Demutualizations: The State of Conversions in 2002.

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--Oct. 1, 2002

The wave of mutual life insurance company conversions has subsided now that all of the U.S. life insurers of any appreciable size have considered conversion, according to the special report, "Demutualizations: The State of Conversions in 2002," issued by A.M. Best Co.

As recently as 1986, mutual life insurance companies in the United States accounted for approximately 50% of assets, capital and sales of the total life insurance industry. Since that time, however, mutual life insurance companies have given the merits of becoming public companies significant consideration.

Of the 20 largest mutual companies in mid-1996, only six decided to remain mutual, with another seven converting to the mutual holding company form. Following the conversions of Metropolitan Life Insurance Co. and Prudential Insurance Company of America in 2000 and 2001, respectively, the share of the total U.S. life insurance industry held by mutual companies, based on assets, capital and sales, decreased to approximately 15%.

Clearly, the vast majority of life insurance executives felt that converting to a public company was the way to go. Not all of the benefits have been realized, however.

For instance, demutualized companies have not yet materially increased capital or, therefore, their financial strength. More commonly, capital that was disbursed to participating policyholders as ownership compensation has just been replaced. However, given the potentially advantageous action plans available to a public company, greater financial strength and flexibility could be realized as the plans are executed.

Many of the remaining mutual companies are committed to that structure, believing that managing their enterprises for the benefit of their participating policyholders is of paramount importance. Thus, operating as a public company would significantly compromise this focus.

Another important issue is the relevance of the different structures, and which structure is optimal for supporting a company's vision and business.

The answer centers on the particular attributes of the various corporate structures. One reason for conversion has been the ability to access capital. In some insurance businesses, however, there is an overabundance of capital, and competitive returns on equity are difficult to attain. Since there aren't enough expansionary opportunities for existing capital -- let alone additional capital -- to be deployed, the returns in many insurance businesses do not cover the cost of the capital invested in them.

It appears that either of these organizational forms could have a positive impact on a company's future prospects, and that one form or the other could be a better strategic alternative depending on the business characteristics of a given company. However, neither alternative is a panacea to overcome poorly conceived and executed strategies and underperforming operations.

Capable management and public-company discipline are factors critical to the future success of mutual companies that convert to the stock form of organization. Some of the demutualized companies will be challenged to create the dynamic culture and develop the market-focused orientation and financial and actuarial systems necessary to operate successfully in their new competitive arenas.

Online Availability

BestWeek subscribers can download a free printed copy of the full 8-page special report, "Demutualizations: The State of Conversions in 2002," or a combination of the printed report plus a spreadsheet file of the report data for $75 from the A.M. Best Web site, www.bestweek.com.

Nonsubscribers can download a printed copy of the full 8-page special report for $50 or a combination of the printed report plus a spreadsheet file of the report data for $125 from the A.M. Best Web site, www.bestweek.com.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.