*Formatting of these documents may vary from those filed with the Division of Insurance due to the conversion process to make them available through the web.

 

 

COMMONWEALTH OF MASSACHUSETTS

DIVISION OF INSURANCE

_______________________
Plan of Reorganization of    )
John Hancock Mutual Life )                                                                                       Docket No. F99-04
Insurance Company             )
_______________________)

 

 

 

PETITION FOR LEAVE TO INTERVENE OF NAMED

POLICYHOLDERS OF JOHN HANCOCK,

AND THE

CENTER FOR INSURANCE RESEARCH, INC.

 

Now comes Loretta M. Harhen, Aaron E. Landy, Jr., and the John S. Katzman Family Trust who are each participating policyholders of the John Hancock Mutual Life Insurance Company ("Hancock"), and now comes the Center for Insurance Research, Inc., who each, pursuant to 801 C.M.R. 1.01 (9), seek leave to intervene as parties in the above-captioned proceeding. In support of their Petition, the parties respectfully submit as follows:

  1. Loretta M. Harhen, of Medford, MA, is a participating policyholder of Hancock entitled to vote on its Plan of Reorganization ("Plan") and to share in an equitable distribution of its surplus.
  2. John S. Katzman Family Trust, of New York, NY, is a participating policyholder of Hancock entitled to vote on its Plan of Reorganization ("Plan") and to share in an equitable distribution of its surplus.
  3. Aaron E. Landy, Jr., of Grapevine, Texas is a participating policyholder of Hancock entitled to vote on its Plan of Reorganization ("Plan") and to share in an equitable distribution of its surplus.
  4. The Center for Insurance Research, Inc. ("CIR") is a Massachusetts non-profit corporation, having its principal place of business at 1130 Massachusetts Avenue in Cambridge, MA. CIR and its legal counsel represent the named Hancock policyholders, other unnamed Hancock policyholders and members of the public who are interested in the integrity of the regulatory process and fair outcome in this matter.
  5. On August 31, 1999, the Board of Directors of Hancock adopted the Plan of Reorganization to "demutualize", converting from a mutual life insurance company to a stock life insurance company, and subsequently filed the Plan for approval by the Massachusetts Commissioner of Insurance.
  6. The proposed Plan involves, inter alia, a determination by Hancock of the amount and nature of the consideration payable to eligible policyholders, the development of a formula for allocation of the pool of consideration among eligible policyholders, and the establishment of a Closed Block of assets for the purported purpose of protecting policyholders’ dividend expectations in the future and from which their policy benefits will be paid.
  7. The policyholder Petitioners named above have governance and financial interests that will be "substantially and specifically" affected by the outcome of these proceedings to determine the fairness and appropriateness of its reorganization – which Hancock characterizes as "a dramatic change" and "one of the most momentous steps in its 137-year history." See Information Guide ("Guide") at 1. Some have been policyholders for over forty years, and all have participating life insurance policies that have current values ranging from several thousand dollars to many thousands. They will be affected by every aspect of the Plan and these proceedings to determine whether the Plan is "prejudicial" to their interests (and those of their fellow policyholders), and whether the allocation of consideration is "fair and reasonable" to them and their fellow policyholders. See M.G.L. § 19E.
  8. In particular, the policyholder Petitioners will be substantially and specifically affected by, inter alia, the following:

A. MISLEADING PROXY INFORMATION: The Policyholder Information Statement ("PIS") and accompanying Information Guide ("Guide") are incomplete, misleading and deceptive. For example:

  1. the definition and description of the policyholders’ current member interests is consistently misleading because the Plan fails to state that Hancock is now run for the exclusive benefit of its policyholders (who elect the directors) and who may solely share in its profits, and that the mutual’s purpose is to provide insurance "at cost." It also fails to state that, after the conversion, Hancock’s purpose will be to serve the interests of stockholders (approximately one-third is estimated to be non-policyholders immediately after the IPO – see, e.g., PIS 2 at 27, 51), and that the policyholders’ future dividends will be limited to the performance of the Closed Block (which contains less assets than Hancock’s total current assets by some undisclosed amount) rather than Hancock’s total pool of assets from which policyholders may now share profits;
  2. the Plan fails to clearly indicate that management will have virtually unchecked control over the corporation for the first three years during which excessive anti-takeover provisions are in effect. Although substantial stock options may be proposed to shareholders after one year, no shareholder will have sufficient voting power, nor the ability to challenge management for inappropriate actions, during that three year period. The potential risks associated with this total lock-up of control is not disclosed to policyholders;
  3. the Plan does not make clear that policyholders voting against the Plan are still entitled to receive consideration in the event the reorganization is approved.

Any one or more of these and other disclosure problems may lead a decisive number of policyholders to vote in favor of the Plan when they might otherwise oppose it, or may have sought to intervene to protect their interests by seeking amendment of the Plan. Since Hancock’s policyholders must vote on the Plan and the vast majority will cast their votes by mail for or against the Plan based exclusively on the PIS and Guide (and other information provided exclusively by Hancock), Petitioners and their fellow policyholders are prejudiced by the materials. The validity of the legally required policyholder vote will be an issue in the proceedings and Petitioners intend to expose the deficiencies in the PIS and Guide as it concerns the vote.

B. DEFICIENT NOTICE OF RIGHT TO INTERVENE: The notice to policyholders concerning these proceedings is deficient and has prejudiced their interests. For example, Petitioner Harhen received the PIS, Guide, and ballot to vote on Saturday, September 25, a mere 5 business days before the date this Petition to intervene was due. The other Petitioners received their information on or around the same date as Ms. Harhen. (Another of the Petitioners received a PIS for two of his policies, but not a third suggesting that not all policyholders have received notice.) It is reasonable to expect that some if not all of the other nearly 3 million policyholders received their notices, which included notice of their right to intervene, at around the same time. Given that the discovery requests are also due on October 4, 1999, this places and undue and unreasonable burden on Petitioners and all policyholders. Moreover, although "Informational Forums" will be held around Massachusetts the end of October, this will occur after the deadline for intervention has long since past. And, since most of Hancock’s policyholders reside outside the state, there is the prejudicial affect of limiting such forums to the Commonwealth. As such, the notice and procedure is not "reasonable" to Hancock’s policyholders as a group, and to Petitioners in particular (some of whom reside out-of-state) as required by Ch. 175, § 19E (2).

C. EXPEDITED TIMEFRAME PREJUDICIAL TO PETITIONERS AND OTHER POLICYHOLDERS: Although the PIS, part 1 and 2 combined, are highly complex and run over 317 pages long, Petitioners and Hancock’s other policyholders were given a mere 5 business days to file their petition to intervene and discovery requests as noted above. Moreover, assuming Petitioners or other policyholders are granted intervenor rights, they will not learn about this until the October 19th pre-hearing conference or thereafter. The status of their discovery requests will also be in limbo until that time. As such, Intervenors will have less than 30 days to conduct discovery, retain and prepare witnesses, and prepare their case. Given that this is a highly complex transaction involving the distribution of consideration with the potential market value of nearly $15 billion, they will be grossly prejudiced by the short timeframe.

D. ALLOCATION FORMULA IS NOT FAIR AND REASONABLE: The Plan proposes to use an allocation that violates the statute. The Plan proposes using a fixed and variable allocation of consideration to policyholders. While the fixed allocation will account for 20 percent of the allocation of Hancock’s surplus, the variable allocation will account for 80 percent of that allocation. Given the potential market value of that 80 percent allocation – one financial institution estimated Hancock’s market value at $14.5 billion – Petitioners and policyholders generally have a substantial interest in this matter. The statute is clear on the requirements. Section 19E (3) states, inter alia:

"In exchange for all membership interests in the company, such plan shall give each eligible policyholder appropriate consideration. Said consideration shall be determinable under a fair and reasonable formula approved by the commissioner, and shall be based upon the insurer’s entire surplus as shown by the insurer’s financial statement most recently filed with the commissioner pursuant to section twenty-five, including all voluntary reserves…"

Yet, the Plan proposes using the "Historic Plus" ("H+") methodology for allocating the variable component which is based on Hancock’s projections of what surplus contributions might be from its different policy types. Thus, the H+ methodology is not "based" on the current, ascertainable surplus, but on a projected, unknowable hypothetical surplus. Not only does this method violate the law, but it greatly disadvantages small and individual policyholders and favors larger, employer policyholders in the way it operates. Moreover, because the H+ methodology utilizes numerous assumptions about the future performance of different types of Hancock’s insurance products, and these assumptions are not adequately disclosed in the Plan, Petitioners and the other policyholders are grossly prejudiced in the ability to participate in the proceedings, and in the ultimate allocation of considerable consideration. The "black box" approach to allocating most of Hancock’s policyholder consideration, which violates the protections in the statute, is prejudicial to their interests, and not fair or reasonable.

E. PLAN PREJUDICES POLICYHOLDERS BY NOT GIVING THEM SUBSCRIPTION RIGHTS TO PARTICIPATE IN THE INITIAL PUBLIC OFFERING: Policyholders are not being given the opportunity to exercise preemptive rights to buy stock in the IPO. Thus, while outside investors will have the opportunity to buy stock that historic experience in demutualizations shows rise rapidly in price, policyholders will be denied this statutorily permitted option. This potential loss of significant value on that stock opportunity is prejudicial to Petitioners and policyholders.

F. CLOSED BLOCK NOT ADEQUATELY DESIGNED NOR FUNDED TO PROTECT POLICYHOLDERS FUTURE INTERESTS: First, policyholders are now entitled to share in the profits of the entire enterprise, while, after conversion, they will be limited to the performance of those assets in the Closed Block ("CB"). Thus, the amount of assets placed in the CB will influence the benefit and dividends of all individual policyholders going forward. Too little funding will harm their interests, and since the proceedings will include consideration of the fairness and funding of the CB, this matter substantially and specifically affects the Petitioners and all individual policyholders. In the Plan, the funding of the CB is not disclosed nor determined. In addition, there is no disclosure of the percent of Hancock’s total assets that will be placed in the CB, or the reason why all of its assets are not being placed therein. Moreover, the CB is vulnerable in other ways. For example, future guarantee fund assessments can be made against it. See Plan, at § 8.2(a)(i)(B). This is prejudicial to policyholders since, before the conversion, such assessments could come out of the pool of all corporate assets. However, after conversion, assessments will come out of the more limited subset of CB assets without the extra cushion of the total corporate asset pool. Clearly, these critical issues substantially and specifically affect Petitioners, individual policyholders, and insuring public, and they are entitled to participate in the proceedings thereon.

G. THE VALUE OF HANCOCK’S ASSETS MAY BE UNDERSTATED: The proceedings must determine that Hancock has valued its assets appropriately since it affects share allocations, the adequacy of CB funding, and the IPO. This issue substantially and specifically affects there Petitioners and all policyholders and the insuring public.

H. HANCOCK’S SENIOR MANAGEMENT NOT QUALIFIED TO OPERATE NEW CORPORATION: Hancock’s most senior management, Stephen L. Brown and David F. D’Alessandro, are two defendants in a derivative lawsuit brought by Petitioner Loretta M. Harhen in state court alleging that these directors/officers were involved in conducting, condoning or recklessly failing to supervise the illegal conduct of Hancock’s top lobbyist who violated the Massachusetts legal limits on "gifts" to legislators on hundreds of occasions during the 1980’s and early 1990’s. The lawsuit seeks restitution to Hancock from these and other individuals for the estimated over $4 million the scandal cost Hancock in terms of, inter alia, fines (the company admitted to the violations), "gifts", legal costs, and loss of good will, and it seeks the removal of these and any other culpable directors/officers. A Superior Court’s dismissal of that matter was reversed by the Massachusetts Court of Appeals in 1999, and the Supreme Judicial Court has not acted (and is not expected by Plaintiff to do so) on the defendants’ petition for further appellate review. If the allegations which Ms. Harhen intends to prove in court are true, then these directors/officers of Hancock are not fit to serve in positions of authority of the converted insurer. This issue substantially and specifically affects Petitioners, other policyholders and the insuring public.

I. FAIRNESS OPINION IS BIASED: The directors relied on, and policyholders are similarly led to rely on, the so-called fairness opinion of Morgan Stanley Dean Witter ("Morgan Stanley") for the proposition that the Plan is fair. However, this fairness opinion is grossly biased and fails to disclose that Morgan Stanley has a significant bias since it is the lead underwriter for the IPO. Thus, it has a significant financial self-interest in the demutualization and IPO occurring. This is prejudicial to policyholders and substantially and specifically affects them.

J. PRICING COMMITTEE IS BIASED: The composition of the IPO pricing committee has not been disclosed and could include parties entitled to participate in the IPO. Because a lower price on the IPO will advantage IPO participants while potentially harming the company and eligible policyholders (particularly cash recipients), a potential conflict of interest exists if any person involved in pricing may also buy in the IPO. Since this matter is not now resolved, and will be a subject appropriately considered in the proceedings, Petitioners, policyholders and insuring public and substantially and specifically affected by it, and may be prejudiced.

K. EXECUTIVE COMPENSATION IS INACCURATELY REPORTED AND EXCESSIVE: There are a number of crucial issues that prejudice Petitioners, policyholders and the insuring public. As the Boston Herald clearly exposed today, October 4, 1999, the compensation disclosures in the Plan for certain executives are inconsistent with those in other regulatory filings. Moreover, there is no disclosure of the amount of Hancock life insurance each director and officer has (given by the company or otherwise) that would be eligible for consideration in the conversion. This could amount to a significant payment to these directors and officers and should be disclosed. In addition, the Plan secures for management the ability to substantially profit from the conversion in the form of stock options – apparently immediately through the employee stock option plan (ESOP), and after one year otherwise.

L. THE NUMBER OF ELIGIBLE POLICYHOLDERS MAY BE UNDERSTATED: The number of par policyholders is a legitimate question for these proceedings. For example, in legal papers filed in the Harhen v. Brown litigation, discussed above, Hancock claimed 5 million par policyholders. Now it claims under 3 million. The correct number of policyholders is obviously important and an issue that affects Petitioners.

M. THE DIVISION’S EX PARTE CONTACT WITH HANCOCK VIOLATED THE RULES OF PROCEDURE AND BIASED POLICYHOLDERS: To the extent the Division’s practices in the State Mutual Life Assurance Co. demutualization in 1995 have been replicated here, there are numerous matters concerning ex parte communication that will prejudice policyholders. Moreover, the integrity of the proceedings, including the entire administrative review process, the pre-hearing conferences, discovery determinations, and public hearing will substantially and specifically affect Petitioners et al. since policyholders’ due process rights, right to public records are affected, and regulatory approval is required before the reorganization can be complete.

9. The Center for Insurance Research, Inc. and the members of the public it represents, are substantially and specifically affected by these proceedings in that the Hancock is one of the largest two life insurers domiciled in the state, and has a substantial market presence in the Commonwealth and elsewhere. Since the statute requires that the Commissioner of Insurance ("Commissioner") determine that the Plan is not prejudicial to policyholders or the "insuring public," and since the conversion of Hancock from a policyholders-controlled entity to a stockholder-controlled entity could significantly impact product availability and the treatment of policyholders, these proceedings will substantially and specifically affect them.

10. The parties intend to exercise all their rights, including to conduct discovery, including pre-hearing depositions, requests for admissions, and interrogatories, to examine and call witnesses, to file legal briefs and argument, to make oral argument in the proceedings, and to take any appeals.

 

For the foregoing reasons, Petitioners seek party status in the above-named proceedings, and seek to preserve leave to further amend this Petition, as necessary.

Respectfully Submitted By,

Loretta M. Harhen,
John S. Katzman Family Trust,
Aaron E. Landy, Jr., and the
Center for Insurance Research, Inc.

By their counsel,

Jason B. Adkins
Paula Isola
Adkins & Kelston, PC
90 Canal Street, 5th Floor
Boston, MA 02114
(617) 367-1040

Date: October 4, 1999

 

Certificate of Service

I hereby attest that a copy of this Petition has been served on Hancock’s General Counsel as prescribed in the Notice of Hearing.

Jason B. Adkins