Has the demutualisation experiment paid dividends?

The past five years will certainly remembered by financial services historians as the time our big institutions threw off the shackles of their mutual structures and demutualised. John Wilkinson asks whether the great experiment has paid off.

In the mid-nineties, demutualisation was the buzzword of the life industry.

National Mutual, Colonial and AMP all headed down the same route ( with mixed fortunes.

For National Mutual and Colonial it was the key to raising capital to acquire other financial services businesses. Both had been through a very rocky patch in the early nineties. The recession we had to have had hit both companies badly, and left them in a weak position.

National Mutual's first solution in the early nineties was to merge with ANZ which would have created a massive financial services company with a dominant position in the Australian market. The move was blocked by the then-treasurer Paul Keating as not being in Australia's interests.

Interestingly, almost a decade later National was allowed to buy MLC and create a similar operation as to what was planned for National Mutual and ANZ. Of course, this is after the abortive merger plans between National Mutual and MLC in 1998.

In the short term, National Mutual's rescue plans focussed on AXA, the global insurance giant that was on the acquisition trail. It took 40 per cent of the company at a cost of $1 billion. Eventually, the stake increased to 51 per cent which was the maximum allowed under the Federal Government's terms for approval of the deal.

Colonial took a different tack. It appointed a chief executive officer from outside the industry ( Peter Smedley of Shell. It was also able to call in some reserves from the UK operation.

Smedley pulled off one deal before demutualisation, buying the State Bank from the New South Wales Government. This deal has been described as 'the greatest bank heist ever' as Colonial ended-up paying very little due to state government guarantees on loan defaults.

National Mutual was first cab off the rank in the line up to demutualise, with an announcement in August 1995. According to its demutualisation document, National Mutual's reserves were about $600 million short of the level it required to run an efficient business.

"The additional capital was needed because National Mutual's expected profits were insufficient to generate the required level of capital reserves within an acceptable time frame," the document said.

For the policyholders, there was the offer of free shares in the newly listed company as a sweetener for approving the deal. The move to demutualise was approved by the policyholders and shares were given to them in August the following year.

National Mutual then had a public and institutional offer that were oversubscribed. The shares were offered at $1.50 in October 1996 and closed on the first day's trade at $1.80. During the next four years the shares slowly crept up to hit a $3.99 high last year. During this period, National Mutual made no major external acquisitions and undertook one unsuccessful merger.

Late in 1999, the French finally put their stamp on the organisation with a name change and a new chief executive officer, the first from outside the old National Mutual ranks. Currently the company is undergoing a major shake-up under chief executive Les Owen, so the jury is still out on the final outcome of the demutualisation.

Colonial was the next one to make a move with the plans to demutualise unveiled in November 1996. It was quite blunt in its demutualisation document. "The mutual structure which was established in 1873 has become inappropriate for Colonial," the document said.

Colonial gave three reasons for demutualisation:

to give members a value of their involvement in the mutual;

to allow Colonial to raise new capital;

to create an ownership structure which maximises value for members.

The Colonial demutualisation achieved one first ( the first demutualisation of a UK life insurance company.

After seeing the success of the National Mutual float, Colonial members were keen to proceed and the policyholders' vote passed without a hitch.

The potential shareholder returns that could be obtained from demutualised life companies meant Colonial's offer was heavily oversubscribed. Its public offer of $2.60 listed in May, 1997 at a 75 cent premium.

The next three years were a roll a coaster ride, with Colonial acquiring a number of financial services companies including Prudential, Legal & General as well as overseas operations such as UK fund manager Nicholas-Applegate.

For shareholders, the share price climbed slowly as analysts wondered whether Smedley's latest takeover was too big. Then speculation started about potential takeovers of Colonial and the share price soared. Finally, in March last year Commonwealth Bank offered a scrip-for-scrip deal that valued Colonial shares at $8.75 each. Approval from shareholders was swift and Colonial disappeared off the map.

Without doubt this has been the demutualisation success story from a shareholders' point of view.

At the end of 1997, Tower put demutualisation on the table as an option for the future. It saw a trade sale as an option to demutualisation, but the path to the sharemarket was not easy.

Tyndall offered to merge with Tower, however, this was rejected by the New Zealand life company. The merger proposal and demutualisation got caught up in the courts, with Tyndall's parent, Guinness Peat Group, taking a vigorous stance against the demutualisation move. The demutualisation proposal dragged through the New Zealand courts for about a year before Tower aimed for an August listing last year. In September, the group bought Bridges financial planning group for $168 million as part of a move to boost its distribution.

Since listing Towers shares have traded about $4. It is certainly too early to say if former policyholders and shareholders have benefited.

In 1998 the financial heavyweight AMP went down the demutualisation path. It was a fairly smooth ride for management, as policyholders could see untold fortunes awaiting them after listing.

The process was also helped when former Colonial chief financial officer Paul Batchelor, with one demutualisation already under his belt, joined AMP. AMP's extrovert American chief executive officer George Trumbull announced the company would have an $8 billion war chest to go on the acquisition trail after listing.

The day of listing was a day of chaos with shares trading at a $17 premium before settling to $18.50. The agreed price for policy holders had been $16 a share.

And what did AMP do with the war chest? It went and spent a good chunk of it acquiring GIO ( which turned out to be one of the nineties' biggest lame duck.

The fallout from the GIO debacle has seen George Trumbull return to the US, shareholders have sought more scalps and potential investors are looking for some sort of turnaround with the financial giant.

Today the shares trade about $17-18, having hit a $13 low earlier this year.

It would have to be said that the jury is still out on the success of AMP's demutualisation.

NRMA also went through lengthy court battles with its directors before listing this year. Shares have traded in the $2.50 to $3.10 range and it is much too early to pass judgement on that the demutualisation move.

One of the historical parts of the mutual map are the friendly societies. When Rob Turner became managing director at IOOF in October 1996, he said the friendly was looking at demutualisation. Four years later, it is still looking at the subject, although a decision on the subject is looking like happening soon. However, the largest friendly society has been beaten off the mark by the Over 50s, which plans to demutualise early next year.

Looking at the life insurance industry demutualisation moves, Colonial has been the only real success story to date. Most analysts have put hold notices on the other listed life companies, with the general exception of AMP which has a buy up to about $20.

Further takeovers of these companies cannot be ruled out, although it would be hard to pick a target at this stage.

Certainly 2001 is going to be an important year for the demutualised companies as investors will be watching for improved performance and a better share price.