Barbados Mutual to consider IPO by year end 2002

...as demutualization brings an era for co-operatives to a close

The idea of a mutual company for insurance and financial services is such an appealing concept that it was a difficult decision for us to give it all up, says Hugh Mazely, Executive Vice-President at the Barbados Mutual Life Assurance Society.
"However, if we were to have any chance of remaining as competitive as we are today, and to continue to grow in the long term, we really had no choice but to demutualize," he added.
"It was an option the company had been considering for some time, but developments over the past two years including moves by competitors to consolidate their position, meant that our current structure will hinder our ability to access resources and capital that are necessary to compete and grow in the future.
"From its inception, the Mutual was a 'ground up' organization," he said, "and the power, as well as financial returns, generated by the company belongs to the policyholders. This concept will be preserved as the demutualization process continues, and when it is all completed, the ownership of the company will still remain in their hands."
As one of the best-kept corporate secrets of the year, the Society's Board of Directors had agreed to demutualize the organization since July 2000. However, if the plans were made public prematurely, it would have attracted a flood of new policies, as investors would have attempted to buy into the Society to benefit from the eventual share issue at the end of the demutualization process.
After gaining initial approval from the Board, the management team was asked to develop a demutualization strategy. This was completed and approved in early October and the formal announcement was made on November 1 to the media, policyholders and staff members across the Caribbean.
"Although demutualization was an option we had been reviewing for several years, we have been reluctant to go ahead with the plan because the Society was growing at a good pace," says Mazely.
"However, as the assets under management continued to expand and we considered new investments and acquisitions, we realised that all our acquisition will have to be done in cash. We had no stocks to trade and no way or raising cash outside of our own surpluses.
"We are also facing a very competitive industry which, is attempting to consolidate its position in the region to deal with domestic as well as foreign competition. It would be difficult to respond to these market changes without placing a strain on our asset base."

Options

The Board had several other options available before making its decision, including a plan to partially demutualize, but they all had drawbacks that were considered unacceptable.
If they did nothing, their growth prospects would be limited, as expansion would have to be financed from surpluses. Though the current surplus of Bd$173 million was a sizable figure, it was still a finite amount, and additional funds might still be needed for future growth.
Another option, which included acquiring debt, was also unacceptable, as there will also be a limit on the quantity of funds the Group could borrow. In addition, the high interest expense would reduce the potential returns for stakeholders.
With the good performance of all of their subsidiaries, the Board considered it unwise to sell off any of its investments to acquire new assets. In addition, they will still have to maintain at least a 51 percent share in the company in order to list it on their consolidated accounts.
A good alternate option to full demutualization was partial demutualization. In this process, another mutual company will be established, which will facilitate the separation of the policyholders' ownership rights from their insurance benefits. The new company, would, serve as a holding company and be registered as a shareholder owned company that manages the mutual's investment and insurance portfolio. As a shareholder-owned company, it would also be allowed to issue shares and raise funds on the capital markets.
The disadvantages, however, are that shareholders would have no voting rights in the mutual holding company and policyholders would not be entitled to a bonus distribution or dividends, while the shareholders would. This system would effectively take away ownership of the company from shareholders without adequate compensation and may actually increase the eventual cost if the company decides to fully demutualize at a later date.
"So the directors decided to avoid taking measures that didn't go all the way and agreed on fully demutualising and provide policyholders with the first option on the ownership rights of the company."

Strong history

With sizable assets and investments in almost every country in the Caribbean, the Barbados Mutual is the oldest and one of the largest remaining Mutual services company in the western hemisphere. Through the depression in the 1930s and two World Wars, the Mutual has never failed to declare a bonus for its policyholders, says Mazely.
First incorporated by an Act of Parliament in Barbados in 1840, the Mutual was established with a similar vision of the other Friendly Societies, Building Societies and Credit Unions of the era. It was popular for lower income earners in particular, as it helped them to improve their standard of living by assisting in the acquisition of social services, insurance and other financial services by pooling the resources of individuals in the wider community.
In 1853, the Mutual insurance concept was expanded to cover the other nearby territories, including Trinidad and the Eastern Caribbean. It would later include Jamaica as well.
A significant step forward was made when the Barbados Mutual purchased the portfolio of Capital Life in Trinidad in 1977. As part of the deal, the company was also fortunate to acquire Capital Life's sales team and with the help of the new staff, the company's new business portfolio and asset base started to expand faster than ever before.
After nearly two decades of steady growth, another boost came in 1994, when the Mutual's new office complex in Trinidad was completed. Describing the sales team as the Rolls Royce of the insurance industry, Mazely said the asset-base of the Trinidad operation has now surpassed the value of the portfolio managed by the company's head office in Barbados.
In the 1999 financial year, the Barbados Mutual Group boasted assets of Bds$1.15 billion (Bd$2= US$1), with total funds under management exceeding Bds$1.61 billion.
The company also has interests in some of the region's most successful financial services companies including, Nationwide Insurance (Trinidad), NEMWIL (Trinidad), Island Life Insurance (Jamaica), the Mutual Bank of the Caribbean (Eastern Caribbean), the Mutual Asset Management Inc (Barbados) and Caribbean CariCard Services Inc. (Barbados.)
In 1999, the Group also generated an income of $22 million from $239 million in revenues and a $173 million surplus.
The company now has more than 69,000 policies in force from 44,000 policyholders.
"Currently each policyholder is allowed up to three votes at the AGM and the main problem we face is developing a procedure for allocating the shares for the new company. We need to be fair, while protecting the policyholders' rights and entitlements.
"A mutual company is owned by its policyholders and they have rights to a share of the company's profits and assets. However, these ownership rights are not tradable or exchangeable and they expire when the underlying insurance policy contracts terminate."
At the end of the demutualization process, common shares, cash or other benefits are given in exchange for these ownership rights.

Demutualize

Globally, demutualization is not a new concept. Some of the largest insurance and financial services companies in the world were previously mutual companies and following their demutualization, they have experienced rapid growth in their asset base and funds under management.
The list of demutualized firms includes the Mutual of New York (MoNY), Prudential Insurance and the Equitable. All these firms manage rapidly growing global portfolios and provide tremendous returns for their clients, policyholders and shareholders.
The objective of demutualization is to separate the ownership of the company from the insurance policies. The company then has the opportunity to expand its assets to compete more effectively, take on more risk and earn higher income for its stakeholders.
Because premiums are used to secure the policyholder's future, fund managers operate under strict guidelines that limit how they can use those funds.
When the process is completed, policyholders who were registered on November 1, 2000, will eventually receive a share certificate, which can be sold or transferred, and it would not affect the enforcement of their policy or any other bonuses they may receive.
"Policyholders have the option to take cash or shares," he said. "If a significant number of them want cash, we may then consider an initial public offering (IPO) to raise the capital necessary to pay them off and to allow for easy trading of the shares on the stock market.
"Another important issue that concerned the management team was the staff reaction to the decision. So, understandably, we moved ahead cautiously, and tried to explain to them all the issues and the extent of the impact of the new development on them, as well as on their clients.
"After our initial meeting on November 1, we realised that we need not have worried, as their reaction was more like: 'What took you so long?'
"They knew we were at a disadvantage when we did not have access to the cash and the flexibility in the market that many of our competitors had.
"Our successes so far were based on our investment management strategy, the efforts of the sales team in particular, and the surpluses we had been able to generate over the years.
"Unless we are able to respond to market changes by diversifying our risk and asset portfolio, reducing management expenses and expanding the assets under management through the acquisition of new business through mergers and buyouts, we will be left behind."
Mazely said the high cost of demutualization had been a major factor in the company's long deliberations, before the Board finally decided to go ahead with the plan.
The funding for the project had to be allocated, as there are costs involved in sourcing the legal, actuarial and financial expertise to carry the process forward.
However, the benefits of raising the necessary capital to cover business expansion and these other expenses far outweighed the disadvantages.
Although the demutualization has been successful for some of the world's largest insurance companies, the process is still new in the Caribbean. Therefore, the company's management will have to cross several significant hurdles before conversion is completed by the end of 2001.
With the Barbados Government agreeing to update its legislation to facilitate the conversion, the management team has already crossed a major hurdle by gaining the approval of its major regulatory agency.
Policyholders also have to agree to demutualize and Mazely is confident that after they are able to review the facts, as well as the positive impact this decision will have on their investment, they would overwhelmingly decide go along with management's proposals.
The era of Mutual Societies was important in the Caribbean's social and economic development. They helped to transform individual territories into self-sufficient entities, which could save and invest their own funds to improve the lives of their members. With the demise of the Friendly Society Movement and the steady downturn of Building Societies across the region, this decision to demutualize by one of the strongest organizations from that period, may signal the end of an era for Mutual Societies in the Caribbean.