If you did not already "click here" in the above table, you will not have seen where all the reserves went.  Ah, now you have checked it out.  Good.  And I'll bet you still don't know where all the reserves went.  Which, when you think about it, is probably a major motive behind either full demutualization or formation of the Mutual Holding Company.

The policyholder equity box is basically an illusion to make the MHC conversion seem less of a cheat.  In theory, the participating policyholders will still "own" part of the entire entity (typically 51% of voting shares).  But consider the Prudential full demutualization above.  They are keeping about 60% of the potential value as "treasury" shares, owned by the corporation as a whole.  By contrast, the MHC keeps 51% plus some outside the MHC box -- i.e. they are keeping the same percentage of the company as Prudential, but not returning a dime to the policyholders.  (Prudential is returning billions.)  Consider that policyholders of the MHC will still only get one vote per policy, while stockholders will get one vote per share.  And if a full demutualization does ever happen, the policyholders have already sacrificed much of their property without compensation.  And they lost a lot of the reserves in the initial reorganization.  And they are likely to lose more of the reserves in a full demutualization.  And "51% of voting shares" -- what a crock of hooey.  Since voting shares include neither preferred shares nor treasury shares, the pre-existing owners are essentially lied to.  They are told that under no circumstances will their ownership interest go less than that, but what sounds like "majority ownership" is not.  ... And, hmmm, well golly!

The MHC pictorial is intentionally inverted to reveal the illusion.  The legal state is that the MHC is the outer, overall, organization.  But the practical state, and the very reason for transforming to MHC form, is to isolate the mutuality.  Let the overall company act as a normal corporation, but pretend it is still preserving the rights of the original owners and remaining true to its mutual heritage.

I am about to go "over the edge", so let me say first that some companies have formed or want to form an MHC as a transitional step to full demutualization.  In those cases, where there is a sincere intent and practical goal of eventually transferring fair value back to the original owners, conversion to an MHC might well be legitimate and ethical.  [For the other cases, well, listen to my shouting as I fall...]

What would be more fun than wheeling and dealing like "real" corporate executives? -- How about starting out by stealing their company from the existing owners.  Now that is deal worth bragging about at the social club!

The first company (or few companies) that wants to do this in any given state has to convince the legislature that this is a nifty-kean idea.  Their case is something like this:

1. They say how it will actually benefit existing policyholders by making their company healthier and stronger.
2. They say that the existing mutuality will be held as a sacred trust to the corporation, and operated, as always, exclusively for the benefit of those policyholders.  (This is the mutual holding company part.)
3. They say that the policyholders do not "really" own the company in the first place.
4. They say that, even if they ever did, the acquired wealth of the company is not that of the current policyholders, but built up over many, many decades by past policyholders, now departed.
5. They say that they now own stock companies, and it is ridiculous to assume that the members of the mutuality own those.
6. They say that the existing executives and members of the board of directors will not gain personally from this conversion.
7. They shred embarrassing old marketing brochures -- the ones that glowingly describe how much better their mutual company is than a stock company, because all earnings go to the owner-policyholders, none to stockholders.

And they donate lots and lots of policyholder's money to the campaign chests of the governor and legislators.  Some lawmakers are clueless; they don't know what a mutual insurance company is in the first place, so eliminating such a strange entity will be one less thing to have to seem knowledgeable about.  Other lawmakers are simply, um, appreciative of the donations.

A few states have already fallen.  A law is passed that says, essentially, "this entity which was owned by no one can be sold to the public at large".  I'm sure there are lots of pretty words and noble-sounding phrases too, but in the end, the executives of the company can sell it.  The company still needs to get a majority of voting policyholders to vote for this transition, but since most policyholders never vote anyway, this step has been one of the easiest and cheapest ones to accomplish.  It is quite interesting that the participating policyholders don't have sufficient owneriety to fully own the company in the "real" sense, but it is sufficient to give them the authority to sell it.  I bet that after the first six-pack (or the sixth toke), it all would make a lot more sense.

Afterwards, the companies which have already converted to mutual holding corporations might say, "Rich Franzen and others of his ilk are ignorant trouble-makers; our policyholders realized the importance of making this transition and voted to do so."  Yeah, right.  Whatever.  How's your yacht?

• Sometimes "the system" works!
  Several years ago some of the major mutual companies in New York state got behind a bill which would have allowed them to form MHC's.  Governor Pataki backed it, but the legislature defeated the bill with little problem.  This official legislative report shows how little serious credence was given to the hollow claims of the insurance companies.  Way to go, New York!

• Unfortunately this is no longer just a state-by-state affair.
  Several years ago, Congress passed, and President Clinton signed, a bill which allows a mutuality in one state to reorganize itself as a company in a different state.  I.e., if New York won't let you steal the company, move to Pennsylvania or some other state which will.  I do not know whether to blame drugs, or money, or both.  (Sometimes I'm not sure there is a difference...)  Some sanity exists in Canada, where MHC conversions are not allowed.
  

[... climbs back up canyon wall]  Let me be partially fair.  Some of the arguments in favor of an MHC are not completely hollow.  In my case, I own a participating policy from New York Life.  It owns a stock subsidiary called NYLIAC (New York Life Insurance and Annuity Corporation).  How much "right" do I really have to ownership of NYLIAC?  Much of its value derives from policyholders who desired the extra flexibility that Variable and Universal policies provide.  The money those policyholders have put into their policies does not belong to me in any way, shape or form, nor do the reserves NYLIAC has built up over time.  I view "ownership" in this case as a trust.  Commitments were made to those policyholders, and it is the duty of NYL to have NYLIAC fulfill those commitments.  (If a dime or two of NYLIAC profit is added to the general earnings of the mutuality, this is still a better result than a dollar or two going to stock holders of a fully corporate insurance company.)

Ok, let's go further:  fairer than fair.  Assume almost every claim in favor of MHCs is true.  Assume there is no self-serving ulterior motive by the executives and directors of the Mutual Company.  Assume it is even not financially unbeneficial for me to abandon my ownership rights without meaningful compensation.  Besides the theft thing, is there some other problem?  Let us see: -- Now my policy is part of the Mutual Holding Company owned by the bigger corporation.  The law which allowed the establishment of the MHC says it must continued to be operated exclusively for the benefit of the policyholders.  My policy still participates in the earnings of the MHC, and the dividends I receive are the profits of the MHC.

That is to say, there can be no financial return to the stockholders of the corporation.  The current executives are happy with this situation.  They know how hard the conversion was to accomplish, and, hey, maybe some of them really do have concern for my rights.  But what about 22 years from now?  The executives who drove this transition are gone.  To the new executives, the MHC will not be viewed as a trust, but dead weight.  It is not earning anything for the corporation as a whole.  My policy (and I) are relics of a past that no longer matter -- a problem, not an opportunity.  I have gone from being an owner to living in the corporate ghetto.  So, yeah, I have a problem with the MHC concept even if the claims in favor of it were true.

I might be wrong.  Perhaps the MHC is not dead weight to the corporation.  Perhaps the law allowing the creation of the MHC does more than "insure" that it will be operated exclusively for the benefit of its policyholders.  Perhaps it also allows fees, considerations, and shared business expenses to be passed on to the corporation.  Perhaps it allows pooling of reserves to insure not only the health of the Mutual Holding Company, but the health of the corporation as well.  Perhaps I am an asset after all!  Perhaps I not only got robbed in the very creation of the MHC, but have the distinct pleasure of being robbed annually thereafter.

"Are you sure you have never worked for the IRS?"

And, what do you want to bet? -- 33 years down the road, after attrition has significantly reduced the number of participating policyholders, the executives of the corporation will be arguing before regulators that such a small population of policyholders has no right to own such a large percentage.  "It's just not fair", they will say.  And you know what -- that's likely the first honest thing they will have said in the last 34 years.

The internal development pool is where most profits end up.  This money would be used to grow the overall company.  In Prudential's demutualization documentation, they state that for them it was a very rare event when profits were passed to participating policyholders.  This is a bit disturbing from an ownership point of view.  Since the wholly-owned subsidiaries were initially bought with policyholder's money, and since the entire mutual company is to be operated "for the benefit of the policyholders", it should be clear that the policyholders deserve some return from what they "wholly own".  I don't expect as much as a stockholder would, and I don't mind a mutual company making itself bigger.  Still, this doesn't excuse the executives and Board of Directors from their responsibility to those they say they benefit.

Prudential executives will be partially off the ethical hook if their demutualization is approved.  The profit initially denied participating policyholders will be returned to many of them as they become stockholders.  (Ethical relief will not come to those who died before receiving this compensation.)  Mutuals need to let their participating policyholders participate in all earnings.

There should be a legal firewall around NAL Joint Ventures, Inc.   Whenever doing business in foreign countries, the assets of the mutual company as a whole need to be protected from potentially disastrous legal changes, coups, revolutions, nationalizations, etc.  Similarly, if involved in a co-venture within the USA, it would be extremely unwise to have all assets of the mutual company at risk because your partner did something stupid.

The participating policyholders of New Amsterdam Life own it.  Policyholders or investors in any of the subcorporations have the same rights as they would in a stock corporation, but this does not include ownership rights.  It may not seem fair to someone who bought a permanent life policy from NALIAC.  There is a basic tradeoff:

• participating policyholders of NAL
  These are the owners, but they have little control over how the money within their policies is handled.  They demand low risk, so there is virtually no equity market involvement.  The investments of the mutuality are in bonds, real-estate, money market instruments, and hopefully a small return from the corporations which they own.

  The expectation of profit is less than if they were stockholders of a stock insurance company, because stockholders are willing to expose themselves to higher risk.  Plus, philosophically, mutuality means that assets are treated as a trust, not property to plunder.  And realistically, competition with other insurance companies forces that NALIAC policyholders be treated well.

• universal life policyholders of NALIAC
  These policyholders desire fairly low risk, but they have more flexibility in controlling their premiums and death benefit.  Their policies may have a guaranteed earnings rate on accumulated cash value, such as 4%.  They might earn more.  (Compare this to the participating policies of NAL:  the dividends earned are not guaranteed.  They do have an annual increase in Guaranteed Cash Value (GCV), but at policy maturity, GCV is typically not much higher than the sum of all premiums paid.)
  

• variable life policyholders of NALIAC
  These people choose to expose their life insurance to a much greater, but personal, risk.  They expect the possibility of a correspondingly greater return.  Plus, they have a protection not available to other policyholders.  Money they place in the separate accounts is protected, and essentially belongs directly to them.  If NALIAC is sued or makes some very bad investments, the money in the separate accounts is not at risk.  This is pretty much the same protection offered to people buying mutual funds.  For some reason, it is a protection specifically denied to policy money invested in the general accounts of both NAL and NALIAC.

• annuitants of NALIAC
  Owners of fixed annuities are invested in the same general accounts as universal life policyholders.  Their interest rate is guaranteed not to fall below a certain level, such as 3%.  They have lower overhead costs, because there is no large death benefit to support.  This means that they haven't accepted the same risk.  Owners of variable annuities can invest in the same separate accounts as the variable life policyholders.  Again, their overhead costs are lower.