Changing Ownership Structure Is No Panacea For Ills Of A Mutual Life Insurance Company

Corporate reorganization is no cure-all for mutual life insurers that feel competitively hampered by their ownership structure, A.M. Best Co. says in a report published this month.

Mutual insurers—those owned by their policyholders—often consider themselves handicapped in terms of raising capital or affiliating with other organizations. Many believe changing to a shareholder-owned structure or establishing a "mutual holding company" is the key to competing with larger and more complex financial service enterprises.

"A change in ownership structure, however, is no substitute for capable management and strategic vision," says Michael A. Cohen, senior financial analyst in A.M. Best's life/health division and author of the report. He adds that some mutual companies pursuing a corporate conversion will have difficulty developing the "dynamic culture, market-focused orientation, and financial management expertise necessary to succeed in their new competitive arenas and deliver the profits shareholders expect."

"Insurers need to weigh carefully their competitive advantages, capital flexibility, and the possible new affiliations that can be arranged after restructuring, as well as the thorny issue of mutual company ownership," Cohen says.

Two basic forms of conversion exist. In a full demutualization, a company compensates policyholders for their stake in the company, either with cash or stock, and raises capital through an initial public offering in the equity markets or through a corporate sponsor. The company then can use the capital raised through this and future offerings to fund business initiatives.

Some companies cited several attributes that caused them to reject this option. These disadvantages included losing management control if more than 50% of the stock was acquired by an external entity; having to market an IPO at the time of the reorganization, even if market conditions were not favorable; and investing considerable time and expense in carrying out such a transaction. Many companies consider establishing a mutual holding company to be preferable. This entails reorganizing the mutual operating company as a stock operating company, with newly created holding companies placed above it in the organization. A mutual holding company is at the top of this structure. The policyholders who owned the mutual operating company become owners of the mutual holding company-however, the issue of ownership in this new context is complicated and poorly defined in many states' existing statutes.

"Either form of conversion could improve a company's prospects, and one or the other could be preferable, depending on the company's business characteristics," Cohen says. "The fundamental question for management to ask is whether a particular structure will support the company's mission and enhance its performance."

The report was published in the June 22, 1998 life/health edition of BestWeek.