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Mutual's new stock conversion plan adds subscription element it once eschewed

The public comment period regarding the recently amended plan of a Pennsylvania insurer that has been seeking to engineer a mutual-to-stock conversion for the better part of the last three years has been reopened.

The board of Bethlehem, Pa.-based Saucon Mutual Insurance Co. approved a plan in August 2014 whereby eligible policyholders would receive cash and, in certain cases, other forms of consideration in exchange for the extinguishment of their voting rights in the insurer. The revised plan as submitted to the Pennsylvania Insurance Department in April adds the option for eligible policyholders to participate in a subscription rights offering in lieu of receiving cash.

An eastern Pennsylvania-focused provider of term and perpetual homeowners and dwelling property coverage, Saucon Mutual has not actively issued new policies in a number of years, but it intends for the conversion to help set the stage for an eventual return to the marketplace and to achieve a series of other objectives.

The updated member information booklet indicates that the Pennsylvania Insurance Department had advised Saucon Mutual in December 2015 of certain "concerns" it had regarding the proposed conversion plan in the aftermath of a Sept. 1, 2015, public hearing. Following further discussions with the regulator, Saucon Mutual said it proposed to amend the plan to add the option for policyholders to participate in a subscription rights offering and it consented to the regulator's engagement of an independent consultant to perform a valuation analysis of the company and to give a fairness opinion regarding the conversion.

That the revised plan adds a subscription rights component seems to represent something of an about-face for Saucon Mutual, considering its earlier statements that its board had reviewed that approach and opted for a different strategy in the original conversion plan, which took the form of an "alternative plan" under Pennsylvania's enabling statute.

Company officials explained their rationale for not initially selecting a subscription rights conversion during the September 2015 public hearing, as well as in response to concerns raised in public comment letters. They argued that in previous subscription rights conversions "very few members of the mutual insurers chose to purchase stock," which they parenthetically suggested in one response to a comment letter possibly resulted from "a lack of ability or desire to invest" in the stock or, alternatively, because it "may be illiquid ... and of no immediate value" to the policyholder.

"Historically," Saucon Mutual said in that response, "subscription rights conversions benefit the sophisticated few with the vast majority of policyholders receiving nothing."

The amended plan, as the company described it in a response to a policyholder's public comment, "merges the best" of the proposal it first issued with a subscription rights conversion. The company added that the amended plan was the product of "frequent and regular discussions" with the Pennsylvania Insurance Department.

The subscription rights offering would occur in two stages. In the first stage, members other than those deemed to constitute a "control group" would be eligible to submit subscriptions for 500 or more shares of the new holding company's stock. The second stage would permit members of the "control group" to acquire those shares that remain outstanding following completion of the first stage.

The "control group" includes nine members, two of whom, Saucon Mutual Chairman Brian Regan and Philadelphia Trust Co. President and CEO Michael Crofton, are expected to acquire nearly 93% of the shares to be offered in the second stage. The plan permits the Saucon Mutual board to abandon the conversion transactions to the extent that the amount of subscriptions received in the first stage would result in members outside of the "control group" obtaining a stake of 51% or more in the offered shares.

StoneRidge Advisors LLC, the independent firm retained by the Pennsylvania regulator, said in a letter dated April 28 that it considered the amended conversion plan to be fair from a financial point of view to eligible Saucon Mutual members.

The Pennsylvania Insurance Department said that it would leave the comment period open for an "indefinite period of time." Class-action litigation filed in response to the original conversion plan on behalf of Saucon Mutual policyholders that makes a series of claims against the insurer and its board and seeks to prohibit the plan's consummation remained pending, according to the most recent version of the member information booklet.

Saucon Mutual maintains that the conversion will be beneficial to its policyholders. The transactions contemplated in the plan remain subject to regulatory and policyholder approval.