Mutual Capital Investment Fund: Addressing Capital Needs in the Insurance Community
Mutual Capital Investment Fund, LLC, aims to provide capital to mutual insurance companies facing capital needs without converting to stock form or selling minority interests. Led by Mutual Capital Group, the Fund seeks commitments up to $100 million and offers a unique investment opportunity for mutuals and other investors. With a focus on balancing mutuals' capital needs and investors' return requirements, the Fund aims to bridge the gap in the market for mutual insurance community capital.
- Mutual Capital Investment Fund
- Insurance Community
- Capital Needs
- Mutual Insurance Companies
- Investment Opportunity
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259385 Member FINRA/SIPC April 7, 2021
Mutual Capital Investment Fund Addresses Capital Needs of the Mutual Insurance Community Many mutual insurance companies have capital needs but are reluctant to convert to stock form or sell a minority interest in a public offering, leaving only rarely available surplus notes or private equity as external sources of statutory capital The surplus note market is dormant, largely unavailable to many mutuals and subject to significant regulatory and rating agency constraints Private equity firms are not a viable source of capital because of their short term investment horizon (5 to 7 years) and high return requirements (>20%) that require either the sale or eventual mutual to stock conversion of mutuals in which they invest Mutual Capital Investment Fund, LLC (the Fund ) has been formed by Mutual Capital Group, Inc., to fill this market gap and become the goto provider of capital to the mutual insurance community Mutual Capital Group is an existing mutual holding company led for almost thirty years by Jay Chadwick, a long time member of the mutual insurance community The Fund will bridge this market gap by balancing the capital needs of mutuals and the legitimate liquidity and return needs of investors The Fund intends to achieve this objective by: - Providing capital to mutuals in a mutuallyfriendly manner, and - Providing superior returns to the Fund with ample exit opportunities that do not require the sale of the underlying mutuals in which the Fund invests 2 2
Fund Investment Basics Mutual Capital Group has formed the Fund, its General Partner and Manager (see next slide) and paid all the organizational expenses of each entity The Fund seeks commitments of up to $100 million from mutual insurance companies and other investors with interim closings at fund raising benchmarks (likely $25 million increments) Mutual Capital Group has committed $10 million to the Fund Minimum investment commitment of $1 million (subject to waiver by the General Partner) The General Partner will draw on investor commitments to make specific investments Commitments expire five years after the initial closing (subject to limited exceptions) The Fund will have an Executive Board of Advisors that will advise the Fund on investment opportunities and consist of investors who are members of the mutual insurance community or the insurance investment community The Fund will pay an annual management fee to the Manager of 1.5% of drawn capital commitments. No management fee will be paid on undrawn commitments The Fund will make distributions to its investors as follows: - First, 100% to all investors until each has received a distribution equal to their capital contribution - Second, 100% to investors until each has received a distribution equal to 7.5% of their capital contribution, compounded annually - Thereafter, 85% to investors and 15% to the General Partner The Fund will have an initial term of 12 years 3 3
Diagram of Structure Mutual Capital Group formed Mutual Capital General Partnership, a Delaware general partnership (the General Partner ) to act as General Partner of the Fund The General Partner formed the Fund, which is a Delaware limited partnership The Fund is managed by Mutual Capital Investment Advisors, LLC, a Delaware LLC (the Manager ) that is owned by Mutual Capital Group 4 4 3
The Typical Fund Investment The Fund intends to primarily invest in the intermediate stock holding company ( Stock Holdco ) of a mutual holding company (the MHC ) - The Fund will either invest in the Stock Holdco of an existing MHC or the mutual will form an MHC as part of the process - The Fund also may invest in other insurance and insurance related assets The typical investment will be the purchase, in a private placement, of convertible preferred stock of the Stock Holdco. Each transaction will be separately negotiated, but the Fund expects typical terms of the preferred will be: A maturity date of 10 to 12 years from the date of investment or the ability to convert the preferred to common stock followed by a sale of that stock - In the latter case, the Fund will work with, and give ample time to, the MHC to identify an acceptable buyer The preferred stock will pay a quarterly dividend estimated to be 4% to 5% The MHC can cause its Stock Holdco to redeem the Fund s investment at any time in whole or in part The Fund will have the right to require the Stock Holdco to redeem its investment upon the occurrence of certain extraordinary adverse events The existing board of the mutual will be the board of the MHC and keep absolute voting control - The Fund will be entitled to observer rights or a seat on the Stock Holdco board (but not the MHC board) The Fund will promise never to seek a full stock conversion or sale of any company in which it invests 5 5
The Appeal of the Fund to Mutuals The Fund is managed and, in significant part, owned by mutuals committed to the mutual structure and the mutual community. Therefore, the Fund understands mutuals and intends to be mutual friendly Existing board and management will remain in place with no risk of loss of control The Fund will never pressure the mutual to sell or convert to stock form The investment is a private placement. Therefore the mutual does not become a public company with all the attendant costs, scrutiny and short term focus that public company status entails The investment is redeemable by the mutual at any time The investment is longer term, patient capital The investment does not present the same regulatory and rating agency constraints as surplus notes 6
What the Fund Offers Investors The Fund expects most investments will be made at 50% to 60% of pro forma book value, which will provide a cushion against downside risk and a significant opportunity for capital appreciation The Fund expects that investments in the Fund will be an admitted asset for statutory accounting purposes and be carried as a long term asset like common stock with the same risk-based capital charge as common stock The Fund s investments will be valued quarterly by an independent valuation firm, and, based upon these valuations, the Fund will report a quarterly net asset value (NAV) to investors The Fund will make tax distributions as needed The Fund will be independently audited Upon the occurrence of liquidity events with respect to the Fund s investments, investors receive a return of their capital, plus a preferred compounded return of 7.5% and an additional 85% of excess profits above this hurdle rate Investors have six potential exit strategies: - Maturity of the preferred stock investment or sale of the underlying common stock - Call by the mutual at any time - Put by Fund to the mutual upon the occurrence of negotiated adverse events - The sale of the company (only upon its own initiative) in which the Fund has invested - The conversion of the company (only upon its own initiative) in which the Fund has invested - Market making by the Fund (e.g., arranging the sale of limited partner interests between existing investors or new investors) 7 7
Models and Potential Investor Returns Detailed models have been prepared, including a base model that assumes one scenario as to the timing of the entry and exit of investments as well as best and worst case scenarios The Fund may borrow to increase returns and the returns shown below are both without the use of debt and with the use of debt with a debt to total capital ratio of 30% Returns cannot be guaranteed and are highly sensitive to the timing and method of exit from each investment Below is a summary of the returns in different scenarios on an unleveraged and leveraged basis: Unleveraged Fund Returns Base Case Best Case 17.5% Worst Case 7.3% 22.6% Leveraged Fund Returns Base Case Best Case 21.3% Worst Case 8.1% 27.2% 8 8
