Western and Southern Life Insurance Co. has gotten the green light from its policyholders to convert to a mutual holding company, a move critics say will increase the company's profitability but diminish policyholders' interests without fair compensation.

A mutual holding company serves as a parent company to a number of subsidiaries. Ownership of the subsidiaries, in turn, is generally split between the mutual holding company and outside investors, with the mutual holding company always maintaining majority control, usually just over 50 percent.

Under Western and Southern's proposed restructuring plan, two new companies would be created: Western-Southern Mutual Holding Co., which would be a non-stock mutual holding company owned by policyholders; and Western-Southern Financial Group, which would be a stock holding company. The present company, Western and Southern Life, based in Cincinnati, would be converted to a stock company, and policyholders would become "members" of the mutual holding company.

"The mutual insurance holding company structure will give us more flexibility in raising capital, while preserving the benefits of our mutual status," says William Williams, chairman of Western and Southern.

About 93.5 percent of the voting policyholders approved the plan. They were given the option to vote by mail or at a policyholder meeting on June 26 in Cincinnati. Western and Southern's board of directors approved the plan in April.

The conversion plan still needs approval of the Ohio Department of Insurance, which will hold a public hearing on July 12. The insurer, which has over 2 million policyholders in the United States, expects to the complete the conversion by January 2001.

Western and Southern has established a phone number in which policyholders can get information about the conversion plan. The number is (800) 908-9995.

Are policyholders getting a raw deal?

Though Western and Southern says the mutual holding company structure benefits policyholders, the Center for Insurance Research (CIR) in Cambridge, Mass., a nonprofit insurance advocacy group, argues the opposite.

The CIR claims that Western and Southern policyholders would have received $3 billion in compensation under a demutualization plan, in which ownership is transferred directly from policyholders to stockholders in an initial public offering (IPO). Nathaniel Orenstein, a CIR policy analyst, says that in a mutual holding company conversion, policyholders get nothing in return for their ownership rights unless the insurer goes public. (Western and Southern says it has no plans to have an IPO at this time.)

The CIR estimates the average ownership interest of Western and Southern policyholders is $1,900 per person for each policy. Orenstein also points out that stock from a mutual holding company is generally worth less than a traditional company because you only have half of a voting interest in the company.

"Policyholders are really losing out on this," Orenstein says. "People can get stock in the company, but they will never have a controlling interest."

Brendan Bridgeland, another policy analyst at CIR, says while insurers tout that the mutual holding company — which is owned by policyholders — maintains majority interest in the subsidiaries, policyholders do not have the power to vote management out of office. Thus the company's officers are eligible for stock options and are immune from the interests of stockholders or policyholders, he says.

Herb Brown, a spokesperson for Western and Southern, declined to comment on CIR's analysis.