A consumer victory amid demutualization by insurers

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Probably most people don't know that when they buy insurance from a mutual insurance company they become a part owner of the firm.

"I was not aware of any rights at all," says Lloyd Taylor, a financial analyst, long retired, in Marietta, Ga. He bought some life insurance 60 years ago from Prudential Insurance Co. By now, his dividend more than covers his premium.

The other day, Mr. Taylor got in the mail a 1.7-pound "Policyholder Information Package" asking him to approve a plan for Prudential's demutualization.

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"I'm flabbergasted." says Taylor. "It probably took 15 lawyers to write this thing. And they think I'm going to understand it? I don't know what to do."

If two-thirds of those casting ballots among Prudential's 11 million policyholders do vote yes, the Newark, N.J., insurance company will convert to a company owned by stockholders, not policyholders.

The 1 out of 10 households in the United States with Prudential policies would then be eligible for cash, stock, or credit on their policies. Most policyholders would get shares worth a few thousand dollars. Altogether, the value of the shares could reach $20 billion.

Prudential is following on the heels of demutualizations of other major firms, including Metropolitan Life Insurance Co. of America and John Hancock Mutual Life Insurance Co.

A key reason for mutuals' becoming stock companies, some observers say, is that their executives see a chance to get richer. They can reward themselves with big pay hikes and stock options. "It has become unseemly," says Jason Adkins, founder and legal counsel for the Center for Insurance Research (CIR), a consumer-advocacy group in Cambridge, Mass.

Policyholders who took stock have generally done well. Prices mostly rose. John Hancock stock went from $13 at issue early last year to $38 last week.

But will policyholders' insurance be as cheap in the long run with the switch to stock companies, if profits go to stockholders and not to policyholders as dividends?

Probably not, guesses Mr. Adkins, whose group led the drive to force mutuals wanting to convert to stock companies to properly compensate policyholders - their legal owners.

CIR's effort, one of the greatest triumphs ever for consumers, goes almost unheralded. But it has saved tens of millions of Americans some $100 billion, maybe as much as $150 billion, in the past two years or so. "It was a silent victory for consumers," says Adkins.

What CIR did was break the momentum across the country toward mutuals converting to another corporate form known as a "mutual holding company." This is a complex structure. But to Adkins, the key problem is that it provides no compensation to policyholders.

Insurance-firm executives liked the holding-company idea because it would allow them to keep accumulated surplus capital, use stock for purchases of other companies, and maintain full control of their companies.

With intense lobbying by the insurance industry, some 25 states passed legislation permitting mutual holding companies.

But CIR's campaign helped defeat similar legislation in New York, a crucial state. Key was a legislator with no ties to the insurance industry, Alexander Grannis, chair of the insurance committee in the New York State Assembly. Mr. Grannis accepts no campaign financing from insurance firms, not even a free lunch. His 55-page report in 1998 quashed the proposed bill.

New Jersey took it a step further, deciding to ban mutual holding companies. Even in states permitting mutual holding companies, few insurance companies are following that route after the industry giants chose to offer stock to policyholders. "It would look bad," says Brendan Bridgeland, now head of CIR.

Another reason is that mutual-holding companies "have been unsuccessful in selling stock," notes Joseph Belth, a professor of insurance at Indiana University, in Bloomington.

Because shareholders have less influence in a holding company than they do in a stock company, Wall Street analysts turn up their noses at the stock.

Two sizable firms that took the holding-company route have decided to fully demutualize. Principal Financial Group, in Des Moines, announced its plan last week; AmerUs Group, in the same Iowa city, did so last year.

One major exception to the trend is Liberty Mutual, based in Boston. It is seeking holding-company status, which, it argues, will make for "a more streamlined and efficient administrative and governance process."

The CIR has launched a campaign against that move (www.Libertymutualwatch.org). Mr. Bridgeland says it will deprive Liberty policyholders of $5.7 billion.

(c) Copyright 2001. The Christian Science Monitor

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