Overview

Version: May 3, 2000                   Prepared by Glenn S. Daily (gdaily@glenndaily.com, 212-426-6265)
                                                         Copyright © 1999-2000 by Glenndaily.com Information Services, Inc.

Many mutual life insurance companies want to stop being purely mutual.
Some have already changed to a different form of organization, some have
proposed a reorganization plan, and some are exploring their options.

Reorganizations can affect existing and future policyholders. It is particularly
important to be aware of a company's plans if you are thinking of replacing
a policy that you already own, because you could miss out on significant
benefits.

In some cases, companies have not adequately disclosed the risks of their
proposed plans or discussed alternatives. The fact that a reorganization plan
must be approved by a company's directors, its policyholders, and state
regulators should give you no comfort.

Directors have their own interests, although they will publicly insist that they
always put policyholders' interests first. Most policyholders don't bother to
vote, and those who do may not understand the issues. State regulators have
multiple objectives, such as promoting commerce in their state and obtaining
future employment in the insurance industry. Most state laws do not require
reorganization plans to be in the best interests of policyholders; regulators
can approve them if they meet the weaker standard of being "fair and
equitable."

There is only one person who can reliably put your interests first: you.
Especially a well-informed you.

Although there are fewer than 100 mutual life insurance companies in the U.S.
(compared with over 1,400 stock companies), mutuals account for over
one-quarter of the industry's assets, insurance in force, premiums, and benefits
paid. Many people are therefore affected by reorganizations.

A mutual company is a corporation that has no shareholders. The policy-
holders are the members of the corporation, and they have membership
rights. These rights derive from the insurance contract, the corporation's
bylaws and charter or articles of incorporation, state laws, and case law.

Membership rights include (1) the right to contractual benefits, including
dividends declared by the board of directors; (2) the right to participate
in corporate governance, usually by electing directors to oversee the
operation of the company; (3) the right to receive any remaining value if
the corporation is liquidated or demutualized; (4) the right to expect that
the corporation will be run primarily for the benefit of the members; and
(5) the right to bring legal action against the directors and officers for
violating their fiduciary duties.

These rights are enjoyed collectively; individual members cannot sell their
rights to someone else. Membership rights terminate when a member
cancels the policy or dies.

In contrast, a stock company is a corporation that has shareholders, who
may or may not be policyholders. Each shareholder's ownership interest is
represented by shares of stock, which can usually be sold. The corporation
is run primarily for the benefit of the shareholders, although its relationship
with its customers must respect commercial laws and the need to compete
in the marketplace.

A stock company is owned by its shareholders. Is a mutual company owned
by its members? That question has been discussed for decades, and there are
multiple points of view. In current conversations on this subject, one person
often tries to avoid using the word "own," while the other person tries to force
its use. Everyone acknowledges that policyholders have membership rights,
but there is disagreement about the specific rights and what they mean.

Many insurance executives believe that policyholders think of themselves
as customers rather than owners, and they may be right. Policyholders'
membership rights do not become an issue in the normal course of business,
except possibly when dividends fall short of expectations. Membership
rights have now become a topic of heated discussion because there is real
money at stake in reorganization plans.

Because a mutual company has no shareholders, there is no conflict of
interest between shareholders and policyholders. This makes it possible to
fulfill the company's primary mission: to provide insurance at cost. That
doesn't mean that mutuals are nonprofit organizations. They price their
products to make a profit, because profits are needed to maintain financial
strength and to support future growth. Mutuals generally have a lower
profit goal than stock companies, however, because they don't have to
satisfy the demands of outside investors. They can also take a long-term
view in running their business, because they don't have pay attention to
daily fluctuations of a stock price.

Over the years, mutual companies have spent a lot of time thinking about
how to treat policyholders equitably; that's one of the core values of their
corporate culture. Some mutuals are more dedicated to fair treatment than
others, but the cash value life insurance policies issued by most mutual
companies have probably provided better value to policyholders than those
issued by most stock companies.

There is a clear legal distinction between mutual and stock forms of
organization, but mutual companies now resemble stock companies in
many ways. There is a convergence in products (level premium term,
universal and variable universal life, annuities, health insurance), corporate
form (some mutuals issue policies from stock subsidiaries), financial
reporting methods (GAAP for mutuals, economic value added),
compensation methods (some mutual company CEOs have an equity stake
in stock subsidiaries), and corporate mission (global competition across
multiple product lines).

Mutual companies believe that the purely mutual form of organization hinders
their ability to adapt to the changes taking place in the financial services
industry. They cannot raise capital by selling stock, and they cannot use
stock as a convenient currency to acquire or merge with other companies.
They believe that these obstacles may affect their ability to deliver attractive
products and services to customers and to remain financially strong.

Some observers believe that there is a second motive for reorganizations:
mutual company executives want to receive higher compensation, particularly
in the form of stock and stock options. The top executives at mutual companies
are generally not as highly paid as their counterparts at stock companies, and
reorganizations offer some hope of achieving parity. The deal-making that
follows reorganizations also provides an opportunity to get greater power and
prestige by managing a larger organization.

Reorganizations also benefit the investment bankers, attorneys, accountants,
and consulting actuaries whose professional services are required to prepare
and implement a reorganization plan. State regulators may gain increased
oversight responsibilities.

Ironically, some of today's largest mutuals converted from stock companies
earlier in this century. At that time, they wanted to eliminate the conflict of
interest between policyholders and shareholders, and they wanted to eliminate
takeover threats.

The most common ways of reorganizing are through a full demutualization
and a mutual holding company (MHC) conversion, which is also called
a mutual insurance holding company (MIHC) conversion. Both approaches
have variations, reflecting differences in state laws.

In a full demutualization, the company becomes a stock company. The
mutual company's net worth (its "surplus") is usually distributed to
policyholders as stock, cash, and policy enhancements. Each policyholder's
share of the total distribution is determined according to some accepted
method of allocation, which must be reviewed by state regulators.

The policyholders' membership rights are extinguished, but their contractual
rights remain unchanged. The company may concurrently issue additional
stock in an initial public offering (IPO), in order to replenish its capital, raise
more capital, and establish a market value and liquidity for the stock.

Here's a numerical example to show what happens. Let's assume that the
company's book value (that is, its net worth according to accounting
statements) is $1 billion and that it has one million identical policyholders.
An established, well-managed stock company might have a market value
of $2 billion, but a demutualizing company will usually enter the market
at a discount. Let's say that its fair market value is $800 million; i.e., 80%
of its book value. Let's also assume that it wants to raise an additional
$250 million in an IPO, which is priced at the same 20% discount.

The total book value, including the IPO proceeds, will be $1.25 billion,
and the total initial market value will be $1.0 billion. To obtain the desired
pricing, the IPO investors must wind up with a 25% stake in the post-IPO
company. They pay $250 million for stock that has an immediate market
value of $250 million and a book value of $312.5 million, so the stock is
priced at 80% of book value, as assumed.

The policyholders initially have a 100% interest in the pre-IPO company,
which has an appraised value of $800 million and a potential long-term
market value of $2 billion. After the IPO, they have a 75% interest in a
company that has a book value of $1.25 billion, an appraised value of
$1 billion, and a potential long-term value of $2.5 billion.

Each policyholder initially has a one-millionth interest in a company that
has a long-term value of $2 billion, so that interest might be worth
$2,000 over time (ignoring any future increase in book value). After the
demutualization, however, each policyholder's stock is worth only $750.

There are two reasons for the shortfall. First, the long-term market value
cannot be realized immediately; it takes years to establish a track record
that will support a higher valuation. Second, the policyholders' interest is
diluted by the IPO. Before the IPO, the long-term value of each policy-
holder's stock is $2,000; after the IPO, it is only $1,875. The $125
difference is equal to the book value that is shifted from policyholders to
IPO investors ($62.50) times the long-term multiple (2).

Of course, in the real world the policyholders are not identical, and the
company has to allocate the book value in some acceptable manner.
Most policyholders will receive stock, but some will receive cash or
policy enhancements that have an equivalent value. Cash may be the
preferred choice for very small amounts. Policy enhancements may be
the preferred choice when cash or stock would produce adverse tax
consequences; for example, for policies in qualified retirement plans.

It provides financial flexibility. The reorganized company can issue stock,
debt, and hybrid securities, and it can get bank credit facilities. It provides
maximum access to capital to finance future growth, and it creates a
currency that the company can use for mergers and acquisitions.

Financial flexibility may improve the company's creditworthiness. Stock
issuance leads to more disclosure and greater scrutiny of management's
performance. Bank credit facilities may carry restrictions on some
transactions and require the maintenance of good financial strength ratings.

It provides organizational flexibility. Business entities can become subsidiaries
of a holding company rather than the life insurance company, thereby
simplifying regulation, improving risk-based capital ratios, normalizing the
financial statements of the life company, and providing marketing and
investment advantages. Employees can be shifted so that GAAP rather
than statutory accounting principles govern their cost accounting.

Full demutualization is a well-established process that has been implemented
successfully for many years.

Policyholders receive full compensation for giving up their membership
rights. In most cases, they become shareholders in the reorganized
company, so they can participate in the company's success both as
policyholders and as shareholders.

It is expensive. A large company can easily spend tens (or even hundreds)
of millions of dollars on the professional services needed to go through the
process. One costly task is figuring out how to allocate the company's
surplus among the individual policyholders. Ongoing administration is also
expensive, because the company is likely to have many small shareholders.

It is time consuming. It can take 18 to 24 months from start to finish. During
this time, management's attention is distracted from other operational duties.

It may lead to litigation or at least to perceptions of unfairness. Some groups
of policyholders may object to the company's allocation method. For example,
the owners of nonparticipating cash value policies, such as universal life, may
wonder why they receive less than the owners of participating whole life
policies. Policyholders who receive cash or policy enhancements may object
to a valuation that is based on a below-book-value IPO price. Litigation can
be costly and time consuming, and it can also damage a company's reputation.

It may hurt the performance of existing policies, through lower dividends,
interest rates, and other factors. Although every demutualization plan tries
to address this risk, there is no assurance that the solutions will work.
Shareholders want their stock to perform well, and policyholders want
their policies to perform well, and that inherent conflict can't be avoided.
Based on unconfirmed anecdotes, it appears that the risk of dividend
cuts is much greater for small policies.

It may hurt a company's financial strength, because managers may take
greater risks to improve profitability. Some companies may find that
the cultural leap from mutual to stock was too sudden, like jumping into
a pool before you have learned how to swim. The mistakes they make as
they try to build a competitive organization may be costly. Early missteps
may also depress the company's stock and create long-term credibility
problems with the investment community.

It usually forces management to issue stock to policyholders even if
conditions are temporarily unfavorable, although some state laws may
provide more flexibility. An immediate IPO is usually needed to recover
the costs incurred in the demutualization process. There may also be
selling pressure immediately after issue if many small shareholders choose
to unload their shares.

It creates the opportunity for the company to be taken over. A takeover may
or may not benefit policyholders, but it is likely to be unsettling until more
information is known.

It eliminates any flicker of mutuality. The company becomes a stock company,
managed for the primary benefit of shareholders. In the past, most policyholders
have sold their stock to institutional shareholders within the first year after
demutualization.

To some observers, it is morally offensive. Philosophers have struggled with this
question: do the citizens of a democracy have the right to vote for a dictatorship,
and thereby permanently abolish the democracy? Similarly, you can ask: does
one generation of policyholders have the right to give itself a windfall, and
permanently change the nature of the enterprise? It's not obvious why today's
policyholders should be entitled to a pot of money built up over many decades,
even if the law says they are.

In a mutual holding company conversion, the original mutual insurance
company becomes a stock insurance company that is wholly owned by
a mutual holding company. In most cases, a stock holding company is
interposed between the mutual holding company and the insurance
company to provide greater flexibility. Other subsidiaries can be owned
directly by the mutual holding company or, more often, by the stock
holding company or the insurance company.

The policyholders' contractual rights remain with the stock life insurance
company, and their other membership rights are transferred to the mutual
holding company. In contrast to a full demutualization, policyholders do
not receive stock, cash, or policy enhancements, because the surplus of
the insurance company is not distributed. The mutual holding company
may choose to proceed with a full demutualization at a later date, so this
option is not precluded by the MHC conversion.

After the conversion, the mutual holding company may decide to sell part
of the stock holding company, the insurance company, or the subsidiaries,
but it must always retain a majority of the voting stock of the life insurance
company.

This flexibility to sell a piece of the insurance company to outside investors
has led to many confusing exchanges between advocates and critics of
MHC conversions. Critics say that policyholders are worse off, because
they lose part of their company without compensation. Advocates say
that policyholders are no worse off or even better off, because they have
a proportionate interest in a larger pie.

The arithmetic of stock issuance for MHC conversions is the same as
for full demutualizations. The impact on the policyholders depends on
the selling price of the stock in relation to the book value of the company.
If the stock is sold for less than book value, as it usually is, the
policyholders' interest will be diluted. Even in that case, however, the
policyholders will benefit if the additional capital can be used to achieve
a higher valuation for the company in the future.

In the earlier numerical example, suppose the long-term valuation of the
company would be 175% of book value without more capital and 200%
with more capital. Let's also assume, as before, that the IPO is priced at
a 20% discount to book value, even though a higher discount might be
justified for a MHC conversion, due to the policyholder/shareholder
conflict. The policyholders' 100% interest before the MHC conversion
might have a long-term value of $1.75 billion, but their 75% interest after
the conversion and IPO might have a long-term value of $1.875 billion
(i.e., 75% x $1.25 billion x 2). If the valuation multiple stays at 175%,
however, the 75% interest will be worth only $1.641 billion (i.e., 75% x
$1.25 billion x 1.75). It's also possible that the company's officers,
directors, and employees would receive stock prior to an IPO, so that
would siphon off some money that would otherwise be available for
policyholders.

You can't say if policyholders gain or lose in a MHC conversion without
looking at specific numbers. Also, a MHC conversion could be better
than remaining a pure mutual but worse than full demutualization.

Because the proponents and opponents strongly disagree about the pros
and cons of mutual holding companies, it's helpful to summarize the arguments
in a table. Some details may depend on state laws and specific company plans.

What the proponents say	What the opponents say
A MHC conversion is faster and cheaper than a full demutualization. In some cases, it can take just a few months and cost just a few million dollars.	Sometimes, yes. But the required time varies, and the cost could actually be higher if the company eventually demutualizes after the conversion, or if there is litigation and bad publicity.
It provides financial flexibility. (1) The holding company can issue stock, debt, and hybrids, and it can get bank credit facilities. The MHC structure permits mergers with other mutuals as well as the acquisition of stock companies using cash or stock. (2) The MHC doesn't have to issue stock immediately; it can wait until conditions are favorable.	(1) A full demutualization provides more flexibility (except for mergers with mutuals). The MHC structure is inferior for raising capital, because the voting control requirement limits the amount of stock that can be offered and depresses the valuation. (2) Existing laws already allow companies to wait to issue stock, and more flexibility could be added.
Financial flexibility will improve the company's creditworthiness. Stock issuance leads to more disclosure and greater scrutiny. Bank credit facilities may carry restrictions on some transactions and require the maintenance of good financial strength ratings.	Financial flexibility can be valuable but it can also be abused, so policyholders could be put at greater risk than with a purely mutual company. When the MHC issues stock, managers may become focused on improving profitability for equity investors, and creditworthiness could suffer.
It provides organizational flexibility. Business entities can become subsidiaries of the holding company rather than the life insurance company, thereby simplifying regulation, improving risk-based capital ratios, normalizing the financial statements of the life company, and providing marketing and investment advantages. Employees can be shifted so that GAAP rather than statutory accounting principles govern their cost accounting.	A full demutualization provides all of these benefits, too.
If the reorganized insurer is taxed as a stock company rather than a mutual, the conversion costs could be offset by tax savings within a few years.	The practical effect of this favorable treatment remains to be seen. The same treatment applies to a full demutualization, too.
It gives the company more flexibility to continue to issue both participating and nonparticipating policies.
It gives managers a chance to get used to operating as a stock company, while they choose an appropriate time to fully demutualize.	Unless there is a definite plan to fully demutualize, a MHC conversion permits management entrenchment.
It enables companies to offer stock and stock options to attract and retain talented employees.	Executives' desire for stock and stock options may be the driving force behind the push for MHCs. This type of compensation creates a conflict of interest with policyholders, and it's unfair for executives and directors to get a tangible, immediate benefit from the conversion while policyholders receive nothing but vague assurances.
Dividends may go up, as the company uses its increased flexibility to benefit policyholders.	Dividends may go down, because policyholders in a closed block may not benefit from future growth and some dividends may be retained by the mutual holding company.
If the company issues stock, policyholders will receive valuable subscription rights.	The subscription rights are nontransferable, so this only benefits people who want and can afford to invest in the stock.
It preserves mutuality. Policyholders are protected in four ways:	If this is preservation, what would destruction be?
#1: Policyholder control of the insurance company is maintained, because the holding company must always own a majority of the voting interest. There are also restrictions on stock ownership by insiders.	#1: Policyholder control is a fiction. Management has effective control of the company, because policyholders don't have a practical way to replace management. Also, limitations on stock ownership may be in conflict with, and therefore pre-empted by, various Federal laws. Existing laws may already allow some restrictions on ownership.
#2: Important decisions must be approved by outside directors and state regulators.	#2: The proponents' faith in these formal mechanisms is naive or, more likely, disingenuous. Outside directors may have an economic interest in going along with management's wishes. In the past, regulators have approved questionable transactions.
#3: A closed block can be set up to maintain the current dividend scale.	#3: A closed block is not necessarily a good solution.
#4: Policyholders' membership rights remain unchanged; the rights are just transferred to the holding company.	#4: As defined by some companies, membership rights are essentially worthless. Policyholders lose the most valuable feature of a mutual company: no conflicts of interest between policyholders and shareholders. If a company issues multiple classes of stock, a majority economic interest could wind up in the hands of outsiders and executives.
	Some questions about MHCs remain unanswered. If dividends are paid to shareholders, will the MHC's members also receive dividends? Could regulatory control over an insolvent company be affected by Federal bankruptcy laws? Could restrictions on stock ownership be pre-empted by Federal laws? Do directors have a fiduciary duty to consider offers to buy the company and proceed wth a full demutualization?
	MHC conversions will further erode trust in the life insurance industry. Mutual company managements may get their way by manipulating uninformed policyholders, but they will pay a price in the marketplace by tarnishing their companies' reputations.
Summary: The mutual holding company structure is the best of both worlds. Policyholders benefit from the financial and organizational flexibility of a stock company without giving up the advantages of a mutual company.	Summary: The mutual holding company structure is the worst of both worlds. Management gets the benefit of a stock company (stock options) and a mutual company (protection from takeovers, less outside scrutiny), but policyholders lose the benefit of a mutual company (no conflicts of interest between policyholders and shareholders) and don't get the benefit of a stock company (demutualization proceeds).

When insurers reorganize, they often segregate the existing participating
policies from other business; in insurance jargon, they set up a "closed
block." Based on actuarial calculations, the company sets aside a pool
of assets to support the current dividend scale and to prevent arbitrary
reductions that would not be justified by actual experience factors. This
does not mean that the current scale is guaranteed; it is simply a mechanism
to ensure that existing policyholders are treated fairly.

The closed block approach was endorsed by a Society of Actuaries Task
Force in 1987, and it is a standard provision in state laws.

Recently, some actuaries and other observers have expressed doubts about
this feature of reorganization plans. It may be a well-intentioned device, they
argue, but it may actually hurt its intended beneficiaries over the long run.
Can the block really be administered fairly as economic conditions change?
If the company grows and prospers, will the closed block benefit, or will it
languish as the company moves on to other ventures? If the company adopts
a more conservative investment strategy in its closed block (for example, by
eliminating any allocation to equities), isn't that likely to produce lower dividends
over the long run?

The critics of mutual holding companies point to actions that come close to
hypocrisy and deceit, and in some cases may cross the line. For example:

Some proponents of MHCs have also made a public relations mistake by
telling the critics that they just don't understand the advantages. The critics
include an award-winning insurance professor and a Harvard Law School
graduate. Telling smart people that they just don't understand something is
like whacking a hornet's nest with a stick.

Here's a question to ponder: if a company's directors and officers can't lead
it through a reorganization without causing an uproar, are they qualified to
create a world-class financial services organization for the 21st century?

That's a good question. The Insurance Marketplace Standards Association
was formed by the life insurance industry in 1997 in response to widespread
market conduct problems that resulted in litigation, fines, and a loss of
consumer confidence. To become an IMSA member, a life insurance
company must agree to follow six principles of ethical market conduct.
It must also perform a self-assessment to ensure compliance and pay for a
review by an independent assessor.

IMSA's first principle of ethical market conduct is "to conduct business
according to high standards of honesty and fairness and to render that
service to its customers which, in the same circumstances, it would apply
to or demand for itself."

It's hard to believe that an insurance company's directors and officers
would want to make important financial decisions with incomplete
information. When a company obtains a "yes" vote on conversion through
a rigged voting process, it does not seem worthy of IMSA accreditation,
but IMSA may not agree.

IMSA's fourth principle of ethical market conduct is "to provide advertising
and sales materials that are clear as to purpose and honest and fair as to
content."

Some companies have promoted their products by saying that policyholders
are the owners of the company, but now they say that the policyholders are
not really the owners. That seems to be a violation of IMSA's fourth
principle, but IMSA may not agree.

No. It depends on the consumer protections provided by state law, the
specific provisions of the conversion plan, and what the company is trying to
accomplish by converting. What are its stated and unstated objectives?

If the goal is to reduce the corporate income tax and to provide a limited
amount of organizational and financial flexibility, with no intention of issuing
stock, the conversion's rewards probably outweigh the risks. That's also true
if the conversion is just one step on the way to a full demutualization — as
long as there is a definite commitment to demutualizing, rather than just a
vague statement.

Policyholders may also benefit if the company uses a small amount of stock
to make strategic acquisitions, as long as the stock receives a reasonable
valuation in the deal. Many informed policyholders might even be willing to
allow management to have a small amount of stock or stock options as an
incentive to prepare the company for a successful demutualization and
initial public offering in the near future. All policyholders would then benefit
from a higher value for their shares.

A MHC conversion is much more troubling if it seems designed primarily
to create a permanent structure for mergers and acquisitions through issuing
stock and to increase management compensation, without providing any
monetary benefits to policyholders. It's reasonable to be suspicious of a
plan that provides directors and officers with real assets, while giving
policyholders nothing more than assurances that something nice will
happen in the future.

No. Some companies may move from the mutual to the stock worlds
without the resources, planning, or skills necessary to be successful.
Remaining a mutual or making a gradual transition by using a mutual
holding company structure might benefit policyholders in the long run.
Obviously, it's difficult to know in advance which companies are not
good candidates for a full demutualization and which ones are. Also,
the mutual holding company approach has its own set of risks for
policyholders.

In the May 2000 issue of The Insurance Forum, editor and professor
emeritus Joseph M. Belth listed these characteristics of an excellent
demutualization plan: (1) adequate compensation for policyowners; (2)
broad definition of eligibility; (3) disclosure of the allocation formula;
(4) IPO subscription rights for policyowners; (5) a policyowners'
committee to facilitate communication and independent review of the
plan; and (6) a formal hearing with cross-examination of witnesses.
(You can obtain a reprint of the article for $5 by calling 888-876-9590.)

Be thankful that the company decided to do a full demutualization rather
than a mutual holding company conversion. Unless you feel strongly about
the end of mutuality, vote "yes" and wait for your shares or other benefits
to arrive in the mail. You can then decide if you want to keep your policy
or shares; that's a completely different question.

If you're not sure about your eligibility to participate in the distribution of
benefits, get your policy number and then check with the company. If you
feel that you are being unfairly excluded from participation, keep your eyes
open for notices of class action lawsuits filed against the company.

You should read carefully the materials that the company sends you, and
keep these questions in mind:

Has the company made an effort to present different points of view, to help
me make an informed decision, or is it just giving me its point of view?

Has the company explained why it chose the MHC approach rather than
an alternative such as full demutualization?

Is the MHC intended to be a permanent arrangement, or is it a step on the
way to a full demutualization?

How does the company plan to distribute excess profits from the holding
company to policyholders?

Will the officers and directors receive stock or stock options prior to any
distributions to policyholders?

Is the company setting up a closed block, and if so, has it discussed the
pros and cons of this feature?

Has the company arranged for a truly independent assessment of its
proposed plan, and is it providing a convenient forum for policyholders
to discuss the pros and cons among themselves?

You should review the materials that the company sent you, while keeping
in mind the additional information that you now have about the issues involved.
If you voted "yes" or abstained and now believe that you would have voted
"no" if you had known what you know now, you can send a brief complaint
to the chief executive officer of the company, with copies to your state
insurance commissioner and IMSA (1001 Pennsylvania Ave., N.W.,
Washington, D.C. 20004). This may not accomplish anything, but you
will put the company on notice that it has a public relations problem that may
ultimately affect its sales.

You can send a short letter to the chief executive officer of your company,
stating that (1) you are following the company's actions closely; (2) you
have made an effort to educate yourself about the advantages and
disadvantages of various types of reorganization, including mutual holding
companies; (3) you expect the directors and officers to make a good-faith
effort to explain the advantages and disadvantages of any plan that they
propose, as well as a discussion of alternatives; and (4) you want the company
to provide a way for policyowners to communicate with one another about
the merits of any proposed plan.

You should think twice before you drop a life insurance policy or an
annuity issued by a mutual company, because you may be forfeiting
your right to valuable benefits if the company reorganizes. It's difficult
to estimate the potential value of these benefits. A participating whole
life policy issued 20 years ago is likely to entitle you to a greater benefit
than a nonparticipating term policy issued two years ago. But in both
cases, if the company chooses to do a MHC conversion rather than a
full demutualization, you might not see any benefits for many years.

If your company is in the process of fully demutualizing, it probably
makes sense to keep the policy until the process is completed. If you
own a cash value life insurance policy, you should also find out what
date is being used for determining benefits. If the determination date
has not yet occurred, you may be able to increase your benefits by
using dividends to buy paid-up additions. Conversely, if the policy is
performing poorly and the determination date has already occurred,
you may use the reduced paid-up nonforfeiture option to improve the
investment return.

If your company is converting to a mutual holding company or has not
yet announced its plans, your decision is more difficult. You should at
least take into account the possibility of receiving an additional benefit
sometime in the future.

If an agent proposes that you replace your policy and doesn't mention
the potential benefits that you might receive as a mutual policyowner,
you can assume that you are dealing with a salesperson rather than a
professional adviser. Just say no.

If you recently dropped a policy issued by a mutual company, you may
want to investigate the possibility of getting it reinstated. You will probably
have to provide evidence of good health and pay an interest charge, but
it might be worth it, especially if the company has announced plans to
demutualize. Be sure to verify that you will be eligible to participate in
the distribution of benefits. According to proposed rules in Canada, for
example, policies must be reinstated at least 90 days before the special
meeting to consider the demutualization plan.

If your former insurer has settled a class-action lawsuit about misleading sales
practices, you may be eligible to reinstate your policy on favorable terms.

First, don't overreact. Yes, some of these companies are betraying the
spirit of mutuality, and it's alarming to watch them defend their actions.
(For example, at a June 1998 panel discussion sponsored by the Society
of Financial Service Professionals, one company's chief actuary argued
that the overwhelmingly favorable votes for MHCs at other companies
were a good indicator of policyholder sentiment, because a 25%
participation rate provides a valid statistical sample. He didn't mention
that these policyholders might not have understood what they voted for,
because the companies had given them only one point of view.)

Yes, it's reasonable to wonder why you should trust companies to be
fair in setting premiums, dividends, interest rates, and mortality charges
when they behave so shabbily in obtaining policyholder approval for
their desired reorganization plans.

But mutual life insurance companies hardly have a monopoly on deceit.
You can probably find other examples in today's newspaper. One
attorney recently told The Economist that he expects to live to see
a dictionary in which one of the definitions of "fiduciary" is "thief."

When money, power, and prestige are at stake, people are able to
rationalize why an outcome that appears outrageous to other folks is
really quite fair. So you could say that the dishonorable behavior on
display in some mutual company reorganizations is just business as usual.

One reasonable response in some situations is to buy low-cost, guaranteed,
convertible, level-premium term insurance, and wait to see how things
develop before making a commitment to a cash value policy. For
disability income and long term care insurance, you may have to buy
on trust, because many products have non-guaranteed premiums that
can be raised later.

I own two Massachusetts Mutual whole life policies, issued in 1964 and 1980.
MassMutual has not yet announced a reorganization plan. If it fully demutualizes,
my guess is that I would receive stock with a market value equal to at least 10%
of my cash values. It's possible that my policies' dividends would be somewhat
lower over time, despite whatever assurances I might receive. However, the
value of my stock would provide a cushion against this. On balance, I'm willing
to take my chances as a policyholder/shareholder of a stock company, owning
the package of my two policies plus stock. (A friend of mine calls this a
"synthetic mutual.")

If MassMutual proposes a mutual holding company conversion rather than a
full demutualization, the burden of proof will be on the officers and directors
to explain why I would be better off without the stock in my hands. That will
be a difficult case to make, but I'll listen to their arguments. If I suspect that
they feel that they deserve stock options and job security while I should be
happy with membership rights, I'll vote against their proposed plan and
encourage other MassMutual policyholders to do the same.

While I'm waiting for MassMutual to make an announcement, I'll certainly
keep my policies in force. I already use dividends to buy paid-up additions,
but if I didn't, I would change to that dividend option in order to maximize
any demutualization benefits that I might receive.

Critics of mutual holding companies have ridiculed the fiction that the
policyholder-owners control the affairs of mutual companies. The critics
claim that mutual companies are really controlled by the management,
because it is virtually impossible for unhappy policyholders to nominate
independent directors, communicate with other policyholders, or take
other effective measures to exert control.

Here's an example: In March 1999, MassMutual mailed a proxy
statement to its policyholders. The only matter listed for consideration at
the April annual meeting is the election of four members to MassMutual's
Board of Directors. By signing and returning a proxy card, policyholders
can instruct MassMutual's management to vote for the four nominees.
There is no place on the card for policyholders to instruct management
to vote against the nominees. To do that, you apparently have to travel
to Springfield, Massachusetts and cast your vote in person.

Before conversion	After conversion
Mutual life insurance company \| Subsidiaries	Mutual holding company \| Stock holding company \| Stock life insurance company and subsidiaries