For Immediate Release: March 25, 1998
For Further Information Contact: Paula Isola at email@example.com or Telephone (617) 441-2900
Cambridge, MAThe mutual insurance holding company (MHC) campaign, instigated and maintained by the nation's most powerful mutual insurers, has suffered several setbacks recently. A eight-month moratorium on new laws is holding as MHC bills in two states have died for 1998 and two proposed mutual holding company conversions now face serious roadblocks to obtaining "no-action" promises from the SEC. In addition, Robert Riegel, Managing Director of the Life Insurance Group at Moody's Investor Service, publicly asserted that "[d]efinitely, the momentum seems to have shifted."
Mutual holding companies are controversial structures which allow mutual insurers to convert to stock form without first compensating their policyholder/owners, as is the norm in a mutual-to-stock conversion. The concept has come under intense scrutiny in recent months as Prudential Life, the largest life insurer in the country, along with several other mutuals, announced plans to demutualize the traditional way, by distributing the entire estimated $20-30 billion value of the company to policyholder/owners upon converting to stock form.
In Indiana and Georgia, the regular legislative sessions for 1998 ended without either legislature taking action on their MHC bills. The Georgia bill will have to be reintroduced, and its sponsor, who is running for Lieutenant Governor, is unlikely to return to the Georgia legislature. Due to intensive industry pressure, both bills had appeared to be on "fast tracks"for approval before being derailed.
In Iowa and Florida, Principal Mutual Life Insurance Company and FCCI were both ordered to amend their plans of conversion to beef up the rights of policyholders to share in the future profits of the MHC. These requirements may make it difficult for either insurer to obtain"no-action" letters from the SEC, because if MHC members expect direct economic benefits, membership in the MHC can be characterized as a security. The plans of reorganization of both Principal and FCCI, like others before it, state that the conversion cannot happen without no-action letters. If the SEC does decide to regulate MHC"membership interests" as securities with a reasonable expectation of profits, the MHC structure would be unworkable because of the expense required to provide policyholders with a prospectus as well as a policy.
Iowa Insurance Commissioner Therese Vaughan has given Principal Mutual Life Insurance Company until April 3 to detail a plan for how MHC members will be the "exclusive beneficiaries" of the MHC's accumulated profits, as required by Iowa law. The March 24, 1998 "Request for Clarification of Record" issued by Commissioner Vaughan rejected Principal's reinvestment proposals as "ambiguous" on the key issue of how MHC members would be the exclusive beneficiaries of such assets.
"Because of the importance of this issue - and the fact that mutual insurance holding companies are new, with their plans and performance untested - this ambiguity should be resolved in advance of any final consideration of a plan of reorganization," said Vaughan. The order gives Principal 10 days to provide a specific plan for satisfying the requirement and interested parties will be provided another 10 days to comment on Principal's submission.
A March 20, 1998 Consent Order issued by the Florida Department of Insurance to the FCCI Mutual Insurance Company, which is seeking to convert to a MHC under Florida law, details a similar requirement. FCCI, if it converts, must approach the Florida Department at least once a year and ask permission to pay a dividend to policyholders or, if it does not want to pay the dividend, demonstrate why such a dividend payment would be inappropriate. If FCCI chooses not to pay a dividend, materials explaining that decision must be mailed to each of its policyholders.
The National Association of Insurance Commissioners has a Working Group, which is working on a draft "white paper" that criticizes several aspects of MHC laws. Consumer advocates nationwide such as the Center for Insurance Research, Ralph Nader, the Coalition for Consumer Rights, the Consumer Federation of America, Consumer's Union, NYPIRG, Citizen Action, New York City's Office of the Public Advocate and others have all sharply criticized MHC laws. Regulators in Illinois, Maine, Florida, New York and Missouri have also weighed in with concerns about the structure.