Dear Valued Customer
by Glenn S. Daily"We have now come to believe that many of America's largest
mutual life insurers are run not by bumbling bureaucrats, as is the
popular wisdom, but by conspiring kleptocrats."
— Schiff's Insurance Observer, May 1998
"Dear Mutual Company Policyholder:
Times have changed, and we have to change, too. We like being
a mutual company, but we need more flexibility to raise capital so
that we can continue to compete in the financial services marketplace.
After careful study, the Board of Directors has recommended that
we reorganize as a mutual holding company.The enclosed Policyholder Information Statement contains a complete
description of the plan. The reorganization will not reduce, in any way,
the benefits, values, guarantees or other terms of your policies or
contracts, and will not change your premium.There will be a special meeting in a few weeks. Before the plan can take
effect, it must be approved by a two-thirds majority of votes cast as well
as by state insurance regulators. The Board of Directors recommends
that you approve the plan."Several mutual life insurance companies have recently sent letters like this
to their policyholders. The typical response is that fewer than one-third
of the policyholders bother to vote, and the approval rate among voters
exceeds 90 percent.But what would happen if the policyholders received this letter?
"...The enclosed Policyholder Information Statement contains a complete
description of the plan. This plan is so controversial that it is certain
to provoke outrage among consumer advocates and to be challenged
in court.You benefit from the plan in several ways:
• After a short period, officers and directors will receive stock and stock
options from the intermediate holding company. If we die, our families will
inherit those assets, which could be very valuable.• You will receive a membership interest in the mutual holding company.
If you die, your membership interest terminates, so your family will get
nothing. (By the way, your agent will be happy to discuss your life insurance
needs with you.)• The mutual holding company will always control at least 51 percent of the
voting stock of the insurance company that issued your policy. We can take
over other companies, but they can't take over us. You have the peace of
mind of knowing that we won't lose our jobs.• The intermediate holding company — basically, that's us — can issue
multiple classes of stock, so we can sell most of the economic interest to
outsiders, while maintaining voting control. Although we look and act like
a stock company, we can still pretend that we're a mutual.You may remember that when you bought your policy, we said that you
were an owner of the company. After paying some lawyers to give us their
opinion, we now believe that you are not an owner in a legal sense but only
in a warm, fuzzy sense. This plan preserves all of your rights; for example,
your right to vote for directors in uncontested elections, if we remember to
send you a ballot.We also paid some investment bankers to give us a fairness opinion, and
they said, "Yeah, it sure looks fair to us. When can we do the IPO?"We have a good working relationship with our state insurance commissioner,
and we are confident that the plan will be approved.The Policyholder Information Statement contains everything that you need
to know to make an informed decision. Don't pay attention to the statements
that we've filed with the IRS and the SEC; you'll just get confused by the
inconsistencies.We want to assure you that serving the interests of policyholders has always
been, and will continue to be, our mission. We see no conflicts of interest
among policyholders, shareholders, officers, and directors. We're just one big
happy family."Would the plan be approved if policyholders received this letter? You see,
it's just a matter of phrasing.You can find an overview of this subject, a reading list, and a table
showing the reorganization status of major mutual life insurers at my website,
glenndaily.com.
Glenn S. Daily is a fee-only insurance consultant in New York City.
He can be reached at www.glenndaily.com.[Originally published in the September 1998 issue of NAPFA Advisor.]