Why You Should Vote Against the Restructuring of American Family Insurance

Photo: Flickr User Martin Kenny: http://bit.ly/2eNo5Yn

The Bottom Line: Vote Against Restructuring American Family Insurance

Are you currently buying insurance from American Family Insurance? Then you should be receiving at least one packet in the mail urging you to vote to restructure the company.

This is a very bad deal for policyholders and a very, very good one for American Family executives. In making its case for restructuring, the company is vague about why it's good for consumers and its claims about why it's good for the company are based on shaky, unexplained premises.

Essentially, policyholders will be given valueless shares in a new holding company -- and (I believe) liability for bad decisions and lost lawsuits. Meanwhile, if an analysis of a similar restructuring at Liberty Mutual is any guide, the executives at AmFam will get most of the stock in a new stock insurer subsidiary.

My wife and I will be voting against this move (though I admit most policyholders won't care or vote), and we plan to move our insurance business to a company that's at least a little more committed to its policyholders. We don't have illusions about why insurance companies are in business or what their leadership gets out of it -- policyholders aren't their priority -- but the deal needs to be a little more mutually beneficial and less obviously exploitative. Not that our defection will make a difference to company execs who stand to make millions out of this, but still.

Want to know more? Read on.

What American Family Insurance Says It's Doing

The basic idea is that AmFam will switch from being a mutual insurance company to a "mutual holding company-owned stock insurance company." Policyholders would no longer be voting members of the mutual insurance company and would instead become members of the new mutual holding company, "with comparable member rights".

"Policyholders of [American Family Mutal Insurance Company] would become members of the mutual holding company under the new structure, retaining the memership rights they have now." Rates and policies would be "unaffected".

Got that? Means that your status as a member of the mutual company -- because you're a policyholder -- will be transferred to a mutual holding company. According to the company, there's no difference, from your perspective.

Why AmFam Says It Wants to Restructure

In its letter to policyholders, the company writes that its restructuring plan is "focused on your future" -- i.e., policyholders like you and me. The letter goes on to say:

"This plan -- unanimously approved by American Family's board of directors -- is all about the future and our customers. It will position American Family to meet customer needs in an age of automated cars, smart homes and aother advanced technologies that are already altering lives and the insurance industry."

Here's the other set of reasons AmFam gives to support restructuring (also from the letter):

"A mutual holding company structure would eliminate restrictions on investing in or acquiring non-insurance companies that can provide important customer benefits, such as developing technologies or programs that can help prevent accidents and save lives. A mutual holding company would also better position American Family to consider acquiring other mutual insurance companies to serve more customers." 

You can find more info on pp. 8-9 of the Policyholder Information Booklet you'll get in the mail, but basically it's about expanding the company without giving up its status as a mutual insurance company; being able to acquire ancillary or non-insurance subsidiaries; being able to pursue mergers and acquisitions; and to raise capital more cheaply.

A Weak Rationale

Let's look at AmFam's stated rationales for restructuring more closely. The first one again:

"This plan -- unanimously approved by American Family's board of directors -- is all about the future and our customers. It will position American Family to meet customer needs in an age of automated cars, smart homes and aother advanced technologies that are already altering lives and the insurance industry."

Okay, so it's about AmFam's customers. What does that mean? That's completely unclear. I'm baffled as to how things like automated cars and smart homes affect AmFam's ability to meet my needs as a policyholder. The time-honored way of dealing with new technological, environmental, and social developments in insurance is to issue riders to your existing policy that expand or limit your benefits or coverage exclusions, or to adjust the policy itself. You don't have to completely restructure the company just because Tesla manufactures self-driving cars.

The other three reasons the company advances include being able to:

1. acquire ancillary or non-insurance subsidiaries;
2. pursue mergers and acquisitions; and
3. raise capital more cheaply.

As to #1 and #2, I gotta say, "Wha--?" Okay, so what's an example of an "ancillary subsidiary" that would benefit customers? This is a great example of what I mean when I say their rationale is "vague."

Second, why on earth would we care about AmFam acquiring non-insurance subsidiaries? And why do we want our insurance company to be able to acquire other companies? It's an axiomatic assumption in American business that acquisitions and growth are Good, but that's not always the case. Acquisitions carry considerable risk for the company (especially of businesses outside the company's expertise and that aren't necessarily related in any way to insurance) and often staggering rewards for the company's leadership (even when unsuccessful) -- though not, of course, for policyholders. It seems to me that AmFam leadership has lost focus on its actual business, or doesn't really want to be in that business anymore.

As to #3 -- raising capital more cheaply -- that's clearly something Amfam only needs if it wants to acquire other companies -- a strategy it hasn't justified. At all.

Now let's look at this  part more closely. According to the information booklet, a mutual insurance company can't raise capital cheaply, but a restructured one can do so by creating an intermediate stock holding company with stock that can be sold. That may be true, and to be fair, the company says it has no plans to actually sell any voting stock, but it wants to be able to do so.

It also says that it will need member approval before it can sell any voting stock. That may sound like a good check-and-balance, but remember (a) most members (policyholders like you and me) won't vote; (b) this restructuring will add a lot of new "members" who are currently policyholders in other existing AmFam subsidiaries, as well as members from any new companies it acquires. As the company notes on p. 27 of the info booklet, that may lead to conflicts, because "current members may want insurance with the greatest possible value while the new members may want the highest return on investment." I.e., the small number of member/policyholders who do vote on the issuance of voting stock may be outnumbered by people who don't care about your interests as an insurance policyholder.

Finally -- and most crucially -- current policyholder/members won't automatically own any stock in the new stock subsidiary ... because our membership will be transferred to the (valueless) holding company, not the new stock holding company. Don't believe me? Read on.

Why I Think AmFam is Ripping Us Off

When Liberty Mutual did a similar restructuring in 2001, it did what I believe is the same thing as AmFam is doing now: it transferred membership of policyholders to a valueless holding company, and then gave its executives most of the quite valuable stock in the new subsidiary. Here's the key quote from the source I just linked to at the start of the paragraph:

"Liberty Mutual policyholders, according to Schiff, would receive on average $6,060 to $9,090 if the company fully demutualized and thereby provided stock or equivalent cash payments to its insureds/'owners.'"

I haven't found language in any of the supplied materials saying whether or not AmFam executives will get a lot of the voting stock of the new subsidiary, if issued (and, just as a loaded gun in a play must be used by the third act, as Chekhov noted, you can bet that voting stock will be issued at some point) but I also can't find anything saying they won't, either.

What My Agent Said

Naturally, I asked my AmFam agent what he thought; I wasn't hopeful that he'd be critical, but I was curious how he would reply. He wrote, first, to say that the deal would "help American Family to be a stronger company with the ability to acquire more companies as opportunities become available."

I pushed back, saying that acquisitions do not necessarily "strengthen" a company and can expose it to considerable risk -- and that it's not clear why AmFam needs to be "stronger" to serve policyholders better. He wrote again to say, "In our current economy companies must evolve and be forward thinking to continually compete with competitors and I believe American Family is heading in the right direction with this move." Then he sent me a link to information "published by a third party" on the restructuring.

I agree that companies have to evolve sometimes to stay competitive, but that doesn't necessarily mean restructuring. Yes, restructuring worked for Liberty Mutual as a company and its executives -- it's now huge -- but as noted above, it did so by transferring value from policyholder/members to the company's executives.

And that "third-party" information my agent sent? Well, it read like a press release from AmFam full of more vagaries and empty phrases, so I looked closely, and sure enough, at the bottom of the article, it says, "Source" American Family Insurance." Not exactly a neutral party.

One More Thing: The Class Action Lawsuit by AmFam Agents 

AmFam agents filed a class action lawsuit against the company in 2013, claiming that the company had incorrectly categorized them as independent contractors in order to get out of providing them with retirement benefits and health, life, disability and dental plans like other employees of the company. In August, a federal judge rejected AmFam's attempts to dismiss the lawsuit, which will now move forward.

Here's why that matters, beyond the fact that I'd like AmFam to treat its employees fairly: Should AmFam lose this case, and AmFam restructures as it pleases, it seems probable that costs will be borne by the new mutual holding company -- the one policyholders like you and I will be members of -- and not the new subsidiary. I can't predict what effect that will have on rates, but one can guess. (Granted, the impact of the lawsuit is a bit of guesswork. But in this situation, cynicism will likely be rewarded.)

Again: Vote Against Restructuring American Family Insurance

If AmFam can't make a clearer and more specific case about why the restructuring is good for policyholders -- and the best it has done on a concrete level is to reassure us that our rates won't change because of the merger -- then it's reasonable to conclude that it's not, actually, good for policyholders, but that it is good for those pushing it.