Lawsuit seeks to block Liberty Mutual conversion
Editor's note: Liberty Mutual settled the lawsuit on Dec. 11, 2001. The settlement requires Liberty Mutual to disclose to policyholders how their voting rights might be diluted in the company's upcoming mergers, prohibits issuing stock options to outside board members for as many as three years, and limits the stock options for company officers and directors for 10 years. Liberty Mutual also agreed to pay $715,000 in attorney's fees and $125,000 for a grant to study fair methods of demutualization. Liberty Mutual denies the allegations.
In preparation for the Oct. 10, 2001, public hearing to decide the fate of Liberty Mutual Insurance Co.'s controversial conversion plans, the Massachusetts Division of Insurance has opened a public room with copies of documents relating to the issue.
|Liberty Mutual's plan is an attempt to stage a "hostile takeover from within."|
Included in the public room will be copies of correspondence between the division and the insurer, financial information on Liberty Mutual, and insurance division internal recommendation memos. The collection will be updated periodically until the public hearing.
Liberty Mutual seeks to reorganize from a mutual insurance company into a mutual holding company, which, like other structures of mutual companies, would still be entirely owned by policyholders. The mutual holding company would then create an intermediate stock holding company, which, in turn, would entirely control the stock insurance companies that would sell insurance policies.
Opponents of Liberty Mutual's plan, who have filed suit to prevent conversion, and sought to prevent the insurer from printing or mailing the details of its plan in a 273-page booklet, including the ballots that would be used to ratify it by policyholders, suffered a setback when Middlesex Superior Court Judge Ralph Gants permitted the insurer to mail out the information.
Although the judge said in his ruling on July 11, 2001, that the informational packet "may not be fraudulent," he expressed reservations that most policyholders would not understand "the serious objections" that had been raised in the suit.
"Indeed," writes Gants, "they communicate the 'pros' and 'cons' of this corporate ballot question far less effectively than the League of Women Voters does each election year in providing voters with a balanced discussion of public ballot questions."
Judge Gants also cleared the way for Liberty Mutual executives to be questioned under oath in the continuing lawsuit, and for the plaintiffs to obtain company documents that might prove that the presentation — which, according to Gants, heavily accentuates the positive and glosses over the negative aspects of the reorganization — was intended to mislead policyholders.
John Cusolito, vice president of external relations for Liberty Mutual, said that although he was disappointed with the way the judge characterized the informational packet, he was pleased with the decision that allows the insurer to proceed with the mass mailing, which began July 13, 2001.
|The presentation heavily accentuates the positive and glosses over the negative aspects of the reorganization.|
"We're committed to making the issues about the restructuring fully and clearly available to our policyholders," said Cusolito.
Liberty Mutual also mailed a supplemental information packet to its policyholders on July 30, 2001. According to the insurer, the new information would help policyholders better understand the issues Judge Gants thought were unclear in Liberty Mutual's original mailing.
"This mailing was produced voluntarily in response to the court's concerns about the clarity of our original mailing," said Cusolito. He also noted that the new mailing, which includes a replacement ballot for policyholders who wish to change their vote in light of the new information, had also been approved by the Massachusetts Division of Insurance.
Liberty Mutual's proposed conversion, and the lawsuit that seeks to stop it, are the first test of the 1998 law passed by the Massachusetts legislature that permits the transition of a mutual insurer into a mutual holding company.
If the proposed reorganization is approved by policyholders and the Massachusetts Insurance Commissioner, the intermediate stock holding company created by the reorganization would be able to sell stock to raise money, but the mutual holding company would always retain control (usually by keeping just over 51 percent of the company's stock). If this were to happen, policyholders would be able to get "subscription rights," which is the right to purchase stock at the initial public offering (IPO) price.
In contrast, if the company simply demutualized into a stock insurance company, policyholders would be compensated for their loss of ownership of the company with shares of stock that they would not need to purchase.
Although the mutual holding company could still demutualize, critics of the insurer, spearheaded by the Cambridge, Mass.-based Center for Insurance Research (CIR), claim that Liberty Mutual's plan is an attempt to stage a "hostile takeover from within" that could potentially cheat the insurer's policyholders out of almost $5.7 billion in dividends.
|Liberty Mutual claims that the move is necessary to remain competitive.|
The CIR believes that instead of converting to a mutual holding company, Liberty Mutual should undergo a traditional demutualization, changing the company from a policyholder owned company into a publicly traded company — without the switch to a mutual holding company, which the CIR sees as a stepping-stone to demutualization.
According to the CIR, the proposed change to a mutual holding company "takes away policyholders' ownership of the insurers, and replaces it with worthless 'membership' in a shell mutual holding company — a company with no cash flow and that will never pay dividends to policyholders."
Liberty Mutual, citing "unprecedented competition from traditional stock insurance companies, foreign-based insurers, and financial services companies," claims that the move is necessary to remain competitive and that the proposed reorganization is nothing more sinister than a streamlining of the corporate organization.
The insurer also asserts that in the transition to a mutual holding company:
- Policy benefits, including coverage, dividends, and premiums will be unaffected.
- Policyholders will continue to elect directors.
- Policyholders will continue to have equity interest in the company's surplus — which they will realize in the event of a dissolution or liquidation.
- Policyholders will be able to participate in any future demutualization.