The Catch In Signing On To John Hancock's Ipo

Critics say the insurer's offering is unfair to policyholders

The John Hancock Mutual Life Insurance Co. is already planning a big celebration. For nearly two years the large Boston insurer has been maneuvering to take itself public and raise an estimated $2 billion. Hancock expects the deal to go through in early January, and is contemplating hiring home-run king Mark McGwire to stand on the New York Stock Exchange podium and hit whiffle balls onto the trading floor, a spokesman says.

But Hancock might not be able to uncork its champagne as soon as it had hoped. Opposition to the IPO has gained momentum. Insurance watchdogs complain that policyholders are getting a bad deal. For instance, the IPO gives an unfair advantage to institutional investors by delaying the access of Hancock policyholders to their stock for at least 20 days after public trading begins. One insurance company antagonist, Cambridge (Mass.) lawyer Jason Adkins, says unless Hancock offers a fairer deal to its policyholders, he may seek a court injunction to block the IPO. "A lot of policyholders will consider suing," Adkins says.

Hancock is one of many U.S. insurers trying to raise capital through stock offerings to catapult their sleepy businesses into competition with bigger and more nimble banks and brokers. Long overshadowed in Boston by Fidelity Investments and FleetBoston Financial Corp., Hancock wants to expand its insurance and mutual-fund business.

CASH PAYOUT. Hancock Chief Executive David F. D'Allesandro dismisses critics. But he is circumspect about the hurdles his company faces before his IPO can proceed. "Ultimately what matters is whether the deal is fair to our 2.9 million policyholders," he says. Hancock's IPO is now in the hands of Massachusetts insurance regulators. Before yearend, they must approve portions of Hancock's proposed demutualization--the process of converting from a policyholder-owned firm to an investor-owned firm--before the IPO can proceed. D'Allesandro hopes Massachusetts regulators will approve the plan. "They wouldn't have let it get this far if they had major problems," he says. Massachusetts Insurance Commissioner Linda Ruthardt declined to comment.

A key complaint of Hancock's IPO is its unusual plan to distribute cash instead of stock to policyholders. Most demutualizations have distributed stock. Hancock is giving policyholders until Nov. 30 to elect to receive either cash or stock. But those who do not make an election will automatically get cash. Hancock estimates that about two-thirds of its policyholders will receive $1.8 billion of the $2 billion from the IPO.

David Schiff, editor of Schiff's Insurance Observer, says the plan is unfair to policyholders. Those who don't opt for either stock or cash will face an immediate tax liability when they receive a check. And policyholders who elect to receive stock won't get access to their shares until weeks after the effective date of the plan, giving big investors who receive shares on Day One of the IPO an advantage if the shares rise quickly and they take profits.

Hancock defends its cash payout as one of the strongest benefits of its plan. "Most demutualizations couldn't afford to do this" because they didn't raise as much money, says D'Allesandro. John M. DeCiccio, a Hancock executive overseeing the demutualization plan, says the cash option includes a potential bonus of 120% if Hancock's stock rises sharply after the IPO. That would compensate those who elect cash for a discrepancy in their distributions. He adds that Hancock will save $30 million a year in shareholder servicing costs by having 1 million shareholders instead of 2.9 million. "That $30 million goes directly to annual earnings," he says.

But other critics cite another reason why policyholders aren't getting a square deal. Joseph M. Belth, an Indiana University insurance expert, claims many policyholders aren't likely to understand Hancock's arcane method for allocating shares to policyholders. He says some longtime policyholders will receive no stock while some recent customers will receive significant numbers of shares. "The strange results of John Hancock's allocations formula suggest something is wrong," he says. Hancock says its allocations formula has been used in other demutualizations and has been approved by regulators in Massachusetts and New York.

Much of this debate centers around arcane insurance accounting. But $2 billion rides on whether Hancock can persuade regulators its plan is fair.

Before it's here, it's on the Bloomberg Terminal.