In the past year, much has been written about mutual insurance company efforts to "demutualize" and to go public so that they have an opportunity to raise additional capital in a way that the "mutual" structure does not allow. By going public, insurers hope to raise the financial wherewithal to assist them in competing in an already hotly competitive environment. This trend has been seen primarily in the life insurance sector, where insurers are being forced to play catch-up with alternative investment vehicles.
But the property/casualty side of the business has not been immune to the demutualization trend, and one particular company that demutualized over a decade ago has seized the limelight--or been caught up in it unintentionally, perhaps--as the result of the way the company was demutualized. When the Allied Group, based in Des Moines, Iowa, decided to go public, it did not opt for the "pure" approach to demutualization. Instead, the Iowa Insurance Department allowed it to spin off its then parent company, Allied Mutual, and create a holding company called Allied Group, with the same board of directors on both the mutual company and the stock company. Other states are considering similar holding company approaches, and some already have such laws.
Recently, Nationwide Mutual Insurance Co. made an offer--a very generous one, by most standards--to take over the Allied Group. The offer was for $46 per share, or about $1.6 billion. From Nationwide's standpoint, the two companies are a perfect fit. They have compatible products in the areas of auto and homeowners insurance. The acquisition would open the western U.S. market for Nationwide, where Allied is strong. It would give Allied a strong presence in the eastern part of the country where Nationwide is well-recognized. The marriage would give both companies greater geographic strength and also would allow Nationwide to boast multiple distribution systems--its own captive agents and the acquired independent agency force of Allied Group.
But Allied Group initially turned down the offer, and there was speculation in the industry as to why. Some thought it was because Allied Group has a bit too much on its plate at the present time. Less than a year ago, a lone individual named David Schiff, publisher of a New York-based newsletter, began making allegations that the Allied Group board--which, remember, is the same board on Allied Mutual--conducted a series of transactions intended to benefit the stock company and its board members at the expense of the mutual company.
At first, Allied Group executives dismissed Schiff's contentions, saying such things as, "He's just a writer from New York--what does he know?" But Schiff's persistence gained him the attention of the Iowa Department of Insurance and of a group called the Center for Insurance Research. The department has begun an investigation into the Allied Group's handling of the mutual company, and the Center has instituted a suit against Allied Group for $500 million on behalf of Allied Mutual policyholders.
Others believed that Allied Group's rejection of the Nationwide offer amounts to nothing more than a game of "chicken," with Allied Group holding out for a better price. As it turned out, this was the case. Nationwide decided to sweeten the pot, offering $48.25 per share, and Allied accepted it. But that's not the end of the story.
A further wrinkle, according to Schiff, is a separate, but related offer from Nationwide to take over Allied Mutual as well. The initial offer was to pay policyholders $65 million in dividends, but this amount was upped to $110 million in the subsequent offer.
Schiff is not in favor of the Nationwide bid as it stands now. He says that Nationwide would benefit by acquiring a mutual insurance company worth about $600 million, including the building which it owns, for only $110 million and that wouldn't be fair to policyholders.
"Yes, given the two alternatives--Allied Group being run the way it is now with two boards with conflicts of interest or with a respectable company such as Nationwide--the latter would be preferable," says Schiff. "But the policyholders of Allied Mutual will still be cheated out of hundreds of millions of dollars and Nationwide's offer of $110 million does not nearly make that up."
One alternative, Schiff says, is for Nationwide to buy Allied Group at the current offer of $48.25 per share and then separately purchase Allied Mutual, demutualize it and then pay full value to policyholders, allowing them to recoup what he says they've lost.
The Allied Group scenario has become dramatic to be sure, but more than that it points to a larger concern among regulators and consumer activists--a concern over the entire demutualization concept. For example, in New York, Gov. George Pataki and the New York Insurance Department were backing proposed legislation that would have allowed mutual insurance companies to "demutualize" by creating holding companies as "umbrellas" for the existing mutual and a newly created stock company. Sound familiar?
Not surprisingly, the proposed law had the support of major players in the life insurance industry.
But Alexander Grannis, chairman of the state assembly's insurance committee, put a stop to the movement and, in a special report, detailed a host of concerns about the bill, most particularly how it would affect policyholders of the mutual. Grannis said that, with the proposed legislation, policyholders would give up control of their companies and be exposed to added risk. Laws similar to the one proposed in New York already have been adopted in 18 states, and other states are considering similar bills. In New York, however, the bill was defeated in the Senate.
However, almost immediately after Grannis made his announcement, John Hancock Mutual Life Insurance Co., which had been a strong supporter of the holding company approach to demutualization, announced that it would demutualize, but not in the holding company fashion. Instead, it would effect complete demutualization as have Prudential and MONY. It is expected that policyholders will benefit greatly from the Hancock move.
There was speculation in the industry that Hancock reversed its position because of all the bad press that the holding company approach had received. Hancock executives denied this, but Schiff sees the change as an indication that the forces for the holding company approach might be breaking apart.
It is not beyond the realm of possibility that the Allied Group situation in Iowa might have had an effect on the defeat of the bill in New York, and it might even have an effect on existing or proposed laws in other states. There are indications that Allied Group is taking Schiff a bit more seriously than it did originally. Recently, the Allied Group announced that it had amended its pooling administrative agreement with Allied Mutual so that, by the year 2001, the expense ratios between the two companies should converge--in other words, policyholders will get a fairer treatment.
Meanwhile, despite Allied Group's acceptance of the Nationwide offer, the Iowa department is continuing with its investigation, the lawsuit by the Center for Insurance Research is ongoing, and Schiff continues to dig in his heels. *
The author
Phil Zinkewicz is an insurance journalist with some 25 years' experience covering the international insurance and reinsurance arenas. He was the insurance editor of the Journal of Commerce for a number of years, handling all their domestic and international supplements. In addition, he writes for a number of London publications on a regular basis.
©COPYRIGHT: The Rough Notes Magazine, 1998