Demutualisation Risks and Credit Unions

1
Demutualisation Risks and Credit Unions

• Kevin Davis
• Commonwealth Bank Chair of Finance
• University of Melbourne
• and
• Chairperson, Melbourne University Credit Union

2
Demutualisation A common theme

• Irish Nationwide Building Society (INBS)
• April 2003 AGM stoush
• a litany of cases illustrating how woefully
  inadequate accountability remains in the
  financial services industry
• new legislation is expected later this year that
  will facilitate building societies in giving up
  their mutual status, enabling them to be taken
  over immediately. Currently, a society that ends
  its mutual status must remain independent for
  five years thereafter. The POST.IE Tues, April
  29, 2003
• Riches even beyond those he the CEO currently
  enjoys await. However, the interests of members
  who own institutions like Irish Nationwide appear
  to rate a dismal and distant second.

3
Demutualisation A common theme

• Standard Life (UK Insurer)
• Standard Life gets tough with carpetbaggers
• The Guardian March 28, 2002
• Increase number of member signatures required to
  call a special general meeting from 50 to 1000.
• The number of members required to nominate a
  director will also rise sharply to 250 from the
  previous level of just two.
• Standard Life says the increase will "provide a
  balance between democracy - calling a meeting for
  good reasons - and the potential for a small
  group of members to cause the company to incur
  significant costs". A demutualisation bid two
  years ago, only narrowly defeated, resulted in
  costs for the insurer of nearly 11m.

4
Demutualisation A common theme

• National Mutual (UK Pensions Firm)
• The Guardian, Saturday March 17, 2001
• 105-year-old pensions company
• one of the last bastions of mutuality in the
  insurance world
• set to ditch its member-owned status after
  announcing it is putting itself up for sale.
   250,000 policyholders, 150,000 of whom hold
  with-profits policies
• only this latter group would receive
  windfallsobservers have claimed payouts could
  average 3,000-plus.
• National Mutual is talking to potential buyers
  as part of a review of its mutual status.  

5
Demutualisation A common theme

• IOOF Friendly Society (Australia)
• October 17, 2001announcement of demutualisation
  plan
• a logical progression for the financial services
  group and its members. A demutualisation will
  allow for the reserves to be distributed to
  members in the form of shares and also provide
  access to capital to support our growth plans.
• although the existing mutual structure of IOOF
  had served the group well, IOOF is now beginning
  a new phase of its corporate lifecycle.
• 70,000 members.
• Fixed entitlement of 140 shares plus additional
  variable allocation of shares according to a
  formula based on the type, number, size and
  duration of policies held.
• likely market price of a share would be between
  2.70 and 3.15.

6
Demutualisation A common theme

• Principal Mutual Holding Company (US Insurance
  Company)
• Demutualization will help us leverage our
  strength and leadership in a rapidly changing
  financial services industry. Demutualization
  provides us with the capital structure needed to
  pursue growth through strategic acquisitions, to
  develop new products and services and to invest
  in technology. We believe that pursuing these
  strategic opportunities will strengthen our
  leadership position, provide additional security
  for customers and be in the best interests of our
  policyholders.
• eligible policyholders allocated at least 100
  shares
• IPO (2001) took place at USD 18.50 per share

7
Demutualisation and Credit UnionsA coming theme?

• Australia
• Sunstate 1997
• demutualisation via merger with First Provincial
  Building Society
• City Coast Australian National Merger 2003
• Attempted intrusion by Illawarra Mutual Building
  Society
• Canada
• Surrey Metro 1999
• Had non - voting traded shares
• Members rejected sale to Canada Trust

8
Demutualisation and Credit UnionsA coming theme?

• USA
• At least 24 Credit Unions have converted to or
  merged with a mutual savings bank
• IGA Federal Credit Union
• 1998 converted to mutual savings bank.
• 1999 converted to stock company
• stock only offered to credit union members for 8
  per share
• 2001 merged with First Penn Bank
• PSB Bancorp acquired Jade Financial Corp (holding
  company of IGA). IGA stock sold for 13.55 per
  share.
• Converted CU Members Recover Capital From Bank
  Takeover CU Journal Daily for 11/07/00