Standard Life Demutualisation: A Complex Investment Decision for Policyholders

Policyholders of Standard Life are faced with a crucial decision after the company's demutualisation plans were overwhelmingly approved by its members. With around 2.4 million eligible members set to receive a fixed allocation of 185 shares, along with a variable element based on policy type, value, and length held, the question arises as to whether to hold on to the share entitlement post-flotation, which is expected to take place in July.

Key Takeaways:

• The demutualisation will catapult Standard Life into the FTSE 100, potentially boosting demand and supporting the share price, but recent stock market falls could put downward pressure on the share flotation price.
• The company has a strong brand and turnaround story, having turned losses of £350 million in 2004 into a £152m profit last year, but its business model is still different from that of its peer group, with limited international activity.
• Around half of eligible members will receive a pay-out of £500-1,000, with average pay-outs expected to be £1,700, but this figure is skewed by large awards to investors.
• Customers will be able to buy up to £50,000-worth of stock on the preferential basis, with a discount of around 5 per cent, and will be offered the opportunity to buy more shares after the flotation.
• The company's with-profits fund has been criticized for its lack of financial strength, causing it to underperform compared to stronger rivals, and Standard Life plans to ring-fence the fund and set up a with-profits committee.
• A large outflow of money from the with-profits fund could prompt the business to take a more aggressive position on its market value reduction (MVR), which has been a deterrent for policyholders to surrender their policies to date.

Statistics:

• Members who received a share windfall in exchange for membership benefits keep them; the other 25 per cent sell them post-flotation.
• Around £1.02 billion-worth of Standard Life stock could be up for grabs if policyholders relinquish their share entitlement.
• The company hopes to create a large retail presence by offering its 2.5 million and 4.5 million other customers the opportunity to buy more shares at a preferential rate.
• The share price performance of life companies that have previously demutualised has been lackluster, with Norwich Union shares rising just 22 per cent since demutualisation on 16 June 1997, and Friends Provident shares currently trading at around 176p.
• The company's costs of the flotation are estimated at over £150m.

Sources:

• Byline: ENNIFER HIL SSTANDARD Life members this week voted overwhelmingly in favour of the group's demutualisation plans.
• Justin Modray, head of communications at Bestinvest: "Standard Life has recognised the flaws in traditional life company business models and is striving to expand its investment management and wrap platforms."
• Jason Hemmings, a director of Albannach Financial Management: "Standard Life does not have the dominance it had many years ago and its future is very uncertain."
• Ken Murphy, a director of Bestinvest: "It remains to be seen whether Standard Life will slash MVRs on with-profits policies. If it doesn't, it will be hard to justify, as the fund has produced positive returns in the past three years."
• Andy Cowan, head of sales at Towry Law: "People should seek advice on the type of policy they own: this is a highly complex issue."