Culture Clash.

Executives disagree about whether life insurers must demutualize to succeed.

The leaders of former mutuals MetLife and John Hancock Financial Services have a lot to say about the rewards of going public, but the chairman of MassMutual Financial Group, which remains firmly committed to staying a mutual, insists his company can thrive just as well through innovation.

The executives, appearing together at a PricewaterhouseCoopers conference, generally agreed on the paths life insurers must follow to prosper in today's environment, but their opinions varied on whether demutualization is a prerequisite for success.

David D'Alessandro, president and chief executive officer of John Hancock Financial Services, said demutualization is "inevitable" for survival. Mutuals will lose because they will lack the results-oriented "stock culture," they won't have a stock currency for timely acquisitions, and they will suffer from a "talent drift" as they fail to attract and compensate top-performing employees. Over time, they will be staffed by "less-motivated" people, he said. John Hancock demutualized in January.

Au contraire, said Robert J. O'Connell, chairman, president and chief executive officer of MassMutual Financial Group, a company that intends to remain a mutual. When asked to name his competitors, O'Connell pointedly said John Hancock is not one, and he predicted that company "will be a division of some other company" someday--a reference to the fact that attractive stock companies are vulnerable to takeovers, while mutuals are not. He identified his competitors as GE Capital, Citigroup, Axa Financial and other European-based financial-services giants.

Robert Benmosche, chairman, president and CEO of MetLife Inc., which demutualized in April, took the middle ground. He said each company must choose what works and that mutual companies like New York Life and Northwestern Mutual probably have. "We had bloated expenses and weren't doing that well," he said during a presentation. "We were concerned about growth."

Aside from the demutualization question, D'Alessandro and O'Connell agreed on several keys to success. Both said their companies had diversified distribution by expanding from their career agency systems. John Hancock converted them from agents to brokers through creation of its Signator system. Both use the Internet and many other sales outlets. MassMutual retains its career agents, but they contribute only 9% of new business. MassMutual is even selling through accounting and legal firms.

Both CEOs said their companies are working to develop products quickly that respond to marketplace demands, and both recognize the importance of brand recognition to compete in multibrand marketplaces, such as insurance aggregator Web sites. But Hancock has chosen to concentrate on long-term-care and variable products, while O'Connell said a top ingredient for success is a broad diversification of products so that customers can easily switch from those that are out of favor.

Hancock is focusing on building Internet capability to connect its network of distributors and to sell to consumers. It sells 60% of its termlife policies online today compared with none two years ago. And these sales are to upscale clients--as evidenced by the $440,000 average face amount compared with less than $250,000 for offline transactions, D'Alessandro said.

Hancock expects to sell variable life, variable annuities and long-term-care policies over the Internet soon. Hancock also wants to improve its intermediary online service, allow customers to move money among products they own, and simplify applications for consumers, such as by allowing them to take a single physical exam for more than one product. The Internet can help the company get rid of the "silo products" of the past and a commission-based sales mentality, D'Alessandro said.

O'Connell aims to have MassMutual act like a stock company even though it remains a mutual--something he believes he is succeeding in doing. He insists on growth through innovation, and he said 60% of revenues today come from products that didn't exist three years ago.

On the recruitment side, MassMutual has attracted large numbers of senior executives from stock companies as well as younger recruits. MassMutual pays its executives based on their ability to meet earnings benchmarks. It can't give stock options, but O'Connell said, "We pay our executives in cash and tell them to buy any stock they want."

O'Connell pointed to sales statistics as a measure of success. In 1999, MassMutual sales rose 20%. So far this year, they are up 38%. In order, the fastest-growing segments are asset accumulation with high-net-worth investors, mutual funds (MassMutual owns the Oppenheimer fund family), the pension and retirement business, and life insurance. The company also has a big presence in the disability field. And, it is the fifth-largest financial-services company in Hong Kong and is growing there at 65% a year, O'Connell said.

MetLife went public at least in part to revamp old, unproductive ways of doing business. Benmosche began that work before the initial public offering, noting that 28% of management today has come from outside the company Agents that rank in the bottom 15% in sales are terminated every year, he added.

Benmosche also has the highly ambitious goal of reaching 100 million customers by 2010. "I'd like to return MetLife to its position of 1934, when Forbes magazine wrote an article that said we were the biggest company in the world." Benmosche said it's not likely MetLife could again become the largest company, but he wants to be in a "giant league" with the likes of American International Group Inc., Axa and Citigroup.

M&A Era Is Expected to Last 5 More Years

Mergers and acquisitions will be a way of life for life insurers for about another five years, a leading insurance attorney said in October at the PricewaterhouseCoopers conference, "Success in a New Paradigm."

Donald J. Greene of the Washington-based law firm LeBoeuf, Lamb, Greene & MacRae LLP said the estimate is based on, the continuing cycle of requested legal feasibility research that his firm and others are undertaking.

A business model with two parts is driving the phenomenon, he said. The risk business is no longer popular, instead replaced with asset management, so companies seek to amass assets at high speeds, with fees charged for employment of the policyholders' assets. Companies seek to create or remodel a system to withdraw from taking risk in mortality, disability and general-account investment return.

In the past two years, European financial-services companies have been doing the buying; spurred by huge market capitalization and high price-to-earnings ratios, said Mark A. Ellman, managing director of Donaldson, Lufkin & Jenrette Inc. Since Jan. 1, 1999, the dollar volume of life transactions has exceeded $42 billion, and almost $37 billion has been from European sources.

The most important reason, Ellman said, has been to access new and different sources of distribution. Deal sizes have grown larger, to $208.3 million so far this year from $86.2 million in 1999. He said clients have been saying they want the acquisition to be a "transforming transaction" for their companies.

Further spurring action by European corporations is a mindset far different than 25 years ago. "They're no longer afraid of the United States' system of regulation," Greene said. "The Europeans don't believe we're coming to an end of state regulation or that we will have a federal charter, but they've factored that into their business formula.

"That's another interesting sign of their sophistication today," he added. "Our level of understanding about what we can do overseas is nowhere near that."

Expectations to the contrary, banks this year have not been acquirers of life insurers. Ellman said this was due to a drop in their stock values after passage of the Gramm-Leach-Bliley Act in November 1999.

Demutualization is part of Greene's model, and he predicted "many more to come." In particular, he expects a "stream" of demutualizations by smaller companies because an array of precedents, and plans is now available, and cost has been reduced through these precedents. Also, regulators and advisers have become more familiar with the process and have made it more efficient, and some demutualizations may be forced on management. He also predicted a "handful" of mutual mergers, in that "respect for mutual culture has not been recanted by all."