BEFORE THE INSURANCE COMMISSIONER AND THE
ATTORNEY GENERAL OF THE STATE OF IOWA
________________________________________________________________________
)
In re the application of )
MOTORISTS MUTUAL )
INSURANCE COMPANY )
for approval of a plan to )
acquire control of )
IOWA MUTUAL INSURANCE ) COMBINED
COMPANY and IOWA ) FINDINGS OF FACT,
AMERICAN INSURANCE ) CONCLUSIONS OF LAW,
COMPANY, and for approval of ) AND ORDER
a reinsurance pooling agreement )
between MOTORISTS MUTUAL ) (Iowa Code chapters 521 and 521A)
INSURANCE COMPANY, )
IOWA MUTUAL INSURANCE )
COMPANY and IOWA AMERICAN )
INSURANCE COMPANY )
_________________________________)______________________________________
I. INTRODUCTION
MOTORISTS MUTUAL INSURANCE COMPANY (“Applicant”) is an Ohio domestic
mutual multi-line property and casualty insurance company. IOWA MUTUAL
INSURANCE COMPANY and IOWA AMERICAN INSURANCE COMPANY
(collectively referred to as “Iowa Mutual” or “the Iowa Companies”) are licensed and
organized under Iowa law. The former is a domestic mutual insurance company. The latter
is a domestic stock insurance company.1
On September 30, 2003, Applicant submitted to the Iowa Insurance Division (“the
Division”) a “Statement Regarding the Acquisition of Control of or Merger with a Domestic
Insurer” with attached exhibits (“Form A”), in furtherance of its application for approval of
a plan to acquire the Iowa Companies. Timely notice of the public hearing on this matter
,
was mailed to all Iowa Mutual policyholders on or about September 2 2003, as well as
information about the proposed transactions. Notice was also posted on the Division’s
website.
Upon acquiring control of Iowa Mutual, Applicant also wishes to seek approval of a
reinsurance pooling agreement between it and the Iowa Companies from a commission
comprised of the Commissioner and the Attorney General (“the Commission”) under Iowa
Code section 521.5.
1
Iowa American is a subsidiary of Iowa Mutual. For ease of reference, both companies will be referred to
herein as “Iowa Mutual” or “the Iowa Companies” as warranted.
Pursuant to Iowa Code sections 521A.3(4)(b) and 521.4 (2003), and at the request of
Applicant, a combined public hearing was held on October 28, 2003, at the Division for the
purposes of determining whether (1) Applicant’s proposed acquisition of control of Iowa
Mutual complies with the standards set forth in Iowa Code section 521.3(4)(a), and (2)
authorization of the reinsurance pooling agreement between Applicant and the Iowa
Companies is appropriate under Iowa Code section 521.8 (2003).
II. JURISDICTION
The Commissioner has jurisdiction over the proposed acquisition of control under Iowa
Code section 521A.3(4) (2003). The Commission has jurisdiction over the proposed
reinsurance pooling agreement under Iowa Code sections 521.3, 521.4, 521.5 and 521.8
(2003).
III. EVIDENCE PRESENTED
Both Applicant and Iowa Mutual presented evidence at the hearing. One Iowa Mutual
policyholder also appeared at the hearing.
Iowa Mutual presented the testimony of James D. Owen, Jr., Iowa Mutual’s chief executive
officer. Applicant’s submissions in support of its application included the Form A filing, as
well as the testimony of Michael L. Wiseman, senior vice-president, treasurer, and chief
financial officer of Applicant, and John J. Bishop, chairman, president and chief executive
officer of Applicant. Applicant also submitted as exhibits the Iowa Mutual policyholder
information booklet (“PIB”), and the affidavits of Mr. Wiseman and Brian L. Doom,
Secretary of Iowa Mutual.
In support of its request for approval of the reinsurance pooling agreement, Applicant
submitted its existing reinsurance pooling agreement, and the proposed amendment adding
the Iowa Companies as parties.
All submitted evidence was admitted without objection and is part of the record considered
by the Commissioner and the Commission in issuing the following combined findings,
combined conclusions and combined order.
No one appearing at the hearing opposed Applicant’s requests or otherwise offer evidence
to contradict or question Applicant’s submission of evidence required under Iowa Code
section 521A.3(4)(a) or chapter 521.
IV. COMBINED FINDINGS OF FACT
The Form A filing, other documentary evidence and the witness testimony comprising the
record in this matter support the following findings:
A. As to Applicant’s Acquisition of Control of Iowa Mutual under Iowa Code
section 521A.3(4)(a) (2003). The statutory requirements Applicant’s acquisition plan must
meet are straightforward. Iowa Code section 521A.3(4)(a) requires a showing by Applicant
2
that the facts and circumstances supporting its application for acquisition of control of Iowa
Mutual meet five standards.
Briefly, these standards relate to (1) Iowa Mutual’s post-acquisition ability to retain an Iowa
license and continue writing existing lines, (2) the effect of acquisition on insurance
competition in Iowa, (3) the effect of Applicant’s financial condition on Iowa Mutual, (4) the
effect of Applicant’s anticipated changes to Iowa Mutual’s operations on its policyholders
and the public interest, and (5) the effect those Applicant has chosen to lead Iowa Mutual in
the future will have on the interests of Iowa Mutual policyholders and the public. These are
discussed in greater detail below.
If Applicant establishes that its application for acquisition of control meets these standards,
Iowa Code section 521A.3(4)(a) requires the Commissioner to approve the application.
Applying these standards to the evidence presented by the record, when viewed as a whole,
the Commissioner finds the following facts:
1. After a change of control, Iowa Mutual will be able to satisfy Iowa
licensure requirements and thus continue writing the line or lines of
insurance for which it is currently licensed.
Iowa Code section 521A.3(4)(a)(1) (2003) requires an applicant to demonstrate to the
Commissioner that, after a change of control, the acquired domestic insurer will be able to
satisfy the requirements for issuing a license to write the line or lines of insurance for which
it is presently licensed.
Iowa Mutual has been rated as a B company by A.M. Best since the mid-1980s. (Trans. at
14.) Mr. Owen testified that this rating has been largely due to a convergence of several
factors. Iowa Mutual has experienced several years of large claims due to escalating storm
losses across its policyholder base. (Id. at 15, 17.) By the end of 2000, its leverage position,
as it relates to the net written premium to surplus, ha d slipped to 3.1. (Id. at 15-16.) Iowa
Mutual’s ten-year combined ratio through September of 2003 is 106.4%, producing an
underwriting loss in excess of $30 million. (Id. at 15.) Iowa Mutual’s investment yield
declined steadily throughout the same period. (Id.)
Iowa Mutual tried to remain independent by reducing its size by approximately 30% at the
end of 2000. (Trans. at 16-17.) This was accomplished by withdrawing from the South
Dakota market and from the farm market, with accompanying staff reductions. (Id. at 17.)
Anticipated increases in cash surplus on earned premium as a result of downsizing did not
happen, largely due to the fact that storm losses were at an all-time high. (Id.) Iowa Mutual’s
investment portfolio declined as a result. (Id.)
All of these factors have contributed to Iowa Mutual’s A.M. Best rating remaining stagnant,
which in turn has prohibited the company from attracting good accounts and certain
professional agents. (Trans. at 14-15.) The company’s lack of size prohibited it from gaining
economies of scale, driving up its expense ratios to higher than industry standards.
3
As of August 31, 2003, Iowa Mutual had a surplus of $14.9 million. (Trans. at 22-23.) After
the proposed acquisition by Applicant, Iowa Mutual projects a surplus of $20.7 million. (Id.
at 22-23, 28.)
With the proposed acquisition, Iowa Mutual will become financially stronger and be a more
viable competitor going forward. (Trans. at 23-24.) A.M. Best has expressed its intent to
assign the Iowa Companies the A rating of The Motorists Insurance Group (“the Group”).
(Id. at 24.) All of these positive outcomes from acquisition will enable Iowa Mutual to
continue to satisfy Iowa licensure requirements and continue writing lines for which it is
presently licensed.
The Commissioner finds that Iowa Mutual’s ability to satisfy Iowa licensure requirements
and its ability to continue writing existing lines of insurance for which it is presently licensed
will be unimpaired after a change of control.
2. Applicant’s acquisition of control of Iowa Mutual will not
substantially lessen insurance industry competition in Iowa.
Iowa Code section 521A.3(4)(a)(2) (2003) requires an applicant to demonstrate to the
Commissioner that the effect of acquisition of control will not substantially lessen
competition in insurance in Iowa.
Applicant is not presently licensed in Iowa and has no plans to become licensed. (Trans. at
23.). While one of its affiliates writes a small amount of Iowa premium, Applicant does not
expect this affiliate to compete with Iowa Mutual’s marketing efforts. (Id.)
It appears that Iowa Mutual’s ability to compete within Iowa will actually be strengthened by
the acquisition. As noted in Section A(1) above, Iowa Mutual’s surplus is projected to
increase to about $20.7 million. (Trans. at 22-23, 28.) All of its leverage measures will drop
significantly. (Id. at 24.) Its reinsurance costs should also decrease. (Id. at 25.)
The Commissioner finds that Applicant’s acquisition of control of Iowa Mutual will not
substantially lessen competition in insurance in this state.
3. Applicant’s financial condition will not jeopardize the financial
stability of Iowa Mutual, or prejudice the interests of its policyholders.
Iowa Code section 521A.3(4)(a)(3) (2003) requires an applicant to demonstrate to the
Commissioner that the applicant’s financial condition will not jeopardize the financial
stability of the acquired domestic insurer, or prejudice the interests of its policyholders.
If the proposed affiliation is approved, Iowa Mutual will become a member of the Group.
(Trans. at 27.) As of August 31, 2003, the Group had approximately $441 million in surplus.
(Id.) All of the Group’s leverage ratios are substantially below industry averages, reflecting
its financial strength. (Id. at 27-28.) The Group has a consistent history of producing
positive net income and adding to surplus. (Id. at 28.)
4
Applicant is the lead company in the Group. (Trans. at 28.) As of August 31, 2003,
Applicant had a surplus of approximately $348 million. (Id.)
Iowa Mutual’s financial position will be significantly enhanced by the proposed acquisition.
(Trans. at 28.) Its surplus will increase from $14.9 million to $20.7 million. (Id. at 22-23, 28.)
The proposed acquisition will essentially be invisible to existing Iowa Mutual policyholders.
(Trans. at 29.) There will be no changes in rates or forms, no change in the company they
are insured with, and no change in the independent agent they procured their policy from.
(Id.) The policyholders will also benefit from their obligations being backed by a post-
acquisition company that will be much stronger financially. (Id.)
The Commissioner finds that Applicant’s financial condition will not adversely affect Iowa
Mutual’s financial stability. Applicant appears financially sound, and its reserves are well
over the statutorily required minimums.
There being no evidence of adverse financial impact on Iowa Mutual which would impair its
financial stability, the Commissioner also finds that the interests of Iowa Mutual’s
policyholders will not be prejudiced by Applicant’s financial condition.
4. Applicant’s proposed post-acquisition changes in Iowa Mutual’s
business, corporate structure and management are not unfair or
unreasonable to Iowa Mutual policyholders and are not contrary to the
public interest.
Iowa Code section 521A.3(4)(a)(4) (2003) requires an applicant to demonstrate to the
Commissioner that the applicant’s plans or proposals for material changes to the acquired
domestic insurer’s business, corporate structure or management are not unfair or
unreasonable to its policyholders and are not contrary to the public interest.
The record reveals that, other than the plans outlined in the Form A, Applicant does not
intend to liquidate Iowa Mutual, sell its assets, merge it with another company or change its
business operations, corporate structure, or management. (Trans. at 29-30.)
Applicant has publicly committed to Iowa Mutual remaining in Iowa for at least 10 years
following approval of the proposed change of control. (Trans. at 30.) The record
demonstrates that applicant has a vested interest in Iowa Mutual succeeding and has
committed its considerable resources toward that end. It has loaned its senior vice president
of property casualty marketing to Iowa Mutual for approximately a year. (Id. at 30-31.) His
role will be providing Iowa Mutual with consulting services, with a special emphasis on
improving Iowa Mutual’s marketing. (Id.) Applicant is developing a business plan that will
allow Iowa Mutual to grow as a company and operate with improved loss and expense
ratios. (Id. at 30.) Applicant will use its resources to implement and support Iowa Mutual’s
new business plans. (Id.) All of these proposed changes will benefit Iowa Mutual’s
policyholders and the public at large.
The Commissioner finds that Applicant’s proposed post-acquisition changes in Iowa
Mutual’s business, corporate structure and management are slight and positive. These
5
changes are not unfair or unreasonable to Iowa Mutual’s policyholders and are not contrary
to the public interest.
5. The competence, experience and integrity of those individuals who
will control Iowa Mutual after acquisition are sufficient to indicate that
Iowa Mutual policyholder interests and the public interest will not be
jeopardized by Applicant’s acquisition of control of Iowa Mutual.
Iowa Code section 521A.3(4)(a)(5) (2003) requires an applicant to demonstrate to the
Commissioner that the competence, experience and integrity of those an applicant selects to
control the acquired domestic company are sufficient to indicate that policyholders’ and the
public’s interest will not be jeopardized by acquisition.
Mr. Wiseman testified as to the competence of those individuals who will control Iowa
Mutual after the proposed acquisition. (Trans. at 31-32.) He is personally familiar with their
qualifications. (Id. at 31.) He opined that, based upon his professional relationship with
these individuals, they are competent and experienced people of integrity, having a
demonstrated ability to successfully manage and lead an insurance company. (Id.) He
believes that these individuals, as members of the Iowa Mutual board of directors post-
acquisition, will use their collective experience in the insurance industry in the best interests
of Iowa Mutual policyholders and the public. (Id. at 32.)
The Commissioner finds that the competence, experience and integrity of those individuals
who will control Iowa Mutual after acquisition are sufficient to indicate that Iowa Mutual’s
policyholder interests and the public interest will not be jeopardized by Applicant’s
acquisition of control of Iowa Mutual.
B. As to Approval of a Reinsurance Pooling Agreement Between Applicant and the
Iowa Companies under Iowa Code section 521.8 (2003). If Applicant’s application to
acquire control of Iowa Mutual is approved, Applicant then desires approval by the
Commission of a reinsurance pooling agreement between Applicant and the Iowa
Companies.
The interests of Iowa Mutual policyholders are properly protected
under the proposed reinsurance pooling agreement, and no reasonable
objection to the proposed pooling agreement exists.
Iowa Code section 521.8 (2003) permits the Commission to authorize a reinsurance pooling
agreement if (1) satisfied that the interests of the affected policyholders are properly
protected, and (2) no reasonable objection to the reinsurance pooling agreement exists.
In evidence is Applicant’s existing reinsurance agreement (“the Agreement”) and the
proposed amendment (“the Amendment”) to the Agreement, adding the Iowa Companies as
parties to the Agreement. (PIB at Ex. E; Ex. 1 to Form A, at E.) Applicant presently
participates in and administers a reinsurance pool (“the Pool”) that was established in 1993.
(PIB at 16.) The other members of the Pool are three affiliates of Applicant, all of which are
managed by it. (Id.)
6
Under the Agreement’s terms, each member cedes or transfers to Applicant all of its
premiums, losses and expenses. (PIB at 16.) Each member then assumes from Applicant a
stated percentage of the entire Pool. (Id.) This spreads the risk of an exposure insured by
any Pool member among all of the members. (Id.)
The Amendment relevantly provides that the Iowa Companies shall have the same duties,
rights, obligations and liabilities as the other parties to the Agreement. (Ex. 1 to Form A, at
E2.) It empowers Applicant to manage the Pool post-amendment. (Id.) Under the
Amendment, the Iowa Companies are attributed proportional shares [Iowa Mutual @ 3.5%;
Iowa American @ .5%] of the Pool allocated among all of the parties under the Agreement.
(Id.)
The proportional shares attributed to the Iowa Companies under the Amendment appear
reasonable. As noted in Section A(2) above, Iowa Mutual anticipates that its reinsurance
rates will go down post-acquisition due to its improved financial status. (Trans. at 25.) This
is based at least in part upon the Iowa Companies’ participation in the Pool under the
Amendment. Both the participation in the Pool and the potential reduction in reinsurance
rates will inhere to the benefit of Iowa Mutual policyholders. The majority of policyholders
voting on the proposed acquisition of control at the special meeting on October 27, 2003,
approved the proposed amendment. (Id. at 18-19; Doom Aff’d. at 2.)
The record establishes that the proposed reinsurance pooling agreement as amended meets
the requirements of Iowa Code section 521.8 (2003). The Commission finds that Iowa
Mutual policyholder interests are properly protected and no reasonable objection to approval
of the proposed reinsurance pooling agreement exists.
V. COMBINED CONCLUSIONS OF LAW
The legislature has vested discretion in the Commissioner and the Commission not only to
hold hearings and make factual findings, but also to interpret and apply the law. Iowa Code
section 521A.3(4)(a) (2003) requires the Commissioner to approve an application for
acquisition of control if, after a public hearing, the applicant demonstrates all five criteria
listed within that section to the Commissioner. Iowa Code sections 521.3 and 521.8 permit
the Commission to approve a reinsurance pooling agreement if it determines that the
applicant demonstrates the two criteria listed within section 521.8 to the Commission.
All evidence in the record relevant to chapter 521A and chapter 521 requirements was
considered by the hearing officer(s), whether or not specifically referenced herein. After a
careful review of the evidence submitted, the Commissioner concludes, upon substantial
evidence, that Applicant has demonstrated to the Commissioner all five standards set forth
in, and required by, section 521A.3(4)(a). None of these standards are violated by
Applicant’s proposed acquisition of control of Iowa Mutual.
The Commission concludes, upon substantial evidence, that the proposed reinsurance
pooling agreement between Applicant and the Iowa Companies meets the two requirements
of Iowa Code section 521.8 (2003). Neither of these requirements is violated by the
Amendment adding the Iowa Companies as parties to the Agreement.
7
COMBINED ORDER
IT IS THEREFORE ORDERED that:
Applicant’s application for approval of a plan to acquire control of Iowa Mutual and Iowa
American and for approval of a reinsurance pooling agreement between Applicant, Iowa
Mutual and Iowa American is APPROVED.
This Order shall be considered final agency action for the purposes of Iowa Code chapter
17A (2003). Any action challenging this Order shall comply with the requirements of Iowa
Code chapter 17A.
Any application for rehearing shall comply with the requirements of Iowa Code section
17A.16.
DATED this 26 th day of November, 2003.
THERESE M. VAUGHAN THOMAS J. MILLER
Iowa Insurance Commissioner Iowa Attorney General
_____________________________ ______________________________
By: Jeanie Kunkle Vaudt
Assistant Attorney General
8