Prudential’s Imminent Demutualization

Mutual insurance companies (and mutual savings banks) ‘demutualize’ for two reasons, one stated, one not. The stated reason is that it gives them needed access to capital markets – the ability to float bonds, issue stock. This, they say, should make them better able to fund the modernization required to remain competitive and serve their customers.

Well, maybe. Most of the insurance companies I know already have more than enough cash to modernize, and they sure don’t need to build new buildings.

The unstated reason is that, heck, executives of all the private insurance companies have a shot at getting rich and the chance to do the really fun stuff, like mergers and acquisitions – why not us?

There’s some intersection of the two. It could be argued that talented executives will all be attracted to the places that can offer stock options, leaving the least talented to run the mutual companies, and that mutual policyholders (and depositors) will thus suffer in the quality of the financial products and customer service they receive.

I don’t much buy that argument. If true now, it would have been true for decades. Yet a number of mutuals have done just fine in attracting talent and providing value.

In any event, Prudential Insurance is poised to demutualize, distributing its roughly $11 billion surplus to its roughly 11 million policyholders (who technically own the company), and one of those 11 million asked me how he should vote. (The policyholders get to vote July 31 on whether to demutualize.) The answer is: it doesn’t matter, it’s going to pass anyway. The important question is: should he take stock or cash. And here, although nothing like this can ever be guaranteed, one would come down strongly in favor of taking the stock.

That’s because the demutualization is designed to be good for management (who designed it), and they want their own stock, and options, pegged at a nice low price.

I called a friend who’s made it his life’s work to try to force the mutuals to give policyholders a fairer shake when they demutualize. How badly is this one treating the shareholders, I asked? Well, fairly badly, he said, but it could be a lot worse. That’s pretty high praise under the circumstances.

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