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To: The Insurance Commissioners of the United States

Re: Demutualizations by Life Insurers

Date: March 16, 1999

We believe the forthcoming demutualizations of John Hancock, Metropolitan, and Prudential, in particular, and of other, smaller United States and Canadian life insurers, represent perhaps the most remarkable development in life insurance in the 20th Century. Billions of dollars are at stake, and while we do not need to tell you that the distributions must be handled with careful regulatory attention, our observations may be helpful as you are asked for approvals of demutualization plans.

The Consumer Federation of America (CFA) offers a service that evaluates life insurance policy illustrations for consumers. James H. Hunt, Vermont insurance commissioner from 1965-1969 and a life insurance actuary, does the work. In the last year, nearly 600 illustrations have been evaluated for more than 400 customers, the vast majority of which were for existing policies. In recent years, we have routinely informed our customers who own policies in mutual life insurers, whether those insurers have announced demutualizations or not, about the implications of demutualization. In general, we urge policyholders to continue such policies, preferably paying premiums in cash and, where applicable, reinvesting dividends in paid-up additional insurance in order to build cash values. While CFA's service is for cash value policies, the implications of demutualization extend to term life policies as well.

Many of CFA's customers own policies that may be excluded from forthcoming distributions of free shares by narrowly targeted eligibility rules, as suggested by these examples:

A call to Prudential's 800# elicited the preliminary information that its "Variable Appreciable Life," or VAL, policies written in PRU would be eligible but VAL's written in PRUCO, a subsidiary, would not. This position is obviously unfair to PRUCO's customers, few of whom must realize they did not buy a PRU policy.

Similarly, John Hancock revealed that its variable life policyholders, despite owning John Hancock policies sold by John Hancock agents, will be ineligible because the business was written in a subsidiary; on the other hand, certain New York variable life policyholders will participate.

Manulife's universal life (UL) policies will be ineligible because they are not participating, even though they were written in the mutual company. Is there one buyer in a hundred who would have been advised at time of sale of the distinction between a participating whole life policy and a non-participating UL policy? In practice, a UL policy passes through current interest rates and current mortality experience, just as a participating policy does, and it also contributes to the surplus that forms the basis for the distribution.

Other "fairness" examples could be adduced. What of annuity contract owners? What of PRU's VAL policyholders who were sold, almost without exception in our observation, what must be hugely profitable disability riders? What of those who left dividends to "accumulate at interest," lately at or near 4% in PRU and others, while those who were better advised bought paid-up additional insurance with their dividends? The latter group not only earns about 7.5% currently but may also receive extra shares based on their paid-up insurance values.

Unless U.S. insurance commissioners intercede, we fear demutualization eligibility will be limited to participating policyholders of the parent mutual companies. This is clearly unfair to policyholders who bought the parent mutual company name, not that of a subsidiary, or were sold UL policies in life insurers that at the time of issue also offered participating whole life policies. Indeed, it would be a double insult to exclude UL policyowners, since the performance of UL policies has lagged that of whole life policies badly.

Inasmuch as the distribution of free shares in a demutualizing insurer is a "zero-sum game," participating policyholders may seek the narrowest of distribution rules to maximize the number of shares they get. But the current generation of policyholders hardly deserves the windfall it will get, since the surplus to be distributed in all demutualizing insurers was built up over several generations of policyholders, dating back a century or more in some cases. This reality surely demands that eligibility rules be as inclusive as possible. Managements of demutualizing insurers should be indifferent to an expansion of eligibility rules, indeed might prefer it to get a broader distribution of shares, possibly making subsequent takeovers more difficult. By "indifferent" we mean that a broader distribution will not affect how the new company is operated, the issuance of stock options, and so forth.

It may be appropriate to point out that recent demutualizations, as opposed to mutual holding company reorganizations, have been free of protracted litigation. It is hard to believe that the size of the forthcoming demutualizations will enjoy such freedom if groups of deserving policyholders are to be excluded.

Finally, we have been alarmed to observe in recent weeks several instances in which agents selling variable life policies have proposed replacements of participating mutual life policies in insurers that have announced demutualizations. In one of these cases involving Metropolitan, the new policy was within the "free look" period, and the transaction, which involved a "Section 1035" transfer of MET's policy values to the new company, was reversed. We can only hope that MET will treat the reinstated policy as eligible. We are concerned that in other cases reinstatements may be made ineligible or tax-free transfers may not be able to be reversed. We urge commissioners to warn all life insurers that they will be held responsible for replacements of demutualizing insurers' policies. Indeed, it seems to us that the replacing insurer will be legally liable for accepting such a replacement when no warning has been given, and that such liability could extend to replaced policies in mutual insurers who later demutualize.

There are undoubtedly demutualization issues that we have not identified. We urge commissioners to work together to assure fair treatment for the millions of U.S. policyholders that will be affected by demutualizations in forthcoming months and years.

Mary Griffin
Insurance Counsel
Consumers Union
Washington Office

James H. Hunt
Life Actuary
CFA Insurance Group

J. Robert Hunter
Director of Insurance
CFA Insurance Group

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