It’s been a steep learning curve for Susan Boe, VP of IR at Des Moines, Iowa-based AmerUs Life Holdings. A harbinger of the insurance industry’s demutualization trend, ALH became America’s first mutual insurance holding company on June 30, 1996. An IPO raised about $100 mn in February 1997. A former attorney and journalist, Boe was brought into the IR function the first day of the roadshow.
‘We started from scratch,’ recalls Boe. ‘When I returned from the roadshow, I began working on the annual report. A few weeks later, we began the quarterlies. It was an interesting time.’
Since going public, AmerUs has made two major acquisitions, settled a class action lawsuit, and switched listings from Nasdaq to the Big Board. That tempo of events is typical of what’s in store for IR teams as mutuals move to an equity culture.
Indeed, the seeds have been sown for a rush of life insurance company demutualizations and the trend promises a fecund field for IR growth. With giant mutuals like Prudential, Sunlife, and Mutual Life Insurance Co of New York making headlines, all sorts of mutual life insurers have shown interest in going public. Estimates peg the process adding $20-50 bn in stock market capitalization over the next five years. The IPOs may be among the biggest in US corporate history, yet the nascent IR operations that sprout up face enormous challenges.
Perhaps the most precipitous slope is encountered at the beginning. The demutualization process changes the very premise of ownership and control from policyholder to stockholder. Mutual management, used to a slower communications pace with policyholders, must brace for the transition to a faster-paced dialogue and a shorter-term focus. But an equity culture is undiscovered country for newly converting mutuals.
‘Some demutualizers don’t pay enough attention to the IR function early in the transaction and wish they had afterward,’ comments Pat Tracey, VP at ChaseMellon Shareholder Services. ‘Someone must be in place to work within the transition team so they can hit the ground running with knowledge and authority.’
Making a seamless transition from communicating with policyholders to communicating with investors presents IROs with the unique challenge of building a dual capacity. If policyholders don’t get their questions answered, a demutualization can commence with suspicious investors. ‘A good IRO will help enfranchise all constituencies,’ says Tracey.
The policyholder vote is the first test of IR-like skills. Getting soon-to-be investors on side means a broad education campaign. That can involve ads, mailings and a web site. But don’t count on a web site reaching Aunt Betty. In fact, a big challenge for demutualizing companies is that they are often distributing stock to conservative individuals who may never have owned equities before.
Besides cultivating policyholders, getting off to a good start with the media is also a vital communications goal. Journalists encountering something complex tend to paint it with an uncertain brush. With big companies throughout North America ready to pull the trigger and demutualize, the topic will likely become a leading story.
Equity culture rules
Demutualization does have its allure: deregulation has spurred competition among insurance companies; mutuals are losing market share and many want more capital-raising flexibility to expand operations and product lines; and the lack of growth potential has been noticed by the industry’s rating agencies. Demutualizers yearn for the vast equity pool waiting for their sizeable splash.
Investors like conversions too. Indeed, several funds and hundreds of professional investors invest in bank and thrift conversions. Some are now turning to the insurance opportunity. One new player bills itself as the only mutual fund to target insurance demutualizations. Based in Bethesda, Bowes Bank and Insurance Fund does so by investing up to 5 percent of assets in mutual insurance company annuities.
‘As an account holder, the fund may be eligible for shares in the demutualizing company,’ says Robert Bowes, president of Bowes Bank and Insurance Fund. Bowes believes that with M&A activity rising and with the history of similar transactions as a guide, the shares can appreciate six times their initial value.
IPOs by mutual insurers, generally priced at 65 percent to 85 percent less than book value, have outperformed both industry peers and the overall market in recent years. Meanwhile, amid the greatest boom in stock market history, mutual managements are not overlooking the stock option pool party their publicly-traded neighbors enjoy.
Notwithstanding the upside, management must be prepared for a public company’s added pressures – including hostile offers. For example, during demutualization this spring, New Jersey-based Mercer Mutual Insurance Co rejected an offer by Franklin Mutual Insurance Company to pay Mercer policyholders cash for the shares of Mercer stock once Mercer’s demutualization is complete. Franklin’s offer remains on the table and it is asking for a list of policyholders in order to lobby them directly.
Two ways to market
No conversion is a cookie-cutter proposition, but mutuals go public in two basic ways. In a full demutualization, eligible policyholders are issued shares under complicated formulas while additional capital is often raised via an IPO. The process can take years and cost hundreds of millions of dollars.
Another scheme, such as the one Mercer opted for, involves bringing a subsidiary public with the mutual holding company retaining majority control. Since such restructurings were first allowed in 1995, well over a dozen states have passed authorizing legislation, and bills are pending in several others.
Critics like Ralph Nader contend that mutual insurance holding companies are a bad deal for policyholders because they are not compensated for loss of control. In full demutualizations, policyholders get equity. Prudential, for example, plans to distribute about $12 bn as cash and stock to its 11 mn policyholders while maintaining their insurance benefits.
Portland-based Standard Insurance Co also chose to go down the full demutualization route. Even before its December announcement, however, Standard had organized a very comprehensive communications plan to bring regulators, policyholders, the public and media on-side. It has set up a web site and toll-free number to answer policyholder questions. A continent away from Wall Street, it recently hired an experienced IRO to warm up contacts among investors and financial press.
Coordinating much of the change is Greg Ness, vice president and corporate secretary at Standard. ‘All this is relatively new,’ says Ness. ‘There’s not much of a roadmap to follow.’
From the start, Standard’s shareholder base will include hundreds of thousands of former policy owners. ‘Many may never have owned stock before,’ notes Ness. ‘Shareholder communications will be among our biggest challenges.’
Ness points out that if Standard’s pattern follows other demutualized companies, its shareholder base will be substantially more institutionalized in a few years.
In contrast, 75 percent of AmerUs Life Holdings shares are already in institutional hands. Since its highly successful IPO in early 1997, it has attracted four equity analysts. In fact, AmerUs’ novelty has been something of an investor relations advantage.
‘Analysts have been interested because they get to find out about our company but also how our holding company method works,’ says AmerUs’s Boe, who notes the method is much quicker and cheaper than a full demutualization.
All in all, Boe points to her legal experience as a key element of success. ‘The advice lawyers give is often unworkable in the real world,’ says Boe. ‘A lawyer will read you the regulations, but how do you put the law into practice? When an analyst calls, you must stay within SEC rules, but where is the line? Being a lawyer makes it easier to know.’
AmerUs’s stock price doubled in the year following its IPO. Now performance has leveled off. ‘We had a great ride the first year, but memories are short in this game,’ concludes Boe.
