Center for Insurance Research
1130 Massachusetts Ave., Cambridge, MA 02138


February 6, 2000



Director Nathaniel S. Shapo
Department of Insurance
State of Illinois
320 West Washington Street, 4^th Floor
Springfield, Illinois 62767-0001

Re: Mutual Trust Life Conversion

Dear Director Shapo:

I urge you to reject the inadequate plan of conversion filed by the Mutual Trust Life Insurance Company. The plan, as it currently exists, is far too sparse to make a judgment on the reorganization's fundamental fairness to policyholders.

The Center for Insurance Research is an independent, nonprofit public policy and advocacy organization that actively represents mutual policyholders on these issues nationally.

I. PROCEDURAL DIFFICULTIES
As a preliminary matter, the procedural setting for this 'public' hearing suffers from several flaws and a second hearing, after full notice, is needed to correct these defects. Despite the mandate provided by 5(a) of Illinois Compiled Statutes § 59.2, this hearing is not public at all. Only policyholders, or those having a written proxy from a policyholder, have been allowed to make oral statements at the hearing. Thus, the public has been excluded. In addition, no official ever responded to inquiries by the Center about the availability of cross-examination at the hearing. Phone calls made to the hearing officer by Center staff asking the same question were never returned. The extremely short time line permitted by the Illinois department also serves to exclude many policyholders living outside the state of Illinois. By the time notice was received, they had only a little over a week to inform the department they intended to attend the public hearing (notification by August 2 was required) and to make the necessary travel arrangements. Since only 22% of the premiums collected by Mutual Trust come from residents of Illinois, the remaining 78% of the company's policyholders live in other jurisdictions and have been given inadequate time to respond (especially since they had to wait several more days after notification in order to get a copy of the plan in the mail). Information regarding the plan itself has also been hard to obtain, as the Department refused to provide copies of the plan unless a formal request was made under the freedom of information act. Fortunately, Mutual Trust was willing to mail copies of the plan to those who requested it, though this created a delay of several days (a critical problem in this fast-track proceeding). The currently scheduled hearing is inadequate because: it is not public as the statute mandates; the procedural rights of policyholders and their representatives were never provided or detailed; information was not made available in a timely way (given the shortened timeline); and the period of notice serves to prevent policyholders from other states from having any meaningful participation in the process. A second, fully public hearing with clearly established procedural rights, access to information, and an adequate notice period is needed to cure these defects.

The time-span provided for review of Mutual Trust's plan is inadequate because it does not provide regulators with enough time to review all the facets of this complex restructuring. Indeed, the mutual insurance holding company structure (MIHC) and the provisions of § 59.2 seem to be misunderstood in several ways. In 1997, the Department stated: "[o]ur experience causes us to question the viability of MHC [MIHC] reorganizations." Despite the concerns expressed by the Department in 1997, not addressed in the current plan, this conversion has been put on a fast track for regulatory approval. Indeed, the Department seems to have embraced the MIHC concept, advocating for the passage of § 59.2 (again in opposition to consumer groups). Upon the law's passage the Department noted in a press release:

Staff of the Department of Insurance worked with the drafters of the law to ensure that policyholders would be treated fairly in the event of a mutual insurance company conversion to a mutual holding company (MHC) system. Staff studied the relevant issues extensively in conjunction with the National Association of Insurance Commissioners Mutual Holding Company Working Group and sought the inclusion of extra regulatory protections in the Illinois MHC legislation. As a result, the Illinois law has several provisions which provide protections that are not available under the MHC laws of other states.

Upon reviewing the actual text of § 59.2, it becomes readily apparent that it is one of the worst MIHC laws rather than one of the best. In fact, despite the discussion of the work done at the NAIC, § 59.2 contains few of the consumer protections recommended in the NAIC white paper. For example, there are no provisions in § 59.2 limiting the amount of stock officers and directors may receive as options following the conversion. Virtually every other state with a MIHC law has a statutory provision or regulation which places such limits on a mutual's management.

The release's description of § 59.2 contains other misconceptions as well:
MHC Regulated as an Insurer – All provisions of the Illinois Insurance Code, including corporate law, investment law, reporting requirements, and regulatory authority, apply to the MHC just as to any mutual insurance company. Many other states apply only specified provisions of their insurance laws to the MHC, which results in an incomplete regulatory framework.

Despite provisions in the statute which apply the insurance code to an MIHC, there is still a substantial danger the regulatory framework will be incomplete. This is best shown by Mutual Trust's plan, which shows the intermediate stock holding company (IHC) will be incorporated in Delaware. Thus, the middle tier company may, in some circumstances, be beyond the reach or authority of Illinois regulators. This passage also fails to address problems created by potential federal preemption of the Department's authority. Since an MIHC is "not in the business of insurance" it may not be exempted from federal regulation by the McCarran-Ferguson Act (see the bankruptcy discussion below). The regulatory framework may still prove incomplete, despite the application of the insurance code to the MIHC.

Trust Provisions and Bankruptcy Protection – Illinois is the first state to require that the MHC hold its assets in trust for the benefit of policyholder members. This provision should ensure that the Director's ability to reach MHC assets for protection of policyholders cannot be preempted by federal bankruptcy law.

There is a good reason why no other state has required a provision like this, they are not sure it will actually work. The Department first suggested the trust concept at the NAIC, but no evidence showing the mechanism would actually function was ever produced. As a result, the NAIC white paper states:
These are new provisions which have not yet been tested in the context of an insolvency. It may well be prudent that state regulators simply not assume that assets in the MIHC will be available to the insurer in the event of financial difficulty. Perhaps management should not represent, and regulators should not assume, that value residing at the intermediate or parent holding companies will in some measure substitute for adequate capital and surplus at the insurer.

Despite the earlier reference to the NAIC white paper, § 59.2 clearly does not follow the procedures recommended by that document, for the law assumes the assets of the parents will be available. The 1997 memo of the Department also voices concerns over potential federal bankruptcy preemption:
In our view an MHC lacks this primary basis for prompting the federal courts to accept a deferral to state regulation. It may be called an insurance company under state law, and it may be subject to liquidation by the state; but since it has no insurance contracts, is not in the business of accepting or spreading risks, and is not authorized under state law to issue insurance contracts, we think it unlikely that it would be denied federal bankruptcy relief under any circumstances.

Requiring the parent company to hold its assets in trust for the policyholders of the subsidiary insurance company may prove fruitless, as the NAIC has recognized.

Authority for Conditional Approval – The Illinois legislation grants broad authority for the Director to grant conditional approval of the MHC Plan of Reorganization. This will allow the Department to respond to specific concerns that may arise with each particular reorganization. The conditional authority allows the Director to require reporting and oversight as appropriate to the situation, considering the strengths and weaknesses of the mutual insurer and the particular Plan of Reorganization. The Director may utilize this regulatory authority to effectively amend the Plan of Reorganization to assure the fair treatment of policyholders. Other states that do not have this broad authority to effect [sic] the provisions of the Plan may face a "take it or leave it" decisions regarding approval of a MHC reorganization.

Again, virtually all other states with MIHC legislation have the authority to make a plan of conversion. In fact, the conversions of Principal Mutual (Iowa), FCCI (Florida), and GenAmerica (Missouri) have all been conditionally approved.

No director, officer, employee or other person may receive any fee, commission, or other valuable consideration for promoting the plan of conversion, except as set forth in the plan.

While officers, directors, and employees are barred from accepting any fee for promoting the plan of conversion, § 59.2 (unlike virtually every other MIHC law) fails to place any limits on the amount of stock options directors or officers could be granted post-conversion.

The MHC structure, as set forth in the Illinois legislation, was carefully crafted to assure that all of the mutual policyholder's interests in the mutual company are protected and preserved after the MHC conversion. The member/policyholder's contractual rights for insurance coverage are continued in the converted insurance company while the rights to participate in governance, profits, and liquidation proceeds are retained through the membership interests in the mutual holding company.

This fundamental error plagues the MIHC concept. Policyholders are not members of a mutual company, they are its owners. The concept of policyholders as "members" was developed by mutual insurers looking for ways to cash into the stock market without having to pay out the proceeds to policyholders or give up management control. Mutual insurers made the same "membership" argument to Congress during debate on § 809 of the Internal Revenue Code, and their contentions were soundly rejected.

First, that the legal rights of mutual policyholders did not constitute the equivalent of ownership and therefore that no equity return could be present. While the limitations on mutual policyholders' contractual rights distinguish them from normal equity owners and may create a relationship with the company more akin to one of beneficiary and fiduciary, this argument was simply unpersuasive to the Treasury and congressional decisionmakers. An equity return or its equivalent seemed to be present in mutual companies and, if so, it was necessarily reflected in distributions of policyholder dividends. The 1984 legislation treats mutual policyholders as surrogates for shareholders and views policyholder dividends and mutual company retentions as including an equity-type return. There seems little to be gained from further argument about the characterization of policyholders as "owners" of mutual companies.

Though § 59.2(1)(e) speaks of policyholders as "members" rather than owners, Illinois law cannot override the dictates of the United States Congress. No MIHC law has been constitutionally tested yet, but any state law which transformed policyholders from owners into "members" would clearly contravene Congressional intent. If MIHC laws are ruled unconstitutional by the judiciary, then any MIHC conversions which have already taken place will have to be undone years after the original reorganization. This potential problem can be avoided if the Department treats the policyholders of Mutual Trust as owners for the purposes of this conversion. If the policyholders of Mutual Trust are recognized as the company's owners (and thus the owners of the MIHC as well) and treated as such, then there will be no question as to whether the ownership interests of policyholders have been destroyed.

Furthermore, the discussion of membership interests in the press release also mistakenly states that policyholders, as members of the MIHC, will continue to have the right to share in the profits of the enterprise. The proposed MIHC structure is under no obligation to pay dividends to its members, indeed the proposed articles of incorporation and bylaws state that no dividends will be paid to MIHC members without the permission of the Director of Insurance. However, no mechanisms are established by which the MIHC will, at least annually, go before the Director and request permission to pay a dividend or explain why a dividend would not be in the bests interests of the MIHC policyholders (a requirement in the FCCI conversion in Florida). In fact, Mutual Trust may avoid the payment of dividends to MIHC members by ensuring, after obtaining the Director's approval, the subsidiary stock corporations pay no dividends to the MIHC. The plan contemplates using dividends due from subsidiaries to purchase more securities of the subsidiaries instead of bringing funds into the parent MIHC (making it no more than a shell corporation which shields current management from any takeover attempts). As discussed below, such reinvestment policies will only benefit the stockholders of the subsidiary corporations (possibly including officers and directors granted stock options) at the expense of the policyholder-owners. Thus, it is unlikely that members of the MIHC will ever share in any of the enterprises' future profits. If dividends to the policyholder-owners are not paid by the MIHC, the equity component of the mutual insurer's dividend discussed above (the ownership dividends) will be eliminated and the policyholders' ownership interests will have been partially destroyed without providing any sort of compensation in return.

MIHCs are complex new entities plagued by a host of potential problems that are not well understood by the public or the insurance industry. The remarks in the press release show that some of the provisions of § 59.2 and portions of the NAIC white paper are not yet fully understood. Given the complex nature of an MIHC reorganization and the current confusion (not well justified) about policyholders' ownership rights, a greater amount of time is needed for Department decision makers to evaluate all the voluminous materials relating to MIHC conversions in order to make an informed decision about the plan's fairness to policyholders. Regulators must fill in the multiple gaps left by § 59.2 and the plan of conversion itself which expose policyholders to substantial risks. The abbreviated approval process currently underway for the plan submitted by Mutual Trust unfairly restricts the review period available to the Department and the company's policyholders to consider this intricate reorganization process.

II. MUTUAL TRUST'S PLAN
The plan of conversion filed by Mutual Trust provides scant detail about the reorganization and the benefits it will supposedly provide. To begin with, no draft of the Policyholder Information Statement (PIS) was included in the hearing materials sent to the Center. The PIS is a crucial part of any MIHC reorganization and must be thoroughly reviewed in order to determine whether it fairly and accurately apprises policyholders of the risks and benefits inherent to the reorganization. The PIS should be reviewed as part of the public hearing and approved by the Department before it is sent out. This simple step could save Mutual Trust much trouble in future. In Pennsylvania, Provident mutual filed a plan to convert to an MIHC and did not provide policyholders with a draft copy of the PIS before the public hearing. Subsequently, a Pennsylvania court enjoined the conversion of Provident when it found the PIS to be a document which misled policyholders and did not fairly inform them of the real risks and benefits of the plan. A PIS evaluated before it is sent out will not be subject to the same risk. The materials sent out by Mutual Trust to notify policyholders of this public hearing (the Q&A sheet discussed below) did contain misleading statements, any similar statements in the PIS might block the conversion indefinitely. If the Department chooses to conduct a second public hearing, as the Center recommends, the PIS could be made available to all participants and evaluated before it is sent to policyholders.

The stated rationale given by Mutual Trust for the conversion does not stand up to close scrutiny. First, Mutual Trust states that the conversion will better position the company to make strategic acquisitions. Given Mutual Trust's diminutive size, even if it conducted an initial public offering (IPO), it would not have the resources to acquire any substantial insurance companies or banks (presuming some form of financial services modernization passes). In the mergers and acquisitions market, Mutual Trust is much more likely to be a target than an acquirer. However, the MIHC structure will block any takeovers made by larger stock companies, giving management guaranteed control of the entity and access to the stock market. The company will remain takeover proof, but without the support of a much larger company, Mutual Trust will lack the resources to play a significant role in the merger and acquisition market.

The second stated rationale of Mutual Trust is that the conversion will give the company greater access to capital than is currently available to the mutual structure. At least one study has shown that demutualized companies do not have greater access to capital than they did as mutual insurers. In addition, it is now widely recognized that Wall Street investors do not look favorably upon MIHCs (wherein the stockholders cannot control management). Any stock issued by Mutual Trust as a MIHC is sure to trade at a substantial discount due to the company's structure and diminutive size. Thus, not much extra capital will be produced by the IPO and the sale of greatly undervalued securities will destroy the value of the policyholder's equity interest in the company. An MIHC conversion will not yield much capital to Mutual Trust.

Finally, in a Question and Answer sheet sent to policyholders in conjunction with the notice of hearing (Q&A), Mutual Trust indicates the conversion will produce 'substantial' tax savings. No figures or information is provided on how these tax savings will operate to the company's advantage. If the company is referring to the operation of Internal Revenue Code § 809, then their statement may prove incorrect. While it is true § 809 only applies to mutual life insurance companies and does not apply to a converted MIHC structure in accordance with Internal Revenue Service private letter rulings, the overall level of tax will remain the same. § 809 was added to the tax code, after all, in order to level the playing field between stock and mutual life insurance companies and to ensure both segments paid equivalent amounts in taxes. Thus, the overall level of tax should remain the same regardless of the company's status as a stock or mutual company. The rationales offered by Mutual Trust do not seem compelling.

The Q&A sheet provided by Mutual Trust to policyholders as part of the hearing notification packet contains several unclear passages which could confuse policyholders as to the effect of the conversion and their rights. It is improper to include promotional materials in the notification letter which might persuade policyholders not to attend the public hearing or request further information on the plan of reorganization. A second hearing should be held and the notice this time should not include pro-conversion materials drafted by Mutual Trust. The Q&A sheet states:
Under a stock insurance company structure the stock insurance company is controlled by stockholders. Under the Illinois Mutual Holding Company Act, stock of the insurance company is controlled by Mutual Trust Holding Company, which in turn is controlled by policyholders.

The level of policyholder "control" must be elaborated on. Mutual Trust should provide statistics showing the number of policyholders who vote in the annual meeting each year (not counting proxies voted by current directors or officers). The discussion should also reveal how many directors have been nominated and elected by policyholders in the last decade, excluding those nominated by the incumbent board of directors. Information on the nomination requirements policyholders have to fulfill to nominate a candidate and have him placed on the ballot and the power of the policyholders to remove directors without cause would also prove helpful to those reading the Q&A.

After the reorganization, the contract rights and membership interests of policyholders will be separated. The contract rights will be retained with the life insurance company, MTL Insurance, while membership interest will be moved to the holding company, Mutual Trust Holding Company. Generally, when an insurance company fully demutualizes, the mutual membership interests are terminated, and only contract rights remain.

This statement is incorrect insofar as it fails to acknowledge that policyholders have ownership interests, not just membership interests (as noted above). This paragraph also fails to mention that in a traditional demutualization policyholders would be compensated for the termination of their ownership rights through grants of stock or subscription rights. The paragraph also fails to disclose that part of the policyholders' ownership rights will be eliminated by the MIHC conversion, namely the right to receive ownership/equity-type dividends from the mutual company (as discussed above).

This conversion would have no effect on the company's financial strength but would provide more financial flexibility because of the ability to raise capital, if needed, in the future.

Of course, the amount of capital the MIHC structure could raise is limited due to the heavy discounting of the stock price Wall Street investors will insist upon since the stockholders will not be able to control management (see above).

The interests of policyholders are being protected by both Mutual Trust's Board of Directors as well as the Illinois Insurance Department.

This seems to be a polite way of telling policyholders that no consumer advocates have been asked or allowed to represent the interests of the policyholders in the conversion proceedings. The Department of Insurance, while charged with protecting consumers' rights in the insurance marketplace, will be acting as a judge in these proceedings and not strictly as an advocate for the policyholders. Department officials must balance the needs of the Illinois insurance industry with that of Illinois consumers in performing their duties in this adjudicatory setting. The board of directors, as suggested in the proposed bylaws and articles of incorporation attached to the plan, are allowed to consider several other constituencies in their deliberations – including employees (possibly including officers and directors who may gain access to stock incentive plans following a conversion) of the company, the surrounding community, and the national economy. Neither the board or directors or the Department is solely representing the policyholders, both have multiple duties to perform. Policyholders should be told outright that nobody has been appointed to represent solely their interests. Better yet, a second hearing should be held with an appointed policyholder advocate whose only duty is to ensure the conversion is in the best interests of the policyholders.

Q12: Do I give anything up due to the conversion?
A12: No. As part of the conversion process, membership interests will move to the mutual insurance holding company. You will thus continue your voting rights for the Board of Directors of the Mutual Trust Holding Company which will own MTL Insurance Company. Your contract rights will continue uninterrupted with MTL Insurance Company, which is the stock insurance company owned by Mutual Trust Holding Company.

This "answer" fails to inform policyholders that the conversion may eliminate their ability to receive equity-type/ownership dividends on the holding company they own since the MIHC has established no regular plan to gain Director approval to pay dividends to members and apparently intends to re-invest any amounts due from subsidiaries in those subsidiaries (for the sole benefit of the stockholders). Policyholders are not told that the directors of the converted insurance company will no longer owe their exclusive fiduciary duty to the policyholders (the directors of a stock company owe their complete fiduciary duty to the stockholders). A new class of owners will be introduced and the fiduciary duties owed by the boards at the three different companies (some of the boards may be interlocking) will be split between policyholders and shareholders.

Quite apart from the questionable assurances provided in the policyholder Q&A, the terse plan of conversion itself contains several provisions which make the conversion unfair to the policyholders of Mutual Trust. The current plan allows more than 51% of the stock insurer's equity to be sold off to investors. The MIHC is only required to own 51% of the voting stock of the IHC, not 51% of the total equity. The articles of incorporation of the IHC authorize the issuance of 800,000 shares of voting stock and 200,000 shares of non-voting preferred stock. 600,000 shares out of the total 1 million could potentially be sold to investors, leaving the MIHC and policyholders with only 40% of the converted company.

The plan also contemplates the issuance of debt by members of the MIHC structure. The MIHC could issue substantial amounts of debt, contributing the proceeds to its subsidiaries (whose stockholders would reap the benefits) while the policyholders are left in a heavily indebted mutual parent with excessive interest costs. Furthermore, since the parent is entirely dependent on its subsidiaries for revenues, the failure of a subsidiary to provide the parent with funds needed to pay its interest expenses could force the MIHC into bankruptcy. Since the MIHC is not an insurer (though the Illinois insurance laws do apply to it) and does not have reserves or surplus, debt issued by the MIHC may not be subject to the limitations placed on surplus notes issued by real insurers.

The plan states:
"Member" means a person who, on the records of MTL and pursuant to its articles of incorporation or bylaws is deemed to be a holder of a membership interest in MTL and shall also include a person or persons insured under a group policy subject to the conditions expressly set forth in Section 59.2(1)(E) but shall not include a holder of a certificate of insurance issued in connection with a group policy or contract. Following the Effective Date, "Member" means, a Person who, as provided in the articles of incorporation or bylaws of the Mutual Holding Company, is a member of the Mutual Holding Company.

Again, intentionally or not, Mutual Trust is confusing membership and ownership. Policyholders are the owners of Mutual Trust and should clearly be acknowledged as so in the plan of conversion. Ample evidence indicates the "policyholders are not owners" argument put forth by the mutual life insurance industry has been soundly rejected.

Section 3.2 of the plan asks the Director to waive the closed block requirement of code § 59.2. The closed block is an integral part of code § 59.2 and one of the few policyholder protections contained in the MIHC conversion law. § 59.2(8)(b)(iv) declares that the Director may waive the closed block requirement only if the Director finds the waiver is in the "best interests" of the policyholders. Neither section 3.2 of the plan or appendix G provide any reasons or evidence submitted by Mutual Trust to show the request meets the high standard of "best interests." Unless the rationale for waiving the closed block is contained in some other document which has not been made available to policyholders, it looks like Mutual Trust has simply requested the waiver without providing any details. Surely this bare request will not satisfy the "best interests" standard the Director must find in order to waive the closed block. Absent far more compelling, or indeed any, evidence as to the necessity of the waiver, the closed block must be created to protect the policyholders contractual dividends (though the closed block will not provide policyholders with ownership/equity dividends). Appendix G itself contains no concrete description of the dividend practices the company will guarantee to follow, no figures, percentages, or examples of any kind are available for policyholders to determine what dividend scale actually will be.

In section 6.2 of the plan, Mutual Trust declares the conversion is contingent upon the receipt of a no-action letter from the Securities and Exchange Commission (SEC). Notably, the company's request for a no-action letter has not been included as an appendix to the plan given policyholders. The language contained in the no-action letter is striking because it often contradicts the assurances provided policyholders in information statements or question and answer sheets. Indeed, Provident Mutual of Pennsylvania requested the SEC keep their no-action letter non-public until after the public hearing on the plan of conversion because the company felt the release of the letter could hurt their chances for policyholder approval if made available to the policyholders. A full copy of the no-action request letter should have been attached to the plan as an appendix so policyholders could read for themselves what Mutual Trust is telling federal regulators about the plan of conversion and its impact on the policyholders.

Section 10.3 of the plan states the MIHC will not pay ownership/equity dividends to its policyholder-owners without the prior approval of the Director. However, the provision fails to establish any sort of mechanism by which the MIHC, at least annually, must ask the Director permission to pay dividends to the policyholder/owners of the MIHC. As the plan currently stands, policyholders may never receive any dividends from the MIHC and their equity dividends will have been effectively terminated. In Florida, FCCI Mutual's plan of conversion required the company to request, at least once per year, permission to pay dividends to members of the mutual holding company or explain why (to both the Department and the policyholders) why it decided not to pay them any dividends that year. At a minimum, this same level of protection is necessary for the policyholders of Mutual Trust. Principal Mutual of Iowa was also required to establish a plan to ensure profits made by the mutual holding company inured to the exclusive benefit of the policyholders.

Section 10.4 of the plan states that any income or dividends received by the parent MIHC will inure to the exclusive benefit of the policyholders, but then bizarrely suggests an "inurement" method which serves to enrich stockholders at the expense of policyholders. To begin with, the MIHC may have no income or dividends. Section 10.4 allows the board of the MIHC to waive any or all dividends due from subsidiaries if the waiver is approved by the Director and the waived amounts inure to the exclusive benefit of policyholders. By simply waiving dividends, the board could ensure the MIHC never had any income to distribute anyway (leaving it a shell corporation only designed to make the subsidiary insurer takeover proof). Alternatively, the MIHC may only receive enough in dividends to cover its expenses, potentially including interest expenses on large amounts of debt issued by the MIHC the proceeds of which have been given to the subsidiary corporations (enriching the stockholders). However, under the plan, it appears the MIHC intends to waive dividends from its subsidiary operations by using those proceeds to benefit stockholders (not policyholders). The example of exclusive inurement provided by Mutual Trust involves using the waived income of the MIHC to buy more securities in the subsidiary corporations. In essence, the MIHC will just be feeding the money directly back into its stock subsidiaries. The stock companies will have more money to invest and build new business with, thereby increasing their profits and making their shareholders wealthier. Providing funds to the subsidiary stock companies only serves to enrich stockholders (whose numbers may include officers and directors granted stock through incentive or employee stock ownership plans). Any income thus invested by the MIHC will inure to the exclusive benefit of shareholders who are paid dividends when the stock company prospers. Since policyholders do not receive any equity dividends, for all the income of the MIHC they own is plowed back into the stock subsidiaries, none of the income inures to their benefit, much less exclusively to their benefit. Policyholders who do not receive equity dividends from the MIHC will not receive any benefit from a prosperous subsidiary. By no stretch of logic will investments in subsidiaries inure to the exclusive benefit of policyholders.

Section 10.11 of the plan requires that the assets of the MIHC be held in trust for the policyholders of the converted life insurance company in order to pay claims should the insurer become bankrupt. As the excerpt from the NAIC white paper quote above shows, the enforceability of this provision is questionable at best.

The proposed bylaws of the MIHC are also inadequate as they do not provide policyholders with the procedural tools necessary to control the attenuated MIHC structure. § 2.2(a) of the bylaws states that special meetings of the members can only be called by the directors. Policyholders are given no mechanism for calling a special meeting to remove directors who may be favoring the stockholders over shareholders. Such a provision is critical if Mutual Trust is to be truly controlled by the policyholders and not by management. § 2.8 of the bylaws notes that proxies of the predecessor company (the mutual life insurer) will continue to be in force at the MIHC. Directors should be required to collect new proxies upon adopting a new corporate structure in order to ensure the new structure is properly responsive to current policyholder concerns. The provision does detail how long a proxy may last, if not required by Illinois law elsewhere, the directors of the MIHC should be required to collect proxies every year (i.e. no proxy may last longer than 12 months). Bylaws § 3.3 provides that directors may be removed by a 2/3 vote of the board. Policyholders should also be provided with a mechanism to remove board members if their control is not to be illusory. Bylaws § 4.5 should require that all members of the board's nominating committee be independent directors (not officers of the MIHC or any of its subsidiaries) who are not also members of the IHC or stock life insurer's boards (i.e. no interlocking directors). § 1.11 of the bylaws of the IHC (incorporated in Delaware) declares that shareholders of the IHC will have access to a list of shareholders upon request. Policyholders of the MIHC should have similar access to a list of all policyholder-owners.

Shortly before this hearing, I was informed that a second mutual insurer – Trustmark Insurance Company – had filed a plan to convert to an MIHC as well. The Trustmark conversion has been placed on the same regulatory fast-track as Mutual Trust, and the Trustmark hearing will be held on August 25 (scarcely over two weeks from now). Trying to deal with two such complex transactions at the same period of time may prove overwhelming. Most of the same concerns I have raised above now apply to the Trustmark hearing as well. Policyholders in foreign states will receive the same inadequate period of notification and the regulatory review process will be cramped by an unreasonable time window which will not allow the Department to make a full evaluation of the conversion plan. The Center recommends that the hearing on Trustmark be briefly postponed and proper notice of a fully public hearing be given to the company's policyholders in accordance with our suggestions made above.

We urge that the Illinois Department take its time with these potentially harmful and intricate transactions in order to ensure policyholders do not suffer as a result. The full-court MIHC press of mutual life insurers in Illinois will have far reaching effects that are not yet fully understood by the public, state and national officials, and the media. Mutual Trust alone is licensed to do business in 46 different jurisdictions (78% of the premiums it collects come from foreign states – a majority of its policyholders), including many states who have chosen not to enact MIHC legislation. The majority of those affected will not be citizens of Illinois, but those of other sovereign states. When mutual policyholders across the country come to the realization of what they have lost in MIHC conversions, of what has been taken away from them by other states (Manufacturer's Life of Canada plans to distribute $15,000 Canadian to each of its policyholders), they will be sure to voice their disapproval. Mutual Trust's quick and easy MIHC conversion plan should be rejected by the Department. MIHC conversions are complex transactions with unrealized repercussions which should be fully and carefully evaluated by state regulators every time one is brought forward. Any similarly rushed plan, like Trustmark's, should also be rejected as a matter of course.

Sincerely,



Brendan Bridgeland
Policy Director