1. A H I A C O N F E R E N C E 2 0 0 6A H I A C O N F E R E N C E 2 0 0 6 A Creature Called "Mutuality" N O V E M B E R 2 0 0 6N O V E M B E R 2 0 0 6 Jon Gidney Managing Director, Investment Banking JPMorgan Australia

2. Agenda What is “Mutuality” History and Current Use Arguments For and Against Relevant Experience 1. 4. 3. 2. Closing Remarks 5. 1

3. Context JPMorgan is an investment bank Generates fees from raising capital Promotes M&A Business not aligned with promoting the “status quo” However – we are also strategic advisers to Boards and management Requiring focus on the long term Requiring consideration of the interests of all members, stakeholders and sometimes, staff and customers Hence a commercial but (hopefully) balanced perspective 2

4. Defining Mutuality Most constitutions of mutual organisations define what mutuality is... but for broad use: “An grouping of individuals – called members - brought together with a common interest, where activities are solely focused on the benefit of those members” “One vote per member regardless of each member’s financial commitment” Ownership defined by product or service relationship rather than contributed capital – consequently typically no transferability on ownership possible 3

5. History Most mutuals originally established as co-operatives Many formed companies limited by shares for mutual benefit under legislation available in NSW early last century Includes: Health Insurance Funds Building Societies, Credit Unions, Friendly Societies Road Service organisations Growers and Primary Producer marketing and sales organisations etc 4

6. The “Strategic” Question How does a mutual organisation... Retain and/or distribute surplus wealth (if any) ? — albeit that profits can be distributed by reduced premiums and charges and/or bonuses Access capital to protect members interests (if required) ? — debt capacity probably exists, but this can be of little use in “difficult” circumstance Change its operations in order to stay competitive ? — if there is a need for diversification by product or geography — In the context of a changing regulatory environment Most often reflected in Boards and management considering the arguments for and against demutualisation 5

7. Forms of Demutualisation Sale to another organisation (with member approval) and distribution of proceeds — Capita Part share issue and part sale — National Mutual Share Issue and Listing – — Colonial, AMP, ASX, Building Societies Corporatisation – — Hibernian, Building Societies 6

8. The “Yes” Case Crystallises and provides access to members’ valuable rights Increasing sophistication of product offering blurring lines between policyholder/customer and member rights Access to capital – providing both risk mitigation and the opportunity to leverage / generate further value Encourages “best practice” corporate governance and accountability through transparency and enhanced regulatory oversight 7

9. The “No” Case Relinquishes membership rights in substitution for shares (potentially diluting ownership / influence – although compensated) Additional cost of corporate structures (including as may be relevant – the need to pay corporate tax) and compliance costs Potential for conflict of interest between shareholders and policyholders Potential increase in the risk profile of the organisation 8

10. Key Execution Issues How should value be allocated ? Based on an Appointed Actuary’s opinion Subject to a “dead or lost” component Should a Board recommend ? Based on an Independent Expert’s “Best Interests” opinion Will this attract interlopers ? Potentially not a “bad” outcome Subject to “greenmail” concerns 9

11. Selected Australian examples Tower 1999 NRMA, SFE 2000 AMP, ASX 1998 Colonial 1996 National Mutual 1995 Aust Unity * 2005 StateWest, Police & Nurses* 2006 IOOF 2003 OFM, Home, Hibernian 2002 * Denotes withdrawn or rejected by members Source: Reserve Bank, JPMorgan Capita 1990 Building Soc. x10 85-90 Co-op BS 1994 Building Soc. x7 90-93 10

12. Australian experience - general statements Processes can become highly emotive Many members driven by the perceived “windfall gain” Some members focused on the non-financial aspects, generally represented by lobby groups Need for balance Boards and management can become close to the proposal Post NRMA, a very clear need to outline the ‘No’ case Significant cultural impact Conflict between customer and shareholder interests is unavoidable Demutualisation does lead to cultural change 11

13. Case Study #1 - IOOF At the time of its demutualisation, IOOF has 70,000 members, with a reported average age of 70 years Particular reasons for demutualisation outlined at the time were: Optimisation of capital reserve requirements Establishment of options plan to better align the interests of employees 12

14. Case Study #1 – IOOF (cont.) The number of shares issued to each Eligible Member was the sum of that Eligible Member’s Fixed Entitlement and Variable Entitlement, rounded to the nearest share The fixed entitlement for each Eligible Member was 140.4 shares in IOOF Holdings Ltd (approximately 9.6mm shares divided by the number of members) In the case of Joint Eligible Members, members received a proportion of the fixed entitlement of 140.4 shares based upon their interest in their joint eligible membership The variable entitlement was calculated in accordance to the following formula: (Benefit Fund Policy Value x 0.0025252) + (Health Policy Value x 0.1262490) Benefit Fund Policy Value: aggregate of Investment Account Policies, Unit Linked Policies, Annual Premium Risk Policies, Immediate Annuity Policies, and Whole of Life and Endowment Insurance Policies Health Policy Value: sum of the premiums paid between 1 July 1997 and 31 December 1999 Approximately 48 million shares were issued to Eligible Members (9.6mm fixed entitlement shares and 38.4mm variable entitlement shares) The Board also issued approximately two million shares (4%) to the IOOF Foundation to be held in trust for charitable purposes The number of shares issued to each Eligible Member was the sum of that Eligible Member’s Fixed Entitlement and Variable Entitlement, rounded to the nearest share The fixed entitlement for each Eligible Member was 140.4 shares in IOOF Holdings Ltd (approximately 9.6mm shares divided by the number of members) In the case of Joint Eligible Members, members received a proportion of the fixed entitlement of 140.4 shares based upon their interest in their joint eligible membership The variable entitlement was calculated in accordance to the following formula: (Benefit Fund Policy Value x 0.0025252) + (Health Policy Value x 0.1262490) Benefit Fund Policy Value: aggregate of Investment Account Policies, Unit Linked Policies, Annual Premium Risk Policies, Immediate Annuity Policies, and Whole of Life and Endowment Insurance Policies Health Policy Value: sum of the premiums paid between 1 July 1997 and 31 December 1999 Approximately 48 million shares were issued to Eligible Members (9.6mm fixed entitlement shares and 38.4mm variable entitlement shares) The Board also issued approximately two million shares (4%) to the IOOF Foundation to be held in trust for charitable purposes Allocation Policy Share Allocation Rationale A number of factors determined the allocation process: A minimum entitlement was needed to compensate the Membership Rights that had been given up Recognition of members’ contribution to the Management Fund assets was needed so that larger entitlements were given to Members of long duration or larger benefit value Chief Actuary recommended: 80% of the Shares in IOOF Holdings Ltd be allocated having regard to the duration of each Policy, the value of the Policy and the fund that issued the Policy – approximately reflecting each Members’ relative contribution to the accumulated Management Fund 20% of the Shares be allocated through fixed entitlement A number of factors determined the allocation process: A minimum entitlement was needed to compensate the Membership Rights that had been given up Recognition of members’ contribution to the Management Fund assets was needed so that larger entitlements were given to Members of long duration or larger benefit value Chief Actuary recommended: 80% of the Shares in IOOF Holdings Ltd be allocated having regard to the duration of each Policy, the value of the Policy and the fund that issued the Policy – approximately reflecting each Members’ relative contribution to the accumulated Management Fund 20% of the Shares be allocated through fixed entitlement 13

15. Case Study #1 – IOOF (cont.) IOOF Foundation Not-for-profit organisation established as part of the demutualisation of IOOF Ltd Received nearly two million shares (4%) in IOOF Holdings Ltd to fund its activities worth approximately A$15.8mm Foundation Deed provides for a broad range of charitable objects and purposes, including support for disadvantaged families, aged care, and disadvantaged children In 2005, the Foundation made grants totalling over $475,000 Following the wind-up of the IOOF Unconfirmed and Overseas Members Trust in June 2005, 25 percent of the balance was also transferred to the Foundation for charitable purposes (approximately A$160,000) 14

16. At the time of demutualisation, AMP was the largest life insurer/fund manager in Australia with approximately 1.7m policyholders Particular reasons for demutualisation at the time were understood to include: An expanded ability to manage capital within the diversified and international AMP Group Case Study #2 – AMP 15

17. Case Study #2 – AMP (cont.) Participating policyholders were allocated approximately 75% of total shares (policy liabilities were only 57% of total liabilities) to reflect their special position within AMP The allocation of shares per Member, as recommended by the Appointed Actuary, were as follows: 100 shares for each Eligible Policy A number of shares representing the size component for each Eligible Policy —Number of Shares = Size of the Policy x 0.10 —The size of an Eligible Policy was the aggregate of the annual premium of Individual Policies, the annual annuity of Individual Policies, the annual premium of Group Life Policies, 10 percent of the account balance of Group Investment Account Policies, 10 percent of the surrender value of any other Policy A number of shares representing the participation component for each Eligible Policy which is a Participating Policy —Number of Shares = Measure of Participation x 0.01 —The measure of participation for individual and group investment account Policies is the account balance —For other Policies, the measure was the value of the participating sum insured plus five times the value of annual bonuses attaching to each Eligible Policy Participating policyholders were allocated approximately 75% of total shares (policy liabilities were only 57% of total liabilities) to reflect their special position within AMP The allocation of shares per Member, as recommended by the Appointed Actuary, were as follows: 100 shares for each Eligible Policy A number of shares representing the size component for each Eligible Policy —Number of Shares = Size of the Policy x 0.10 —The size of an Eligible Policy was the aggregate of the annual premium of Individual Policies, the annual annuity of Individual Policies, the annual premium of Group Life Policies, 10 percent of the account balance of Group Investment Account Policies, 10 percent of the surrender value of any other Policy A number of shares representing the participation component for each Eligible Policy which is a Participating Policy —Number of Shares = Measure of Participation x 0.01 —The measure of participation for individual and group investment account Policies is the account balance —For other Policies, the measure was the value of the participating sum insured plus five times the value of annual bonuses attaching to each Eligible Policy Allocation Policy Share Allocation Rationale All Members had membership right and because all AMP Members gave up their membership rights when it demutualised, all of them should receive shares The Share Allocation Rules also recognised that Participating Policyholders had a special position because: Participating Policyholders had a right to be considered under AMP’s By-laws for participation in annual or other periodic distributions of surplus – usually in the form of bonuses Participating Policyholders had been the primary risk bearers for AMP’s business, and had contributed significantly more to date than Non-Participating Policyholders to AMP’s capital A large part of AMP’s future profits from existing business are expected to be generated from Participating Policies All Members had membership right and because all AMP Members gave up their membership rights when it demutualised, all of them should receive shares The Share Allocation Rules also recognised that Participating Policyholders had a special position because: Participating Policyholders had a right to be considered under AMP’s By-laws for participation in annual or other periodic distributions of surplus – usually in the form of bonuses Participating Policyholders had been the primary risk bearers for AMP’s business, and had contributed significantly more to date than Non-Participating Policyholders to AMP’s capital A large part of AMP’s future profits from existing business are expected to be generated from Participating Policies 16

18. Case Study #2 – AMP (cont.) Foundation Established in 1992, the Foundation supports the community by investing in "community partnerships" with non-profit organisations in the areas of community involvement and youth employment The AMP Foundation has a number of partnerships with non-profit organisations such as The Smith Family, Planet Ark, Youth Off The Streets and the Beacon Foundation Investments (FY05) In 2005, the AMP Foundation donated A$4,060,055 to 210 community programs 17

19. International experience North America Similar to Australia – large mutuals becoming rare, smaller community organisations retaining relevance Regulatory issues becoming an increasing concern (particularly where there is some cross jurisdictional activity) Continental Europe Large mutuals still relevant – consistent with general approach to corporate structure and governance Close relationship with communities – but takeover remains a threat UK Similar to Australia – BUPA remains an interesting case study 18

20. JPMorgan’s perspective Mutuality has achieved significant successes – but in some circumstances may be anachronistic to a changing environment Significant precedent and a clear path exists to demutualise – although ultimately this decision is for members, not Boards or management Demutualisation is a complex process, not without risk...... but in the right circumstances, significant value can be created for members, with community and customer interests appropriately protected 1. 4. 3. 2. 19