Fairness Trumps Greed
The Prudential Life Insurance Company of America is to be praised for taking a just route from being a mutual firm to a publicly traded stock company.
The New Jersey-based company's method is fair because 11 million "owners" of Prudential - those who have bought its policies or annuities - will receive some compensation for that ownership.
Many policyholders in mutual insurance companies don't realize that they own these companies. Mutuals were first created more than 100 years ago as cooperatives with the goal of providing insurance at the lowest cost. (Many still provide insurance at low, low cost.) Much of the profit beyond operating expenses goes back to policyholders as dividends that lower the actual cost of their insurance. But some portion of profits accumulates as surplus capital.
In Prudential's case, that surplus amounts to $12 billion, the equivalent of about $1,090 for each policyholder.
In 16 states, laws have passed allowing mutuals to convert by becoming holding companies. This allows the company to keep policyholders' capital without any compensation. The new stockholders (including top executives with fancy option packages) benefit, not the old policyholders.
It is gradually being recognized what a rip-off this holding company route has become. In six states, drives are under way to repeal the laws.
Some mutual company executives argue that they need to convert to stock companies to compete in the fast-evolving world of finance. Maybe, but maybe not. Seven of the 10 largest life insurers in the US are mutuals. Capital doesn't seem a problem for these companies.
Just how fair Prudential's conversion will be depends on details as enabling legislation works its way through the New Jersey legislature. At present, the plan is to give policyholders stock in the new company. They can sell it if they need money. Or hold onto it if they think it will appreciate in value.
Whether policyholders will get the same fat dividends when Prudential is a stock company remains a question. Stockholders like dividends, too.
We hope some mutuals stick around. They put pressure on stock companies to keep prices down.