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Hard nut to crack for securitisation squirrel

NPI has spent much of the last few years struggling to transform itself into a modern mutual life office capable of sur viving well into the next millennium.

But it has been mostly a process of firefighting as industry experts continue to sting NPI with criticism. It remains the centre of speculation that it will be the next life office to demutualise.

Commentators have believed for a long time that NPI lacks the financial strength of some of its rivals. This was confirmed two weeks ago when NPI rolled out a £260m plan to boost its financial strength and performance. The move is aimed at attracting new business from IFAs. The life office has a reputation among IFAs for poor performance in the with-profits market.

NPI is fighting against a history which has left it with a free-asset ratio of 12 per cent against an industry average of above 20 per cent. This means it has not had much capital to improve its investment performance.

The free-asset ratio measures a life office&#39s assets against its liabilities. The lower the ratio, the less money a life office has to invest in equities because of regulatory requirements.

In 1997, NPI was significantly underweight in equities compared with other life offices. It held under 50 per cent of all assets in its with-profits fund in equities, with nearly the same amount in fixed-interest investments, such as gilts, and property.

NPI says it has been deliberately bearish about the market but industry experts have slammed this policy, particularly given current rocketing stockmarkets.

So how can NPI achieve its goal of becoming "the leading mutual retirement specialist"? Will its latest plan finally put an end to the speculation over its future?

NPI has set up a securitisation deal which will pass a percentage of the cashflows it would normally get from its policies over 20 years to a series of financial institu tions. NPI will receive a big up-front sum in exchange for this cashflow.

The securitisation is the first of its kind to be set up by a life office. NPI says the deal will boost its free-asset ratio to 14 per cent.

In the past, life offices such as NPI and Scottish Provident have used bond issues and subordinated debt plans to boost funds and improve their free-asset ratios.

NPI says the deal will allow it to increase new business and improve its operational efficiency. The move could also boost bonuses on with-profits policies. But chief executive Alastair Lyons says NPI has no plans to increase its equity exposure.

He says: "The deal will raise the amount of capital at our disposal and help us maintain our investment flexibility. This will allow us to finance for the long term rather than borrowing."

But analysts are sceptical that the deal will turn around NPI&#39s performance. They feel that, even if NPI chooses to increase its weighting in equities, the amount it could buy because of the deal will remain insignificant.

Cazalet life analyst Ned Cazalet says: "The amount in the deal is not a lot compared with NPI&#39s liabilities. It will free up some money for equity investment but it will create only a modest improvement."

One insider on the deal estimates that NPI will be able to spend only an extra £750m on equity investments.

The deal may be an innovative idea but it is unlikely to pull NPI out of the pit completely. It has to make more drastic moves to win IFAs over to its cause.

Scottish Amicable found itself in a similar situation to NPI at the end of 1996. It chose to demutualise to increase its financial strength. The rest, as they say, is history.

In January, ScotAm was able to launch a personal pension offering high early surrender values on the back of the Prudential&#39s financial muscle. IFAs feel this is a move that NPI needs to emulate to win more pension business.

NPI claims it is sticking with its high maturity value contracts because its research shows this is what IFAs want. But its competitors disagree and it is one of the few life offices without a high surrender value contract.

NPI has also faced IFA criticism for poor service. It is aiming to improve service and revamped its IFA service structure earlier this year.

Michael Philips partner Michael Both says: "The deal on its own is not enough. It needs to undertake a comprehensive overhaul. For inst ance, it needs to get its admin sorted out."

NPI brought Lyons in last year to make NPI a strong mutual life office with a firm position in the retirement market. After nearly nine months in the job, it seems that his task is as big as ever.


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