Iain Lumsden, the chief executive of Standard Life, yesterday shocked policyholders by quitting the group, leaving Europe's largest mutual insurer to concede that it would have to consider floating on the stock market.
Announcing the outcome of talks with the Financial Services Authority on its new regime for calculating solvency, the company said it plans to raise £750m and would undertake a strategic review of the business that could result in a float.
"The environment we find ourselves in has changed and we have to look at what is most appropriate for the company," said Sandy Crombie, the deputy chief executive who has taken over from Mr Lumsden with immediate effect.
Mr Crombie said the company's rapid expansion but dwindling number of with-profit customers meant the business risks were being borne by too few people. The company is planning to update policyholders in April and any float would be unlikely before the summer of 2005.
A trade sale is also a possibility, as is selling off assets such as the group's loss-making bank. Of its 2.6 million members, around 2.1 million would be eligible for a windfall under current rules, and would be in line for payouts of around £1,500 if the company is valued at around £4bn. To qualify for a pay-out, members must have held a policy for at least three years, but management may review this rule if it decides to recommend demutualisation.
Mr Lumsden has "retired" from the company on the grounds that he would have been unable to see through the strategic review because of the retirement date he had already planned. He leaves after 36 years at the company with a pension worth at least £300,000 a year.
Despite assurances from Standard yesterday that it is financially strong and has £4.5bn of surplus capital under the existing solvency rules, the company is planning to raise £750m through what it calls "hybrid capital". This is likely to be a form of permanent debt, which requires a high coupon for investors to compensate for the risk they are taking on.
Moody's and Standard & Poor's yesterday downgraded the insurer's credit ratings over concerns about its capital. This will also make the cost of borrowing more expensive for Standard Life.
"If this company has billions of pounds in surplus, why is it having to raise capital immediately, and in such an expensive way? Why can't they wait until they demutualise?," said Ned Cazalet, an independent insurance analyst.
The solvency regime change will mean that Standard's 2.6m policyholders will see the illustrations of their policy values coming down sharply. The company has been wrestling with new solvency rules that require it to account for its liabilities more stringently.
In the past, Standard has added anticipated profits on to projections, but it will no longer be allowed to do this unless it guarantees and makes reserves for those additional bonuses.
"Standard has made itself look very competitive by adding on these 'benefits of mutuality' which makes its charges look non-existent," one investment expert said yesterday. "It is going to be exposed now."
Such was the dispute with the regulator that the FSA is now sending in a team of independent experts to fathom how Standard came to value its liabilities so differently from the new realistic method.
In a distinct lack of confidence in the business going forward, the company has also taken the unusual step of offering customers who have joined since 16 November 2003, the company's year-end, the chance to withdraw their money without penalty.
The company also set expectations for further bonus cuts for its policyholders, to "reflect the impact of lower equity markets in recent years".
At least Standard had some good news to report yesterday as it banked £357m from the sale of a 20 per cent stake in the property company Hammerson. It sold 55 million Hammerson shares through Citigroup, but said the sale was not connected to yesterday's statement on the group's financial health.
David Stonebanks, a retired lecturer who has been trying to convert the mutual for the past year, yesterday said he would continue with his campaign.
Veteran of 37 years' service is group's choice for top job
Alexander 'Sandy' Crombie, like Iain Lumsden and Scott Bell before him, is another 'Standard Lifer, man-and-boy', having been at the company for 37 years. But he is not one of the typical Edinburgh elite that has in the past dominated Standard Life's senior management.
Mr Crombie hails from a small coastal town near Fife and he left school at 17 to become a trainee actuary at Standard in 1966. He did not leave the department for nearly 20 years.
He moved to the investment team in 1994 and has run Standard Life Investments since 1998 when it was launched as a separate business. In 2002 he was named deputy chief executive, much to his disappointment as he had hoped he would take over from Scott Bell, the stalwart of mutuality. His rival Iain Lumsden, then finance director, got the top job.
While Mr Lumsden was always seen as being too close to Mr Bell, Mr Crombie is well-liked within the organisation. He is well-known in the City as head of the Association of British Insurer's Investment Committee and some say that his background in investment and fund management makes him more dynamic than the old-school life insurance guard. David Prosser, after all, the revered head of rival insurer Legal & General, is a fund manager by trade.
But Mr Crombie will suffer from constant reminders that his investment expertise called the bottom of the stock market at 5,500, keeping Standard's with-profit fund heavily invested in equities and losing its policyholders billions of pounds.
The fund management business has, however, been noted for its tough stance on shareholder activism, with Mr Crombie taking a role in recent shareholder rucks such as BSkyB and Barclays.
The soft-spoken man who has confessed to only losing his temper with his teenage daughters does have a huge task ahead in restoring trust with independent financial advisers, policyholders and the City. Many critics will not be silenced until an outsider is brought into the management team.Reuse content