A very secret life
By Ian Fraser
Published: Sunday Herald
Date: January 18th, 2004
IAIN Lumsden was clearly under strain. Friends and colleagues commented about how tired and stressed the Standard Life chief executive was looking over the festive period. Last week, the issues that had been worrying him came to a head and he stood down from his post, which some have suggested might even have come as a blessed release for the 58-year-old Oxford-educated actuary.
It meant that, while his predecessor Scott Bell was in the Standard Life hot-seat for 14 years, Lumsden’s term at the helm was a mere 21 months. This was clearly not how things were meant to be.
The financial community has been agog with speculation about the real reason for Lumsden’s departure. Was he carrying the can for the assurer’s over-heavy position in equities? Had he lost the board’s confidence because he failed to keep them fully and properly informed over the regulator’s concerns? Or was he simply too wedded to mutuality to take the business forward to listed plc status?
New chief executive Sandy Crombie rejects any suggestions that the board had been kept in the dark about the spat with the Financial Services Authority (FSA). “I can assure you that since we entered into discussions with the FSA, in early December, the board has been fully informed. The board has been fully aware of the discussions from the very commencement.”
Jim Stretton, former UK chief executive who retired in December 2001, believes it was simpler. “Iain has been a very, very strong supporter of mutuality. Since the company has not yet made a decision about what its future status should be, I can envisage what the comment would be were the review to go ahead with Iain in charge. At 54, Sandy is younger and knows how to take good decisions which are not necessarily traditional thinking.”
The company’s acknowledgement that, despite years of protest to the contrary, mutuality may not be such a good idea after all was last week’s second bombshell. The third was the announcement of a £750 million hybrid capital issue to shore up its finances. This coupled with the FSA’s continuing probe into the way Standard calculates its liabilities led to speculation that something must be rotten in its Lothian Road HQ.
So what does the future hold for Standard Life, which, with its 8,000 Edinburgh staff, is the capital’s largest private employer?
Its softening stance on mutuality made some splutter into their cereal, especially since it so implacably vaunted its benefits when squashing carpetbaggers such as Australian Fred Woollard and retired lecturer David Stonebanks. There was an arrogance in that which offended even some of its friends. Standard folk such as Lumsden sometimes gave the impression they wanted to stick with mutuality forever, and not just because it was in the interests of its 2.3m with-profits policyholders.
The announcement that everything is now up for grabs came as a shock, but for some it was catharsis. The phones have been hot since last Tuesday with investment bankers jostling to get their hands on the expected £200m cheque for seeing Standard through to conversion as a plc.
But what lay behind the volte face? It can’t just be the difficult industry backdrop which has seen life assurers challenged by a volatile equity market, consumer mistrust of investment products and a severe margin squeeze.
It seems more likely that the news that it was struggling – and might continue to struggle – to marry its own figures with the new “realistic” reporting regime required by the Treasury and the FSA was behind the announcements. The regulator may have been so badly spooked by the Equitable Life debacle – remember, Equitable was a mutual until 1993 – that it wanted to get the boot in before the Penrose inquiry into the Equitable fiasco is finally published.
“The FSA is under a huge amount of pressure. They are determined to show the world that they are a regulator with teeth ahead of the publication of Penrose,” said one source. “The recent fines for HBOS, Abbey and Lloyds are another side of this.”
It also seems that rival insurers, most prominently Legal & General, have been loudly complaining to the regulator that Standard enjoys a distribution advantage because of its mutual status.
When Standard was doing some preliminary modelling using the new “stochastic” approach (with a random variable) demanded by the Treasury in November, it realised that the proposed approach portrayed its future liabilities – the amount owed to policyholders – as far higher than it thought.
Crombie said: “They’re trying to work out new ways of predicting things that might happen over the next 25-30 years.
“Getting it calibrated so it produces sensible results is somewhat difficult. You don’t get it right at the first attempt and we’ve been through the first attempt and we think it exaggerates the provisions which we have to make.
“When you look at a model that says there’s a one in five chance that the stock market will fall 90%, you think to yourself, maybe that’s exaggerating the problem.
“We felt we had a responsibility to keep the regulator informed of a potential issue.”
But the industry view is that Standard may have already decided what it should do for itself, its 14,000 staff, and its policyholders and that is to demutualise and revisit the ownership structure it had until 1925 by becoming a stock market listed plc.
That would mean that the current review, likely to be led by investment bank UBS, would be a charade. One analyst said: “It is little more than window-dressing.” But Crombie said: “We are not presuming a particular outcome in the status of Standard Life. All we have said is we will consider all options.
“Ruling anything out at this stage is not right.”
Standard Life’s director of corporate affairs, Gordon Arthur, doubts whether it will be necessary for it to sell off any part of its business ahead of the review this summer. “There is no fire sale going on here. There’s no kneejerk reactions. The £750m debt issue was something that was planned for this year anyway.”
One possible outcome is that Standard Life does decide to float but is so weakened because of last week’s events it is soon snapped up and wound down by by some competitor from south of the Border or further afield.
It does seem less vulnerable to such a fate than smaller players such as did Scottish Amicable prior to its takeover by Prudential, partly because of its size and because the game of consolidation in the UK’s financial services may have nearly played itself out. “There’s been considerable consolidation already,” said Commerzbank’s Roman Cidzyn.
But a source close to rival Norwich Union said the uncertainty at Standard will cripple its ability to win new business, medium term. “The view is that they will not be able to write much in the way of new business in the year or so up to demutualisation.”
But Arthur strongly denied this. “That’s just mischief making. Over the course of the last three years, our market share has risen far more than anybody else’s.”
The current state of affairs must be humiliating for many of Standard’s top executives, many of whom believe in the mutual ideal.
However, it’s worth remembering that several of today’s most successful plcs – including Halifax and Norwich Union – were once mutuals, and both floated in 1997. You can hardly accuse them of being flat-footed or having opened themselves up to takeover as a result of their flotations. More recently, and with perhaps less success, insurer Friends Provident floated as a plc in July 2001.
What is unclear is into which camp Standard Life will fall. Having been run by dyed-in- the-wool actuaries for so long, many would question its chances of functioning as an aggressive and predatory plc. But stranger things have happened.
Who benefits from demutualisation?
The news that Standard Life’s five million customers might be in for a small windfall in two years time, if the company goes for a flotation, will prove small compensation compared with worries about future security and prospects for pensions and mortgage endowments, writes Teresa Hunter.
Recent events have changed the outlook for investments in the short-term. A major impact, which will reduce final payouts in the longer-term, will be the removal of the “mutual benefit” if the company floats. In the normal course of events, customers would receive shares in the new company, which would allow them to continue participating in the insurer’s profits through regular dividends. The concern, however, is that Standard’s value may have been harmed by recent publicity. In such circumstances, small investors can be expected to sell their mutual benefit for less than it is worth.
That said, in two years time, the most likely timetable for flotation, sentiment may have changed and the demand for the company’s shares be strong.
Until any change of status, the company expects to continue paying a mutual bonus and does not believe returns will be affected materially. Payouts were already expected to fall up to 10% in line with the decline in maturity values across the industry.
From next April, Standard, with more mortgage endowments than any other insurer, will cut the projected value of its contracts. A typical endowment will see prospects at maturity fall by up to 15% on top of any further downward slide in payouts.
The final question is how much policyholders will get in windfalls if it floats? When Fred Woollard attempted to force a demutualisation in 2000, he believed it would sell for £10bn. Last week he acknowledged that would be nearer £5bn. Woollard estimates the company could be worth £3bn today, but says it is impossible to estimate what it will finally be sold for.
Copyright 2004 SMG Sunday Newspapers Ltd.
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