DIVING INTO DEMUTUALIZATION.
Insurance companies are clearly a fixture of the Old Economy. Many are still doing business much as they did 50 years or more ago, with a network of company agents selling a variety of time-tested products keyed to actuarial tables.
But the industry is beginning to undergo fairly dramatic change, responding to new technologies and changing demographics. Perhaps no change is more revolutionary than demutualization -- the transition from a mutual form of ownership, where the company is nominally owned by policyholders, to a public company owned by stockholders. In the past few years; some of America 's insurance giants -- Prudential, John Hancock, Mutual of New York and MetLife -- have announced or completed a demutualization. It's a complicated, drawn-out procedure that involves approval from insurance regulators and policyholders.
While life as a public company can be far more complicated, access to capital and corporate partners can be far easier. And insurance companies also find themselves facing a new, daunting level of competition from diversified companies able to combine banking, insurance and brokerage operations under financial services legislation signed into law last year.
Financial Executive asked Stewart Nagler, vice chairman and chief financial officer of MetLife and an FEI member, to talk about the demutualization and its ramifications, both for MetLife and for the industry in general. MetLife completed the process earlier this year, and began trading as MET on the New York Stock Exchange on April 5.
Nagler, who has been a MetLife director since 1997, has been CFO since 1993. He joined MetLife in 1963 as an assistant actuarial analyst and became an officer of the company in 1969. In 1978, he was appointed senior vice president and head of the company's pensions department. He was promoted to executive vice president in 1983, and to senior executive vice president in 1986.
Nagler has a bachelor's degree in mathematics, sum ma cum laude, from Polytechnic University in New York. He is a fellow of the Society of Actuaries and a past chairman of its pension committee, and is also a member of the American Academy of Actuaries and a past member of its board of directors.
Q. How long had MetLife been seriously considering demutualization?
A. On Nov. 24, 1998, MetLife's Board of Directors authorized management to develop a demutualization plan. Then, after extensive analysis and evaluation of strategic alternatives and a review of the interests of policyholders, the board adopted a demutualization plan on Sept. 28, 1999.
Q. MetLife's materials talk about how conversion to a stock company "increases potential for long-term growth and financial strength in ways not available to it as a mutual insurance company." Could you elaborate a bit?
A. Having stock as a currency gives us the added flexibility to consider more acquisition opportunities in the new financial services market, as well as provides us with greater access to capital in general. In addition, having stock options gives us an employee incentive to obtain top talent.
Q. How important were competitive factors in the eventual decision -- i.e., what your direct rivals were doing?
A. With the advent of the new financial services market created by Congress and the President -- which allows banks, brokerages and insurance companies to be in each other's businesses -- our definition of our rivals broadened. We looked at international and national businesses as our future competitors. While competition was a consideration in making our decision, the most important factor was our policyholders. We wanted to make sure that demutualization was in their best interest.
Q. How do you think the market's view of mutual companies has changed in recent years?
A. The Wall Street community doesn't look at mutual companies. Clearly, one thing that was learned from our demutualization was that mutuals do have business acumen and are capable of making an impact. Early demutualization successes may make it easier for other companies to go public.
Q. One of MetLife's stated objectives was to have greater flexibility to make acquisitions. Is that principally a reference to pooling or other combinations that wouldn't require cash outlays?
A. Yes, stock provides us with a critical new option with respect to making acquisitions. We now have the ability to offer stock and/or cash, depending on the merger and acquisition opportunities that we review. In the past, we had to walk away from attractive acquisitions where cash was not the seller's preference.
Q. How did your policyholders react to the process, in general? What percentage elected to become shareholders?
A. MetLife policyholders voted overwhelmingly in favor of our demutualization plan. In fact, 93% of the nearly 2.8 million policy-holders who voted approved the plan. Overall, 87% of our eligible policyholders became shareholders.
Q. The New York State Superintendent of Insurance had to approve the demutualization plan following a hearing. What was that hearing process like?
A. Neil Levin, the Superintendent of Insurance, held the public hearing about our demutualization plan on Jan. 24, 2000. During that time, Mr. Levin listened to details about our demutualization plan as well as our reasons for going public. The general public also had the opportunity to air their comments and ask questions about our plan to go public. Of course, we spent many hours with the insurance department before and after the hearing to clarify any issues before the Superintendent rendered his decision.
Q. Other New York mutuals, like MONY, had earlier demutualized. Were you able to learn from their experiences?
A. We definitely looked at other demutualizations to get a better understanding of the process, as well as the issues, One difference in our plan was that policyholders defaulted to stock rather than cash if we were not notified of their choice. In doing this, 8.8 million of our eligible policyholders became shareholders of MetLife. Approximately 6.3 million are small shareholders owning 50 shares or less. We provided our new shareholders with easy commission-free access to cash if they changed their minds, or additional shares of stock if they wanted to purchase more.
Our demutualization was also different in terms of the large number of policyholders -- 11.1 million. We had to ensure that each policyholder received information about our plan and had the opportunity to have their questions answered. By the end of the demutualization, we received and answered more than 2.5 million calls, 134,000 letters and 3,000 emails. All this took place over a period of seven months.
Q. What kind of contact had you personally had with the analyst community prior to the conversion? How much do you have now?
A. Prior to the IPO, we met with underwriting syndicates to do due diligence and discuss the nuances of the demutualization. I was also part of a team of senior managers that traveled throughout the U.S. and Europe to meet with investors. We traveled to 44 cities in 10 countries over a three-week period. During our road show, we had the opportunity to show analysts that MetLife was more than a leading life insurer with a strong brand. Now that we're public, the interest in our company has grown, so we meet with analysts on a much more regular basis, particularly for our quarterly earnings.
Q. During the first few months after the IPO, MetLife's stock trended steadily upward. Still, do you think the market is valuing you fairly?
A. It's still too soon to answer that question. Generally speaking, it takes time to value a newly minted public company. We may have been in business for more than 130 years, but we have only been public for two quarters. Over the years, as the market becomes more familiar with our company, and as we meet expectations and deliver on our goals, we should see that valuation continue to increase.
Q. Now the company's valuation is subject to constant fluctuations in the stock price. Has that become a distraction?
A. We are committed to shareholder and policyholder value. The objectives we need to meet, such as grow our business, reduce expenses and maintain best practices, will result in the success of our share price. Keeping focused on these things prevents any stock distractions.
Q. Early in the summer, MetLife announced that its board had authorized a share repurchase program. Such programs have been an effective means of boosting earnings per share at many companies. Is that the principal motive for such a program, or were there other reasons?
A. The principal reason for our share repurchase program is for managing capital efficiency. A byproduct of managing our capital efficiency is a nominal lift to our earnings per share.
Q. The demutualization materials stipulate that no stock options or grants can be issued in the first year after the conversion, but that the company intends to make stockbased incentives a part of its compensation in the future. These types of awards are routine in much of corporate America. Does MetLife view them as an important means of attracting and retaining talent?
A. It is clear to us that to attract and retain top talent we need to give a stake in the future of the company. We have definitely become a very performance-based culture. We base the current bonus on earnings, as well as the performance of business units. We also make sure that those who have exceeded expectations get rewarded appropriately. It is a critical element of a performance-driven culture. Stock and stock options will be a part of the reward package going forward.
Q. What has been the biggest change in your own role as CFO since the demutualization?
A. The biggest change is that we now report our numbers on a quarterly basis, rather than annually, so we are continually improving our projection process, as well as our ability to quickly report and analyze our numbers. In addition, we need to continually interface with analysts and investors to update them about our business activities.
Q. Do you think that all mutual insurers will eventually go public, or will we continue to see holdouts, especially among smaller companies?
A. Obviously, I can't speak for other companies. They need to determine what is best for their policyholders, It is clear that over time the industry will change and consolidate, and the need for businesses to grow will be an everincreasing challenge. Some mutuals will choose to convert, others will not.
Q. How much merger activity do you think might be unleashed by eventual demutualization of the largest insurance companies?
A. As I said, there will be pressure from increased consolidation for growth and greater efficiency. I don't think people should expect a frenzy of activities. Companies like MetLife will be cautious. We are definitely not interested in making acquisitions merely to impress the market. We like acquisitions that grow or exploit our core competencies.
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|Date:||Nov 1, 2000|
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