Lloyds TSB, the high street bank, yesterday announced it had agreed to buy the Edinburgh-based life insurer for pounds 7bn from the policyholders who own it. Scottish Widows said all its 1.8 million customers will receive a basic payout of pounds 500, with some possibly receiving over pounds 10,000.
Half of its members hold "with profits" policies, which means their money is collectively invested in Scottish Widow's main life insurance fund. These 900,000 members will share the pounds 4.9bn cash paid by Lloyds TSB in exchange for giving up their membership rights. If this were divided evenly, it would amount to a further pounds 5,444 each.
However, the money will not be divided evenly. Scottish Widows said yesterday it would give more to those who had been members the longest and had invested the most with the society. Someone holding a with-profits policy who had been a member for just one year would get little over pounds 500, but a member who had been with the society for 25 years could receive tens of thousands of pounds.
The windfall benefits will be by far the largest ever paid to policyholders of a mutually-owned life insurer. In previous deals, customers have received a few hundred pounds and a promise of better bonuses for their policies.
The Lloyds TSB takeover differs from recent deals, including AMP's takeover of NPI and the Prudential's purchase of Scottish Amicable, because the buyer is a bank.
In effect, Lloyds is buying the right to the future profits of Scottish Widows, and the right to manage assets built up by Scottish Widows since the Napoleonic wars. Lloyds said the deal would help it achieve its aim of selling more pensions and savings.
While the sale was rumoured in the City, it still surprised observers because the directors of Scottish Widows have consistently said they wanted to remain independent.
Mike Ross, the chief executive of Scottish Widows, said: "Our dominant concern has been our members best interests. They will receive benefits of approximately pounds 7.0bn, including an estimated cash amount of pounds 5.7bn. We could easily have been a great company on our own: we have chosen to be a greater company as part of Lloyds TSB."
Analysts of the life insurance sector said the deal was positive for holders of with-profits policies. Holders of the other main type of policy, unit-linked policies, will receive only pounds 500, no matter how long they have been investing.
"I think it's a very good deal for policyholders. But whether it works for the companies will depend on whether it can boost its profit margins or its sales," said Jonathan Sheehan of Dresdner Kleinwort Benson, the investment bank.
However, hundreds of thousands of Scottish Widows customers will be excluded from the payouts altogether. No windfall can be gained from holding a Scottish Widows Pep, Individual Savings Account, unit trust, credit card, bank account or mortgage loan.
Customers of Scottish Widows' other ventures - including pensions bought at Tesco and Scottish International - will be excluded from the deal.
Business news, page 19