Can You Believe In These Conversions?

Do you have a life insurance policy or annuity issued by Prudential Life Insurance Co.? The huge mutual insurer recently announced plans to go public, and policyholders--who own the company--can only hope that they will be as fortunate as those at Allmerica Financial. They were awarded stock when the Worcester (Mass.)-based insurer shed its mutual status and did an initial public offering in October, 1995. Since then, Allmerica shares have tripled, netting investors an average annualized return of 57.4%.

Ahead of the Pru conversion--which could take two years to complete--is another widely anticipated deal: the planned conversion of Toronto-based Manufacturers Life Insurance Co. Others that may also go public include Metropolitan Life, Pacific Life Insurance, and John Hancock. Why the rush? The blurring of boundaries among financial-services providers has stepped up the pace of consolidation in the insurance industry. Companies need access to capital, and public stock can be one of the best currencies around. Shares can also be used as incentive compensation for management to improve performance.

If approved by policyholders, Manufacturers' demutualization should go through in the spring of 1999. Salomon Smith Barney analyst Colin Devine describes Manufacturers as one of the industry's most efficient operators. He figures that even if the insurer's shares go for twice their book value, they will still be a good deal. Equitable and UNUM, two of the biggest insurers to convert to date, now trade at about two and three times book, respectively.

But the latest round of conversions may not prove as lucrative for investors as the first. For one thing, Allmerica's timing was impeccable, with its shares issued on the eve of a raging bull market. Moreover, Allmerica's shares were priced at just 64% of book value, due to the company's high costs and slow growth in some product lines. Allmerica moved quickly to streamline and boost sales of hot products such as variable annuities. Its net operating income soared to $181 million in 1997, up 55% from 1995. In contrast, Prudential's low profitability and legal woes stemming from its life insurance sales practices mean investors may have to be patient to see a payoff from their Pru shares. "That's a big ship to turn around," says Larry Mayewski, an analyst with the A.M. Best insurance company rating service.

STOCK FLIPPERS. Some mutual insurers have sought a hybrid form of public ownership. In 15 states and the District of Columbia, a mutual insurer can set up a holding company owned by policyholders, then sell just under 50% of its stock subsidiary in an IPO (BW--Mar. 2). Policyholders typically get first shot at buying into the IPO at the issue price. One company that took this route is AmerUs Life Holdings. Still, many pros advise caution about putting money into a mutual holding company. Some insurers favor the structure because the conversion takes less time and money. But because the public owns only a minority stake, takeovers of an underperforming mutual holding company would be difficult. And management may be less responsive than it would be in a fully public entity.

You'll fare best if your insurer launches a pure demutualization because you'll usually receive cash or shares in the new public company. Often, a mutual insurer will raise capital by selling stock in an IPO to outside investors at the same time. In many cases, new shareholders have profited by flipping their stock shortly after the conversion.

If you want to play the conversion game, your best bet is to identify the strongest operators. Sources such as A.M. Best, Moody's Investors Service, and Standard & Poor's can indicate whether a company has been plagued by volatile earnings or is facing business problems. You should also pay close attention to how the insurer intends to use the money raised in an IPO. Plans that are vague or represent a major departure from previous strategy could be a warning sign. "I'd be highly skeptical of companies trying to reinvent themselves overnight," warns Robert Stein, national director of Ernst & Young's insurance industry services. With a number of insurers expected to go public, investors can afford to be picky.

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