Lancaster insurers make second try at partnership

A lot has changed in the four years since Educators Mutual Life Insurance Co. and Eastern Alliance Insurance Group parted ways.

Educators Mutual helped to found Eastern Alliance in 1997. But business was slower than expected, and in 2001, Educators backed out to focus on changing its own operations. Since then, Educators has watched from the sidelines as its younger cousin grew rapidly.

The two Lancaster County insurance carriers may revive their ties with a merger. They have struck a deal in which Educators would fundamentally change its corporate structure and buy Eastern's parent, Eastern Holding Co. Ltd., along the way Eastern Holding Co. is based in the Cayman Islands.

"The strategy that attracted us to start (Eastern) in 1997 is there to be worked on in 2005," said Bruce M. Eckert, Eastern's chairman and chief executive officer.

The deal would combine the insurers' business lines in group benefits, workmen's compensation and an insurance product in which employers assume some of their own risk to make a profit.

It also would convert Educators from a mutual to a stock company and give the region another publicly held insurance carrier.

Eckert started one arm of Eastern in 1987 as an offshore reinsurance company A decade later, Educators invested more than $2 million to own 50 percent of a new Eastern business selling workers' compensation insurance.

Eckert's idea was that industry mergers had left small and midsized employers casting about for good service. He also gambled they were hungry for access to workers' compensation reinsurance arrangements that can be profitable, but generally only are offered to big companies.

One of his first reinsurance customers was the Pennsylvania Builders Association.

John Maleno saw opportunity in Eastern's novel approach. Maleno is chairman of the PBA's workers' compensation fund.

Eastern offered to find the PBA reinsurance, which is essentially insurance for insurers. With that backup in place, PBA could take on the risk - and the profit - of insuring its own members against workers' compensation claims.

PBA was pleased, but Eastern found it could not land enough big contracts for similar reinsurance plans and its other products.

In 2001 Educators backed out. Educators was trying to manage with a floundering health insurance business and had to focus on its problems, Eckert said. He and his investors bought out Educators for a little more than its original investment. Over the next four years, Educators dropped its health insurance line and attempted to become profitable again by offering fewer products. Eastern found new investors and expanded to $83.2 million in premiums. Eckert said those changes positioned the carriers to give their marriage another whirl.

Robert M. McAlaine, Educator's chairman, said the company had lots of cash available and has been weighing what to do with it.

"We looked at a lot of available alternatives, and the board unanimously decided this was the most attractive," he said.

Two-thirds of Educators' policyholders must approve the conversion to a stock company. The Pennsylvania Insurance Department must OK the deal, too. Terms call for Eastern shareholders to receive cash and stock from the new company equivalent to 1.28 times Eastern's book value on Sept. 30. Eckert said it would be measured by Eastern's total equity, which was $41.7 million in fiscal 2004. Educators reported totally equity of $62.4 million in fiscal 2004.

Educators employs 108 people Eastern about 85. McAlaine didn't know if there would be layoffs. He would not say if Educators plans to keep all of Eastern's operations.

Mutual insurance companies are effectively owned by their policyholders, rather than shareholders. Instead of sharing profits with shareholders in good times, mutuals can issue dividends to those policyholders or reward them with lower premiums.

Most of them were started decades ago by businesses that were considered too risky to obtain insurance from stock-based carriers.