Standard Life, Europe's largest mutual life insurer, announced today it is considering a stock market flotation to raise the capital it needs to meet new solvency requirements set down by the regulator.
The insurer has spent the past four years insisting that its mutual status was in the best interests of all its 2.6 million policyholders, but it may now have to make a dramatic U-turn.
Standard could need to raise up to £2bn to help meet the new rules being introduced by the Financial Services Authority.
The group announced plans to raise £750 million of debt and said its chief executive Iain Lumsden was to retire and be replaced by the current chief executive of Standard Life Investments, Sandy Crombie.
The company has been locked in negotiations with the regulator over these rules for some time, as they require Standard to account for its liabilities more stringently. It will announce the outcome of talks with the FSA and it is understood that, to satisfy the new regime, Standard will have to look at finding new funds.
The group would not elaborate on the details of the discussions, but said it had now reached an agreement and stressed that its financial position remained very strong in both relative and absolute terms.
The FSA said in a statement that there had been a "significant divergence" in Standard Life's calculation of its liabilities and the higher level of reserving it needed under the new regime compared with the current rules.
Standard Life said today it would immediately set aside increased reserves for guaranteed bonuses to its policyholders, and would take further steps to improve its calculation of its future liabilities.
It also said it would change the way it illustrated the financial benefits of being a mutual to with-profits policyholders, but stressed that the maturity value of people's investments would not fall as a result of this.
The society added that demutualising was only one of a number of options being considered as part of the strategic review.
Chairman Sir Brian Stewart said: "Standard Life remains financially strong, with a great brand, low costs, outstanding products and superb customer service. There are tremendous growth opportunities for us.
"However, we have to recognise that the world is changing and this is why the board has commissioned a strategic review to examine how we should best respond to this changing industry and regulatory environment."
Trading in Standard Life bonds was suspended yesterday until clarity is given to its solvency situation.
A demutualisation and float could take up to two years to complete and the company may have to take interim steps to shore up its finances, such as drastically cutting back bonuses and closing to new with-profits business.
Retired lecturer David Stonebanks, who has been campaigning for the society to demutualise, has previously estimated that payments would average between £2,400 and £3,000.
Standard said that it was confident it will announce a very sound "relative and absolute" capital position, telling its policyholders that they "need have no concern" for its financial strength. The regulator is demanding, however, that insurers move to "realistic" solvency, which involve the outlawing of practices such as using "future profits" to bump up balance sheets. Standard banked £1.5bn of future profits to clear the current solvency rules last year.
It has come unstuck with the new rules because of the substantial guarantees given to policyholders. Around £11bn of pensions have guaranteed bonuses of 4 per cent, which have become a significant liability as stock markets fell and capital drained away from the business. A float of the business will almost certainly claim the scalps of its management team, which has clung resolutely to its mutual status. They received "performance-related" bonuses of nearly £1m last year, including £276,000 to the chief executive, Iain Lumsden, even though the group lost up to £5bn on the stock market and policyholder bonuses were cut back sharply.
The same management shot down attempts to demutualise in 2000 when the company had more than £12bn in surplus assets and policyholders could have enjoyed windfalls of about £6,000. With Standard Life now worth £4bn, policyholders can only expect windfalls of £2,000.
Ronnie Sloan, a Standard Life policyholder and retired actuary who has campaigned for improvements to the board, said the positions of many of them would be untenable if it were to end up recommending demutualisation. "I expect the board to resign or be fired. We can't turn back the clock to 2000 but the corporate governance has to be seriously questioned. There is no independent actuary on the board. There was no one there to challenge the executives or ask the right questions," he said.
Instead of raising capital by floating, a buyer may come forward for Standard. But many would-be bidders are still nursing their own heavy falls in spare capital after three years of falling stock markets, and are unlikely to have the funds themselves to finance a bid.
Raising money in the debt markets is all but closed off to Standard as it raised £980m of subordinated debt in July 2002 to fund growth.
A spokesman for the company would not comment on whether the business would demutualise, saying no decision had been taken on how Standard would raise capital, if at all. "But even just saying that they are considering options as to how to raise capital only creates more uncertainty. If they do need to, the market will price it against them and make them pay up," Roman Cizdyn, an analyst at Commerzbank, said.Reuse content