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Soon there may be only one Factory Mutual insurance company.

Allendale Mutual Insurance Co., Arkwright Mutual Insurance Co. and Protection Mutual Insurance Co. last week announced plans to merge into a single entity to be called Factory Mutual Insurance Co.

The merger, which would be effective Jan. 1, 1999, after obtaining regulatory and policyholder approval, would yield greater financial resources, loss prevention expertise and international breadth, making the combined company a stronger competitor in the highly protected risk market, executives say. The Factory Mutual companies invented the HPR concept in response to the perils faced by New England mill owners in the last century.

Policyholders and insurance industry analysts view the proposed merger as a positive development.

"The Factory Mutual system is a great system; they have served the policyholder well over the years," said Robert J. O'Toole, chairman and chief executive officer at A.O. Smith Corp., a manufacturer in Milwaukee. "But as the economy gets more competitive, I'm not sure you can afford to have three or four different organizations."

Industry observers say the merger is a logical response to heavy competition in the HPR property insurance market.

"I think it was a somewhat inevitable move. As the competitive environment continues to increase, the three individual companies were not able to compete as effectively by themselves as they would as one consolidated company, in terms of cost efficiency and capacity," said Peter Kellogg, assistant vp at A.M. Best Co. Inc. in Oldwick, N.J.

"The acquisition of IRI by GE perhaps added a sense of urgency and may have added impetus to this movement," said Allen Murray, senior credit officer with Moody's Investors Service Inc. in New York. Employers Reinsurance Corp., which is owned by GE Capital Services Inc., bought 99.5% of Industrial Risk Insurers late last year. The move strengthens IRI, a pool that competes with the Factory Mutual companies for HPR business (BI, Dec. 22, 1997).

Executives of the merging insurers agreed the move will make them stronger competitors.

"In a fast-changing business environment, the opportunity costs of delaying the realization of such powerful benefits is too high. This is an excellent time for the Factory Mutual companies to merge," said William J. Poutsiaka, president and CEO of Waltham, Mass.-based Arkwright.

"The market is both intensely competitive and also filled with many great opportunities. Industry leaders remain industry leaders because they don't take competition for granted," he said.

"We've been here 163 years," said Shivan S. Subramaniam, chairman, president and CEO of Johnston, R.I.-based Allendale. Without pointing to the IRI deal directly, Mr. Subramaniam, who will be president and CEO of the new company, said "always, always never take your competition for granted."

The merger of the three Factory Mutual companies into a single mutual insurer completes a process of consolidation that stretches back decades. At the turn of the century, 20 insurers belonged to the Associated Factory Mutual Fire Insurance Cos. Those 20 -- as well as an additional 22 mutual insurers that existed at one time or another during the Factory Mutual system's history -- gradually consolidated into the three remaining companies.

"Policyholders and employees will realize many benefits from the creation of this exciting new company. First, we will have a simpler and more consistent message in the marketplace by presenting our products and services as one company, said Arkwright's Mr. Poutsiaka.

The merger would also provide "a superior corporate structure for organization change and individual improvement. This will allow us to achieve better integration of engineering and insurance services," he said.

The new company will allow more effective use of the individual companies' global distribution channels and risk-taking capacity, while also "combining our best practices," said Mr. Poutsiaka.

Based on 1997 results, the combined insurance company would have assets of about $5.3 billion and policyholder surplus of $2.33 billion, the insurers reported.

Allendale is the largest of the companies, with year-end 1997 net earned premiums of $433 million, compared to $326 million for Arkwright and $253 million for Protection Mutual. Allendale also had the largest surplus at $1.02 billion, compared to Arkwright's $819 million and Protection Mutual's $488 million.

The three HPR insurers jointly own Factory Mutual, a Norwood, Mass.-based loss prevention engineering and research entity, and FM Insurance Co. Ltd., a London-based insurer. Both of the joint ventures will be integrated into the new company.

In addition to greater financial strength and expertise, the proposed merger should bolster the individual companies' overseas operations, said James Black, who has been named chief operating officer of the new company. He currently is president and CEO of Park Ridge, Ill.-based Protection Mutual.

"We've been overseas since 1963, so being there is not new to us," he said.

Mr. Black said the merger would allow the new company to better focus internationally while giving it more flexibility in where to direct its efforts. "We just feel it will make us a much stronger global competitor," he said.

"At the end of the day, we will have an intellectual talent pool second to none. If we do this correctly, we should be able to provide solutions superior to any other organization in our area of expertise," said Mr. Black.

Allendale's Mr. Subramaniam added that the merger would "reduce the confusion in some of these overseas markets" because there will be only one Factory Mutual company providing service and insurance worldwide.

Arkwright's Mr. Poutsiaka said risk managers "will see the benefits of the efficiencies that we hope to achieve with the merger. Ultimately we would like to have an expense structure that is similar to firms that sell insurance without the leading risk management services for which we are known throughout the world. The combination will be a vastly improved menu of products and services at what we believe will be at a very competitive and lower price."

Risk managers agree.

"I think it's good," said Stephen M. Wilder, vp-risk management at The Walt Disney Co. in Burbank, Calif. "My perception is that it will create one larger company that is more efficient."

The merger should streamline some of the administrative tasks the three companies performed individually, and "over time that should reduce our costs," Mr. Wilder said.

Disney has purchased property coverage from Allendale for the entertainment company's U.S. risks for the past 50 years, Mr. Wilder noted.

Mr. O'Toole of A.O. Smith, a Protection Mutual policyholder, said his company will benefit from "tremendous economies of scale that will allow them to operate more efficiently and effectively."

The merger actually would solve a problem for The Budd Co., a Troy, Mich.-based automotive parts company.

Budd, an Arkwright policyholder, is trying to consolidate the insurance programs of its sister companies that also have coverage with Factory Mutual insurers, explained Louis J. Drapeau, manager-insurance and risk management.

"Poof. This makes the problem go away," Mr. Drapeau said, now that Budd's various operations will be dealing with one Factory Mutual insurer.

Mr. Subramaniam said there obviously will be some duplication of functions as a result of the merger, which will mean a reduction in force. "The intent is to end up with a single culture," he said.

"We will look at that very carefully during the next several months."

He added that the merger is not necessarily a precursor to demutualization.

Mutual companies can absorb greater variations in loss costs than stock companies generally can, Mr. Subramaniam said. Demutualization "doesn't have a lot of economic appeal for us," he explained.

John A. Luke Jr., an Arkwright director who is president, chairman and CEO of New York-based Westvaco Corp., will serve as chairman of the new company's board.

No decision has been made about where the new company's headquarters will be located.

Michael Bradford in New Orleans contributed to this report.