This is about our industry, IPOs, financial danger, and some possible implications for our agency clients.
Let's erase the board for a moment and get really basic about economic exchanges. There are five legitimate ways you can get money:
- Earn it
- Borrow it
- Sell something for it
- Win or find it
- Be given it
If you get money any other way - well, I think you know what I'm getting at. Let's call that The Other Method.
The media keeps us well informed of the enormous sums of money made these days in financial transactions, especially with initial public offerings (IPOs). The dot-coms are the ones that grab our attention - people wonder whether this is high finance or hijinks.
Generally, the people who make money by forming a corporation and selling it in the public markets, either directly to the public in an IPO or to a public corporation, earn that money. The investment bankers and brokers who help them earn their money, too. I know some people question the real value of some of these firms and the size of some of the bankers' fees, but let's not be too judgmental. These are voluntary transactions by people who either are fully informed of the facts and risks or should be. By the rules of our system, the money is earned.
Martha Stewart comes to mind. About a day after her enterprise's IPO, Martha was worth a cool $1.2 billion, and her investment bankers got to dip in their beaks for a good drink of it. You go, girl! It'll be interesting to watch what you do with the dough, but as far as I can see, you earned it all.
Then there are two guys named John. One is John Evans - not my good buddy John Evans, the investment manager, but the guy who formed Allied Group, a holding company of Allied Mutual - who ended up with lots of money that used to belong to the policyholders of Allied Mutual. I don't know the details firsthand, but my hair curled during the last couple of years as I read accounts of Evans's dealings, the related fairness opinion, and the reactions of the Iowa Commissioner of Insurance in Schiff's Insurance Observer. (I have no interest in Schiff's Insurance Observer; I'm just a subscriber, and it's the best industry publication I get. You can reach them at 300 Central Park West, New York, NY 10024, 212/ 724-2000, fax 212/712-1999, subscriptions 804/977-5877.)
The other 'guy named John' is John Hancock, the venerable mutual insurer that's now in the process of going stock. Demutualization arrangements are complex because for the most part the policyholders don't know what's going on. That makes lots of opportunity for The Other Method.
It's up to the insurance commissioners and ultimately their states' elected officials to ensure that the very handsome sums the mutual company executives and their advisers make in these conversions are indeed earned. The typical justification for going stock is that the economic returns of mutuals are paltry and that performance could be improved under public-stock ownership. These are the questions: In the process of going stock, do the policyholders get the absolute best, top-of-the-line treatment in all respects? Did they ask these people to do what they are doing? And when the deal is done, are the owners of the company, the policyholders, better off?
If your Aunt Tillie was providing for her retirement with savings bonds, and thought these instruments were just fine in spite of their modest returns, are you obligated to take hold of her money, 'fix' her investment portfolio, and make a big fat gain for yourself in the process? I know that might be tempting, and you might be able to pay someone to say it was fair, but that's not the question. I don't remember reading that the Hancock or Allied Mutual policyholders were in danger of not having their claims paid. And claims coverage, along with the hope of lower net cost for insurance, is why the mutuals were formed.
Is there a point here other than my moralizing finger-wagging? Well, first of all, there doesn't need to be. It's my article, after all. But, yes, there is a point. I'll now get off my soap box and try to explain.
I've held for some time that much of the action in the P/C business is moving to the field, that is, away from the back rooms of traditional carriers and to agencies and agency collectives. We've often advised our clients and seminar participants to prepare for a world in which the agent/broker deals direct to the reinsurer. Admittedly, this is an exaggeration - but a useful one for planning purposes.
Seeing the world this way will help you get ready.
This observation about the rising star of the independent agency isn't flag-waving or a rally call. It's an acknowledgement of what's happening: widespread localizing that's enabled, even forced, by economics and technology.
This trend will be good for the agencies that are ready in the areas of finance, systems, and skills - but it bring the end to the independents that aren't ready. My foray into IPOs, demutualizations, and megafinancial transactions is to alert you to the fact that these developments and the zillions of dollars at stake are not just current events. These developments could affect your world quite tangibly. And maybe very soon.
We're used to thinking of insurance companies as huge. They are, but it's sobering to look at the market cap (the market value of all the outstanding stock) of some large stock insurers and compare them with the market caps of high-profile dot-coms and their partner companies. The dot-coms are way bigger than insurance companies. And consider that many insurers are valued at less or slightly more than liquidation value.
When insurance company capital is tied up inside a mutual, there are a lot of goings-on to untie the funds. The resulting stock transactions create beneficial results for those who know the game. Yet the capital in stock companies seems to be just sitting there for the taking.
Somehow I think the capital will be taken. Maybe that will be the end of the long Commercial Lines pricing trend bemoaned by so many producers and underwriters. Frankly, I don't know what these imbalances will bring about. But whatever the result, it could turn the carrier roster upside down. I suggest you buckle your chin straps.