"The merger between CUNA Mutual Life Insurance Company and"
1 The merger between CUNA Mutual Life Insurance Company and CUNA Mutual Insurance Society represents the second step in the inevitable demutualization of CUNA Mutual. With only 21.5% of CUNA Mutual Insurance Society (CMIS) policyholders voting on April 20, 2007, CUNA Mutual was able to change CMIS from a Wisconsin- regulated company to an Iowa-regulated company. Iowa insurance regulations are considerably more lenient in three areas: 1. Trading in Derivatives 2. Conversion to a Mutual Holding Company 3. Demutualization In its mailing to CMIS policyholders, the company mentioned investing premiums in derivatives as one reason to redomesticate to Iowa. Derivatives are risky investment vehicles described by super-investor Warren Buffet as “financial weapons of mass destruction.” Risky derivative trading led to the infamous bankruptcies of Barings Bank, Long-Term Capital Management and Orange County, CA. Merging CMIS with CMLIC would allow the company to invest the premiums of nearly one-half million policyholders in risky derivatives. According to CUNA Mutual’s own analysis, “Comparison of Wisconsin and Iowa Insurance Regulation” filed with the Wisconsin Insurance Commission and available at http://oci.wi.gov/cunadom/cumiscomp.pdf, the only significant advantages to moving to Iowa were the relative ease with which the company can form a Mutual Holding Company or demutualize. Pages 10-15 of the “Comparison” chart make this clear. Policyholders have considerably less rights and protections under Iowa mutual insurance laws. In fact, in May 2007 CUNA Mutual denied Iowa policyholders the right to inspect the list of fellow policyholders – a right that did exist for CMIS policyholders when the company was regulated in Wisconsin. If the merger of the two companies goes through, Jeff Post and his executive team will have one large pot of policyholder money to play with. Policyholders can expect more risky expansion plans, as CUNA Mutual continues to move away from its mission of serving credit unions. In the past few years, CUNA Mutual has experimented with everything from China to crop insurance to new strategic alliances – see the “No More Turmoil” section for details. Further, CUNA Mutual can continue to cut the jobs of experienced workers in Madison and replace them with lower-paid, less experienced staff in the company’s new call center in Texas. And perhaps Jeff Post can increase his 2006 “Bonus” of nearly one million dollars in policyholder’s money. CUNA Mutual executives constantly mention “flexibility” as a reason for the move to Iowa and the merger of the two mutual insurance companies. Most of this new freedom (besides an increased ability to invest in derivatives) will only come after policyholders surrender ownership of their mutual insurance company. Flexibility will be the result of a conversion to a new corporate structure – either a mutual holding company, or demutualization. Demutualization and Iowa go hand-in-hand – one expert, Richard G. Clemens of the law firm Sidley & Austin, has even coined the phrase “The Iowa Method” of demutualization. In The Iowa Method, mutual policy owners' membership interests are automatically converted into membership interests of a mutual insurance holding company. The insurance company is reorganized into a stock subsidiary which is 100% owned by the mutual insurance holding company or an intermediate stock holding company. Make no mistake – the merger is just the second step in a process that will extinguish policyholder’s membership rights under the current mutual structure. While repeatedly denying they have any intention of demutualizing “at this time,” CUNA Mutual officials repeatedly point out the advantages of moving to Iowa just in case they demutualize. Someday, maybe. Nudge, nudge, wink, wink.