Critic Of Allied Group Demutualization Wins Victory As Holding Company Alters Pooling Arrangement

by Phil Zinkewicz

Exclusive to PropertyAndCasualty.com from the National Insurance News Service

The Governor and the New York Insurance Department appear to be in agreement with the life insurance industry on a proposed insurance company demutualization bill. It would allow mutual life insurance companies to "demutualize" by creating holding companies as "umbrellas" for the existing mutual and a newly-created stock company.

Alexander Grannis, chairman of the state Assembly insurance committee, however, put a stop to the movement and, in a special report, detailed a host of concerns about the bill, most particularly how it would affect policyholders of the mutual. Grannis said that, with the proposed legislation, policyholders would give up control of their companies, and be exposed to added risk. Laws similar to the one being proposed in New York already have been adopted in 18 states and the District of Columbia. There are indications that other states are considering similar bills.

But the concerns expressed by Grannis are not new. The move towards life insurance companies demutualizing has become popular in recent years as mutual life insurance companies seek to go public and raise additional capital. Critics of recent demutualization schemes are not so much against the concept as they are wary that, in the conversion process, policyholders will be treated unfairly.

As a practical example of how the adversaries have locked horns, consider the situation regarding the Iowa-based Allied Mutual and its former subsidiary the Allied Group and their decision to converge, forming Allied Group as the stock holding company. David Schiff, editor of the New York-based "Schiff's Insurance Observer," published an article last year entitled "The Dark Side Of Demutualization" which he said was an "examination of how, beginning in 1985, the chairman, CEO and president of both Allied Mutual and Allied Group, engineered a dozen or so transactions between Allied Mutual and Allied Group: sales, purchases, poolings, transfers, stock repurchases, fee arrangements, loans and more."

Says Schiff: "Virtually every one of these transactions has turned out to be a good deal for Allied Group (of which the chairman and other Allied Mutual directors and offers are large stockholders) and a poor deal for Allied Mutual, which is owned by its policyholders." Cumulatively, alleges Schiff, these transactions have made more than $500 million for Allied Group--value that otherwise would have belonged to Allied Mutual's policyholders.

Initially, executives of Allied Group dismissed Schiff as just "a writer from New York" and a "self-appointed expert." But after several months of criticism from Schiff, Allied Group announced that it had amended its pooling administration agreement with Allied Mutual so that, by the year 2001, the expense ratios between the two companies should converge--in other words, policyholders get a fairer treatment.

But Schiff wants more, even though he has attracted the attention of both the Iowa Insurance Department and the Center for Insurance Research as allies. He wants Allied Group to repay the alleged $62 million that it made from 1993 through 1997 at Allied Mutual's expense. So the Allied story is apparently not over. But in New York and in other parts of the country, the demutualization story is only beginning.

There is a strong grassroots lobby on the part of the insurance industry to ease state laws regarding insurance company demutualization. Right now, it is primarily on the life side, but it could spread to the property and casualty side as well. What should be remembered is that regulators have a responsibility to protect, not the executives of the mutual company who can afford to hire high-priced lawyers and accountants, but the policyholders who, after all, are the owners of mutuals.

The New York Insurance Department has long been considered a leader in state regulation, although that image has become tarnished in recent years as some perceive to have become less consumer-oriented and more pro-industry. Grannis is correct in calling for a total examination of the New York proposed bill before it can be railroaded through by special interests.

Ed. Note: At press time, it was learned that John Hancock Mutual, one of the strong supporters of the "holding company" approach to demutualization, has decided to go the full demutualization approach. This could be a strong setback for those who are pushing for the establishment of holding companies in the demutualization process, especially in New York.