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Insurance companies eye policyholders' money

Some time late next year, the Prudential Insurance Company expects to send its 13 million policyholders a nice surprise in the mail: stock worth on average a few thousand dollars.

The Prudential windfall stems from a little-known fact: Policyholders legally own their mutual insurance companies. As a result, they share in the company's "profits" through reduced premiums.

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In recent years, many mutuals, including Prudential, have wanted to become corporations that issue stock. The switch, they say, provides three competitive advantages: (1) They can raise money by selling stock. (2) They can use stock to buy other companies. (3) They can give their executives stock options to attract and keep good managers.

But consumer activist Ralph Nader sees it differently. It's "stock option envy," he says. The bosses of the mutuals see executives in other companies getting rich with options. They want the same.

The standard technique for switching is called "demutualization." It involves distributing accumulated profits, called the "surplus," to the policyholder owners in the form of stock, cash, or insurance credits. That's the Prudential route.

But not all mutuals are following in Prudential's footsteps. Laws now exist in 22 states allowing mutuals to convert to mutual holding companies rather than demutualize. This technique lets the new holding company keep the surplus as a backing for acquisitions or other uses, including fancier executive salaries or options.

"An outrage!" says Joseph Belth, a professor of insurance at Indiana University, Bloomington. "It terminates or dilutes the ownership of policyholders without compensation."

Much is at stake. Some 70 million people own policies with mutual insurance companies. These companies have accumulated a $100 billion "surplus" on their books over the years.

Exacerbating the matter, Congress devised an escape hatch for the mutual insurance companies located in the 28 states with no mutual holding company law. Lawmakers slipped into the financial modernization bill that President Clinton is expected to sign a "redomestication" provision. It would allow mutual insurance firms in states that don't allow the formation of mutual holding companies to do so by jumping to another state.

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The measure could cost policyholders located anywhere literally tens of billions of dollars in compensation.

Virginia Republican Thomas Bliley Jr. inserted the provision into the financial-services overhaul bill. No other type of company is prohibited from shifting its legal domicile to another state, notes a Bliley staffer.

But Mr. Nader sees the provision as part of what he calls "a combination of bribery and extortion" in Congress. Though no linkage is explicit, members of Congress protect or do favors for special business interests in return for campaign contributions.

The top business contributor to Mr. Bliley's campaign funds is the insurance industry. Individuals or PACs connected with insurance firms gave him $92,000 in the 1998 campaign and $26,000 so far for the 2000 elections, reckons the Center for Responsive Politics, in Washington.

"It's real special-interest legislation," charges Alexander Grannis, a New York state lawmaker representing an upper-East-side Manhattan district. "If I were a mutual policyholder, I would be checking my wallet." His committee, after extensive hearings and a 55-page report in 1998, quashed a proposal of Governor George Pataki for mutual holding company legislation.

Mr. Grannis, a Democrat, accepts no campaign money from the insurance industry. He even pays for his own meal when lunching with industry lobbyists. "It gives me terrific freedom," he says. "No one questions my independence."

Grannis says he warned the Clinton administration of the redomestication provision. And in response, Treasury Secretary Lawrence Summers sent a letter to congressional leaders saying the provision could enrich mutual company insiders "at the expense of consumers."

But the letter was too late. The provision got through the Senate-House conference with 10 votes for, 10 against.

Mr. Summers suggested the administration might seek repeal of the provision "if necessary."

The bonus for Prudential policyholders, by the way, is not yet a sure thing. The board of directors of the Newark, N.J., company is expected to make a final decision early next year on demutualization. A spokesman, however, noted that the company has "no plan to move."

(c) Copyright 1999. The Christian Science Publishing Society

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