Standard Life prepares to do battle over case for mutuality

News Analysis The insurer's board must convince policyholders to resist lure of windfalls

The battle for the future of Standard Life begins in earnest today when Scott Bell, managing director, fires the first broadside in the mutual life insurer's campaign to avoid being bounced into converting into a public limited company against its will.

Having being forced on Tuesday to agree to demands from Fred Woollard, the Monaco-based investor, for a special general meeting of policyholders to vote on conversion within the next few weeks, Standard Life will be announcing the date of the meeting and writing to each of its 2.3 million policyholders. It will explain why, in its view, even after allowing for windfall payouts, they will be financially better off if Standard Life remains mutually owned.

Iain Lumsden, the insurer's finance director, says returns to Standard Life's policyholders have consistently been better than both proprietary companies and those like Norwich Union which have converted from mutuals to plcs. Mr Woollard claims policyholders could net windfall shares worth £6,000 on average. He calculates Standard Life could be worth £15bn on flotation.

"Demutalisation actually destroys value. Future members will lose more than present members will gain [from windalls]," Mr Lumsden says.

Standard Life claims that over the period 1986-96, payouts on its with-profits policies were 2.6 per cent higher than the industry average while those from proprietary companies came out 2.7 per cent below. A policyholder who invested £25 a month in an endowment policy for 25 years would get £110,000 on maturity, £19,900 more than an investor paying the same into a policy with Norwich Union and £16,700 than they would have received from Legal & General.

The clincher though in Mr Lumsden's view is that fact that as well as paying a slice of their investment profits to shareholders, Standard Life would have have to pay 12 per cent of its investment profits to the Inland Revenue. As a mutual owned by policyholders its earnings are not taxed since even the Revenue agrees you cannot make profits from yourself.

"Becoming a plc would cut the value of the business by 12 per cent at a stroke," Mr Lumsden said. "If we were a plc and the board received Mr Woollard's proposal we would also have to throw it out.

"I am not saying Standard Life should remain mutual for ever. But to justify such a step you have to have a jolly good strategic reason for doing so. We have sufficient capital to buy in the UK, although we see no reason why we need to buy anything here. I don't doubt that if we wanted to make a considerable overseas acquisition we would have to demutualise." But that is clearly not on the cards at present.

Standard Life's belief that as an efficient player with a strong capital base it has little to gain by floating is shared by some independent analysts. Martin Lees, director in the insurance ratings group at Standard & Poors, the credit rating agency, says other mutuals have had to convert because they lacked the capital to invest as much as they would like in equities, which deliver better returns than bonds, and have not therefore been able to pay competitive rates to policyholders. That is not the case for Standard Life which is strongly capitalised and already invests 90 per cent of its funds in equities.

The company, which has nearly 7 per cent of the UK market, is also one of the lowest cost producers in the industry, and it is hard to argue that it needs to be answerable to outside shareholders to become efficient. "If they were a proprietary company I don't think it would affect the underlying operating business one way or the other," Mr Lees says.

But others disagree. Ned Cazalet, independent analyst and a trenchant critic of the life insurance industry whose latest annual life industry review Life 2000 was published yesterday points out that the very latest figures show that Standard Life's gross returns (ie. before expenses) are below the industry average.

In the past, however, Standard Life has been able to make up for that at the net level because of its lower costs. But its current forecasts for reduction in yield, the industry yardstick for future costs, indicate that it believes its costs will rise over the coming years.

However, Mr Cazalet insists Mr Lumsden is missing the point: "Isn't past performance meant to be no guide to future? What relevance has a 25-year policy taken out in 1955 to today?" he asks.

According to Schroders, Standard Life's own advisers, the group is sitting on excess capital of £8.5bn. Mr Cazalet says that had Standard Life's management had more zip, the money could have been used to write more business. As it is demutualisation would unlock this capital for policyholders.

Mr Cazalet says: "If the shares are priced correctly and shares are priced to reflect future cash flow and dividend, it is nonsense to say you would not be better off taking the shares. What are Standard Life afraid of?"

Mr Woollard is not arguing that Standard Life is failing. Indeed at Standard Life's AGM earlier this week he said that the reason he had targeted Standard Life was precisely because of its success. For Mr Woollard the hardest part of the battle was always going to be to get the board to agree to a demutualisation vote, although the 75 per cent he needs presents a considerable hurdle. Now the onus is on Mr Bell, and the Standard Life board, to convince policyholders it is in their interests to look Mr Woollard's gift horse in the mouth.