triple A rating by the credit rating agencies. After the Equitable Life débâcle, you might have expected investors to be wary of mutual life assurers. In a mutual, there are no shareholders to bail out the life fund if things go wrong. In Standard Life's case, the reverse seems to have applied. Investor have bought the story that there's a great wodge of excess capital in Standard to support them through the bad times in their droves.

Post Equitable, no one talks much of excess capital in life assurance any longer and, the way Standard Life is growing, it may eventually run dry round there as well. In the meantime, Mr Bell believes he's established a virtuous circle of growth. The company's capital strengths mean that unlike some others, it hasn't been forced to dump equities for bonds in order to fulfil solvency requirements. That in turn means its investment performance relative to others should remain strong, allowing the company to sustain the strength of its capital reserves despite the growth in its business.

It sounds almost too good to be true and, though its heartening to see a mutual doing so well, it doesn't take away from the view that this is a structure of ownership that may be hard to maintain in the long term. In a way, Standard Life's problem is the mirror image of Equitable's. At Equitable, the management gave away all the excess capital to policyholders, so that when there was mismanagement there was no buffer to fall back on and the company had to close up shop. Standard's capital strengths, by contrast, make it an obvious target for the carpet baggers and, although for the time being that threat seems to have gone away, they'll undoubtedly be back come the next bull market.

The only obvious long-term protection against the demutualisation brigade is, like Equitable, to ensure that all the benefits of mutual ownership are paid out in the form of higher current bonuses, so that there are no surplus capital reserves to plunder. But that leaves no room for error, as Equitable policyholders have discovered to their cost. Standard deserves its moment of glory, but its management should be under no illusions.

Standard Life is also being targeted by savers because it is one of the few life assurers left where there is any remaining prospect of a windfall, either through conversion or a more fulsome bonus payments. The danger is that management will spend it for them in its dash for growth before it can be extracted.

Spend and spend

To judge by yesterday's crop of economic data, that last half-point cut in interest rates seems to be doing the trick. Consumers continued to spend, spend, spend in November, and all the signs are that they'll do so again in the run-up to Christmas, not withstanding the gloomy economic prognosis. According to the latest Nationwide survey, the housing market too came bouncing back in November after October's slight dip.

If there's a recession looming, the British consumer isn't yet aware of it. According to one forecast released yesterday, he'll be putting an extra £19bn on his plastic this Christmas, 14 per cent more than in December last year. The lowest interest rates in a generation are working their magic. Or should that be evil, for the old virtues of thrift and good housekeeping seem to have been entirely forgotten in the drive to keep the cold waters of global recession from our shores?

Household debt as a percentage of disposable income is once more approaching the record levels it reached in the late 1980s, and the sort of sums being borrowed for house purchases lend a whole new meaning to the expression "mortgaged up the hilt". In theory, all this borrowing is that much more affordable than it was because interest rates are so low, but just think of the consequences once they begin to rise again.

In any case, affordability is something of an illusion, since the flip side of the low interest rate environment is poor rates of investment return, which makes it more expensive to repay the capital. Nor can borrowers expect the loan to be inflated away as in the past by price inflation. The policymakers are in danger of spawning a whole generation of debt-burdened householders in their efforts to maintain economic confidence. Eventually, there will be a reckoning.

All of which means that there is highly unlikely to be another interest rate cut after today's meeting of the Monetary Policy Committee. Having been temporarily knocked off their perch, the hawks are back with a vengence and this time around, they'll win the argument.

Monetary policy over the past year, both in Europe and the United States, has become almost exclusively focused on the fight to maintain business and consumer confidence, an entirely new thing for Western policy makers, focused as they have been in the past on the war against inflation. There is no recent experience of what the long-term consequences of such a dramatic monetary easing might be. The dangers seem equally balanced.

What happens after Christmas is anyone's guess, but if consumer spending is to follow business confidence down the pan, that's probably when it will occur. The present cocktail of debt-fuelled spending has all the ingredients for a very nasty hangover indeed. There's nothing like a big credit card bill to concentrate the mind on job insecurity, and there's every possibility of widespread belt tightening once they start arriving.

BT's Samurai

IT'S HARD to know what to make of Pierre Danon's reference yesterday to BT Retail "changing from a ponderous Sumo wrestler into a lean and agile Samurai swordsman". BT is not an organisation known for the Samurai warrior's habit of falling on his sword when faced by failure or embarrassment. Sir Peter Bonfield, the soon to depart BT chief executive, famously had a Samurai sword hanging on a wall in his office, a present from Fujitsu, but he never did use it despite repeated occasions on which he might have done. As it happens the Japanese analogy is an unfortunate one all round. It may have escaped Mr Danon's notice, but as things stand the entire Japanese economy is sinking fast into the surrounding sea, Sumo wrestlers alongside Samurai swordsmen. Is that to be BT Group's fate too?

j.warner@independent.co.uk

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