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Mutual holding company conversions continue as insurers seek M&A flexibility

A corporate structure that allows insurers to retain elements of mutuality while affording them greater strategic flexibility, including a wider array of options for executing mergers and acquisitions, continues to gain popularity among regional property and casualty companies.

Two Wisconsin-domiciled P&C insurers intend to conduct mutual-to-stock conversions under newly formed mutual insurance holding company structures, just nine months after the restructurings of two similarly situated entities took effect.

The Wisconsin Office of the Commissioner of Insurance has scheduled a public hearing for Oct. 23 regarding the proposed conversion of Sentry Insurance A Mutual Co. It convened a public hearing on Sept. 3 to consider SECURA Insurance A Mutual Co.'s conversion application; the company was slated to hold its special meeting of policyholders on Sept. 15.

Conversions of Church Mutual Insurance Co. S.I. and Jewelers Mutual Insurance Co. SI became effective on Jan. 1. Wisconsin's largest individual P&C entity by 2019 direct premiums written, American Family Mutual Insurance Co. S.I., converted to a stock insurer in a mutual insurance holding company structure, effective at the start of 2017.

Sentry and SECURA presented similar arguments in their respective policyholder information booklets regarding the benefits of a mutual insurance holding company structure in enabling future M&A activity. Among other things, they said that they could not merge with or acquire other mutuals without one of the parties to such a transaction ceasing to exist.

"As a result," Sentry said, "the valuable 'brand' recognition and goodwill of the mutual insurer that ceases to exist is effectively a lost or diminished asset." The company added that a mutual insurance holding company has the flexibility to preserve a merger partner's separate identity in a transaction, and it can engage in sponsored conversions to effectively acquirer mutual companies. Two mutual insurance holding companies may also merge without affecting the identities of the individual subsidiaries.

Mutuality does not preclude growth by way of M&A activity, as the recent news of State Farm Mutual Automobile Insurance Co.'s agreement to acquire GAINSCO INC. demonstrates. American Family executed several noteworthy M&A deals in the years leading up to its conversion.

Sentry has its own history of inorganic expansion. It engaged in a sponsored demutualization of Middlesex Insurance Co. in 1974, acquired the stock of John Deere Insurance Group Inc. in 1999 and Viking Insurance Holdings Inc. in 2005 and affiliated with Florists' Mutual Insurance Co. in 2015. The company also inked a pair of acquisitions that are scheduled to close before the conversion takes effect.

Form A filings submitted in connection with the proposed changes in control of Southern Fire & Casualty Co. and Unigard Insurance Co. indicate that Sentry intends to acquire the U.S. subsidiaries of QBE Insurance Group Ltd. as clean shells.

Terms of the transactions call for Sentry to pay $175,000, multiplied by the number of state licenses maintained by Southern Fire and Unigard, plus the amounts of any remaining surplus. Southern Fire and Unigard were licensed in 11 and 22 states, respectively, as of June 30. A Sentry spokeswoman declined to comment on the acquisitions.

Other benefits to mutual insurance company conversions beyond M&A, according to Sentry and SECURA, include broader access to capital and the ability to grow ancillary and non-insurance subsidiaries while preserving the benefits of mutuality for current members. But those conversions could, over time, lead to the dilution of the ultimate voting control currently held by the companies' members.

While conversions have occurred in a number of states, Wisconsin has been a hotbed of activity. Assuming Sentry's and SECURA's conversions are successful, there would only be five remaining Wisconsin-domiciled mutual P&C insurance companies, excluding town mutuals, that generated at least $100 million in direct premiums written during the trailing-12-month period ended June 30 on a standalone basis, according to S&P Global Market Intelligence: ACUITY A Mutual Insurance Co., West Bend Mutual Insurance Co., Rural Mutual Insurance Co., Society Insurance and Badger Mutual Insurance Co.

The pro forma combined direct premiums written of all Wisconsin mutuals, again excluding town mutuals and assuming successful Sentry and SECURA conversions, represented 11.8% of the total-filed direct premiums written by all S&P Global Market Intelligence-covered, Wisconsin-domiciled P&C carriers during the 12 months ended June 30. The aforementioned insurers with recent and pending mutual insurance holding company conversions held share on the same basis of 18.7% of the Wisconsin-domiciled P&C insurer tally.