Major Business News

Provision in Financial Bill Could Cost
Mutual Insurers' Policyholders Billions

By MICHAEL SCHROEDER and DEBORAH LOHSE
Staff Reporters of THE WALL STREET JOURNAL

WASHINGTON -- Among the many special-interest favors slipped into the
recently passed landmark financial-services overhaul, a provision that could
cost insurance policyholders billions of dollars escaped serious opposition.

As the House and Senate were preparing to approve the legislation last week,
the Clinton administration belatedly objected to a provision that permits mutual
insurance companies to move to other states in order to take advantage of a
popular ownership structure -- even if the insurer's home state doesn't allow
such relocations. Companies will reorganize in friendly states as a way to avoid
payments to policyholders, critics say.

"The administration really dropped the ball on this," said New York
Assemblyman Peter Grannis, chairman of the state Assembly's insurance
committee. At a meeting with Treasury Secretary Lawrence Summers last
week, Mr. Grannis said he got Mr. Summers to agree to raise a red flag about
the provision, even if it was too late. Mr. Clinton is expected to sign the bill
sometime in the next week or so.

In letters to congressional leaders before Thursday's House and Senate votes,
Mr. Summers backed the bill, but issued a warning about "redomestication."
While threatening to seek separate legislation to overturn the language "if
necessary," he complained the provision "could allow mutual insurance
companies to avoid state law protecting policyholders, enriching insiders at the
expense of consumers."

At the urging of a trade group for small mutual insurance companies, House
Commerce Committee Chairman Thomas Bliley (R., Va.) was adamant about
keeping the insurance language, which was attached to another provision that
forbids insurers from discriminating against domestic-violence victims. Rep.
John LaFalce (D., N.Y.) tried but failed to have the provision removed as the
compromise bill was being negotiated. The White House objected, too, but
decided to press changes on other issues, including bank lending to low- and
middle-income neighborhoods and customer privacy protections, an
administration official said.

At issue is the controversial ownership structure -- permitted in 22 states -- in
which an insurance company converts from a mutual company, owned 100%
by policyholders, to an "insurance mutual holding company." The attraction:
Instead of reorganizing from a full mutual company to a stock company in which
the insurers generally turn over all their accumulated capital to policyholders,
mutual holding company executives can sell as much as half of their companies
to outside investors without giving policyholders anything.

The legislation pre-empts states, including New York and New Jersey, that
don't allow companies to relocate without the regulators' consent in the insurer's
domicile state. That allows mutual-insurance companies to avoid having to
distribute the company's equity value to their policyholders by setting up
mutual-holding companies in states with permissive laws.

A group led by Jason Adkins, a Boston lawyer who is a vocal critic of such
plans, estimated policyholders nationwide would be at risk of losing more than
$50.8 billion in such value if the major mutual insurers in New York and New
Jersey converted to holding companies.

Supporters say the fears are unfounded. Some of the largest companies that
critics feared might skip town to become holding companies have made other
arrangements. New York Life Insurance Co. says it still intends to remain a
mutual insurer, while Prudential Insurance Co. of America and Metropolitan
Life Insurance Co. will continue the process of becoming stock companies.

Many insurers say the provision gives them flexibility to tap capital markets, and
say it's unfair for some states forbid it. Mutuals "want to have some choice in
this bold new world we're creating here," said Gary Hughes, general counsel of
the American Council of Life Insurance.
 

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