By L. Carlos Lara
[Reprinted from the January 2018 edition of the Lara-Murphy-Report, LMR]
Subscribers To The Lara-Murphy Report have come to understand that our publication is unique in the market place in the sense that it features within its pages expert coverage of financial markets, Nelson Nash’s Infinite Banking Concept (IBC), and Austrian Economics. In rendering this service our readership receives monthly in-depth articles, interviews, and current news reporting regarding these three subjects that helps them navigate a constantly changing economic environment. As always our number one goal is education.
It is with this in mind that I wish to take a closer look at the Mutual Insurance Holding Company (MIHC), which is a topic that is relevant to IBC practitioners and all those who may be thinking of implementing IBC policies in the near future. It is especially important now because Bob and I repeatedly stress that we are in the midst of an unsustainable boom that will crash and IBC offers, among other benefits, an exit strategy from the market collapses that are heading our way.
In fact, I will go as far as to say that in my estimation we can expect to see a rush for these type of instruments once it dawns on people that the euphoric market highs are coming to an end. In preparation for that event we want our readership to be well informed on what they can expect when implementing a specially designed IBC policy.
Going hand in hand with this forward guidance we have also repeatedly stressed that specially designed IBC policies should be acquired from a life insurance carrier whose policyholders are also the owners of the company. Of course, the insurance company that best fits this description is the mutual. Alternatively, the ownership qualification excludes the stock insurance company. But what many consumers don’t know is that there also exists a “holding company” structure that houses a stock company within it that also fits the “owned by its policyholders” description. This type of infrastructure is known as the Mutual Insurance Holding Company, (MIHC).
The reason this structure is not as widely known as the other two is partly due to the fact that the MIHC structural conversion is relatively new having made its first appearance in 1995. Although nearly all states now have statutes regulating mutual conversions to a MIHC structure, comprehensive information about these statutes and the many unique accounting issues that arise when a mutual insurer converts to an MIHC continues to remain beyond the reach of the average consumer and advisor.
Critical to this understanding is the regulatory framework that has been adopted for adequately protecting the on-going ownership interest of policyholders in the MIHC, which is its distinguishing feature. In fact, their adequacy has helped blur the lines of notable differences between the two structures. Yet it is these problematic differences and how regulators have since resolved them is what I wish to shine a spotlight on, in order to provide the reader a more comprehensive and easy to understand explanation of why we can include the MIHC structure as being just as ideally suited for IBC purposes as the pure mutual company.
Before delving into the various aspects of these structures there is this one last consideration to also take into account. Most of us would agree that as consumers we are guided in our insurance buying decisions by price considerations, but also by brand names. What I mean is that rarely do we consider company structures, charters, or bylaws when selecting an insurance carrier.
When we think of insurance companies such as New York Life, Mass Mutual, or Nationwide we recognize the established brand. These are names we are familiar with, but we can’t really know for sure which one is a mutual and which one is an MIHC. Nor are we aware that when considering an IBC-type policy to meet our cash flow management needs not all mutual and MIHC structures have yet adopted the best specially designed features and rider flexibilities for practicing IBC. To determine which is which you will need to talk to an expert insurance professional that truly understands the theory of IBC and be able to match you with the adequate insurance carrier.
This is why we also stress that you should look to our list of authorized IBC financial professionals for IBC implementation guidance. These graduates of our training course can guide you to the best mutual and the best MIHCs that work best for practicing IBC right now. Here is where you can find an Authorized IBC Practitioner: https://infinitebanking.org/finder/
Background and Introduction to the MIHC
(In this article I have relied heavily on two outstanding sources, which I have condensed considerably. One is a 94-page publication by the National Association of Insurance Commissioners (NAIC) entitled, “Mutual Insurance Holding Company Reorganizations,” December 7, 1998.1 The other publication is an 11-page report from the Society of Actuaries: Issue 41 February 2000.2 It is recommended that these be read for a much more thorough understanding of this subject. Information for accessing these two reports can be found in the footnotes. Any direct quotes from each will be italicized and marked by its corresponding report and page number.)
Historically, issuers of insurance policies have been either mutual or stock companies going back over 200 years. In a stock company management control rests with the stockholders who in turn elect a board of directors who in turn select the executives that run the company.
In a mutual the policyholders own the company and participate in the election of the company’s board of directors who in turn select the executives that run the company. This ownership privilege also gives the policyholders the contractual rights to share in the dividends declared by the board of directors. When the company experiences favorable expenditures in its operations, these dividends represent a return of excess premium and or a build up in surplus for the company.
One big difference between a stock and mutual insurer is that a mutual company cannot sell shares of stock. Consequently, the mutual has to rely on retention of earnings or borrowing from its own surplus in order to raise capital. Historically there have been only two forms of restructuring alternatives to compensate for this disadvantage: either a merger or complete demutualization. Demutualization converts a mutual to a stock company completely. (i)
The demutualization process is lengthy, arduous and expensive because all the equity and surplus interest in the mutual must be exchanged for shares of stock. The regulatory review process is time consuming in that it has to insure that the policyholders receive fair value for their interest in the company. Nevertheless many mutual insurers, large and small, have completed the process successfully especially during the last three decades. Today these carriers are now simply stock companies. As stock companies they do not have “participating” life insurance products that pay dividends from the profits of the company to its policyholders.
By August of 1998 the newest restructuring alternative for a mutual, the MIHC, passed legislation in twenty-one states and the District of Columbia. In spot-checking other sources while writing this article I noticed that most all states have come on board in support of MIHC legislation. The main advantages for MIHC laws is that they provide the mutual companies greater access to capital markets in order for them to enhance their efficiency of operations without having to go through a complete demutualization while also maintaining the advantages of a mutual company—a most unique structure.
In the past twenty years many mutual companies have opted to reorganize in this manner. The conversion is made into a stock company, however, the converted stock insurer becomes a wholly owned subsidiary of the MIHC and the policyholder’s ownership interests are transferred to the MIHC.
Interestingly, during the conversion process none of the policy terms and contractual obligations, including policyholder dividend rights will change. Most importantly, and I repeat again, control of the converted stock insurer remains vested with the policyholders as sole owners of the MIHC.
“The following depicts a mutual insurance company before and after a MIHC reorganization.”
Regulation of the MIHC
“It is critical to understand that ownership rights and interests are determined by state laws, the mutual insurer’s charter, its by laws, and the individual contract.”—Mutual Insurance Holding Company Reorganizations, Page 19
To keep this article from becoming too lengthy and getting too technical the following five paragraphs represents what I think are the most important aspects of the MIHC structure and how states regulate them currently.
- A MIHC structure does not directly issue insurance contracts, but the converted stock company does; nevertheless the MIHC is state regulated as though the entire infrastructure were an insurer. This applies even in cases of rehabilitation and liquidation. “In addition, the statutes contain ‘reach-up’ provisions intended to make the assets of the MIHC available to fulfill contractual obligations to policyholders and other creditors in the case of insolvency in the converted stock insurance company.” Other devices include “a requirement that the MIHC grant a security interest in all its assets to the converted stock insurance company and statutory provisions which would require that assets of the MIHC be held in trust by the MIHC for the benefit of policy-holders.” MIHC Reorganizations, page 45
- A mutual insurance holding company (MIHC) structure is owned by its policyholder members. Furthermore, participation by non-members is prohibited at the MIHC level. The MIHC is also subject to the state’s insurance holding company act, which has oversight over mergers, authority for examinations and annual financial reporting requirements.
- MIHC laws provide mutual insurance companies with greater access to equity capital markets. In order to protect policyholders from outside stockholders a MIHC must maintain majority ownership and control by at least “51% of the voting shares of the converted stock insurance company and any intermediate stock holding companies.” MIHC Reorganizations, Page 38. In addition to this the states limit participation by Directors and Officers with regards to stock options and percentage of stock ownership in order to limit opportunities for personal gain.
- Members of the MIHC have dividend rights. “The MIHC must receive a pro rata share of stockholder dividends from subsidiaries. Insurance regulators require that the insurer include in its Plan of Reorganization the methods to be used to ensure that excess capital of the MIHC inures to the exclusive benefit of MIHC policyholder members. For example, excess capital may be contributed to the stock insurer for premium credits or reductions, policy dividends, or increases to surplus.” In this manner dividend scales are maintained. However, membership interest in the MIHC is not considered securities under state law and SEC rulings. “The SEC’s no-action position does not prevent MIHC members from realizing the benefit of earnings by the MIHC. Instead, the SEC’s position should be interpreted as requiring the insurance regulator’s approval or direction for such distributions.” MIHC Reorganizations, Page 41
- With regards to protection of policyholder dividends at the onset of a conversion, (particularly with respect to “participating” life insurance policies so that they are not reduced to benefit stockholders), regulators have adopted two methods. One method is called the “Closed Block.” This is an allocation of assets that is set completely apart, together with its premiums for those policies, its investment earnings, its expenses and continuation of its dividend scale that will be sufficient to maintain the payments of guaranteed benefits on that specific closed block of business. The MIHC must carry the closed block decades into the future until all benefits have been fulfilled.The other method is known as the “In Accordance With Past Practices.” This method is more appropriate for smaller insurance companies and regulators establish a set formula from the experience of previous years and then hold the company to that formula going forward.
After careful consideration of the extent of the mutual conversion process to a MIHC these five regulations provide reasonable assurance that, provided the specially designed features of an IBC policy are available with a particular MIHC, they are an excellent choice for practicing Nelson Nash’s Infinite Banking Concept (IBC).
The MIHC structure is a relatively new mutual conversion process—an alternative to a complete demutualization. Since the MIHC reorganization retains the same mutual identity before and after the conversion, practicing IBC with a MIHC is quite permissible and offers similar safeguards to the pure mutual. All of the conservative and protective features we all associate with Nelson Nash’s description of a dividend paying Whole-Life insurance policy are all there. The underlying main security, as in the case of the pure mutual, is that the policyholders own one hundred percent of the MIHC.
What must always be kept in mind while considering the various aspects of the MIHC in this article is that, as with all life companies, the insurance death benefit remains the primary concern of state regulators. Protecting the policyholder is the state regulator’s chief responsibility. As consumers this is very reassuring.
Ironically, the IBC practitioner uses a specially designed participating Whole-Life insurance policy primarily as a cash flow management system. The death benefit is viewed mostly as a spectacular bonus. But this powerful combination is what makes the mutual or the mutual insurance holding company (MIHC) ideally suited for IBC.
(i) The NAIC report states that in recent years some mutual carriers have been successful in tapping the equity markets by offering shares of stock to the public in “downstream” stock subsidiaries. However few mutual carriers have significant economic activity outside the insurance company to replicate that success. Consequently attracting equity capital remains difficult for most mutuals. Another negative is that the down stream stock subsidiary also increases SEC regulatory constraints.
2.The Financial Reporter, Society of Actuaries, Issue 41, February 7, 2000 https://www.soa.org/globalassets/assets/library/newsletters/financial-reporter/2000/february/frn0002.pdf