Page 2: What demutualization means for policyholders
Should policyholders even care?
So, what do you get out of demutualization? It’s difficult to get a firm answer.
The insurance company cannot tell you how much your anticipated stock or cash options might be worth before the initial public offering (IPO). That’s because your degree of eligibility can vary, and there can be more than one class of eligible policyholders. This is all figured into a formula calculated by actuaries and is based on how many policies you own, the face value, and how long you've been paying your premiums. Basically, the insurer determines how much you've contributed to the equity of the company. Translating your equity share into dollars isn't possible until the price of stock is determined at the time of the IPO.
Despite earnest assurances from your insurance company, how will you benefit from demutualization? Your insurer will probably pursue profits more aggressively. This could benefit you, if you choose to receive stock from the insurance company.
Historically, mutual company IPOs have averaged 79 percent of the company's total worth, or "book value." The stock of publicly held former-mutual companies on average trades well above book value, according to the investment-banking firm Credit Suisse First Boston. The insurance company can't put a value on your share ahead of time, and your stock could either rise or fall in value following the IPO.
Policyholders have final say
It's a long and arduous process to change the structure of an insurance company, but in the end it's the policyholders who have the final say. If your insurer is demutualizing, you'll be receiving a slew of information from the company before voting time comes.
Standard Insurance Co. of Portland, Oregon sent its policyholders a 72-page booklet outlining the company's conversion plan, along with plenty of explanations and a glossary of insurance terms. That information helped convince more than 90 percent of Standard’s policyholders to approve the conversion. The initial price of the stock was $23.75, and it has been as high as $52 per share. The stock has remained well above its initial price.
Standard, which trades under the name StanCorp, claims demutualization has provided great benefits to both the company and to policyholders. "The growth and financial performance of StanCorp continue to be strong," says Eric Parsons, Standard’s President and Chief Executive Officer. "We are pleased to add to our return to shareholders through increased annual dividends."
Holding company schemes: The feeling isn't mutual
Insurers wishing to preserve their mutual structure sometimes form a mutual holding company (MHC). An MHC is a corporation that allows insurance companies to sell stock for up to a 49 percent stake of the company — without passing proceeds onto policyholders. MHCs are prohibited in some states, mainly because they give many stock options to senior management without sufficient accountability to shareholders. Policyholders have no voting rights in MHCs, and do not receive dividends. Although companies seeking to convert to MHCs often tell policyholders that the company will still be mutual after the conversion, in reality, policyholders lose a major advantage of the mutual structure: The lack of conflicts of interest between policyholders and stockholders.
Some smaller insurance companies have used subscription rights to demutualize. This is legal only in a small number of states. Subscription rights allow policyholders to purchase stock at the IPO price without paying commission. Generally, access to IPOs is limited to large institutional investors, so proponents of subscription rights say policyholders have a rare opportunity to participate in the process.
The company may change, but your insurance won’t
If your insurance company converts from a mutual to a stock structure, your insurance policy won't change. Insurance companies set aside assets to fund your cash value and administration costs just as if the company hadn't undergone any changes.