EMTH - Profiles - Reprints of Articles by Partners/Assosciates

To the editor:

Rhona L. Ferling=s article, AHeading for Conversion?@ in the January issue is an excellent, balanced discussion of the current state of demutualization. What is particularly interesting are the Astandard@ objections and fears about demutualization it cites, which, once investigated, turn out to be virtually without merit. To set the record straight, I=d like to take a swipe at a few of the straw men that were lurking in Ms. Ferling=s piece.

The article discusses the volatility of the stock market and the pricing of Equitable Life=s shares. However, there is no reason to be scared of the stock market if you have knowledgeable advisers. True, Equitable=s Aforced@ demutualization and a dip in the Dow last July caused the stock to be priced lower than what had originally been estimated. Yet recently the stock closed at 16 e, an 85% increase in market value in six months.

Did Equitable leave too much on the table for its policyholders? Maybe, but what=s wrong with that? One purpose of a demutualization is to unlock the equity a policyholder has in the company, which otherwise would be inaccessible except in a liquidation. (And we all know how much is left for policyholders in those situations.) Why shouldn=t policyholders be rewarded for their loyalty to the company?

Not convinced, the straw man retorts, AThe stock price can go down, too.@ But even we laymen know that stock prices usually drop for a particular reason, such as bad operating results. Consider that as another warning bell to management, one that is not heard when the company is in mutual form.

Another downside noted in the article is that stock companies have to focus on short-term earnings and cannot operate in a long-range environment. This is another shibboleth. Sure, it would be nice to show great quarterly results, but no chief executive sacrifices his or her long-term prospects for short-term profits. If you don=t believe me, Warren Buffett is quoted on the November 23, 1992, cover of Forbes as saying, AI don=t worry about one quarter=s results.@

It also is not true that the minute a company converts to stock ownership corporate raiders will be at its doorstep. First, the corporate raiding business isn=t what is used to be: Mr. Bilzarian is on work release, Mr. Icahn has just slunk away from Trans World Airlines and Mr. Pickens is back in Texas hitting dry holes. The junk-bond market for corporate acquisitions virtually has disappeared and banks are not too interested in doing highly leveraged transactions.

Furthermore, if the demutualization is properly planned and executed, the stock company will have significant anti-takeover defenses in place. Finally, several states, including New York, have anti-takeover provisions in their demutualization statutes to give the converted insurer the opportunity to get on its feet as a stock company and to deploy any proceeds from the sale of its securities.

Demutualization also is attacked as being too expensive. Its benefits, however, are undisputed and tangible. Stock companies, unlike mutuals (unless they have great earnings), are unable to attract real capital. Real capital doesn=t have to be repaid like surplus notes, and a company can go to the well for additional capital again and again. How many times can a company sell its home office or receivables?

Let=s face it, a demutualization is a complex transaction requiring a lot of expensive talent. The expense is just another cost of doing business and if your company is able to sell securities in the transaction, this expense is not charged against earnings but netted against the proceeds. In effect, the stockholders carry the cost of the deal.

But the naysayers counter that converting to generally accepted accounting principles is difficult. While this is true, mutual companies are going to have to adapt to GAAP anyway. Moreover, most businesses, including insurers, account for their results on a GAAP basis. In the last five years, even the banks and thrifts have been forced, by law and regulation, to give up regulatory accounting procedures and institute GAAP. And if Rep. John Dingell gets his way, all insurers that obtain federal certificates of solvency will be required to account for their operations under rules to be promulgated by the Financial Accounting Standards Board, and that=s GAAP.

Another misconception discussed in the article is that in a stock company policy dividends are diverted to the stockholders. As Ms. Ferling points out in her sidebar on Equitable=s transaction, New York law required the insurer to establish a closed block of business to Aguarantee the dividend scale.@ There=s nothing in any other state=s demutualization statute that would prevent a company from taking this precaution.

Indeed, all demutualization statutes require Afairness to policyholders@ as the sine qua non of the transaction. While having a closed block shouldn=t necessarily be required, it certainly is evidence of the company=s attempt to treat its policyholders fairly.

Finally, Ms. Ferling notes that there=s a Acatch-22" in the demutualization game: If your company doesn=t have the Equitable name, needs capital and has had a few bad years, no one is going to buy its stock, and if the company is healthy and profitable, why bother? This is simply not true: Several private investors are currently seeking investment opportunities in the mutual insurance arena. While it would be great to find a gem, these investors are realists. What they want are companies that have good management with a good business plan.

There are innumerable ways to structure a demutualization. Companies are often surprised by the amount of interest the local community has in investing in them. That interest runs from the curious (those who want to know what=s been going on in that big building for the past 100 years)to the selfish (political types who want the company to succeed because it provides nice, nonpolluting white-collar jobs). Witness the amazing success of the recent rash of rights offerings by capital-deficient savings banks. Most, if not all, of those deals have been oversubscribed.

If your company has plenty of capital, should you demutualize anyway? Maybe, if it is advantageous to do so. Why wait until you=re under the gun? If you do it when it is an option rather than a necessity, you will have more control over the process.

It=s always easier to criticize than it is to act. Critics take no risks, and consequently, share in no rewards. The rewards of demutualization can be great. In a way, conversion to stock form sets a company free from the handcuffs of a 19th-century form of corporate organization and heads off a shotgun wedding with an incompatible company. It also removes the risk of being sued by a joint venture partner for usurping a joint venture opportunity and eliminates conflicts of interest associated with serving on the board of a downstream holding company.

Once the homework is done, the demutualization boogeymen pretty much vanish. Demutualization is a grueling process, but it=s worth it. Ask the companies that have done it.




			To the editor: Rhona L. Ferling=s article, AHeading for Conversion?@ in the January issue is an excellent, balanced discussion of the current state of demutualization. What is particularly interesting are the Astandard@ objections and fears about demutualization it cites, which, once investigated, turn out to be virtually without merit. To set the record straight, I=d like to take a swipe at a few of the straw men that were lurking in Ms. Ferling=s piece. The article discusses the volatility of the stock market and the pricing of Equitable Life=s shares. However, there is no reason to be scared of the stock market if you have knowledgeable advisers. True, Equitable=s Aforced@ demutualization and a dip in the Dow last July caused the stock to be priced lower than what had originally been estimated. Yet recently the stock closed at 16 e, an 85% increase in market value in six months. Did Equitable leave too much on the table for its policyholders? Maybe, but what=s wrong with that? One purpose of a demutualization is to unlock the equity a policyholder has in the company, which otherwise would be inaccessible except in a liquidation. (And we all know how much is left for policyholders in those situations.) Why shouldn=t policyholders be rewarded for their loyalty to the company? Not convinced, the straw man retorts, AThe stock price can go down, too.@ But even we laymen know that stock prices usually drop for a particular reason, such as bad operating results. Consider that as another warning bell to management, one that is not heard when the company is in mutual form. Another downside noted in the article is that stock companies have to focus on short-term earnings and cannot operate in a long-range environment. This is another shibboleth. Sure, it would be nice to show great quarterly results, but no chief executive sacrifices his or her long-term prospects for short-term profits. If you don=t believe me, Warren Buffett is quoted on the November 23, 1992, cover of Forbes as saying, AI don=t worry about one quarter=s results.@ It also is not true that the minute a company converts to stock ownership corporate raiders will be at its doorstep. First, the corporate raiding business isn=t what is used to be: Mr. Bilzarian is on work release, Mr. Icahn has just slunk away from Trans World Airlines and Mr. Pickens is back in Texas hitting dry holes. The junk-bond market for corporate acquisitions virtually has disappeared and banks are not too interested in doing highly leveraged transactions. Furthermore, if the demutualization is properly planned and executed, the stock company will have significant anti-takeover defenses in place. Finally, several states, including New York, have anti-takeover provisions in their demutualization statutes to give the converted insurer the opportunity to get on its feet as a stock company and to deploy any proceeds from the sale of its securities. Demutualization also is attacked as being too expensive. Its benefits, however, are undisputed and tangible. Stock companies, unlike mutuals (unless they have great earnings), are unable to attract real capital. Real capital doesn=t have to be repaid like surplus notes, and a company can go to the well for additional capital again and again. How many times can a company sell its home office or receivables? Let=s face it, a demutualization is a complex transaction requiring a lot of expensive talent. The expense is just another cost of doing business and if your company is able to sell securities in the transaction, this expense is not charged against earnings but netted against the proceeds. In effect, the stockholders carry the cost of the deal. But the naysayers counter that converting to generally accepted accounting principles is difficult. While this is true, mutual companies are going to have to adapt to GAAP anyway. Moreover, most businesses, including insurers, account for their results on a GAAP basis. In the last five years, even the banks and thrifts have been forced, by law and regulation, to give up regulatory accounting procedures and institute GAAP. And if Rep. John Dingell gets his way, all insurers that obtain federal certificates of solvency will be required to account for their operations under rules to be promulgated by the Financial Accounting Standards Board, and that=s GAAP. Another misconception discussed in the article is that in a stock company policy dividends are diverted to the stockholders. As Ms. Ferling points out in her sidebar on Equitable=s transaction, New York law required the insurer to establish a closed block of business to Aguarantee the dividend scale.@ There=s nothing in any other state=s demutualization statute that would prevent a company from taking this precaution. Indeed, all demutualization statutes require Afairness to policyholders@ as the sine qua non of the transaction. While having a closed block shouldn=t necessarily be required, it certainly is evidence of the company=s attempt to treat its policyholders fairly. Finally, Ms. Ferling notes that there=s a Acatch-22" in the demutualization game: If your company doesn=t have the Equitable name, needs capital and has had a few bad years, no one is going to buy its stock, and if the company is healthy and profitable, why bother? This is simply not true: Several private investors are currently seeking investment opportunities in the mutual insurance arena. While it would be great to find a gem, these investors are realists. What they want are companies that have good management with a good business plan. There are innumerable ways to structure a demutualization. Companies are often surprised by the amount of interest the local community has in investing in them. That interest runs from the curious (those who want to know what=s been going on in that big building for the past 100 years)to the selfish (political types who want the company to succeed because it provides nice, nonpolluting white-collar jobs). Witness the amazing success of the recent rash of rights offerings by capital-deficient savings banks. Most, if not all, of those deals have been oversubscribed. If your company has plenty of capital, should you demutualize anyway? Maybe, if it is advantageous to do so. Why wait until you=re under the gun? If you do it when it is an option rather than a necessity, you will have more control over the process. It=s always easier to criticize than it is to act. Critics take no risks, and consequently, share in no rewards. The rewards of demutualization can be great. In a way, conversion to stock form sets a company free from the handcuffs of a 19th-century form of corporate organization and heads off a shotgun wedding with an incompatible company. It also removes the risk of being sued by a joint venture partner for usurping a joint venture opportunity and eliminates conflicts of interest associated with serving on the board of a downstream holding company. Once the homework is done, the demutualization boogeymen pretty much vanish. Demutualization is a grueling process, but it=s worth it. Ask the companies that have done it.