Life in the public eye: newly demutualized life insurers adjust to the glare of shareholder scrutiny.

Despite corporate accountability issues that surfaced in recent months following the controversial bankruptcies of energy trader Enron Corp. and WorldCom Corp., the Leaders of three recently demutualized life insurance companies don't regret going public.

In recent interviews with Best's Review, the chief executives of MetLife Inc., AmerUs Group and Principal Financial Group discussed the- changes that have occurred within their organizations as a result of the restructuring and the challenges they face.

Making the Case

Many reasons are cited for demutualizing, but Robert H. Benmosehe, chairman, president and chief executive officer of MetLife Inc., said that, first and foremost, being a mutual insurance company has to make sense to the people participating in it. "As our business moved from participating to nonparticipating, our policyholders weren't participating in the profits," he said." So who was really benefiting?"

Likewise, MetLife knew that as a mutual holding company its options and ability to remain globally competitive would be limited as financial-services reform reshaped the industry, Benmosche said.

When AmerUs initiated a new growth strategy in 1993, the goal was to become a $40 billion public company, said Roger K. Brooks, chairman, president and chief executive officer of AmerUs Life Insurance Co. "Since we were a $2.7 billion company, it was fairly clear that we needed to change the corporate structure to reach that goal?' In 1996, AmerUs created the mutual holding company structure that allowed the company to obtain outside capital on a gradual basis.

Not wanting to be a small player against ever larger players, AmerUs embarked on the demutualization route and quickly realized its expectations. Within a few months of forming the mutual holding company, AmerUs made two acquisitions. The company now has $19 billion in assets, Brooks said.

Principal's goal was to become a "capital-markets ready organization," said J. Barry Griswell, chairman, president and chief executive officer of Principal Financial. "All along the strategy was to give ourselves the flexibility to fully tap into the capital markets as needed to execute our strategy," he said. Principal could have waited until it wanted to make a large acquisition or needed capital for another purpose, like the ongoing international expansion of its retirement services business, but demutualization takes several years, he said.

"This was largely about giving ourselves flexibility," he said. As it turns out, the company has considerable excess capital and the need to tap into the capital markets is not as great as anticipated when the process began. But with international operations and a product mix heavily focused on 401(k) and retirement services, demutualization made sense, Griswell said. "In the long run, this was clearly the right move for us."

In the Short Run

Significant growth and a revamped company perspective are among the radical changes demutualized insurers have experienced.

For example, AmerUS Life Insurance Co. was a $3.5 billion, single-site mutual insurance company with a few small banking and real estate businesses when it embarked on demutualization. Since then, AmerUs has grown to four locations--Des Moines, Iowa; Topeka, Kan.; Long Island, N.Y; and Indianapolis--and to $19 billion in assets. "Our sales have grown hugely," Brooks said. "I think our life sales are five times what they were in those days, and our annuity sales are about a hundred times what they were."

This has brought significant change in the complexity and scale of AmerUs. As a mutual, the company was earning some 6% on statutory surplus, Brooks said. "We didn't think we could grow as a mutual as rapidly as we thought would be necessary in a consolidating industry," he said. Demutualization, however, brought the opportunity to use stock as currency and enhanced the company's ability to grow through two acquisitions within the first year. "The capital made things happen, and the acquisitions helped us get to the scale we are at today."

For Principal Financial, which had first converted to a mutual holding company in 1998, the transformation to a fully public company brought a new perspective. Principal has been an employee-benefits company since the 1940s and has competed against public companies for many years, Griswell said. Even though the company had already adopted a culture similar to that of a public company, it took some time to adjust to the required transparency. "There is just an enormous focus on short-term performance that was quite a bit different for us," Griswell said.

"You try to manage to the best long-term result," Griswell said." [After demutualization], all of a sudden you find yourself having to deal with questions about very short-term issues.

Some argue that by holding a company's feet to the fire month-by-month, quarter-by-quarter, good long-term results will occur, Griswell said. "I think you could argue that you occasionally run into making choices that have a good long-term outcome, but may have a poor short-term effect," he said. "We continue to take a long-term view, but now we have to balance it with the short-term view, as well.

"I think, to some extent, that Enron and WorldCom really point to [the short-term focus] as being a flaw in our system," he said. "I hoped that people would take a broader view of the quality of a company--its management, history, pricing philosophy, integrity--and would give more credit for that. Instead, it seems that analysts are more focused on whether or not you hit your numbers or missed by a penny," he said.

Market Conditions

The decline in stock values would make AmerUs think twice before using its stock to fund expansion. "Under current market conditions, we wouldn't be real interested in using our stock for acquisitions," Brooks said. "We still want to grow the company, and believe we can grow internally." AmerUs' plans include investing in marketing and distribution while cutting expenses on a unit-cost basis through technology investments.

Benmosche agreed that the environment in which these companies demutualized and now are operating has been one of the biggest challenges. "The difficult stock market has depressed earnings," he said. "But we have a plan and are executing to it." Although MetLife is doing well, the company reported in its second-quarter earnings announcement that it's lowered its annual per-share earnings expectations to between $2.43 and $2.53.

Principal Financial's executive team was in Paris on Sept 11, 2002, preparing to give its "road show" to build interest in its initial public offering. "Preparing to relaunch our road show and trying to gauge what was going to happen to the markets after Sept. 11 proved to be enormously difficult," Griswell said. "If you think about what's happened over the past year--Sept. 11, the equity markets collapsing, the Enron and World-Com debacles--how could you have a more turbulent environment to become a new public company?"

Public Scrutiny

The cumulative effect of those events is that executives have less appetite for risk, Brooks said. "You get punished badly for taking risks which don't turn out well, and not every business decision turns out the way you plan it," he said. Like in baseball, you try to make your batting average good enough so they keep you around, he said. "However, everybody needs to experiment carefully in business."

For instance, in today's environment, AmerUs might have bypassed the mutual holding company or some other successful initiatives because people wouldn't want to take a chance now, Brooks said. "Today, you might slow down some very favorable experiments."

Benmosche said that companies need to be careful to leave some latitude for making strategy changes. "MetLife has a three-year plan, and may slow it down or speed it up depending on the environment," he said.

Principal's Griswell hopes that some positive changes will result from the recent accounting scandals and the increased focus on corporate accountability. He is particularly hopeful that a debate on the need for sound advice for retirement plan participants will occur, a need that he said is becoming more serious.

A recent Principal Global Financial Well-Being Study, which tracks trends in retirement confidence, organized saving, employee-benefit coverage and benefit programs, found that 60% of workers are willing to save for retirement on a regular basis. Yet fewer than 30% of the employees in the countries surveyed--Australia, Brazil, Hong Kong, India, Japan and the United States--have calculated their retirement needs.

"We have a legal and regulatory system that really discourages giving investment advice," Griswell said. "Employees are aware they need to save for retirement, but neither the plan provider nor the employer can provide advice because of regulation and liability issues. "I hope one of the things that will come out of this is an understanding that we have to provide people with good asset allocation, investment selection, and retirement planning."

Culture Shock

Demutualization changes the corporate culture.

At AmerUs, the pace of business has gotten much faster. "We were a fairly aggressive, high-intensity mutual and we were involved in three mutual mergers prior to forming the mutual holding company," Brooks said. But the pace picked up substantially after becoming public, with the company completing two acquisitions within 60 days. "Everyone had to turn their game up a notch to keep up with the pace," he said. In fact, Brooks lost one of his senior life insurance executives along the way because the man wasn't used to doing so many things at one time. "That's just not the way I work," the executive told Brooks.

Principal is aggressively recruiting people with public company experience to augment those employees who "grew up" with the company, aligning pay with performance standards, formalizing management and decision-making practices and developing a succession plan. "We've tried to take a comprehensive view about changing our culture," Griswefl said. "The thing I'm most proud of is the way our employees have responded to change and embraced the public company culture."

At MetLife, Benmosche is also looking for employees to take personal responsibility for making decisions based on what's best for the customer and not necessarily on policy or procedure. To demonstrate what he meant, Benmosche told a story about a MetLife executive who was on his way home from a business trip and arrived at the airport in time to catch an earlier flight. But it wasn't until after the ticket had been changed that the airline employee mentioned a $100 fee for the change. When the executive said to leave the ticket as it was, the airline employee said that would be another $100--to change it back again. The MetLife executive took the earlier--but now more expensive--flight.

The airline employee wasn't empowered to satisfy the customer's need, and that is something that Benmosche is working to prevent at MetLife. "Employees need to have enough sense about their job, the customer and their own judgment to go forward and satisfy the customers' needs," Benmosche said. "I don't want process or policy to dictate over common sense."

Part of this common sense will be provided through experience in other positions at MetLife, which rotates more than 10% of its management into different positions each year. "We're developing people for the future," Benmosche said. "And they need to understand more about the company than just their niche."

By far, the biggest advantage to being a publicly owned company is name and brand recognition, making marketing and distribution goals easier to attain. "Because we are a public company, we get more attention," Benmosche said." More [analysts] can compare us to other public companies, and clearly that helps with large institutional buyers."

Griswell agreed. "I still find it puzzling that, as a mutual company, we were doing wonderful things, but the financial publications wouldn't pick it up," Grisweli said. "But once you have a ticker symbol and something happens, good or bad, you get coverage." At a recent executive meeting, Griswell told his staff that it seemed like the company's brand image was advanced more in the year since demutualization than in the many years as a mutual company, he said.

The new public awareness and stock structure also translated into the ability to attract and retain some of the most highly talented people. "People like to be associated with a winner," Brooks said. "Being publicly owned creates a certain amount of excitement in your producers, policyowners and shareholders." Also, all three agreed that incentives such as stock options and the ability to participate in the success of the company aid in attracting and retaining high-quality professionals.

One of the original benefits of demutualization touted by the life industry is the ability to use stock as currency during mergers and acquisitions. Given the current environment, however, these companies are not in a hurry to go shopping, and when they do they'll be more selective in their purchases.

In fact, Principal has been divesting itself of some businesses, most recently in Australia. "As a mutual company, we could take a very long-term view [of acquisitions], with good internal rate of returns, over a 10- or 15-year period," Griswell said. "As a public company, we have to be much more disciplined and have investments on track, not only over the long-term, but on some intermediate basis as well."

That was part of the decision to divest the company of BT Financial Group, which Principal acquired in 1999 while still a mutual holding company. "Australia may have been a great long-term investment and if we were a mutual we might have made a different decision," Griswell said. Principal didn't expect it would realize the desired returns over the next several years, however, given the declining equity markets and rapid consolidation in the Australian market. Principal doesn't expect to do any large acquisitions in the next year or two, but does expect to complete some small to medium-size acquisitions that fit with the company's strategies.

MetLife expects to grow organically. It also will use acquisitions, such as Aseguradora Hidalgo S.A., to expand into international markets, such as Mexico where MetLife reports a 37% market share. "We are satisfied with where we are and don't feel the need to acquire [businesses] to grow our business," Benmosehe said.

And, although AmerUs does not have an acquisition strategy, Brooks believes that the company eventually could become an acquisition target. "The question is whether you can continue to hit your financial and operating targets," he said. Thus, the company's goal is not to preserve independence, but to deserve independence. "as long as we're growing at the rates we are now, and improving our earnings, we will deserve independence," he said. "We don't have absolute control over our destiny, but we think we have a very good story as an independent company and there is no push on our side."

Looking Ahead

Growth is the goal on everyone's mind, but each of the three insurers defines it differently.

For AmerUs, it is reaching a return on equity in the mid-13% range over the next two years, and eventually reaching that $40 billion in assets. Brooks said the company continues to develop well-designed and reasonably priced products for customers, while looking for growth opportunities that add value and scale to the organization.

Principal's long-term goal is to further strengthen its position in the small to medium-business retirement services industry, where it already is a leader, and to export some of its skill and knowledge to select international markets, such as Latin America.

Meanwhile, MetLife, already the leading life insurance company with $224.5 billion in assets at year-end 2001, according to A.M. Best data, is planning to maintain the lead by enlisting one of the company's enormous advantages: employee diversity. "More than 30% of our fife insurance sales are to people not born in the United States," Benmosche said, giving MetLife an advantage in a growing, culturally diverse country.

[GRAPH OMITTED]

Top Mutual Companies

Ranking is based on admitted assets as of June 30, 2002.

($ Thousands)

                                     Admitted
Rank  Company                          Assets

 1    New York Life Group        $112,714,088
 2    Northwestern Mutual Group   105,955,227
 3    MassMutual Financial         80,661,501
      Group
 4    Pacific Life Group           52,269,419
 5    Guardian Life                31,152,835
 6    Western & Southern           20,764,324
      Financial Group
 7    Minnesota Mutual Group       16,356,679
 8    Mutual of Omaha Group        15,101,659
 9    Mutual of America Life       10,171,127
      Ins Co
 10   National Life Group           9,070,877

Source: A.M. Best Co.

RELATED ARTICLE: AmerUs Group

Domicile Des Moines, Iowa

Chief Executive: Roger K. Brooks

Business Commenced: Feb. 20, 1898

Assets: $16.1 billion

IPO Date: Sept. 20, 2000 *

IPO Price: $16.50

Current Stuck Price: $26.53

NYSE: AMH

* Company initially converted to a mutual holding company on June 30,1996.

Source: Company data is based on A.M. Best Co. data for year-end 2001; current stock price is as of early aftenoon. Oct. 10, 2002.

Principal Financial Group

Domicile: Des Monies, Iowa

Chief Executive: J. Barry Griswell

Business Commenced: Sept. 9, 1879

Assets: $77.2 billion

IPO Date: Oct. 23, 2000

IPO Price: $18.50

Current Stock Price: $23.00

NYSE: PFG

Source: Company data is based on A.M. Best co. data for year-end 2001 current shock price is as of early aftenoon, Oct. 10, 2002.

Metropolitan Life Group

Domicile: New York

Chief Executive: Robert H. Benmosche

Business Commenced: March 25, 1868

Assets: $224.5 billion

IPO Date: April 7, 2000

IPO Price: $14.25

NYSE: MET

Source: Company data is based on A.M. Best Co. data for year-end 2001; current stock price is as of early aftenoon, Oct. 10, 2002.

Taking the Mutual Holding Company Route

Several life insurance companies began the demutualization process by converting to a mutual holding company.

A mutual holding company transfers ownership from the mutual insurer to the mutual holding company, and contractual ownership rights move from the mutual company to a stock-based company, ultimately owned by the participating policyholders of the mutual holding company.

Critics have two issues with the structure of a mutual holding company. First, proceeds from the sale of the stock-based company's stock accrue to the mutual holding company and not to the participating policyholders. Second, critics warn of the divided attention of management between the interests of the mutual holding company's policyholders and the stock-based company's stockholders.

There were a number of reasons AmerUs chose to first convert to a mutual holding company however. "We were told by the investment community that a pure insurance company would be more favorably received by the investment community than the mix of financial-services businesses we were in at the time," said Roger K. Brooks, chairman, president and chief executive officer.

At that time, AmerUs owned Iowa's largest savings and loan association and a large residential real estate brokerage. The mutual holding company structure allowed AmerUs to retain those businesses until a decision was made on what to do with them, Brooks said.

Second, the mutual holding company structure allowed AmerUs to access outside capital in stages as needed, helping the company get its return on equity moving in the right direction, Brooks said. "Most of the mutuals that brought in a lot of capital at one time--in the big bang theory--have gotten fairly low returns on equity because they had too much capital," he said.

"The mutual holding company structure was a very good structure for our strategy," Brooks said. "And as a result, our policyholders received substantially larger pay-outs than they would have if we had gone immediately to full demutualization."

Special Report Excerpt

Demutualizations: The State of Conversions in 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. This research report looks at the questions surrounding the phenomenon of demutualization.

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%.

Being a public company, compared with being a mutual, offers the following prospective advantages:

* the ability to raise capital through public stock offerings;

* additional flexibility to restructure the company;

* determination of a market value of the company;

* creation of a currency--the company's stock--that can be used in transactions;

* the ability to take advantage of market opportunities more quickly;

* enhanced public scrutiny of company operations and results, increasing the focus on growth and profitability;

* the ability to provide incentives to management and employees with stock and align individual performance with company goals, which has been shown to be a significant enhancer of company performance;

* the ability to use stock as incentives to attract management talent; and

* accounting comparability with most companies across all industries.

Clearly, the vast majority of life insurance executives felt that converting to a public company was the way to go. Not all of these 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. Given the potentially advantageous action plans available to a public company, however, 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.

Clearly, demutualization isn't the right answer for every company. 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.

Also, the deployment of career agents to sell permanent life insurance, and the relatively high cost this incurs, might mean that a mutual company, without the need to satisfy shareholders with competitive returns, could be a more appropriate structure. On the other hand, capital-intensive businesses, such as disability income, long-term care and annuities, might well fit better within a stock company, where additional capital to support growth and build scale could be more easily raised and returns might be more attractive.

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 under-performing 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.