Friday, July 7, 2017

No. 224: Savings Bank Life Insurance Company of Massachusetts—The Plan to Convert into a Mutual Company

On May 19, 2017, James Morgan, president and chief executive officer of Savings Bank Life Insurance of Massachusetts (SBLI), notified policyholders about a plan to buy out the stockholders and convert the organization into a mutual company. He said the board of directors had unanimously approved the plan, and implementation required the approval of a majority of the policyholders who vote on the plan. He said a special meeting of policyholders was to be held on June 28. He urged them to vote in person at the meeting, or by another method. A "Summary Policyholder Information Statement" accompanied the notification letter and described the plan. Policyholders interested in further details were invited to request a more lengthy "General Policyholder Information Statement."

On June 22, 2017, Leslie McEvoy, a policyholder who received the notice, filed a class action lawsuit in state court against SBLI. She also filed a motion for a preliminary injunction blocking implementation of the plan, and she asked for an expedited hearing. The case was referred to Superior Court Justice Mitchell Kaplan. (See McEvoy v. SBLI, Suffolk Superior Court, Commonwealth of Massachusetts, Case No. 2017-1961.)

The Plan
SBLI has 30 stockholders who are savings banks in Massachusetts. SBLI plans to buy back all the shares of Class A common stock for $500 per share and all the shares of Class B common stock for $128 per share, for a total of $57.3 million. SBLI plans to obtain the money by issuing a surplus note (explained later). The Massachusetts insurance commissioner has approved the plan, subject to approval of the policyholders.

The Complaint
The general thrust of the plaintiff's opposition to the plan is that the notice to the policyholders is "grossly defective," that the policyholder vote based on that notice would not be valid, and that the plan should not proceed until SBLI provides an adequate notice. Some of her objections to the plan are mentioned in the first paragraph of the complaint:
Plaintiff is seeking preliminary and injunctive relief related to the imminent vote of SBLI's policyholders — scheduled to occur at a Special Meeting on June 28, 2017 — on SBLI's proposed Plan of Conversion. Plaintiff seeks to enjoin the Special Meeting and block the policyholder vote on grounds that the Notice disseminated by SBLI to its policyholders and holders of annuity contracts eligible to vote, whose affirmative vote is statutorily required to secure approval of the Plan of Conversion, is false, deceptive and misleading. Plaintiff and the Putative Class of its participating policyholders will be irreparably harmed if the Special Meeting is allowed to convene and/or the policyholder vote, which is based on the grossly defective Notice, is allowed to proceed. [Emphasis in original.]
The Alleged Problems
The plaintiff alleges that SBLI's notice is "false, deceptive and misleading" because of several major problems. Here are five of those alleged problems.

First, SBLI has $219 million of net operating losses (NOLs) to carry forward. If the Internal Revenue Service deems the conversion a "change of control" transaction, SBLI may be deprived of a significant portion of the NOLs. The notice did not disclose the likelihood or the consequences of such a development.

Second, the notice did not disclose that Piper Jaffray (PF), SBLI's financial advisor, analyzed the plan and prepared a fairness opinion. The plaintiff alleges that PF said the plan would provide a windfall to the stockholders and adversely affect the policyholders.

Third, the notice did not disclose that the costs of the surplus note may adversely affect the policyholders. A surplus note is a debt instrument that increases the issuing (borrowing) company's surplus because the company is not required to establish a liability for the amount borrowed. A surplus note is subordinate to the issuing company's other obligations, can be issued only with the prior approval of the insurance commissioner in the issuing company's state of domicile, and interest and principal payments can be made only with the commissioner's prior approval.

Fourth, when a stock company issues participating (dividend paying) policies, invariably there are questions about the relative interests of the shareholders and the policyholders in the earnings and surplus of the company. The plaintiff alleges that SBLI's plan will dilute the interests of the policyholders, and that the notice does not adequately address the problem.

Fifth, the notice asserts shareholders have a 37.5 percent interest in SBLI's original surplus. The plaintiff alleges that the assertion is false.

Other Filings
In addition to the complaint, the parties have filed many other documents. Here are a few of them. The plaintiff filed a motion for a preliminary injunction, with a supporting memorandum. SBLI filed an opposition to the motion for a preliminary injunction, with supporting memoranda. SBLI also filed the general policyholder information statement, frequently asked questions, an independent auditor's report, and financial statements.

The Milliman Opinion
SBLI retained Steven Schreiber, FSA, MAAA, of Milliman, Inc., an actuarial consulting firm, to provide an opinion as to whether the proposed plan of conversion is fair to the policyholders from an actuarial standpoint. The opinion, dated January 4, 2017, is appended to the general policyholder information statement offered to policyholders. The plaintiff alleges that the Milliman opinion is "flawed," and that SBLI's use of the opinion in connection with the proposed plan is "irrelevant and erroneous." Therefore the plaintiff alleges that inclusion of the opinion in the general policyholder information statement is "misleading."

The Milliman opinion says it can be used as necessary in connection with the proposed plan, but any other use of the opinion requires Schreiber's consent. I asked him for permission to provide it as part of a complimentary package I plan to offer to my readers. He declined to grant permission, citing "Milliman's longstanding policy of not discussing or distributing client work product."

The Hearing
On June 27, Judge Kaplan held a hearing on the plaintiff's motion for a preliminary injunction. It is my understanding that the judge expressed concern about SBLI's notice in several areas. However, because the special meeting of policyholders was the next day, and because the plan could not be implemented quickly, he decided not to issue an injunction immediately. The reason why the plan could not be implemented quickly is that SBLI has not completed arrangements for the surplus note.

The Special Meeting
On June 28, the special meeting of policyholders was held. It is my understanding that about 60,000 of SBLI's 480,000 policyholders voted, and that about 90 percent of those voted in favor of the plan.

The Order
On June 30, Judge Kaplan issued an order denying the plaintiff's motion for a preliminary injunction. He analyzed the plaintiff's allegations, generally sided with SBLI on them, and said the plaintiff was not likely to succeed on the merits of her allegations. The judge also said that "speed is more important than a carefully crafted explanation of the court's reasoning, so that the plaintiff may consider any other opportunities for the relief she requested."

Since the early 1990s, most insurance company reorganizations have been demutualizations. In such a reorganization, a policyholder-owned (mutual) company converts into a shareholder-owned (stock) company.

During the same period, some mutual companies have partially demutualized by creating a mutual holding company (MHC). In some such cases, the companies later dissolved their MHCs and demutualized; however, some MHCs still exist. I have expressed the opinion that creating an MHC is contrary to the interests of policyholders.

Prior to the early 1990s, most insurance company reorganizations were mutualizations, in which a stock company converts into a mutual company. An example is Equitable Life Assurance Society of the United States. Originally it was a stock company. However, after revelations in the Hughes-Armstrong investigation of 1905, the company mutualized. In 1992, the company demutualized under the sponsorship of AXA, a French company, and became AXA Equitable Life Insurance Company.

The Provident Case
Provident Mutual Life Insurance Company of Philadelphia, which at the time was an old and highly-regarded company, had an experience about 20 years ago reminiscent of the SBLI case. Provident notified its policyholders that the board of directors had approved a plan to create an MHC. The Pennsylvania insurance department held a hearing, the company amended the plan, the department approved the plan, the company asked the policyholders to vote on the plan, and 89 percent of those voting approved the plan.

However, a group of policyholders had filed a lawsuit in a Pennsylvania state court seeking an injunction blocking implementation of the MHC plan. They alleged that the policyholder information statement omitted important information, and that the policyholder vote therefore was not valid. Two days after the vote, the judge issued a preliminary injunction blocking implementation of the plan. Later the judge made the injunction permanent. Provident eventually scrapped the MHC plan and demutualized under the sponsorship of Nationwide Corporation.

As the Provident case progressed, I wrote extensively in The Insurance Forum about the case; the last major article was in the November 1999 issue. Jason Adkins, the lead plaintiff's attorney in the SBLI case, was involved in the Provident case.

General Observations
In general I agree with the plaintiff's allegations about the shortcomings of SBLI's notice to policyholders. Therefore I disagree with Judge Kaplan's order. In my opinion, the motion for a preliminary injunction should have been granted, the initial policyholder vote should have been voided, SBLI should have modified the notice and sent it to the policyholders, and another policyholder vote should have occurred.

I do not know whether the plaintiff can appeal Judge Kaplan's order or take some other action to seek relief. I plan to report significant further developments in the case, should they occur.

Available Material
I am offering a complimentary 68-page PDF consisting of SBLI's notification letter (1 page), SBLI's summary policyholder information statement (18 pages), McEvoy's complaint (29 pages), Judge Kaplan's order (14 pages), and the article in the November 1999 issue of The Insurance Forum (6 pages). Email and ask for the July 2017 package about SBLI's mutualization plan.