If the laws of physics hold that for every action there is an equal and opposite reaction, then the laws of business hold that for every reaction, there can be unexpected consequences.An unexpected consequence of the recent spate of insurance company demutualizations is the renewed interest by state governments in newly revealed unclaimed property. At first blush, states would seem to have limited interest in how a mutual insurance company chooses to structure its capitalization.

However, since 2002, 18 states have passed or are currently considering unclaimed property legislation because of the billions of dollars it could mean to state treasuries, which have been taking it on the chin.

States are scrambling to fill budget gaps, and revenues from unclaimed property are often the second-largest source of income behind taxes.

In the cross hairs

What is unclaimed property? Any intangible asset that has become disconnected from its owner is considered unclaimed. And, as it turns out, demutualizations-which transform an insurance company from mutual ownership to stock ownership-uncover an abundance of unclaimed property. In Florida alone, it is estimated that funds from demutualization proceeds will reach $65 million over the next two fiscal years.

With demutualizations, policyholders must be issued stock certificates or cash. And, unfortunately, based on the experience of companies that have undergone this process, anywhere from 2% to 14% of policyholders cannot be found.

This activates unclaimed property laws, which permit states to collect the value of the stock until the owner is found or comes forward.

Approximately 42% of mutual insurance companies, involving 52 million policies or accounts, have converted to stock ownership, putting them in the cross hairs of state treasurers and unclaimed property administrators. And state legislatures are taking swift action to stiffen provisions and shorten dormancy periods-the time states must wait to collect unclaimed property.

A quick look at New Jersey confirms why. The Garden State recently shortened its unclaimed property dormancy period to three years from five years. With just this one simple legislative change, it collected an additional $220 million in all categories of unclaimed property.

One of the issues that bring lost policyholders to the foreground is the very mechanics of the demutualization process. Specifically, demutualizations take mutual owners and make them shareholders at the same time the once-mutually owned insurance company is orchestrating an initial public offering.

While all companies are already subject to state unclaimed property regulations in each of the 54 reporting jurisdictions, the transfer to public ownership of an insurance company adds the requirements of federal securities laws.

Although there are no U.S. Securities and Exchange Commission laws focused on policyholders per se, there is plenty of focus on shareholders. And now that the policyholders are shareholders, the insurer must comply with these laws.

Specifically, the Securities and Exchange Act of 1934, which was amended in 1997, details the steps companies must go through to ensure they take "reasonable care" to locate lost shareholders. For insurance companies, complying with this rule could reveal that a large percentage of lost policyholders-anywhere from 15% to 30%-may be deceased and owed death benefits, adding billions of dollars to the pot.

Just as relevant, however, is that demutualizations serve as highly visible events, which may trigger investigations regarding the level of a company's compliance with state unclaimed property laws. An investigation launched by one state often serves notice for others to follow.

A good offense

In fact, many states already have descended on these companies and more are planning to do the same. And under such scrutiny, common industry practices such as using 100-year mortality tables to determine if lost policyholders are deceased may not pass muster.

Where does it all lead? Ultimately, the best defense is a good offense. Companies that have completed demutualization, as well as those that are contemplating it, need to put programs in place that address unclaimed property.

The approach should include the following steps:

* Establish a plan for dealing with unclaimed property realized through the demutualization. One way or another, this liability will be uncovered.

* Set priorities upfront. Do these assets belong with your customers or with the states? The answer may be obvious, but you can demonstrate your commitment to shareholders and customers by working to reconnect with these owners on your own terms, instead of those imposed by the states.

* Establish regular campaigns to reconnect with lost policyholders. This enables you to manage future liabilities by proactively addressing lost owners, as they arise.

* Turn potential negatives into positives. Create programs that help beneficiaries of unclaimed property wisely manage their recovered assets, enabling them to smartly reinvest death benefits through additional products and services in your company.

Doug Johnson is president of Keane, a provider of unclaimed property compliance solutions to Fortune 1000 corporations.

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