National Association of Mutual Insurance Companies

Print | ShareThis

Focus On The Future Options For The Mutual Insurance Company

PURSUING CHANGE: THE ALTERNATIVES

Approvals

A demutualization will require the approval of:

  • The board of directors of the mutual company. The approval of more than a majority of the members of the Board may be required.
  • The policyholders. The statute, charter and by laws must be examined to determine the vote needed for policyholder approval. Most statutes require an affirmative vote ranging from a simple majority to three-fourths of the policyholders who actually vote. The law provides that policyholders must receive a copy or summary of the demutualization plan and other explanatory information to assist the policyholder in reaching an informed decision.
  • The insurance regulator. The regulator may impose certain restrictions or conditions with respect to the demutualization. Most demutualization statutes require that the insurance regulator find that the plan of conversion is fair and equitable to the members (policyholders) and not prejudicial to their interests. In most states, the regulator is required to hold a hearing to determine whether the terms and conditions of the demutualization are fair and whether the demutualization is detrimental to the public. The regulator may retain, at the expense of the mutual insurer, lawyers, accountants, actuaries and consultants to assist the regulator in determining whether or not a demutualization should be approved.

Takeover Defense Strategies

After a mutual company converts to a stock company, and if its stock is publicly held, the new stock company is susceptible to a takeover. This is a danger not faced by the company when it was a mutual company. A bidder wishing to make an unsolicited offer with respect to a mutual insurer is likely to first approach the mutual insurer itself. If the bidder is another mutual insurer, it might send a letter proposing a merger on better terms and threatening to go to policyholders if the offer is not accepted. A stock company, and the mutual company or financial investor could propose a sponsored demutualization on better terms under similar threat. If its proposal is rejected, a bidder may try to elect directors to the board of the company who are favorable to its proposal or seek a shareholder vote on its proposal. The board of directors of the company may, subject to the usual standard of care, have the flexibility to "just say no" to the unsolicited proposal.

There are also charter and bylaw provisions that may be put in place to give a company further control over the process in the event of a third party bid. Before undertaking a restructuring transaction, it is good practice to have the company’s counsel review the charter and bylaws to determine which mechanisms it has in place to help it deal with any unsolicited bids and also which mechanisms it should put in place as part of the restructuring. Examples of such mechanisms include staggered terms for board members, director removal provisions, provisions allowing shareholders to nominate directors or to propose business at a meeting, imposing a super majority voting requirement on certain issues, requiring advance notice to the board for shareholders to take certain actions or charter and bylaw amendment process provisions.

The various strategies (often called "shark repellent") that can be used to make it more difficult for an acquirer to take over a stock insurance company (or the stock insurance holding company) are usually set forth in the charter document or the bylaws of the company.

Staggered Terms for Board Members

The Board can be "classified," which means that its members are broken down into classes, usually three, and the members in each class have a three year term. Therefore, only one-third of the Board is elected each year. Anyone seeking to replace the Board, or control a majority of its members, can only do so over a two to three year period.

Super-Majority Vote

In order for the corporation to complete a fundamental transaction, such as a merger or sale of assets, the transaction must be approved by a "super majority" of the shares of stock outstanding. That is, 66%, 75% or even 80% of the shares outstanding must approve the transaction. It is often difficult for a hostile acquirer to achieve the favorable vote of such a super majority of the stockholders. Also, members of management and stockholders friendly with management may control enough shares to prevent obtaining the required super majority vote.

Regulator Approval

In most states, regulator approval is required before a person can acquire a 10% or greater interest in an insurance company domiciled in that state. The bidder is therefore limited in terms of an advance acquisition strategy. Although the bidder may indeed be able to obtain such approval, regulatory approval requirements cause delays, at the very least, and create a forum to question the alternative proposal. (Conversely, the company’s regulatory proceeding to approve its restructuring may provide a forum and delay to the advantage of a bidder.) It is also difficult to solicit policyholders, who generally do not vote.

Policyholder List

It may be possible for a board to deny the bidder access to a policyholder list on the grounds that it contains trade secrets that are confidential, making communications with policyholders difficult. However, regulators or specific state statutes could require the insurer to send out the communications at the expense of the bidder.

Advantages and Disadvantages

Traditional Demutualizations

The advantages are:

  • it provides additional capital;
  • stock ownership is available as a performance incentive to management and employees; and
  • stock is available as currency for future acquisitions.

The disadvantages are:

  • surplus depleted by distribution to policyholders must be replaced through an offering of securities;
  • it is an expensive and time consuming process;
  • after demutualization, the management/directors of the converted company may not be able to maintain control;
  • a small company may not have sufficient number of shares outstanding to have viable investment potential; and
  • it requires expensive and ongoing time-intensive SEC reporting and investor relations activities.

Subscription Rights Demutualizations

The advantages are:

  • the same as those of a traditional demutualization except there is no distribution of surplus;
  • does not require distribution of surplus so existing capital is retained.

The disadvantages are:

  • same as those of a traditional demutualization;
  • the termination of membership rights without cash or in-kind distribution is a very controversial and litigious issue that has not been resolved; and
  • exposes the converting company to a hostile takeover.

Mutual Holding Company System

Mutual Holding Company Structure

A new restructuring method for mutual insurance companies is the organization of a new mutual holding company which is created as part of a multi-level insurance holding company system. Two new entities are formed: (i) a mutual holding company (MHC), a non-stock corporation which is the holding company system parent; and (ii) a stock intermediate holding company (SHC), a subsidiary of the MHC. The original mutual insurance company is converted into a stock insurance company and is controlled by its new shareholder, the SHC.

CONTINUED: 1 | 2 | 3

Posted: Wednesday, January 06, 1999 12:00:00 AM. Modified: Friday, September 23, 2005 11:04:01 AM.

Salary Survey: Reports updated and available online 24/7/365.

(317) 875-5250 - Indianapolis | (202) 628-1558 - Washington, D.C.