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Policyholders for the Savings Bank Life Insurance Co. of Massachusetts voted overwhelmingly in favor of the company’s plan to return to a mutually-owned company from the shareholder-owned status it has held since 1992.
The votes counted by all methods – in person, by phone and by proxy – amounted to 10.4 percent of the total voting contingent. Ninety-two percent voted in favor of the move.
SBLI President Jim Morgan told Banker & Tradesman that the company was currently conducting due diligence on the investors who propose to buy the surplus notes that will fund the stock buyback at the center of the remutualization.
The special meeting vote on June 28 came days after a suit filed in Suffolk County Superior Court sought to block the remutualization. McEvoy vs. SBLI of Massachusetts claimed that the terms of the remutualization would negatively impact the policyholders who would become SBLI’s sole owners. Morgan said that the plaintiff’s attorney had requested that a judge enjoin the policyholders’ meeting, but that did not occur. The plaintiff subsequently filed a second request on the day of the meeting, to which SBLI is responding. Plans call for the remutualization to close this month, Morgan said.
Calls to the plaintiff’s attorney, Jason Adkins, were not returned at press time.
A remutualized SBLI will be wholly owned by its policyholders, who would now have voting rights to select members of the SBLI board, which selects SBLI management. The SBLI actuary stated in his January 2017 letter that such ownership rights “should ensure the continued reasonable financial treatment of the SBLI policyholders.”
In order to fund the share buyback to complete the remutualization, SBLI plans to issue $57.3 million in surplus notes, proceeds of which will buy the shares back from the various holders of SBLI’s stock.
The change in ownership status, by itself, will not stop the $40 million in dividends paid to policyholders, William Parjeans, director of life-health ratings division at A.M. Best, told Banker & Tradesman. He added that the dividend payout could change based on a number of factors including SBLI’s operating performance.
Course Reversal
The remutualization runs counter to the more common transition from mutual to stock ownership. That switch allows for more liquidity – the ability to buy and sell stock – and gives shareholders a voice on the entity’s board of directors, not a perquisite of policyholders in a mutual, despite their ownership of the company’s assets.
Despite the ubiquity of the SBLI acronym on banking and insurance websites, there is no legal link between those and the Savings Bank Life Insurance Co. of Massachusetts (SBLI), A.M. Best’s Parjeans said.
SBLI of Massachusetts is a single legal entity headquartered in Massachusetts and is licensed to sell life and annuity products in the District of Columbia and all states except New York. In its status as a stock company, its dominant shareholders were 30 savings banks with operations in Massachusetts. Half of those banks – some of the nation’s largest among them – acquired Massachusetts-based savings banks, the original owners of SBLI’s shares. As insurance sales by bank shareholders have plunged from 100 percent prior to 1990, they account for less than 0.1 percent of insurance sales today, SBLI said in its policyholder information.
Bank shares are fairly illiquid investments, and are subject to increased reserving requirements against holdings that are not listed on exchanges as mandated under Basel III rules.
The information SBLI mailed to shareholders helped explain the company’s thinking. It cited the Massachusetts Division of Insurance’s assertion that shareholders owned 100 percent of SBLI and that policyholders had no equity in the company, its surplus or its residual value. SBLI also asserted that the conversion would eliminate a complex corporate structure, and would free up the board of directors to focus on policyholder interest. It predicted upward pressure on dividend payments on the part of banks – an assertion with which its actuary agreed – to the detriment of policyholders.
The social media site Fat Wallet lit up with comments on this topic last month, mostly from those who said they would vote against the remutualization. Commenters’ concerns included how the assumption of debt to buy out the shareholders would impact policyholders’ premiums and dividends and whether the interest payments on the debt would eclipse the dividends shareholders had received and, as a result, sap the company’s residual value. Additionally, there was concern that policyholders in a mutual tend to vote their proxies with management, unlike institutional shareholders, who take a more activist role to monitor management behavior.
Given the current shareholder dividends paid by SBLI and the challenges associated with raising the dividend payout, the banks’ returns on SBLI shares were expected to be coming under pressure, A.M. Best’s Parjeans said.
SBLI’s policyholder information included a statement that several of its bank shareholders had approached it in 2015 expressing an interest in liquidating their common stock because Basel III capital rules increased the risk weighting for non-publicly traded equity securities owned by banks from 100 percent to 400 percent, requiring them to quadruple the amount of capital held against their investment.
A.M. Best last November downgraded SBLI’s financial strength rating from A+ (superior), a long-held designation, to A (excellent), revised from stable to negative. The SBLI actuary said that SBLI told him that the downgrade was not related to the proposed mutualization.
The retirement of the bank shares would end their dividend payment, which was $1.8 million annually, as reported in SBLI’s statutory financial filings.
While dividend payouts would end, the surplus notes will have a required interest payment, which would be known at the time of issuance, A.M. Best said.
When analyzing the expected impact of paying interest on surplus notes (which is tax deductible) against the current stock dividend payouts to shareholders (which is not tax deductible), Parjeans said the opinion was that the net impact would not have a material adverse effect on the financial position of SBLI.
Moreover, the interest payments are fixed over the life the surplus notes whereas the share dividend payments are subject to potential increases over time, he said.
