Insurance Industry Eyes Union Mutual’s Conversion to a Stock Firm
The biggest and best-known names in the life insurance industry have their eyes on Union Mutual.
The company has become the object of close scrutiny as it embarks on a course no life insurer its size has ever attempted: conversion from mutual ownership to a stock corporation.
“We are the first, we are the pioneers, and we are being watched very closely, I am told,” says Union Mutual’s president, Colin C. Hampton.
The process is complex, costly and fraught with potential pitfalls. It has already triggered legal skirmishes and a budding proxy fight between management and dissident policyholders.
Industry Pattern
Union Mutual’s success--or failure--could set an industry pattern, influencing the decisions of far larger companies that are quietly conducting in-house studies of the benefits and drawbacks of the process known as demutualization.
The giants of the industry--household names like Prudential, Metropolitan Life and Equitable--are likely to delay any similar conversion attempts while they await the outcome in Maine, insurance experts agree.
With assets of more than $4.8 billion, Union Mutual Life Insurance Co. is itself a giant by most standards. Fortune magazine ranks it No. 35 in the industry. It has more than 150,000 policyholders and 2,700 employees, and is regarded as the industry leader in sales of long-term group disability.
Since it was chartered 136 years ago, Union Mutual has been owned by its policyholders and has paid them policy dividends for as long as anyone can remember. This mutual ownership, reflected in the company’s name, is prevalent among the nation’s largest life insurers, which write the vast majority of the policies sold today.
On the final day of 1984, Union Mutual filed a plan with state regulators to abandon this long-standing mutual structure and convert to a capital stock corporation.
For such a change to occur, state law requires that the surplus earnings accumulated by Union Mutual over the past 136 years--an amount likely to total approximately $250 million when the books are closed on 1984--must be distributed among policyholders.
The conversion requires the approval of Maine’s superintendent of insurance and two-thirds of the company’s policyholders.
Union Mutual views the conversion as being in the best interests of policyholders, whose intangible ownership would be exchanged for real value--Union Mutual stock. It would be a pro rata distribution, determined in accordance with a formula based on each policyholder’s contribution to the surplus.
A policyholder could elect to take a cash payment amounting to 50% of his equity share--an option that Hampton suggests is a poor choice.
“We hope every policyholder takes the stock. Even though he or she may want cash, he or she can get that cash the next day, at a dollar for 50 cents,” he says.
In return for the stock or cash, policyholders surrender none of their contractual rights, says Hampton. He says all insurance benefits, premium rates and dividend policies remain in force.
“What we’re saying is this: Everything that we promised you as policyholders, from a contractual standpoint is still in force, and we’re going to give you value, in addition,” says Hampton.
“What are you giving up? There’s one thing you are not going to be able to do as a policyholder--vote.” But he points out that those who elect to keep their stock will retain their right to elect the board of directors and ratify the choice of auditors.
Committee Objects
But a group of dissidents--The Concerned Policyholders Committee of Union Mutual Life Insurance Co.--says the deal isn’t as sweet as it may appear at first blush.
“There is no reason to convert. The policyholders lose their right to ownership in the company,” says James C. Eastman, Washington-based counsel for the committee organized by a group of Union Mutual agents and former agents across the country.
Rather than reaping a financial windfall in exchange for a theoretical ownership interest, policyholders stand to suffer by being deprived of future growth in their policy dividends, says Eastman.
Management disagrees, pointing to a provision in the conversion plan to establish a fund that would ensure continuation of dividends to current policyholders. The company has filed suit against the committee in U.S. District Court, accusing it of disseminating proxy materials containing false information.
Eastman contends that the lawsuit is part of a heavy-handed attempt by management to intimidate dissenters. Eastman says Hampton has been going around the country, “spreading p.r.” about the benefits of demutualization: “He has made it his issue. He has his ego on the line.”
The committee wants Union Mutual to provide it with access to its list of policyholders, plus enough money to present its opposing viewpoint prior to any vote on the conversion plan. In addition, the committee is seeking to elect three of its members to the Union Mutual board of directors at the April 12 annual meeting.
It’s no coincidence that the industry’s growing interest in demutualization comes at a time of rapid change within the sector of American business that has come to be known as financial services.
Deregulation has blurred the lines that have long separated banks, brokerage houses and insurers, giving each sector a lot more freedom to muscle onto another’s turf.
“Many companies feel that in order to expand, they need more capital. For mutual companies, the only capital they have is retained earnings,” says Charles Greeley, vice president and actuary at Metropolitan Life, one of the industry giants now giving the question serious study.
Added impetus came last year when Congress passed a new tax law that mutual insurers perceive as giving preferential treatment to stock companies. While Greeley says tax changes may have been “the precipitating factor” in stirring industry interest in demutualization, Hampton says Union Mutual started
its conversion plan before it knew what the tax laws would be.
“It’s not a significant factor,” he says. “While we think we do benefit, it’s not of a magnitude that would incite us to go through all of this.”
The chief benefits of conversion, says Hampton, would be to enhance the company’s flexibility by allowing it to raise outside capital, acquire other companies and expand into new product areas.
There would be greater accountability as Union Mutual’s performance comes under scrutiny by securities analysts and investors, he says. And public ownership would allow the company to dangle stock options as incentives to attract top managerial talent.
In terms of image, says Union Mutual, “public companies are thought to be more competitive and fast-paced than mutuals.”
From management’s viewpoint, one of the inherent drawbacks of becoming a stock company is the threat of a hostile takeover. “Takeover is a big potential negative,” says Hampton. “I think you can preclude that by performance, but you can’t totally preclude it.”
The Maine Bureau of Insurance is gearing up for the conversion proceedings by hiring a cadre of actuarial, financial and legal consultants.
By law, the bureau is required to hold a public hearing on the plan. It will be looking closely at whether the current owners--the policyholders--are being treated fairly in the division of the surplus and whether Union Mutual would emerge from demutualization with its financial strength intact.
“This is going to be quite an experience. We’re going to do it as expeditiously as possible, while looking for answers to all the questions that arise,” said Insurance Superintendent Theodore T. Briggs.
While some states have no laws that permit life insurance demutualizations, companies with headquarters in those states are weighing the pros and cons of conversion nonetheless.
Positive View
“One has to take the positive view that a law, if needed, will be passed,” said Metropolitan’s Greeley. His company is studying the prospect, even though New York state, where it’s based, has no demutualization law.
Similarly, Boston-based John Hancock has appointed a task force to examine the issue even though Massachusetts does not now permit such conversions.
Executives at the major companies are quick to point out that their studies do not signal any active plans to go the same route as Union Mutual.
“We’re an interested observer at this point,” says A. Douglas Murch, senior vice president at Prudential, the nation’s biggest insurer.
Demutualization is a complex and expensive process. Companies cite the massive scope of such an undertaking as a factor that must be borne in mind.
At Metropolitan, says Greeley, “We have five times more policyholders than (American Telephone and Telegraph) had shareholders before they broke up. The paperwork would involve well in excess of 10 million people.”
