On Nov. 4, CompSource Mutual — until recently Oklahoma’s insurer of last resort for workers comp insurance — posted a notice on its website detailing a proposed effort at demutualization and expansion.
The reorganization was first announced, suddenly, in August, providing only days to prepare for an Aug. 28 public commentary meeting. The plan was submitted to Oklahoma Insurance Department Commissioner Glen Mulready for approval; subsequently, the process called for the plan to be submitted to policyholders for a vote.
There is a lot at stake in the proposed demutualization, perhaps as much as a billion dollars.
The Nov. 4 notice kicked back against some of the criticisms of the plan that were leveled by the two lone participants at the Aug. 28 public meeting: Bob Burke of the Burke Law Firm, a CompSource policyholder for decades, and Randa Reeves of Oklahoma City law firm Whitten Burrage, which in 2020 initiated a years-long and ongoing lawsuit alleging that CompSource collected, since 1978, $100 million in premiums for coverage that the company had no intention of honoring.
Counting interest, the allegedly ill-gotten premium gains may account for most or all of CompSource’s $1 billion surplus today.
A mutual company is owned by its policyholders. The proposed reorganization would transition CompSource into a mutual holding company that owns a subsidiary empowered to expand into other forms of insurance and do business outside Oklahoma. Ostensibly owned by the holding company — still owned by policyholders — the work of running the insurance company would fall to a mostly independent subsidiary.
The Nov. 4 notice claimed that expansion would permit them to sell insurance in other states and pursue ancillary businesses that would benefit policyholders. Policyholder rights and voting privileges would remain unchanged, the notice claimed, and CompSource had no plans to sell or issue stocks in the holding company. The notice encouraged policyholders to vote for the measure after it was approved by Mulready.
But that wasn’t all.
At the bottom of the notice, a link provided access to a letter from CompSource Board Chairman Randal Allen that repeated the notice’s characterization of the plan and again appealed to policyholders to vote in favor of the reorganization, with a Dec. 5 voting deadline. Critically, the undated letter announced that Mulready had approved the reorganization.
“The Oklahoma Insurance Department has approved the Plan,” the letter read.
Actually, it hadn’t.
Oklahoma Watch contacted Mulready to confirm that the reorganization had been approved; he responded almost instantly.
“I have instructed CompSource to take that letter down immediately and put a correction in place clarifying that this is still under review by OID,” Mulready said in an email.
Misleading Information
Although CompSource’s notice and letter briefly referenced the history of demutualization nationwide, it failed to acknowledge significant criticisms that have been leveled against demutualization as a practice.
A 1998 white paper formalized the framework for demutualizations that could result in minority stock offerings. Although these shares may not be publicly traded, it has been argued that issuing stock enables companies to attract better talent, to accumulate funds to acquire other companies and to protect themselves from hostile takeover threats.
Critics have complained that the conversion of a mutual company to a mutual holding company creates a conflict of interest with policyholders: executives and directors receive tangible, immediate benefit from the conversion in the form of stock options, while policyholders receive only promises of future benefits.
In a 2006 paper entitled “Demutualization in the Life Insurance Industry,” Lal Chugh and Joseph Meador noted that the demutualization process required policyholders to give up a lot with little to show for it.
“Policyholders, regulators and investors generally have not been satisfied with this method of conversion since policyholders lose control of the operating subsidiary without any compensation,” Chugh and Meador wrote.
Others have noted that in converting to a mutual holding company, policyholders lose power to influence the part of the company that is actually selling insurance; policyholders’ influence is diluted by demutualization. The resulting mutual holding company is less accountable than either a full mutual or a publicly traded company would be.
In 1999, a Pennsylvania insurer was found to have secured a successful vote to demutualize by presenting misleading information to policyholders.
Author, financial adviser and insurance expert Glenn S. Daily has warned that while the mutual holding company structure has the advantages of flexibility without sacrificing the benefits of a mutual organization, there are sharp downsides:
“The mutual holding company structure is the worst of both worlds,” Daily wrote. “Management gets the benefit of a stock company (stock options) and a mutual company (protection from takeovers, less outside scrutiny), but policyholders lose the benefit of a mutual company (no conflicts of interest between policyholders and shareholders) and don’t get the benefit of a stock company (demutualization proceeds).”
Half the Story
“As a policyholder, my big complaint is that this entire process has been done under the dark of night,” Burke said. “And they’re still just telling half the story.”
Burke took particular issue with what he saw as equivocation over whether the resulting company would sell stock. CompSource has said that the mutual holding company will not sell stocks, while documents reveal a plan to create 1 million shares valued at $1 each — shares that cannot increase in value unless the company is eventually traded publicly.
For Burke, the proof was public-facing. Tapping emphatically on a copy of a document, Burke insisted that CompSource’s claims of having no plans to sell or issue shares were disingenuous.
“OID has received an application from CompSource Mutual Insurance Company to convert from a mutual insurer to a stock insurer,” Burke said.
Burke was equally miffed by a claim in Allen’s letter that CompSource had been discussing the demutualization plan for three years. It was much more than that, Burke said.
“They hired a law firm in Florida,” Burke said. “And they gave their CEO unlimited authority to spend as much money as he wants to make this happen.”
An Oklahoma Watch investigation revealed that CompSource has already begun selling lines of insurance other than workers comp in Oklahoma, and applications to conduct business in other states have been submitted across the country; many have already been approved.
CompSource Board Chairman Randal Allen did not respond to an interview request for this story.
Contrary to Statute
Whitten Burrage attorney Hannah Whitten agreed with Burke that the plan to demutualize was older than three years and that CompSource had done much more than hold discussions.
“They have been wanting to do this since 2009,” Whitten said. “That’s a matter of public record.”
Whitten had made a study of demutualization efforts across the country; the CompSource reorganization deviated from the norm, she said.
“This is the only demutualization plan I’ve ever seen that does not have a calculation to test whether it’s fair and equitable to the policyholders,” Whitten said.
More troubling was the question of stock, Whitten said — not whether the company would issue or sell stock, but whether converting a mutual company to a stock company that still claims to be a mutual company would run afoul of Oklahoma law, specifically Section 2013 of Title 36.
“A ‘mutual’ insurer is an incorporated insurer without capital stock or shares, and is owned by its policyholders,” the law reads.
Whitten refused to comment on whether Whitten Burrage intends to file a lawsuit related to the proposed reorganization, but asserted the firm’s view: the plan is illegal.
“It’s Whitten Burrage’s opinion that CompSource Mutual attempting to convert to a stock insurer wholly owned by a mutual insurance company is contrary to the CompSource Mutual Act and contrary to the statutes and the Supreme Court decisions of this state,” Whitten said.
Whitten offered a dim view of the CompSource website notice and the letter credited to Randal Allen.
“This is more of the same from CompSource in failing to give the policyholders a full and complete picture,” Whitten said.
That Page Can’t Be Found
Within minutes of Mulready’s command to remove the CompSource notice and letter, they were gone.
If Mulready approves the reorganization, policyholders will have 30 days to vote on whether to accept the plan.
