Several mutual life insurance companies have recently demutualized
or formed a mutual holding company, and almost all mutuals are
studying their options. If you own or recently dropped a life insurance
policy or an annuity contract issued by a mutual company, or if you are
thinking of buying one, this may affect you.Existing policyholders have money at stake in the decision to adopt a
mutual holding company structure versus a full demutualization, or to
remain a purely mutual company.Prospective buyers should also pay attention, because a company's
treatment of its existing policyholders may give you an indication of
how you will be treated in the future. As you review a company's
actions regarding reorganization, you may feel more comfortable
doing business with the company or you may decide to go elsewhere.You can read an overview in Q&A format, and you can look at a
table showing the reorganization status of major mutual life insurance
companies.You can also download this reading list for more information.
Reading list (12/3/02; 45 kb)Download
You can get a good education on mutual holding companies and the
controversy that surrounds them by looking at these online sources:National Association of Insurance Commissioners, "Mutual Insurance
Holding Company Reorganizations" Some insurance companies and
state regulators complained that the first draft of this report was too
pro-consumer, but a panel of regulators decided that the second draft
was too pro-industry. The current version is the sixth draft, dated
September 15, 1998.New York State Assembly Standing Committee on Insurance, "The
Feeling's Not Mutual: An Analysis of Governor Pataki's Proposed
Mutual Holding Company Legislation" This deals specifically with
proposed legislation in New York, but the issues that it discusses
are important in all states.Swiss Re, "Are mutuals an endangered species?" This report deals
with broader issues of mutual ownership from a multinational
perspective.
Other websitesCenter for Insurance Research, a nonprofit organization that is an
advocate for policyholder rights.Demutualization and MHC Research Station, a research project
with links to articles, state statutes, and company websites. The
webmaster has also set up the Finance & Insurance Forum.Demutualization.biz, a site with information about tax issues.
Demutualization.org, a site with links to related information.
Canadian Life Insurance Policyholders Association, a consumer
advocacy group that helps policyholders deal with insurance-related
issues, including demutualization.Canadian Association of Insurance and Financial Advisors, a site
with information and links related to Canadian demutualizations.Guardian Unlimited, a site with news about demutualizations in the U.K.
HancockWatch, a site with independent analyses of John Hancock's
demutualization plan. Many of the issues are relevant to other
demutualization plans as well.The Insurance Forum, a trade publication that has provided insightful
coverage of demutualization.MassMutual Owners Association, an independent monitor of the
actions of MassMutual's management.Schiff's Insurance Observer, another trade publication that has
provided insightful coverage of demutualization.SNL Financial, a research firm that publishes insurance-related
newsletters and sponsors conferences on insurance topics.
The tax treatment of demutualization proceeds remains
unresolved. Policyholders may need to file amended returns
to preserve their potential rights to a refund of Federal and
state income taxes. For more information, contact
Charles D. Ulrich, CPA (www.demutualization.biz,
cdu@charter.net, 218-828-4289). He has been actively
involved in the class-action lawsuit filed against the U.S.
government. (2/7/06)A lot of Connecticut residents are missing out on a windfall.
The Connecticut State Treasurer's Office recently created a
database of almost 100,000 people who have not claimed
$60 million from the demutualizations of John Hancock and
Metlife. The list is at http://www.state.ct.us/ott/aboutdemute.htm.
Connecticut's residents are probably no more careless than
any other state's, so this could be a national issue. (1/9/05)The tax treatment of demutualization proceeds continues to
be discussed. See Theo Francis and Tom Herman, "How to
Tax Some Insurers' Shares," Wall Street Journal, 8/28/03.
There's also information at www.demutualization.org. (8/29/03)
A class-action lawsuit has been filed against the U.S. government;
the plaintiffs' attorney is Burgess J.W. Raby (480-967-1501). (9/7/05)The June 2003 issue of The Insurance Forum raises questions
about the correct tax treatment of cash and stock received in
demutualizations. The consensus has been that proceeds have
a zero cost basis and are taxed as short-term or long-term
capital gains based on the policy holding period. The proposed
alternative would treat proceeds as policy dividends: their cost
basis would be their value at distribution, there would be a
corresponding reduction in the cost basis of the policy, and the
holding period would begin at distribution. (5/6/03)The Job Creation and Worker Assistance Act of 2002, enacted in
March 2002, suspends the IRC Section 809 tax on mutual life
insurance companies for tax years 2001 through 2003. This
eliminates one cost savings from demutualization. See H.R. 3090,
Section 611. (3/15/02)In a June 29, 2001 memorandum, an IRS Branch Chief confirmed
the common understanding about the tax treatment of demutualization
proceeds. If the demutualization qualifies as a tax-free reorganization
under IRC Section 368(a)(1), the taxpayer's holding period will
start when the policy was purchased (not when the distribution
occurred) and the cost basis will be zero. For most taxpayers, this
means that income realized upon the receipt of cash or sale of
stock will be treated as long-term capital gains. (12/14/01)Mutual company governance is making news again. On May 31,
2001 the Iowa Supreme Court reinstated a case against Allied
Mutual's officers and directors, involving alleged wrongdoing
in transactions between the mutual company and affiliated
stock companies. The court decision is available online at
www.judicial.state.ia.us/decisions/supreme/opinions/20010531/
This decision may cause other mutual companies to think more
carefully about fiduciary duties. The June 15, 2001 issue of
Schiff's Insurance Observer raises similar questions about
dealings between Lumbermens Mutual and Kemper.
Update on Allied litigation: In August 2005, a tentative settlement
was reached with Nationwide (which bought Allied and
inherited its liabilities); policyholders will receive $135 million.For a revealing look at how investment bankers arrive at
fairness opinions, see Alex Berenson, "Valuing a Failed Dot-Com:
Buy Low, Sell High, Send Lots of E-Mail," New York Times,
May 22, 2001. The same process presumably applies to the
fairness opinions rendered on mutual company restructurings.Demutualization has become a major issue in the U.K. Some
investors are buying policies with the intent of profiting from
pressured demutualizations, and this has led to a spirited
discussion of the pros and cons of mutuality. You can get
a taste of it by going to www.the-times.co.uk and doing a
search on "Standard Life." Don't miss Magnus Linklater's
"The moral maze of money and mutuality" and websites
of the "carpetbaggers" who want to bring an end to the
era of mutuals: www.themoneybag.com,
http://pages.sprint.ca/improveSLaccountability.index.html
(5/21/00, updated 3/15/02)Advocates of mutual holding companies won a big victory on
November 4, 1999 when Congress passed the Gramm-Leach-
Bliley Financial Services Modernization Act. It was signed into
law by President Clinton on November 12. This legislation contains
a controversial provision (S.900, Section 312) that allows a mutual
company to set up a mutual holding company in another state if
the company's home state prohibits MHCs. "I can't do justice to
this issue in so small a space," Jane Bryant Quinn wrote in the
November 8, 1999 issue of Newsweek. "But depend upon it:
you've been fleeced."The fight against mutual holding companies has moved into the
courts. In September 1999, a judge issued a permanent injunction
against Provident Mutual's proposed plan. In October 1999, a
class action lawsuit was filed against National Life of Vermont.
Both plans had been approved by policyholders, most of whom
probably didn't understand what they were voting for.Advocates and critics of mutual holding companies should read
Peter Coy's commentary on tracking stocks ("Tracking Stocks are
Accidents Waiting to Happen") in the August 2, 1999 issue of
Business Week. Substitute "mutual holding companies" for "tracking
stocks" and see you what think.In the May 1999 issue of The Insurance Forum, professor emeritus
Joseph M. Belth raises questions about the fairness of Standard
Insurance Company's demutualization plan. The formulas used to
allocate shares of stock among policyholders have been judged to be
"fair and equitable" by two actuarial consulting firms and the Oregon
insurance commissioner, but the results for a sample of policies are
hard to understand. The same questions probably apply to other
companies' demutualization plans. You can obtain the article for $5
by calling 888-876-9590. (4/21/99)The Consumer Federation of America is concerned that some
policyholders will not be treated fairly in demutualizations. In a
letter to state insurance commissioners, CFA gives examples
of seemingly unfair treatment and raises questions for commissioners
to consider when they review demutualization plans. (3/31/99)Advocates of mutual holding companies got some good news in
IRS Revenue Ruling 99-3. The IRS has decided that stock life
insurance subsidiaries of MHCs will be able to deduct all
policyholder dividends, without the reduction that applies to
mutual companies (per IRC Sections 808 and 809). In some cases,
it could make sense for a mutual insurer to convert to a mutual
holding company structure solely for tax savings, even if it had no
intention of ever issuing stock to outside investors.AmerUs, the first life insurance company to restructure as a mutual
holding company, is the subject of a front-page article in the
December 1, 1998 Wall Street Journal. This article describes what
happens when you combine the MHC concept with executives who
can rationalize why everything they do is good for policyholders.In the November 1998 issue of Consumer Reports, Consumers
Union joins other consumer groups in declaring that the mutual
holding company approach to reorganization is the least fair
alternative for policyholders.In August 1998, the Canadian Department of Finance released
proposed regulations to facilitate the demutualization of its largest
mutual insurers. The Canadian view is that mutual holding company
conversions do not treat policyholders fairly, so that option will not
be allowed. A white paper provides details. Final legislation was
approved in March 1999.In June 1998, the New York State Assembly rejected Gov. Pataki's
proposed legislation to allow mutual holding companies. The current law
allows only full demutualizations. The proposed law had many critics,
including major consumer groups and the AARP. In July 1999,
Gov. Pataki reintroduced similar legislation.Full demutualization wins a straw poll. At a panel discussion
sponsored by the New York Chapter of the American Society of
CLU & ChFC, seven participants debated the merits of mutual
holding companies. After three hours of presentations by a regulator,
a consumer advocate, and representatives of mutual and stock
companies, the moderator asked the audience of several hundred
to vote on full demutualization versus MHCs. Full demutualization
won by a landslide, although a sizable minority would have preferred
a third option of remaining purely mutual. Only a few people voted
for MHCs. (6/3/98)An editorial in the June 1, 1998 issue of the National Underwriter,
a widely-read insurance publication, gets to the heart of the debate
about reorganization strategies. "The one thing that mutual holding
company advocates have not yet done," it says, "is spell out exactly
why their preferred option is better for policyholders than full
demutualization." A reply from New York Life's Sy Sternberg is in
the June 15 issue.A May 1998 report by Moody's Investors Service offers a mixed
view of the benefits and risks of mutual holding companies.
Contrary to what mutual company executives have been telling
their policyholders, Moody's believes that a company's credit
quality might be adversely affected by pressures to improve the
bottom line to satisfy equity investors. The full report, "March of the
Mutuals — A Rapidly Evolving World", is available online.
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