In what amounts to a high-stakes poker game being played with billions of dollars of insurance policyholders’ money, John Hancock Mutual Life Insurance Co. folded last week.
That means that Hancock’s policyholders win.
And that victory is likely to have spillover effects that make winners out of policyholders of other giant mutual insurance companies, such as Metropolitan Life, Mutual of New York, Mass Mutual and Guardian.
Here’s how:
Traditionally, if you buy a policy through a mutual insurance company, you don’t just get the coverage, you get a small ownership stake in the company.
Mutual ownership, however, makes it impossible for the company to issue stock, which is a problem in the rapid-merger world of insurance.
As a result, all of the major mutual insurers have been looking into ways to change their status and transform themselves into public companies.
Generally, the big players have wanted to convert into something called a “mutual holding company,” which would let them issue stock for part of the value of the company.
That makes the insurer more competitive in the investment world, but it rips off policyholders, who lose some ownership and voting rights and gain virtually nothing in return.
Nonetheless, more than 15 states now allow mutual holding companies. Insurers wanted more states to follow suit. (There is legislation pending in Illinois that would make it the 16th state on the list.)
Without mutual holding company laws approved for the state in which they are based, the only way for big insurers to transform themselves into a public company is through a process called “demutualization,” which gives policyholders fair value–cash, stock or a bigger value on the insurance policy–for the control they surrender in the company.
Insurers have wanted to avoid that route. In fact, Hancock chairman Stephen Brown had described demutualization as too costly, time-consuming and impractical.
Last week, his tune changed. The rest of the big insurers may well follow suit.
“It’s a big victory for policyholders,” says Jason Adkins, founder of the Center for Investment Research in Cambridge, Mass.
For Hancock policyholders, that victory is going to be worth somewhere between $2,000 and $3,000 on average.
“With Hancock doing this, the other (mutual insurers) probably won’t have any choice but to follow suit,” says David Schiff of Schiff’s Insurance Observer, an industry newsletter. “So, long term, this is good news for people with policies at a lot of companies.”
If your policy was issued by John Hancock Mutual Life Insurance Co. and carries voting rights, you most likely will be eligible for compensation. (If your policy is from John Hancock Variable Life Insurance Co., if you have John Hancock mutual funds or anything other than a voting-rights policy with the mutual insurance company, you’re out of luck.)
Your coverage remains in place, unaffected by the change.
Judging from other conversions like this one, policyholders will be offered stock in the new, publicly traded Hancock. How much stock you get will depend on the value of your policy and the length of time it has been in place.
If your policy is due a small amount, you could instead receive either a cash settlement or an increase in the value of the policy instead of stock.
Hancock has set up a toll-free phone line to answer questions about the deal. If you are uncertain about your eligibility, have your policy number handy when you call 800-333-9231.
And don’t try to speculate on this deal–buying a policy tomorrow hoping for free stock or a check when the conversion is done. Some conversions have excluded people with policies opened up to six months before the demutualization was announced; if you aren’t in the game today, it’s probably too late to ante up.
Once the plan is approved by shareholders, regulators and the company’s board of directors, Hancock becomes a public company and policyholders get the spoils. But don’t spend the money yet: the process won’t be completed for 18 months to two years.
