For most of Britain, the first and most important question is not the philosophical one of whether mutual societies should be protected and preserved in aspic as a relic of an older and friendlier form of corporate governance than shareholder owned companies. Rather, how much will we get, and when?
This is a question of some importance to the insurance industry, too. If the public latches on to the idea that there are large gains waiting to be picked up, there could be a rush of new customers to the likeliest candidates for de-mutualisation, and slow starvation of business for the rest. Funds have been rocketing all year from one building society to the next as their customers have played a highly profitable game of spotting the ones to be bought or merged. The societies have taken to imposing minimum deposits of as much as pounds 1,000 to damp down the intense speculation.
Industry experts were claiming yesterday that there will not be the same scale of rewards for the with-profits policyholders who own the mutual insurers as for building society members, where the going rate for selling out to a bank is up to pounds 50,000 for the largest depositors.
On paper, this caution might seem justified. It is possible to make a big single premium investment in an insurance policy, in the hope of receiving a future windfall, though at the cost of a high commission payment. But insurers are likely to give the biggest rewards of a flotation to those who have kept their policies longest, and may give nothing to new customers, however large. If you are going to make money out of it, you are probably already a policyholder of long standing.
It is also true that only 10 per cent of the profits of a life insurance fund belong to the organisation that runs it, and it is on that basis the companies are valued. The paltry few hundred pounds offered by General Accident to the with-profits policyholders of Provident Mutual, which it is currently taking over, were cited yesterday as an example of the likely lower rewards available, compared with building societies.
But policyholders, particularly those in Norwich Union, should not allow the value of the insurers they own to be talked down in this way. Provident Mutual, Scottish Equitable and London Life, all mutual insurers taken over in the last few years, urgently needed the shelter of a powerful parent and their bargaining positions were weak.
Furthermore, their sale values were worked out by actuaries in reports so full of gobbledegook that there can hardly be a policyholder who understands them. They were not tested by being offered for sale in a competitive marketplace, not least because the management of a mutual society has the whip hand in deciding who to negotiate with, and does not like to be bought by an aggressive cost cutter who will sack everyone in sight.
There is more than a suspicion that the actuarial method of valuation consistently understates their real market worth. If a large and well known life assurer with a nationally known name such as Norwich or Standard Life converts to a public company or offers itself for sale in an open marketplace, it is certain that values will rocket above anything seen so far. But it will not happen overnight. Norwich, if it goes ahead, will not float before 1997, and if the pattern of the building societies is repeated it could take several more years for the momentum to build up.
The insurance industry itself was pouring cold water on the idea that this would be a rerun of the massacre of the building societies, where mergers , takeovers and conversions to banks are likely to have removed most of the big names by the end of the decade, if not before. The cautious reaction to the Norwich announcement is predictable. Nobody relishes being swallowed up in an earthquake, least of all the managers of what until now has been one of the staidest corners of the financial services industry.
A rush of conversions of mutual insurers into conventional companies would certainly be a seismic event for them, coming at a time when the life insurance industry as a whole is already contracting rapidly under the pressure of competition and shrinking volumes of business.
The industry is fragmented and the players relatively small, with even the Prudential taking only 10 per cent of the market. The pressures are particularly acute on the medium size companies, where tougher regulation has forced massive investment in training schemes and expensive computers and software.
Sales have been hit by bad publicity from the pensions mis-selling scandals and tough competition from PEPs and Tessas, which also have tax advantages that life insurance policies lost in 1984. And banks and even Marks & Spencer are moving aggressively into their markets.
Smaller and medium-sized life companies are now a dying breed: long before the Norwich announcement, the consensus in the industry was that the total number of life companies would halve to about 50 by the beginning of the next decade. Many are asking themselves whether their real task now is to prepare themselves to be swallowed up by a bank, a building society or another much bigger insurer.
The Norwich move now puts the big mutuals into play as well. It is not only the first, but possibly the most interesting to the stock market among the mutual insurers, since it is closest in nature to the large publicly quoted composites that deal in life, pensions and general insurance. That gives Norwich a commercial value over and above its life funds. It has nevertheless suffered in comparison with the best of the quoted companies. Its performance has been lacklustre and its management unimaginative and slow to grasp the changes that are sweeping the industry, such as direct selling by phone.
So why is the management prepared to cast off the protection of mutuality, which makes a hostile takeover almost impossible? Naked ambition or a desire for the personal rewards of the private sector could be playing a part. But the key could be a realisation that in the UK's fragmented market even a company the size of Norwich may soon be faced with selling out or expanding to a more commanding position as the industry rationalises. Norwich, as it stands, may not be big enough to survive and prosper.
A flotation, which could raise new capital for Norwich as well as paying the policyholders who own it, would provide money to expand in Europe and to diversify further into general insurance in the UK. As building societies have found, mutual ownership has lost its attractions in a financial services industry that is changing at an astonishing pace.Reuse content