Ohio National - Demutualization

[DHK]

How can you assure under your duty that the new projected carrier will perform as illustrated? Wouldn't you have thought 15 years ago that ON would look better than a Pru or Met Life that had just went through demutualization.

What we believe is the right move won't be known until the future when the claim is settled

No one can guarantee exact performance. That's a given.

But the change wasn't by my doing. It was the carrier's doing.

My understanding of the other demutualizations is that they were done with a reduction of dividends, but not an abandonment of paying dividends.

Ohio National has chosen to be the worst of the bunch... voluntarily.**

All I want is a carrier that is committed to paying dividends... and dividends on dividends credited. And if that carrier sells... that they maintain a commitment to the premise of what the policies were structured FOR and sold under in the first place.

And if the new policies that we move to have a kind of overloan protection rider (previously discussed in other threads), that shows that the carrier is committed to cash flow in retirement using life insurance as an asset class.

** I'm not saying that they won't pay claims or that they're insolvent. I'm only saying that Ohio National is radically shifting their focus from cash value accumulation to protection for all EXISTING policies and new policies to be sold.

 

[Allen Trent]

No one can guarantee exact performance. That's a given.

But the change wasn't by my doing. It was the carrier's doing.

My understanding of the other demutualizations is that they were done with a reduction of dividends, but not an abandonment of paying dividends.

Ohio National has chosen to be the worst of the bunch... voluntarily.**

All I want is a carrier that is committed to paying dividends... and dividends on dividends credited. And if that carrier sells... that they maintain a commitment to the premise of what the policies were structured FOR and sold under in the first place.

And if the new policies that we move to have a kind of overloan protection rider (previously discussed in other threads), that shows that the carrier is committed to cash flow in retirement using life insurance as an asset class.

** I'm not saying that they won't pay claims or that they're insolvent. I'm only saying that Ohio National is radically shifting their focus from cash value accumulation to protection for all EXISTING policies and new policies to be sold.

Great points. Could have been easier to accept if they merely changed their focus going forward without also changing the focus of inforce policies sold under a different premise.

 

[somarco]

Just curious . . . why did carriers demutualize?

Some of the Blues demutualized so they could merge or be acquired by larger carriers. I believe MONY changed structure in order to move more toward "financial advice" involving securities. I don't know if that was successful or not but it also allowed them to be acquired by AXA.

New England Mutual became New England life, later merged into Met . . . which was originally mutual but I believe converted to a stock company.

Were most of the mergers to accommodate mergers & acquisitions, was it for tax reasons or allowing them to offer securities? Are there any big mutual's left?

 

[WPM]

I came to the forum this morning to ask about this. It looks like taking the cash and moving on is the way to go

 

[Allen Trent]

Just curious . . . why did carriers demutualize?

Some of the Blues demutualized so they could merge or be acquired by larger carriers. I believe MONY changed structure in order to move more toward "financial advice" involving securities. I don't know if that was successful or not but it also allowed them to be acquired by AXA.

New England Mutual became New England life, later merged into Met . . . which was originally mutual but I believe converted to a stock company.

Were most of the mergers to accommodate mergers & acquisitions, was it for tax reasons or allowing them to offer securities? Are there any big mutual's left?

Manulife, Indianapolis life, Sun Life, Prudential are some other names. Only a couple left of decent size that haven't. Off top of my head, Northwestern, Mass & Penn. But I wonder if Mass is a hybrid. IE: do all Mass WL policyholders share in the profits of all the other Mass holdings they have like Haven life. Or, could it be said that other subsidiaries under Mass drag down the dividend. IE: as Masssgarts new subsidiaries does that infusion of capital or risk of success impact the possible dividend.

To answer why, I am sure becoming a stock company allows for an infusion of cash. Issue stock to raise capital. Use stick in mergers & acquisitions. Maybe executives want move products they know the future is a bit bleak on to investors & at same time maybe getting some nice stock options & golden parachutes for becoming a stock company

One thing jumps out to me when you list all the carriers that have over the last 2-3 decades....those were some major carriers with lots of policies, lots of agents selling & most of those carriers no longer issue life insurance policies & in some cases don't even own their old blocks of policies,.........that can't be good for policy holders or agents or Customer service

 

[scagnt83]

One thing jumps out to me when you list all the carriers that have over the last 2-3 decades....those were some major carriers with lots of policies, lots of agents selling & most of those carriers no longer issue life insurance policies & in some cases don't even own their old blocks of policies,.........that can't be good for policy holders or agents or Customer service

One thing Ive noticed, is those carriers started to diversify more and more over the years. They got heavy into group benefits, advisory services, annuities, P&C, etc.

That is why Im a big fan of life companies that are mainly just life companies when Im selling a CV focused policy. Its no guarantee, but there are plenty of life carriers that could stop selling life insurance tomorrow, and still make ends meet via other product channels. The more a "mutual life carrier" diversifies away from life, its a warning sign imo. Using Met as an example, they essentially turned to P&C as their primary line of business.

 

[DHK]

Just curious . . . why did carriers demutualize?

Some of the Blues demutualized so they could merge or be acquired by larger carriers. I believe MONY changed structure in order to move more toward "financial advice" involving securities. I don't know if that was successful or not but it also allowed them to be acquired by AXA.

New England Mutual became New England life, later merged into Met . . . which was originally mutual but I believe converted to a stock company.

Were most of the mergers to accommodate mergers & acquisitions, was it for tax reasons or allowing them to offer securities? Are there any big mutual's left?

From HS 323 - Individual Life Insurance (CLU curriculum):

Demutualization of Mutual Companies

An estimated 105 mutual life insurance companies converted to the stock form of organization between 1930 and 1969. Sixteen mutual life insurers did so over the 25-year period from mid-1966 to mid-1991. Nevertheless, prior to the 1980s, demutualization generated relatively little regulatory concern, as evidenced by the lack of laws or regulations in many states governing the process. In recent years, however, an insurer's organizational form has been perceived as highly important in the increasingly competitive marketplace because of its impact on the insurer's ability to raise capital and adapt to changing marketplace conditions. Consequently, a growing number of mutual insurers have either undertaken or are considering demutualization. Some companies have sought new legislation to enable mutual life insurers to become holding companies for stock life insurers.

Reasons for Demutualization
The reasons underlying demutualization stem primarily from the perceived competitive disadvantages of the mutual form of organization.

Ability to Raise Capital. First, the mutual insurer's ability to raise capital is limited essentially to retained earnings from underwriting gains and investment income and to borrowing. In contrast, stock insurers not only can draw on retained earnings but they also can raise capital by offering common, preferred, and convertible stock for sale; by financing alternatives such as convertible debentures and warrants; and by utilizing the full range of debt instruments. The ability to raise investment capital more easily puts a stock insurer in a better position to grow rapidly in insurance writings, to finance development of new insurance products, and to avoid statutory or practical limitations inherent in debt financing. Furthermore, access to outside capital may better enable an insurer to strengthen a weak financial statement. The importance of full access to capital has increased with the integration of financial services.

Expansion Flexibility. Second, because of its ability to buy, sell, or exchange its own stock, a stock insurer possesses greater flexibility to expand through acquisitions or diversification. Unlike mutual insurers, stock companies can create upstream holding companies that facilitate expansion into other businesses, perhaps even non-insurance-related businesses, beyond the confines of insurance regulations. Effective diversification in the financial services, in fact, depends on use of an upstream holding company. For example, in the absence of an upstream holding company, a life insurer's acquisition of a bank would be subject to the investment restrictions placed on life insurance companies. It could also render the insurer itself a bank holding company subject to federal banking as well as state insurance regulations. (See discussion of holding companies later in this chapter.)

Noncash Employee Incentives. Third, the stock form of organization offers additional noncash incentive compensation (for example, stock options and payroll-based stock ownership plans) to attract and retain key officers, directors, and employees.

Tax Advantage. Fourth, with the Deficit Reduction Act of 1984, the tax advantages insurers used to enjoy have eroded significantly. The Act limited the deductibility of dividends mutual insurers pay to policyowners. This (and other changes) shifted more of the industry's federal tax burden to the mutual companies. Many mutuals view the federal tax law as biased in favor of stock insurers. Conversion to a stock company might result in tax savings.

However, before a mutual company opts to demutualize, it should carefully consider alternative (and perhaps better) ways to achieve its objectives prior to embarking on the difficult process of conversion. The cost and the complexity of demutualization are monumental (valuation and allocation of surplus to policyowners, along with legal, regulatory, actuarial, accounting, and tax problems). The cost of demutualization and the required distributions to policyowners could significantly deplete the insurer's surplus, thus severely impairing its ability to function. In addition, following conversion, by virtue of its being a stock company, the insurer becomes accountable to stockholders and vulnerable to hostile takeovers. Moreover, once a mutual insurer converts to a stock company, it is subject to the ongoing expense and problems of complying with federal and state securities laws from which mutuals are now largely exempt.

Abuses in and Regulation of Demutualization
The history of demutualization includes several cases of abuse in the distribution of a mutual company's surplus or the transfer of ownership or control flowing from the conversion. On several occasions, managers effected a conversion for the purpose of transferring control of the company to themselves with little infusion of capital on their part. The distribution of surplus redounded not to the benefit of the policyowners who traditionally are deemed to be the mutual insurer's owners but to the existing management.

The perceived inequitable results of such conversions generated legislative responses, including several state laws prohibiting demutualization. In 1923, the National Association of Insurance Commissioners (NAIC) reflected the then prevailing sentiment by proposing a model law prohibiting a mutual insurer from converting to a stock company. Other states enacted laws that, while permitting demutualization, were designed to prevent recurrence of past abuses.

More recently, some states have repealed the total prohibition of demutualization. These and other states have enacted new laws to strengthen protections and vest substantial authority in the insurance commissioner to monitor the conversion process and safeguard the interests of the mutual policyowners. State willingness to shift from the earlier prohibitory approach stems from (1) the recognition that conversion to a stock company may be essential to some mutual insurers' viability and survival in today's competitive marketplace and (2) increased confidence in the state's ability to fashion a regulatory framework that balances legitimate business objectives and policyowner interests.

 

[scagnt83]

Off top of my head, Northwestern, Mass & Penn.

There is also Guardian, Ameritas, Columbus Life, & Lafayette.

Feels like Im still missing one or two smaller ones.

 

[scagnt83]

But I wonder if Mass is a hybrid. IE: do all Mass WL policyholders share in the profits of all the other Mass holdings they have like Haven life. Or, could it be said that other subsidiaries under Mass drag down the dividend. IE: as Masssgarts new subsidiaries does that infusion of capital or risk of success impact the possible dividend.

I think Mass is now a Mutual Holding Company. Which allows them to easily spin off to demutualize if they want to. It also allows them to own non-mutual insurers under their "umbrella". So they could hypothetically acquire a publicly traded insurer, and use them to raise money... or use them to "fold up" into the parent company upon demutualization.

You would have to look at the annual report to see if all the subsidiaries flow up to contribute to the dividend. To a certain extent I think they would if they turn a profit. But if they are losing money, it seems it would be a 2 way street.

Mass now owns Great American Annuity as a subsidiary. Are those profits flowing up to help dividends? I have no clue to be honest.

I do know that the more Mass diversifies, the more "worried" I get about them remaining fully mutual. They have a very large advisory business now that has grown a lot over the past decade. Strong DI, and now really strong Annuities. Seems like they could drop the CV life insurance now and not skip a beat... and lets face it... the main reason agents/clients want a mutual insurer is for CV focused life insurance.

 

[DHK]

I do know that the more Mass diversifies, the more "worried" I get about them remaining fully mutual. They have a very large advisory business now that has grown a lot over the past decade. Strong DI, and now really strong Annuities. Seems like they could drop the CV life insurance now and not skip a beat... and lets face it... the main reason agents/clients want a mutual insurer is for CV focused life insurance.

Interesting. Another prominent poster in the FB group says that the smaller insurers (Penn, One America, and others) lack scale... and THAT would lead to THEIR eventual demutualization.

Concerns on all sides.