A key component of the deal was that it allowed regulators to keep the company in California.

“For the deal to be attractive to both Merced members and United Heritage, the members had to receive from United Heritage more cash for their equity in Merced than the statute would allow Merced to pay,” Hogeboom he said. “In this case, the money came from a third party, leaving the capital and surplus in Merced.”

In most demutualization deals, the surviving company is left with a reduced surplus, Hogeboom explained.

Under the deal, Merced converted to a stock company and 94 percent of the stock was acquired by United Heritage for about $7.5 million. A small group of policyholders retain the remainder of the stock.

The remaining 1,200 policyholders get a certificate which yields them 3.5 percent a year, plus a lump-sum payoff within 10 years upon approval of the commissioner, Hogeboom said.

Hogeboom said Merced was having problems because the recession and housing bust that started in 2007 prompted a number of foreclosures of homes it insured.

Hogeboom estimated that, since 2008, Merced lost about a third to 40 percent of its business due to the recession, “which caused foreclosures [and] automatically resulted in cancellation of the insurance.

“The company decided that, in order to survive, it needed a partner, and the best avenue to get a partner and more capital was to demutualize and then partner through the acquisition with the United Heritage Group,” according to Hogeboom and Dennis L. Johnson, president and CEO of United Heritage holding company.

Merced wanted to find a company that had a mutual background and a specialty in auto in order to expand their offerings and reduce their reliance on homeowners.

“When you can offer both, you can sell both at a lower rate,” Hogeboom said. “They were getting hurt because they couldn't offer auto, and they didn't have the resources or the expertise to start an auto company de novo,” Hogeboom said.

The deal involved a lengthy approval process with the California Department of Insurance, including a public hearing on the application and a special meeting of the policyholders to approve the plan.

Johnson said Merced agreed to the deal with United Heritage because it wanted to “partner with a well-capitalized insurance group that shared Merced's mutual insurance company culture and possessed expertise in underwriting auto insurance.”

Johnson said it is in the process of establishing a system to sell auto and packaged products, “which is expected to complement Merced's existing homeowners' line to further serve California's Central Valley.”

United Heritage is an insurance holding company that owns 100% of the common stock of three insurance companies: United Heritage Life Insurance Company, United Heritage Property & Casualty Company, and Sublimity Insurance Company.

United Heritage Life Insurance Company, offers life insurance, fixed annuities and group insurance products in 38 states and Washington, D.C.

United Heritage Property & Casualty offers property and casualty insurance in four western states and Sublimity Insurance Company offers auto insurance in three western states and is based in Sublimity, Oregon.