Some time late next year, the Prudential Insurance Company
expects to send its 13 million policyholders a nice surprise in the
mail: stock worth on average a few thousand dollars.
The Prudential windfall stems from a little-known fact:
Policyholders legally own their mutual insurance companies. As a
result, they share in the company's "profits" through reduced
In recent years, many mutuals, including Prudential, have wanted
to become corporations that issue stock. The switch, they say,
provides three competitive advantages: (1) They can raise money by
selling stock. (2) They can use stock to buy other companies. (3)
They can give their executives stock options to attract and keep
But consumer activist Ralph Nader sees it differently. It's
"stock option envy," he says. The bosses of the mutuals see
executives in other companies getting rich with options. They want
The standard technique for switching is called "demutualization."
It involves distributing accumulated profits, called the "surplus,"
to the policyholder owners in the form of stock, cash, or insurance
credits. That's the Prudential route.
But not all mutuals are following in Prudential's footsteps. Laws
now exist in 22 states allowing mutuals to convert to mutual holding
companies rather than demutualize. This technique lets the new
holding company keep the surplus as a backing for acquisitions or
other uses, including fancier executive salaries or options.
"An outrage!" says Joseph Belth, a professor of insurance at
Indiana University, Bloomington. "It terminates or dilutes the
ownership of policyholders without compensation."
Much is at stake. Some 70 million people own policies with mutual
insurance companies. These companies have accumulated a $100 billion
"surplus" on their books over the years.
Exacerbating the matter, Congress devised an escape hatch for the
mutual insurance companies located in the 28 states with no mutual
holding company law. Lawmakers slipped into the financial
modernization bill that President Clinton is expected to sign a
"redomestication" provision. It would allow mutual insurance firms
in states that don't allow the formation of mutual holding companies
to do so by jumping to another state.
The measure could cost policyholders located anywhere literally
tens of billions of dollars in compensation. …