The feeling is not mutual

You probably thought you'd seen the last of all those profiteering opportunities. Now with the demutualisation of life assurers comes the prospect of more easy money - though you may have already missed the boat

The carpetbaggers are back. This time they are seeking windfalls from mutual life assurers, rather than building societies. Are you in line for a cash payout from the latest craze? Converting life companies to plc status is a lot more complicated than building societies. It's time to dust off those life policies and see where you stand.

The biggest prospect for a windfall at the moment is the proposed demutualisation of Standard Life, Europe's largest mutual insurer and a historic Edinburgh company. On one side are the gentlemanly members of the board of this 175-year-old company. On the other are the carpetbaggers, led by the media-wise Australian Fred Woollard and his band of Internet-based supporters.

On 27 June the 5 million members of Standard Life will decide whether they want the mutual to convert to a public listed company. If they decide to convert, Standard Life's 2.3 million with-profit policyholders will receive windfalls that Mr Woollard says will average £6,000.

Mr Woollard personally stands to gain up to £150,000, as he has spent the last three years buying up second-hand policies giving him the status of a substantial with-profit policyholder without having had to spend years paying into policies. If he could make £150,000, and thousands of others five figure sums, what about you? Is it possible to become the next Fred Woollard and earn a handsome profit without exposing yourself to much risk from the stock market?

The answer is a qualified yes, but it is harder now than a few years ago, as there are fewer mutuals left to carpetbag - and the ones that remain are learning to fight back. To carpetbag you need to identify your target. Unfortunately, many mutual life insurers have already become plcs. Mr Woollard says: "The best opportunities for making money are definitely over. After Standard Life I am not going to be involved in any more demutualisation campaigns."

But he believes the cause can still be taken on by young and enthusiastic carpetbaggers: "There are potential opportunities out there, the rewards will just not be as great." The UK's second and third largest mutuals, Friends Provident and Equitable Life, are still member-owned for the moment, although Friends has just announced it will float on the stock market. Then there are about seven other smaller ones from the relatively big Liverpool Victoria to the tiny MGM Assurance.

Comprehensive figures do not exist for what sums policyholders would receive if these companies went public. For instance, the Standard Life figure of between £5,000 and £6,300 is hotly contested by Standard Life itself. Gordon Hart, the Glasgow-based businessman who is leading the attack on Friends Provident and Scottish Provident, has predicted people will receive windfalls of between £1,000 and £2,000 in the two Scottish mutuals. Equitable Life could yield as much as £4,000 in windfalls, according to some analysts.

To put it bluntly, if you hold an endowment, pension or terminal insurance product you can get on the conversion bandwagon. The process, as illustrated by Standard Life, is as follows: vote yes to conversion at the end of June. Providing 75 per cent by number of members vote in the same way, the board will then be required to put together a demutualisation document that is scrutinised by independent actuaries and then put to a final vote by members. If that is voted through, again by 75 per cent, the mutual becomes Standard Life plc.

But if you are not a policyholder in Standard Life, Friends Provident or Scottish Provident at the moment, don't bother to take out a policy now. You have already missed the boat. Friends has acted to prevent new policyholders from carpetbagging by making policies dated 4 May or after not eligible for windfalls.

This leaves the smaller companies. Ned Cazalet, a financial adviser who specialises in valuing mutuals, says the smaller ones could make attractive targets: "Liverpool Victoria would be a good one, there are lots of funds there," he says. Mr Cazalet is in dispute with Standard Life, which announced last week that it is suing him for defamation over a document he wrote attacking the company's arguments against demutualisation. But this has not dampened his desire to champion demutualisation. He points out that the small mutuals are the most vulnerable ones, with much smaller budgets to spend on defending their mutual status.

Small life insurers have a drawback, from a predator's point of view. They are too small to survive as public companies on their own but do not attract that much interest from bidders. Mr Cazalet said: "There will be windfalls, but what do you do with the company afterwards? You would have taken all the money out and left it to die."

Obviously it would be better to identify the likely takeover targets beforehand. Policy-holders at Scottish Widows, which has been far less financially strong than Standard Life, are currently waiting for windfall cheques of on average £6,000 after Widows was taken over by Lloyds TSB last summer.

However the window of opportunity is closing. Boards who are keen to maintain their mutual status are learning the tricks of building societies, who are practised in the art of confounding carpetbaggers.

The Birmingham-based Wesleyan changed its rules to make life harder for carpetbaggers at its recent AGM. Jim McDonald, managing director, said: "We have had no approaches from carpetbaggers to date, but we altered the rules on how many members it requires to call a resolution. It was 100 but now it is 2.5 per cent of members, which is about 2,500 people."

Royal London, which is based in Colchester, also says it has not detected a threat at the moment. A spokesman said: "We are looking at all sorts of ways to protect our mutual status, including asking members to sign away windfalls to charity."

Mr Cazalet predicts practically all remaining mutuals will convert (see table). If this is so, should you be a part of it? Defenders of mutuality say a few thousand pounds may seem very attractive, but longer term gains are to be had by remaining within a customer-owned structure.

Others point out how much profit goes to shareholders in listed companies. Gareth Evans, Royal London product manager, says: "With a public company, 10 per cent of profits typically go to shareholders, who have an expectation of high and rising dividends. That money has to come from somewhere - and that somewhere is policyholders' pockets."

Recent data also shows that mutuals have performed well compared to public companies. A survey by Policy Portfolio shows that six out of the 10 top performing endowments spanning 10 and 25 years are mutuals (see table). The Wesleyan comes in at number one, paying out £124,750 on a 25-year policy with total premiums of £15,000.

Just as mutuals are trying to defend themselves with the argument that they are good value for customers, they are also saying that conversion is not all it is cracked up to be. Standard Life says policyholders will not get £6,000. It says in fact about half of the 2.3 million who are eligible will receive £2,500 or less.

That is still a tidy sum, but there are no guarantees about how societies will calculate the windfalls if they are forced to convert. Mr Woollard has based his sums on Scottish Widows, where policyholders received a basic payment of £500 and then between 40 and 50 per cent of the total surrender values of their policies.

This has not been the case elsewhere. When Scottish Amicable was taken over by Prudential a fixed bonus of £250 plus a percentage of the with-profit fund was paid in cash. People with Provident Mutual received an average of only £300 added to their fund over three years when it was taken over by General Accident.

Windfalls can also come in different forms - they do not necessarily mean cash in hand. Some windfalls are paid into a person's with-profits fund, while others are disbursed gradually.

Standard Life, which has said it may pay a flat payment of £250 rather than £500 on a possible conversion, said: "There have been plenty of cases where no flat rate has been paid. And there have been examples where everyone received the same amount. This happened at Northern Rock and policyholders who had held their policy for a long time went bonkers."

Mr Woollard has admitted he has no idea how many Standard Life members have as many policies as he does. "But I am arguing for a £500 starting sum as it will benefit all policyholders. If that sum was only £250 most people would get less and people like me would get more, which would be less fair," he said.

In the end there may not be much to quibble about. The law currently does not allow a mutual to convert if any policyholder - as their circumstances stand at the time of conversion - will be less well off. If you think differently you can approach the high court right up until the final vote. It may be more an issue of whether you are a new carpetbagger who loves change or a traditional type who prefers dull but reliable mutuals.