VideoCFO Bob Broatch likes nothing more than the wind at his back, whether it's driving his 27-foot boat, Prime Interest, in Maine's Casco Bay or piloting the financial future of UNUM Corp., a Portland, Maine-based disability and special risk insurance holding company with $4 billion in revenues last year. It has been full-speed ahead for UNUM since converting from a mutual insurance company to a publicly traded insurer 10 years ago. Premium income has doubled to $3.18 billion, operating income has more than tripled to $342 million, and market capitalization is up to $7.5 billion from $1.3 billion a decade ago. In addition, UNUM's 50 percent stock market surge in 1997 made it 39th in shareholder value among the Standard & Poor's 500.
To what does it owe this spectacular report card? "Largely demutualization," says Broatch, who has been UNUM's CFO for the past two years. "Had we remained a mutual, we wouldn't have had access to the capital markets to make acquisitions and build our infrastructure, as well as attract and retain key employees. The capital markets are a wonderful disciplinarian. Every day, you look at your stock price, and if it isn't performing, the onus is on you to get your house in order. Mutuals just don't have that kind of pressure to perform--that kind of accountability. Moreover, they generally have higher expense structures, lower returns on capital, and lower growth rates."
A FLOOD OF INTEREST
When UNUM demutualized a decade ago, it was considered an industry blip, an anomalous development few others would entertain. Today, such conversions are a worldwide phenomenon. In recent weeks, mammoth mutuals the likes of Prudential, Sunlife, and Mutual Life Insurance Co. of New York have indicated their intent or interest in demutualizing. They follow a long list of insurers, mostly in the life sector, that have converted, including Equitable, Royal Maccabees, First Allmerica Financial, and Midland.
Yet, these companies are just the tip of the iceberg, industry analysts contend. "Our prediction is that dozens of mutuals--first life insurance companies and then property/ casualty insurers--will seek a more modern corporate structure," says Michael Blumstein, a managing director and insurance stock analyst at Morgan Stanley Dean Witter in New York. Agrees Gloria L. Vogel, senior vice president and insurance analyst at Advest Inc., a Hartford-based securities broker, "As MetLife and Pru go, the onus will be on the remaining large mutuals, such as Hancock, Guardian, and Liberty Mutual, to follow suit."
Deciding just what form these conversions will take, however, has become increasingly controversial. Full demutualizations, like the one UNUM endured, can take years and cost millions of dollars. The less-involved alternative--creation of a mutual holding company--however, is viewed by many as a vehicle for profiteering corporate executives. Yet, most experts agree that the traditional mutual company has all the makings of a dinosaur. In an industry that has seen rapid consolidation in the past five years--including the mega-mergers of Phoenix Mutual Life Insurance with Home Life Insurance and Metropolitan Life Insurance with New England Mutual Life Insurance--the survivors are going to be those insurers that can garner the most capital. And in the end, the luckiest beneficiaries may be corporate buyers, which will see more abundant and potentially cheaper insurance offerings.
IN SEARCH OF CAPITAL
Mutuals, which are owned by their policyholders, obviously have plenty of cash on hand from ongoing insurance premium revenues. But their lack of access to the equity markets has dampened their ability to expand operations and product portfolios and acquire other companies. "Insurers increasingly need capital to grow and achieve economies of scale, demonstrate financial strength, and offer better value to consumers," says Sue Collins, the managing principal, North America, for Tillinghast-Towers Perrin, a New York-based risk management consulting firm. "With life insurance earnings down considerably from a decade ago because of the soft insurance market, a mutual's ability to grow its surplus has diminished."
The handicap has been particularly apparent in the recent mergers and acquisitions wave. When publicly traded Travelers Insurance, for example, acquired Salomon Brothers last year for $9 billion, it was an acquisition that most mutuals could not even entertain. And Broatch points out that the two acquisitions he has made since going public would not have been possible otherwise. "In today's mergers and acquisitions market, [mutuals have] a serious hurdle to surmount," says Collins.
That lack of growth potential has also been noticed by the industry's rating agencies. S&P, A.M. Best Co., and Moody's Investors Service are loath to give their best marks to insurance companies facing capital growth restrictions. "They've tightened theirstandards and now threaten ratings downgrades for companies with mediocre growth prospects," Blumstein says. "They seem to have a bigger-is-better bent these days, figuring the bigger the insurer, the smaller its chance of failure. With very modest access to the capital markets, the mutuals are limited in their ability to deal with rating agency pressures."
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