JASON B. ADKINS
ATTORNEY FOR POLICYHOLDERS OF STATE MUTUAL WHO SOUGHT TO INTERVENE
IN DIVISION OF INSURANCE HEARING AND
EXECUTIVE DIRECTOR OF THE
CENTER FOR INSURANCE RESEARCH
July 11, 1995
Good Afternoon. Thank you for inviting me to testify here today. My name
is Jason Adkins, I am attorney for the policyholders of State Mutual who
sought to intervene in Division of Insurance hearing and Executive Director
of Center for Insurance Research, a nonprofit public policy and advocacy
consumer organization based in Cambridge.
I would like to comment on the matters before you as follows:
- First, briefly, the narrow issue of State Mutual's demutualization
plan and the unfair process by which it has been considered by the company
and the Division of Insurance. The result has been a prejudicial, unfair
and unreasonable plan;
- Second, the larger issue of the process by which mutual insurers should
be permitted to convert to a stock company; and
- Third, a brief overview of current deficiencies in State laws governing
mutual insurance companies and suggested reforms.
State Mutual has produced a flawed plan that discriminates against its
93,000 individual policyholders and favors the 15,000 institutional (employer)
policyholders. If you would like more information about the substantive
problems with the plan, I am happy to respond to any questions you may have.
I have also attached a statement I made on behalf of policyholders at the
Division of Insurance's ("Division") State Mutual public hearing
which outlines our essential critique.
I. As for the first issue, the State Mutual demutualization process:
- The first board meeting at which CEO John O1Brien presided there were
61 ballots cast out of a potential 108,000 policyholders eligible to vote.
No annual notice was sent to policyholders about the meeting.
- State Mutual formed the holding company, Allmerica Financial Corp.,
in 1992 for the purposes of the demutualization, according to State Mutual's
Plan of Reorganization (Plan, Part 2 at 36). No annual notice about the
annual meeting was sent to policyholders that year either. There were 36
ballots cast out of 108,000 eligible to vote.
- In early 1993, State Mutual began to "seriously" consider
demutualization. (See letter to policyholder, Division of Insurance docket
# 33A). At the 1993 annual meeting, for which no annual notice was provided,
28 ballots were cast out of 108,000. There was no discussion in the 1993
meeting minutes of demutualization. State Mutual spent $4.6 million that
year developing the plan.
- In late 1993, State Mutual submitted a draft of their Plan to the Division
and, in early 1994, the Commissioner established a "working group"
of top staff and retained outside advisors to review all materials and
work with State Mutual on the plan. The Division and its advisors held
near-weekly meetings with or on the State Mutual matter.
- None of the extensive documents, legal memoranda or other information
submitted by State Mutual to the Division on issues of procedure or substance
was made public at that time or any time since then, despite the fact that
at this point State Mutual was clearly a party in interest and one which
intended to appear before the Division in a public hearing as mandated
under Chapter 175, Section 19E -- the demutualization statute. I have sought
access to this information and the Division has written a memorandum of
law seeking to prevent disclosure of the materials arguing, among other
things, that this is part of an "inter-agency" process.
I urge you to inform the Division that State Mutual is not their client,
is not part of their agency, that the documents they are secreting away
must be released to the public, and that they should have been so released
prior to the public hearings. The hearings should be reopened to enable
the policyholders to participate with full information.
- In March 1994, State Mutual held an annual meeting for which no annual
notice was sent to policyholders, and only 27 ballots were cast out of
a potential of 108,000. The minutes for the meeting show State Mutual discussed
briefly management's study of demutualization. No annual report or copy
of the minutes were sent to policyholders. State Mutual spent $9.2 million
on the plan in 1994.
- In February 1995, the board of directors voted to approve the current
Plan of Reorganization and filed it with the Commission of Insurance. A
241-page complex, table-filled Policyholder Information Statement was sent
to the 108,000 eligible policyholders by State Mutual after it had been
reviewed by the Division. An accompanying notice from the Division gave
policyholders less than three weeks to peruse, digest the plan and seek
to intervene in the upcoming public hearings which were to commence in
- State Mutual was the only party granted full rights in the public hearings.
The policyholders I represent, who are similary situated to the 93,000
other individual policyholders, were informed by the Commisisoner's Presiding
Officer, that they did not have enough interest to be parties. They were
permitted limited participation rights which did not include the right
to discovery of information, the right to cross-examine State Mutual's
witnesses, or the right of appeal.
State Mutual presented its entire case in one day, in a process the Commissioner
herself called "one of the most, if not the very most, complex and
interdisciplinary corporate insurance transactions which any regulator must
- State Mutual cites as affirmation of their process the policyholder
vote approving the plan. This vote was the product of a flawed process,
misleading information and notice, and the supposed promise that policyholders
would receive, at minimum, $504 in shares or cash if the shares market
price in the initial public offering went as planned. Because policyholders
each owned $1,000 of the company at a minimum, and due to other inequitities
in the formulas used by management, policyholders are receiving significanty
less than they would receive under a fair plan.
II. The second matter I will touch on very briefly is the larger issue
of the process and its implications for Massachusetts citizens and policyholders.
The life insurance market is dominated by mutual insurance companies
in Massachusetts and the nation. The biggest life insurance companies headquartered
in Massachusetts are John Hancock with about $43 billion in assets, followed
by New England Mutual, Mass Mutual, and others. The demutualization statute
was filed by John Hancock, they may well be next and the process must best
protect consumers and policyholders alike. The current process, as interpreted
by the Commissioner of insurance, does not and this body should correct
that by reforming section 19E. The proposed one year moratorium on demutualizations
would be an important step to allow you time to reform the process. At minimum,
the standard should be that the plan must be "in the best interest
of policyholders," not "not prejudicial" as is the current
III. Lastly, Massachusetts laws governing mutual insurance companies
more generally require reform to increase the accountability of these companies
to their owners -- the policyholders, and to regulators and the public.
I urge you to consider amending current laws to provide:
- meaningful notice and information disclosure requirements for annual
and special meetings (none now exists);
- a meaningful process by which policyholders may nominate candidates
for the board of directors, and a requirement that the number of nominations
exceed the number of open seats (current nomination provisions serve as
an absolute barrier to policyholder action);
- a process by which life mutuals may have access to policyholder lists
as is available for property and casualty mutual policyholders in Massachusetts.
- allowance for votes by proxy to be received one day before annual meetings
(not seven days as under current law);
- a quorum requirement for annual meetings of some percent or a minimum
number of members who may not be employees of the company (none now exists);
- a meaningful mechanism through which policyholders may call special
meetings (the current mechanism is an absolute barrier);
- limitations on board representation for stock subsidiaries of a mutual
so that representation is in direct proportion to the guaranty capital
versus the mutual's total assets (not the one third representation currently
permissible irrespective of asset value);
- higher fines for officers who ask for or receive proxy votes in violation
of the law.
Thank you for the opportunity to appear before you here today. I am available
for any questions.