Non-profit insurers follow the conversion trend

November 1, 2004

For the past several years, non-profit health plans and insurers have been converting to for-profit corporations (or have been acquired by for-profit enterprises) in an effort to gain access to capital markets, to expand their service area, and/or to add to their product lines. In most states, the Blue Cross Blue Shield plans are no longer non-profit.

For the past several years, non-profit health plans and insurers have been converting to for-profit corporations (or have been acquired by for-profit enterprises) in an effort to gain access to capital markets, to expand their service area, and/or to add to their product lines. In most states, the Blue Cross Blue Shield plans are no longer non-profit. Many of these conversions took place during the 1990s, which resulted in state legislatures establishing regulatory frameworks for the conversion process, the valuation and distribution of assets, and the redeployment of those assets for other non-profit purposes. This trend of converting private, non-profit insurers to for-profit, investor-owned companies is likely to continue.

A non-profit (or mutual) insurance company may consider restructuring for a number of reasons, including the need for increased capital, a more flexible operational structure and business diversification. The recent trend toward non-profit insurer restructuring, however, is no doubt related to the difficulty a non-profit insurer may have competing with a stock company for policyholders, revenue and capital. In addition to insurance regulatory expertise, a non-profit insurer planning to restructure will need advice and guidance in the areas of corporate, tax and securities law.

TWO WAYS TO DEMUTUALIZE Conversion, or demutualization, is one method of restructuring a non-profit insurance company. This process usually involves a mutual insurance company converting to a stock insurer. A company also can use demutualization as an acquisition device whereby the acquiring company purchases all of the stock of the converting company at the time of demutualization. Although a complex and lengthy process, this method of restructuring has several advantages including access to additional capital, having stock ownership available as a performance incentive to management, and having stock available as currency for future acquisitions.

Traditional demutualization- a mutual insurer distributes its surplus in the form of stock, cash or policy credits to its policyholders in exchange for their membership interest upon the conversion, and the company is then recapitalized through a public offering of its securities.

Subscription rights demutualization- the policyholder's membership interest is exchanged for non-transferable subscription rights to purchase shares in the converted company, with the subscription rights only being exercisable at the time the securities are offered to the public.

The appropriate redeployment of assets of a converted insurer has been the subject of significant debate and consternation. While some conversions have resulted in the creation of non-profit healthcare foundations, others have simply involved the deposit of funds into a state's general revenue fund. These transactions are very complex and, consequently, it is difficult to devise a distribution method that will satisfy all stakeholders. Nevertheless, most critics will continue to ignore one common reality: Many (if not most) of the so-called non-profit companies operate in a manner that is almost indistinguishable from for-profit insurers.

This column is written for informational purposes only and should not be construed as legal advice. Barry Senterfitt is a partner in the insurance indsutry practice of Akin Gump Strauss Hauer and Feld LLP and is located in the firm's Austin, Texas, office.