Re: Mutual Holding Company and Demutualization Legislation
Dear Mr. Mackin:
The Center for Insurance Research (Center) urges the National Conference of Insurance Legislators (NCOIL) to hold a public hearing to examine the impact, implications, and fairness of mutual holding company and demutualization laws that are being enacted around the country without public debate. We believe that NCOIL represents the most appropriate deliberative forum in which to hold an open dialogue on the host of legal and public policy issues raised by these new laws.
The Center is a leading nonprofit insurance research and public policy organization that works on insurance reform issues from a consumer perspective. Along with other consumer organizations such as Consumers Union, Consumer Federation of America, and the Texas Consumer Association, the Center believes that this pressing issue deserves public scrutiny.
As indicated in the enclosed December 16, 1996 National Underwriter article, three states (IL, MI, and PA) recently enacted demutualization laws (authorizing mutuals to convert to stock form) which have stripped 100 million policyholders nationwide of their current ownership rights and over $40 billion in cash assets. These laws are based on federal Mutual Savings and Loans statutes in which the rights of policyholders are limited to rights to subscribe to stock at the public offering price. In contrast, traditional mutual conversions (UNUM, Equitable NY, and State Mutual/Allmerica, for example) have provided proportionate shares without charge. These demutualization statutes may also encourage profiteering, as insiders in bank/S&L conversions have engineered huge windfalls for themselves.
Other states (IO, VT, RI, MN, MO) have enacted legislation that allows a mutual insurer to become a holding company and transfer all its business to a new stock subsidiary. Among the process and substantive deficiencies contained in these laws include the failure to provide fair standards for review, adequate notice, or a public hearing. In addition, the holding company structure potentially creates a serious conflict of interest between the interests of equity stockholders and the original policyholders. It is unclear, for example, to whom the board of directors owes its fiduciary duty obligations, and how the interest of equity stockholders in high returns on their investment will be balanced against the interests of the policyholders to receive dividends on their policies. Under the mutual form, the fiduciary duty is exclusive to the policyholders.
At present, upwards of seven additional states, including California, New York, Ohio, Massachusetts, Rhode Island, Indiana, and Nebraska are considering such demutualization and mutual holding company laws.
To date, such statutes have been quietly introduced and passed around the country with little or no public debate. Unless such a debate is conducted, judges with limited insurance expertise may have the first opportunity to frame how the issues are presented and establish important national precedents. In fact, a lawsuit was recently filed challenging the use of Pennsylvania's statute in the conversion of Old Guard Mutual Insurance Company as an unconstitutional deprivation of policyholder due process and a deprivation of property rights.
Given the fundamental impact that such laws have on policyholders nationwide, we hope NCOIL will take the lead on this issue, and facilitate public debate in state legislatures around the nation. We believe that the complexity, importance, and rapid pace of this issue clearly warrants immediate action.
I look forward to talking with you further about this issue and can provide you with additional information.
cc: The Honorable Josephine Musser
The Honorable Brian Atchinson
Enclosure: National Underwriter cover story, December 16, 1996