If the experts can’t figure it out, imagine how the average policyholder feels about “demutualization”–an ungainly name for the change that’s about to reshape the familiar world of life insurance. Most of the industry’s big names-Prudential, Metropolitan, New York Life, John Hancock, Northwestern-are mutual companies, owned entirely by policyholders. Their business is vast - the 110 mutuals have 209 million life policies in force. And it’s comfortable: with no stockholders to satisfy, mutuals can offer policyholders generous dividends and pay little heed to costs. But the insurance industry’s hard times have exposed the downside: unable to sell stock, a mutual has no easy way to bolster a weak balance sheet or to finance expansion. So The Equitable, the nation’s fourth largest life insurer, a major investment banker and manager of $93 billion of others’ money, is taking the drastic step of asking its 2.2 million policyholders to sell out. Says chairman Richard Jenrette, “Public ownership is the wave of the future.”
In The Equitable’s case, there wasn’t much choice: when it began demutualization nearly two years ago, the 123-year-old company was on the rocks. Its guaranteed investment contracts, which let retirement plans lock in high interest rates, pulled in $14.6 billion by 1986 but then became an enormous cash drain; since 1988, The Equitable has swallowed $1.5 billion in GICrelated losses. At the same time, the $13 billion portfolio of real estate and mortgages it manages for its own account was savaged by the real-estate slump; by last September $682 million of commercial mortgages had been restructured and payments on another half billion were more than two months past due. As policyholders fled, Jenrette desperately scoured the world for capital. Last July, he found it: Axa, France’s second largest insurer, put up $1 billion in return for a promise that it could convert its investment into stock if policyholders approve - and gain a network of U.S. agents and licenses that would otherwise take years to acquire. Axa could end up owning a 49 percent stake.
What’s the deal? Although the process has proved enormously complex - and will cost an estimated $165 million in legal, accounting, actuarial and investment-banking fees before it’s over - the bottom line is this: in return for giving up ownership in the mutual, each Equitable Life policyholder will get stock, with the number of shares depending on estimates of how much the policy contributes to profits. All policies will remain in force, and the company will set aside an estimated $7.4 billion in high-grade bonds and mortgages to assure the payment of dividends.
Ballots are due by May 6, and executives at Equitable’s lavish New York headquarters are pacing the floors. There’s never been a vote quite like it. There was a pilot mailing to 100,000 policyholders last August to test the waters. Then, in March, each policyholder got a daunting 1.1-pound information packet. To save cash, the company even negotiated a special postal rate. The Equitable’s information center has fielded 92,000 calls from the puzzled recipients, and agents have watched videos on how to explain to clients why the company needs more capital. So far, there’s little opposition; the company’s biggest fear is that policyholders will toss the package in the trash rather than voting.
Although the New York Insurance Department hired its own legions of accountants and actuaries-at The Equitable’s expense-to pore over the deal, the reams of data sent to policyholders can’t reveal whether the price is right: the value of the shares depends upon the public stock offering that will follow demutualization. But the more important consideration may be the health of the company. New reports, prepared according to accounting rules for publicly traded companies, put its losses since 1990 at $1.3 billion - far more than standard insurance accounting had revealed. Jenrette says the company’s performance this year “should be vastly better than last year,” but no one is certain that all of the bad news is out. In short, the company still badly needs the capital that stock-market investors can bring. “I think it would be foolish for policyholders to vote no,” says Frederick Townsend, a Hartford insurance consultant. Agrees Indiana University professor Joseph Belth, a leading industry critic, " The consequences of a negative vote are so serious it seems to me policyholders are forced to go along."
If they do vote yes, other mutual companies, including eighth-ranked John Hancock and New Jersey’s Mutual Benefit Life, the 18th largest life insurer before it was put under state control last summer, may soon follow suit. Driving them are the same forces that propelled The Equitable. “It’s the need for capital and the need to get bigger,” says New York insurance lawyer Fred Perrotta. The cozy fraternity of mutual insurers may soon be even cozier.
