Insuring Against Demutualization.
Insurance company executives are familiar with the growing number of hostile or forced demutualizations initiated by policyholder groups, such as the demutualization campaigns in the United Kingdom and the recent battle at MassMutual Financial Group.
Many companies, surprised by policyholders trying to force demutualizations, have not addressed the challenge in the most effective ways. Mutual insurance has long been a gentlemanly business. It has no history of hostile takeovers. Thus, many companies may be ill-prepared to face this new era.
Companies cannot continue to rely on policyholders' loyalty lack of knowledge and fragmentation to help fight off an attack. Once these policyholders become convinced that demutualization will bring them a windfall in the form of a big check and rising stock prices, it's hard to recapture their attention.
Two basic strategies can help mutual insurance companies ward off forced demutualizations. First, companies can take steps to lessen the risk that policyholders will ever want to demutualize. Second, companies can create roadblocks to the formation and success of an inappropriate or untimely demutualization movement.
Lessening the Risk
One of the most logical but often overlooked strategies that mutuals can employ to lessen policyholders' desire to force a demutualization is more effective and regular communication. Companies that don't keep their members fully informed often serve as the catalyst for forced demutualizations.
More than 50% of policyholders don't vote in annual company elections. That's because they don't know that they "own" a part of a mutual insurance company and they don't understand that they have a stake in its future health.
Many don't even realize that they receive a dividend from their company ownership each year.
This lack of understanding must end. Mutual insurance companies must wage a pre-emptive and continuous communication campaign that educates their policyholders not only on how the company works but also on why they must participate.
The companies must communicate the benefits of a mutual organization and explain how policyholders' money is used to enhance its value in the future. They must explain the members' ownership rights and their role in maintaining the mutual company for its originally intended purpose: the mutual benefit of all policyholders, not just those that make a claim. Finally, the companies must educate their policyholders about the potential disadvantages of an inappropriate or untimely demutualization.
Communication must go far beyond mailings that often get tossed into the trash without ever being read. Outreach over the Internet, for example, is a flexible and inexpensive way to provide policyholders with updated information about the company and the value of their policies. In particular, the company Web site should provide policyholders with key information, like the value of dividend payouts (the annual check sent to policyholders) and the consequences of removing the mutual structure. The Internet is a very important communication tool, because it takes companies head-to-head with policyholder groups that band together online to force demutualizations.
Talking to Agents
Insurance agents are also a valuable communications tool. What agents say carries a lot of weight with policyholders. Unfortunately, some agents do not explain the mutual structure to their customers or its many benefits beyond insurance claims.
So, at annual meetings and other events, companies should impress on their agents the importance of discussing the benefits of being a mutual company with their customers. They should speak to agents at these meetings about the risks of demutualization. Agents are smart. They follow what's happening with demutualizations in the insurance industry; they face a great deal of uncertainty in the event of a demutualization; and they want to know where their company is headed. So, tell them.
One midsize Midwestern property/casualty mutual has 19 meetings a year with its agents at different locations within their core states. They have sales conferences, one-on-one meetings and agency meetings to discuss the advantages of the mutual structure and the importance of the agents' communicating that information to policyholders.
For companies that fear that their agents will drag their heels in communicating with policyholders, remind those agents that demutualization creates a whole new ball game that could lead, for example, to a stock situation in which the company is acquired and initiates new commissions, service or distribution structures to satisfy the new shareholders.
Forging stronger communication and relationships with policyholders is only part of an effective communications strategy Mutuals also must maintain and strengthen their regulatory relationships to ensure that those agencies are working with them and will back them in the tough times.
At times, demutualization-minded opportunists have gone to a state regulator to effect the demutualization process or even to try to obtain the mutual's policyholder lists-giving them an open door to rousing support for a forced demutualization-because the mutual didn't get there first or maintain stronger ties with that all-important agency. Witness Franklin Mutual's success, through its testimony at the Pennsylvania Insurance Department, in ultimately obtaining a court order to get Mercer Mutual's policyholders list in an attempt to force a sponsored demutualization.
Companies can reduce the risk of an unexpected demutualization campaign by operating more efficiently so they can be more competitive in the marketplace, by lowering their premiums and by providing greater dividends to lower the net cost for policyholders.
Mutuals need to be at least as efficient as stock companies. For example, they can enhance their competitive position by shedding noncore or underperforming businesses. Some individual life companies are selling their group operations. John Hancock, for example, sold its noncore property/casualty insurance company, Unigard Security Insurance Co., to Dukes Place Holding LP to help it focus more on its core operations as a life insurance company.
To enhance profitability, mutual insurance companies also can acquire noninsurance businesses that don't require significant amounts of capital, are nonrisk-bearing service businesses and provide a strong return, so the mutual can pass on more benefits to its policyholders. Many mutuals, for example, are buying family-owned brokers/dealers to help sell or distribute their products. This helps to expand their distribution channels while providing a strong return. Northwestern Mutual, for example, acquired Frank Russell Co., an investment and financial advisory firm.
Mutual insurance companies also should pursue strategic affiliations or mergers to avoid the risk of marginalization in a consolidating industry. The mutual should choose partners whose strengths compensate for its own weaknesses and whose weaknesses are balanced by the mutual's strengths. One potential partner might be particularly good at administration, for example, while another mutual might be good at direct distribution, something the potential partner company needs. Together, the two firms can cut costs by eliminating overlapping or redundant operations, which will enable them to provide more cost-effective coverage to the policyholders.
Underperforming mutuals are not fulfilling the implicit contract that they have made with policyholders, and so they run the risk that members can be persuaded that they will benefit more from a forced demutualization rather than maintaining the status quo. Policyholders listen when someone tells them their company is not making the best use of their hard-earned premium dollars, and they will take action to protect themselves.
On the other hand, a strong company with good service, cost-effective coverage and a good rating has forged a mutually advantageous relationship with its policyholders, and they will be far less likely to seek greener pastures through demutualization.
To further protect themselves against forced demutualizations, insurance companies can pursue several strategies that place roadblocks in the path of anyone trying to start a demutualization movement that may not be in the best interests of all policyholders.
In particular, mutual executives should undertake an immediate legal review of their company's bylaws to assure that all procedural safeguards are securely in place. Often, bylaws are dated, and they may not address the possibility of a hostile demutualization. A state also may have changed or amended its statutes and regulations. These rules should be reviewed carefully, so the mutual takes advantage of all the protections that its state measures provide. The mutual's bylaws should be updated and amended accordingly.
Procedural safeguards in a company's bylaws that minimize the potential for a hostile demutualization include restricting policyholders' ability to raise the topic of demutualization at policyholder meetings, requiring a significant quorum of policyholders in order to call a special meeting or effect a vote on demutualization and staggering the terms of members of the boards of directors, so replacement of anti-demutualization board members by policyholders would take a longer period of time.
Some states have enacted demutualization laws that provide a level of protection. Indiana law, for example, requires that a company's board begin the demutualization process by adopting a conversion plan and a resolution to amend the company's articles of incorporation, while other states, such as Massachusetts, do not include such a requirement.
Requiring the board to begin the process means that policyholder proposals or votes for demutualization are not sufficient to launch a demutualization on their own. Only by replacing board members with demutualization advocates could policyholders force a demutualization, which would take time, particularly if the board terms are staggered.
A mutual insurance company has one goal: to consistently do the right thing for its policyholders. The demutualization trend and other industries struggling through hostile takeovers, however, clearly threaten this goal.
For some mutual companies, demutualization makes good strategic sense. But a forced demutualization can harm a company's long-term strategy and even survival. Mutuals should take the appropriate steps now to ensure that they are not caught off guard and forced into a demutualization that could potentially hurt their future viability.
Thomas Mulhare is managing partner of the Actuarial & Insurance Services Practice and the Northeast Insurance Practice for North America at Andersen.
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|Date:||Nov 1, 2001|
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