Life insurance companies are not normal and there is a black art to valuing them. Woollard gave me a very dumbed-down version of how to do it. First of all, there is what is called the estate, which other companies call shareholder funds, which is essentially retained profits from previous years.
Harder to estimate is the net present value (NPV) to the shareholder of the existing business. Clearly, if you sell a 25-year endowment policy you are going to have a pretty fair idea of how much you can gouge out in fees to keep for yourself. Although the policies may continue for a long time into the future, the chances are that the policyholder will keep paying. This profit stream is therefore virtually guaranteed. Remember that Standard Life is still one of the largest sellers of endowments, so there ought to be plenty of profits. And it takes no account of any future business. Taken together, these two items -- the estate and the NPV of future profits -- make up what is called embedded value. All the listed life companies declare this crucial number, but mutuals are under no such obligation. This is where the heart of the debate is.
By dint of diligent research, and attendance at three AGMs where he pumped the management for data, Woollard reckons the embedded value is £12b, a number endorsed by Cazalet in his report. But remember that this number is just the current value of the business written to date. If Standard Life sold no more policies ever it would still be worth £12b, or whatever the embedded value is. Obviously a brand as strong as Standard Life must have a value, and that is captured by the multiple of embedded value at which these companies are valued. The Prudential(LSE: PRU), for example, is valued at two times embedded value and Scottish Widows was sold to Lloyds TSB(LSE: LLOY) for 1.3 times. Cazalet thinks Standard Life could go for 1.3 times embedded value, which gives him his figure of £16b. However, given the size and quality and of the business it is not hard to postulate a figure closer to £20b.
As Woollard points out, Standard Life has successfully managed to dodge the pitfalls of pension mis-selling that plagued the likes of Royal London, or the guaranteed annuity problem that hit the Equitable Life. He is the biggest fan of Standard Life management there is. Also to be taken into account in any valuation is its new online banking business.
All this is very well, but how will Woollard and other carpetbaggers realise that value? I asked him how he expected the vote to go, bearing in mind that he needs 75% to vote in favour for the demutualisation to go ahead. His view is that somewhere between 50% and 75% will vote his way. He then proceeded to compose several, amusing versions of the sort of press release Standard Life might make if that was the result. Something along the lines of it being a ringing endorsement of the board. When I asked him what his next move would be he was more circumspect.
What next?
However, he did point out that only a 50% vote is needed to change the board, currently 14-strong. All seven executives are actuaries; none of the seven non-executives are similarly qualified. I said that I had presumed a vote on June 27th anywhere near the 50% mark would send a strong signal to other insurance companies that the company was "in play". After all had not Scott Bell, the Group Managing Director, gone on record as saying that it really was not worth demutualising because the group was worth so little? In his defence documents, he assumed a value of £12b as an illustration.
So how would he react if he had a discreet phone call from one of his rivals saying that it would like to buy Standard Life for £12b? Probably he would try and keep it quiet. One of the many virtues of a mutual he undoubtedly values is that there is no market in the shares to react to rumours. But if it escaped into the public domain, what would he do then? After all, this is not his company. He is simply managing it on behalf of its owners, and at the moment they are the policyholders. One imagines the owners would rather like to know if another company valued Standard Life at, say, £20b. Would Mr Bell still argue it was worth only £12b?
During the course of our interview Woollard took part in a brief radio interview. When that journalist asked him why he was doing it -- carrying out his campaign to demutualise -- Woollard replied that, apart from the money of course, he was rather enjoying it. I believe that.
