Shaping a strong future

In business as in life, “strike while the iron is hot” is a familiar maxim. When an opportunity comes along, it’s important to be ready to move quickly to take advantage of it — particularly when conditions are as challenging as they’ve been in recent years for the insurance industry.

This, in a nutshell, is the impetus behind a project at Grinnell Mutual that’s been years, if not decades, in the making, and that has involved a huge effort. It’s a large-scale restructuring that will bring the company’s operations under the aegis of the newly formed Grinnell Mutual Holding Company.

Ironically, considering all the time and effort that went into it, when the change takes effect on Jan. 1, 2025, Grinnell Mutual’s policyholders won’t notice any difference in their coverage. Nor will policyholders and mutual members experience any change in their relationship with the company, though membership rights will be held through Grinnell Mutual Holding Company. A small modification of Grinnell Mutual Reinsurance Company’s legal name — to Grinnell Mutual Reinsurance Company, SI — will be the only externally visible difference.

Planning today for tomorrow’s opportunities

In the minds of Grinnell Mutual’s senior leadership team (SLT), the formation of the Grinnell Mutual Holding Company isn’t about “now” so much as the future.

“We first started talking about [a holding company] way back in the ‘90s,” said Grinnell Mutual CEO Jeff Menary. “Every four or five years a problem would crop up or an opportunity would come along, and our previous structure wouldn’t allow us to expeditiously do whatever we wanted to do in response. Getting things moving can easily take many months. We knew that if we had a holding company, we might have an easier time accomplishing things.”

That being said, Menary and others on Grinnell Mutual’s SLT emphasize that at this time there’s no specific opportunity or formal plans in the offing.

“Currently, we don’t have any plans to use the new structure,” said Grinnell Mutual President Dave Wingert. “Really, this is about getting the mechanics in place so if something advantageous does come along, we can more easily decide what our best course of action might be. There may not be any opportunities just now, but it’s better to be prepared rather than not.”

Prepared to do what, though? What does the holding company structure do for Grinnell Mutual that its tried-and-true way of doing things doesn’t already do? To answer these questions, it’s helpful to understand what a holding company is, and how it works.

What’s a holding company?

According to the financial media website Investopedia, a holding company “typically doesn’t manufacture anything, sell any products or services, or conduct any other business operations.” Instead, it holds controlling stock in other companies, referred to as subsidiaries. This controlling interest enables the holding company to set policy for how the subsidiary companies are to be run. In addition to exercising control over subsidiaries, holding companies can own properties in their own right, including real estate, patents, trademarks and copyrights, stocks, bonds, mutual funds, gold, and other assets.

There are several advantages to the holding company model. One is the protection it affords the company as a whole. The holding company can use its subsidiaries as silos, effectively walling its lines of business and other assets off from each other. Paul Carroll, editor of Insurance Thought Leadership magazine, said that Google provides one illustration of the advantages this can confer.

“After Google created Alphabet as its holding company, it became one arm of the larger organization, and there are a lot of other arms. This has given them a flexibility to innovate that they wouldn’t have had otherwise,” said Carroll. “So, for instance with the Google driverless car — that’s something that’s part of the Google X subsidiary, and as you can imagine, there’s a massive amount of potential liability associated with it. Having Google X as one subsidiary silos the risk and makes it easier to deal with the potential liability.”

Also, subsidiary companies are responsible for any debt they might have on the books, while the holding company is not. Should a subsidiary go bankrupt, this might put a dent in the holding company’s net worth, but the subsidiary’s creditors couldn’t go after the holding company to recover losses.

Holding companies can also make mergers and acquisitions easier.

“Typically, the holding company structure enables companies to position themselves to more easily conduct this sort of transaction,” said Neil Alldredge, president and CEO of the National Association of Mutual Insurance Companies (NAMIC). “If you’re conducting a merger under the holding company structure, you don’t have to maintain the boards of directors for both the company that’s making an acquisition and the company that’s being acquired; they can share one board of directors.”

In addition to making governance easier, a merger under the holding company model does not require the acquired company to be stripped of the brand, identity, and customer relationships it may have labored years to create.

“There are a couple of other potential benefits,” said Alldredge. “You can sometimes mitigate the effects of what would otherwise be a retaliatory tax system under the holding company structure, and you can also more easily capitalize things like investment in technology. It could be that the holding company creates a downstream enterprise that then owns the [technological infrastructure]. In effect, such an investment wouldn’t come out of surplus, but would instead be held as an asset by one of the subsidiaries.”

Holding companies can also raise capital by leveraging their interest in their subsidiaries, either by selling equity in one or more of them, or by selling debt. They can also receive dividends from stock they hold in their subsidiary companies.

Details, details, details

Bill Simonaitis, Grinnell Mutual’s vice president of legal and corporate general counsel, said a huge amount of work went into the restructuring.

“The devil’s in the details, and there were a lot of details we had to keep track of,” Simonaitis said. “Getting this done was an arduous and expensive multi-step process. It involved putting together a vote of all our members, having a member meeting, and a hearing in front of the Iowa Insurance Division Commissioner.”

In addition, Grinnell Mutual representatives spent a lot of time pushing legislative change to support the project at the Iowa State House in Des Moines. Without the new legislation, Grinnell Mutual would have been required to change its name entirely. That would have mandated a total rebranding for the company — another lengthy and expensive process that could have undone more than a century of work that has gone into establishing the company’s current identity.

According to John Terpstra, Grinnell Mutual’s associate general counsel and assistant vice president, “We worked with legislators and lobbyists, and pushed our proposed bill through committees, the legislative bodies, and the governor’s office, and we didn’t get a single ‘no’ vote.

Typically, a bill’s language gets changed during the legislative process, but there were no changes to ours. So, we’ve been able to keep the valuable brand we’ve had for 100-plus years, and, in the end, it was non-controversial. I think that says a lot about our people.”

Grinnell Mutual may not have any immediate plans to take advantage of its conversion to a holding company structure, but Grinnell Mutual’s SLT sees the formation of Grinnell Mutual Holding Company and its subsidiaries as being well worth the effort it took to get here.

“We needed a way to answer the pressures we’ve experienced in the industry in recent years, and head off a downward trend,” said Menary. “It took us over a year of hard work to get this thing accomplished and we’re still not done. But we’ve now set up the company in a way that will support what we do, and that supports accomplishing our main mission: to benefit our mutual members and policyholders.”