Mutual Insurance Loophole

Most of the 70 million Americans who have policies with mutual insurance companies probably don't realize they own the company.

That stake can easily be worth a few thousand dollars for an individual policyholder, perhaps millions for a firm with a group insurance policy.

The insurance industry, however, has for some years now sought ways to use that wealth for its own purposes. What's happened is that many mutual insurance companies have decided they can better compete in the rapidly changing financial industry by converting to stock companies - where the shareholders (not policyholders) own the company.

However, they would rather keep surplus capital built up over years when policyholder premiums exceed outlays. If mutuals follow the straightforward method of conversion, known as demutualization, they have to distribute surpluses to the owners as shares, cash, or extra insurance.

To avoid this, the industry has lobbied through 22 state legislatures laws permitting "mutual holding companies." Policyholders are denied fair benefits. But the mutual company executives can issue themselves stock options and higher pay. The system also enables them to avoid any hostile takeovers, a hazard for the bosses at other stock companies.

"Executive nirvana," says a critic.

But in some key states, such as New Jersey and New York, consumer advocates have managed to block mutual holding company legislation.

Frustrated, the industry went to Washington and got an escape clause in a financial modernization bill just signed by President Clinton. The provision allows mutuals to move their base to states with mutual holding company laws from states without.

The provision was attached to an amendment dealing with family violence that was hard for members of Congress to reject.

Fortunately, some of the nation's giant insurers have already indicated they will shift to stock companies by the honest route, demutualization. These include Prudential, John Hancock, and Sun Life Assurance.

MetLife, the country's second largest life insurer, has announced a monster offering of about $6.5 billion in stock, the largest initial public stock offering ever by an American company. Some 11 million policyholders stand to get fat checks or at least 10 shares in the mail next year.

Even when mutuals choose this route, consumer advocates are raising questions as to whether the compensation being offered policyholders is adequate. That's so with the John Hancock demutualization.

We hope mutuals don't use the escape hatch. Treasury officials promise to keep an eye on the issue.

(c) Copyright 1999. The Christian Science Publishing Society