December 1, 1998

Leader

An Iowa Insurer Pioneers
A New Way to 'Demutualize'

By SCOT J. PALTROW
Staff Reporter of THE WALL STREET JOURNAL

DES MOINES, Iowa -- In October 1995, a company then known as
American Mutual Life Insurance Co. sent notices to its 334,000 policyholders
urging them to endorse a revolution.

Not that the company put it that way.

Its bland notice instead asked policyholders -- the owners of the mutual
company -- to vote to convert the operation into something called a "mutual
holding company." Management said the change would ensure a brighter,
better-capitalized future for the company without harming policyholders in any
way.

"As always, protection of American Mutual policy
owners has been at the forefront of our thinking," Chief
Executive Roger K. Brooks told Iowa Insurance
Commissioner Therese M. Vaughan at a hearing before
the vote.

Though voluminous, the explanatory material provided
to policyholders didn't reveal that they would lose much
of their stake in the Des Moines-based insurer -- and
get neither stock nor cash in return. Nor did it mention
that the conversion would clear the way for directors
and executives to get potentially lucrative stock options
that weren't available under the prior structure.

The notice said nothing about the potential conflict between the interests of
policyholders and those of shareholders under the new arrangement. And it
didn't mention that this was the first time any insurer had ever proposed such a
structure.

On Nov. 28, 1995, the changeover was approved by a policyholder vote of
65,246 to 4,690.

Starting a Movement

While barely noticed at the time, the conversion of the insurer now known as
AmerUs Life Holdings Inc. has since captured the attention of the rest of the
industry, generating lawsuits and controversy. More than a dozen large mutuals
have followed in AmerUs's footsteps or are considering doing so. Among them
are Principal Financial Group of Des Moines and Provident Mutual Life
Insurance Co. of Berwyn, Pa. (no relation to Provident Cos., the business that
is merging with Unum Corp.).

The old mutual-insurance structure, these insurers argue, is a handicap in an era
of consolidation of financial-services companies. Publicly traded companies
have much easier access to capital markets and thus more ways to finance
growth, they note. Mutual companies that once sold policies by emphasizing
that their operations were, as one AmerUs brochure put it, "owned by and
managed in the interests of its policyholders" now play down the ownership
issue. "Most people don't care," Mr. Brooks says.

                      Until AmerUs introduced the holding-company
                      approach, the only way to convert a mutual
                      company into a publicly traded one was to pay
                      policyholders for their ownership, either in stock
or in stock and cash. This is what Equitable Life Assurance Society of the U.S.
(now Equitable Cos.) did in 1992, before making an initial public offering and
freeing the stock to trade publicly. It is also what Prudential Insurance Co. of
America is in the process of doing, and what Metropolitan Life Insurance Co.
announced this week it will do.

Nothing You Can Sell

The structure that AmerUs pioneered is more complex. Policyholders are given
collective ownership of a newly created holding company -- but no shares in
the insurer itself. The holding company owns a majority of the voting stock of a
new public company, which, in turn, owns the insurance company. Critics say
this isn't a fair deal for policyholders because their stake in the holding company
doesn't have any realizable value: It can't be traded, and it isn't convertible into
cash. By contrast, once Met Life demtualizes, its policyholders will receive up
to $14 billion, mainly in stock.

Lawsuits on behalf of policyholders are pending against Principal and Provident
Mutual, challenging such newfangled conversions. The suits allege that
policyholders were illegally deprived of their ownership of the insurers and
instead given worthless "membership interests" in a new holding company.
Provident and Principal deny the allegations and are contesting the suits.

Opposition from consumer groups in New York earlier this year derailed state
legislation that would have authorized the holding-company conversion of New
York-based insurers. Met Life had been set to follow AmerUs's example by
forming a mutual holding company, instead of the standard demutualization it
has now announced.

The bill's main sponsor in the state assembly, Insurance Committee Chairman
Alexander B. Grannis, withdrew his support after a public hearing and issued a
critical report. It said in part that under the bill, "mutual policyholders would
give up control of their companies and the right to share in 100% of the profits
... and would be exposed to added risk."

But AmerUs and some other mutual insurers praise the holding-company
method as faster and cheaper than the alternative, while providing the company
more flexibility in deciding when to tap the capital markets. They contend that
policyholders are adequately protected, and ultimately benefit from the
company's improved financial health, especially if the company later takes the
further step of shifting entirely to public ownership. At AmerUs, Mr. Brooks
says the change has already proved its worth, facilitating an influx of capital
from three securities offerings and making possible two important acquisitions.

Whether a given company can adopt the holding-company structure depends
on whether this is permitted by the state in which it has its domicile. Currently,
21 states and the District of Columbia allow the conversion.

Where the policyholder lives isn't a factor. So one person may get thousands of
dollars in stock when his or her insurer demutualizes, while a neighbor covered
by a different mutual insurer gets none. For instance, both AmerUs and what is
now Allmerica Financial Corp. in Worcester, Mass., converted in 1995.
While AmerUs policyholders received no cash or stock, Allmerica's got stock
worth an average of $4,893. Those who held their shares have seen their value
more than double.

Jay Angoff, until recently Missouri's insurance commissioner, says it can be
hard to explain the disparity. "States have different laws, but for the person that
gets nothing I guess it doesn't make too much sense," he says.

What prompted an old-line Iowa company to become the first to try the
unusual holding-company structure? One answer is that an aggressive executive
was in charge.

Diversification Move

Mr. Brooks, who became CEO in 1974 at the age of 36, didn't fit the mold of
a stodgy mutual-company official. His ambitions for what was then Central Life
Assurance Co. went way beyond selling life insurance. Beginning in 1980, he
went on a buying spree, investing in a company that leased car-wash
equipment, a joint venture to explore for oil, a securities brokerage firm,
title-insurance and mortgage-origination businesses, and a series of other
insurers.

Many of the investments resulted in losses. And although several acquisitions
brought big gains when the units were sold earlier this year, the synergies Mr.
Brooks hoped for never materialized. Three times in the late 1980s, the
company reduced the dividends paid to policyholders. In some years, its
surplus, the cushion of capital that safeguards a company's ability to pay claims,
also declined. The company says the problems stemmed from a weak
performance of its stock and bond portfolio, not from its acquisition strategy.

Scrapping the diversification effort didn't sap Mr. Brooks's ambitions for
Central Life. When James Smallenberger, then general counsel and now senior
vice president, floated the idea for a holding-company structure in early 1995,
Mr. Brooks pounced. There was already a precedent for such a conversion.
During the 1980s, a number of depositor-owned savings-and-loan associations
switched to a mutual-holding-company structure, moves that had proved
advantageous to management.

Iowa certainly seemed a good venue in which to seek the first legislative
authorization to extend the model to insurers. While the state is better known
for corn, insurance is a key part of its economy. This is clear from the Des
Moines skyline: The tall buildings all are insurance-company headquarters or
are owned by insurers.

At the Iowa Historical Society Museum, much of the floor space is given to a
permanent exhibition titled "We've Gotcha Covered: The Iowa Insurance
Story." It features a room of wrecked automobiles for the car-insurance
display, a room of coffins for burial insurance -- even an interactive exhibit on
the job of an actuary.

David J. Lyons, Iowa economic-development director and a former state
insurance commissioner, says, "Every year we try to do at least one thing to
promote the industry." In 1995, that one thing was the holding-company law,
which was drafted mainly by two insurance trade groups.

Among the bill's sponsors was State Rep. Libby Jacobs, who was and remains
a member of management at Principal Financial Group -- which would soon
become the second Iowa insurer to take advantage of the law. Ms. Jacobs
contends there was no conflict of interest because she got no personal benefit
from her company's conversion.

John Manders, a former general counsel of the Iowa Insurance Department and
now a Drake University insurance professor, says the bill "wasn't controversial
because nobody knew about it." He adds: "It was just one of those babies that
walked right on through. I don't think the legislature had the foggiest idea of
what they were doing."

Ms. Vaughan, the current insurance commissioner, says she doesn't recall
whether she asked her staff to review closely AmerUs's notice to policyholders.
She says she saw no need for the notice to disclose alternatives, such as a
standard demutualization that would give policyholders stock or cash. "If you
start saying every option has to be presented, then you open up a can of
worms," she says.

"Most of the policyholders probably never read the prospectus," says Raymond
J. Mals, a 77-year-old agent in Wilmette, Ill., who used to sell American
Mutual policies and is an AmerUs policyholder. "Even today, a lot of those
people don't understand what happened," he says.

The notice to policyholders said the company had no immediate plan to issue
stock. But once the bill became law and policyholders approved the
conversion, American Mutual moved swiftly to take the company public. Mr.
Brooks says, "I don't believe we ever misled our policyholders in any way."

When the IPO was announced, policyholders were told that if they wanted
stock, they would have to buy it as part of a subscription program. Fewer than
1% of those eligible did so.

Stock and Stock Options

One group subscribed for the maximum amount: 5,000 shares each. That was
AmerUs's top management and some directors, including Mr. Brooks, who
were eligible because they, too, were policyholders. On the day of the IPO,
Jan. 29, 1997, the stock rose to $19.125 from $16.50, handing instant paper
profits to insiders and the few policyholders who had participated.

On July 29, 1997, the earliest date allowed, management received its first stock
options. Options for 377,000 shares went to the top five officers, including
165,000 to Mr. Brooks.

Within two months, the company announced two acquisitions: Delta Life Corp.
and AmVestors Financial Corp., both sellers of annuities and insurance. Both
were expected to boost AmerUs's earnings, and the news propelled AmerUs
stock upward.

Two analysts for Credit Suisse First Boston questioned AmerUs's decision to
make the acquisitions only after the options had been granted, though their
report acknowledged that "perhaps these developments were purely
coincidental in a difficult acquisition environment." Mr. Brooks says the options
grants didn't in any way influence the timing of the acquisitions.

To date, AmerUs directors and managers have received 10-year options to
buy a total of 763,000 shares. The options aren't currently in the money, the
stock having taken a hit after a weak third-quarter earnings report, for which
the company blamed losses from indirect investments in small financial
institutions. Last week, Duff & Phelps lowered its rating on AmerUs Life
Insurance Co.'s debt and ability to pay claims. The stock closed Monday on
the New York Stock Exchange at $22.0625, still above the IPO price but well
down from its all-time high of about $38.

Mr. Brooks says he is considering asking the board to reset the options'
exercise price, putting them back in the money. He says that options "are
incentives for people down in the organization," and a reset may be necessary
to keep them from leaving. He says the reset might not apply to top
management's options.

Besides granting options, AmerUs's board has increased cash compensation for
executives. It raised Mr. Brooks's 1997 bonus to $520,000, a 25% increase,
bringing his 1997 cash compensation to more than $1.4 million.

Whose Interest?

AmerUs has also bought back $75 million of its stock and announced plans for
an additional $25 million buyback. David Schiff, an industry critic who
publishes a newsletter, alleges that the company's use of capital for buybacks,
which tend to prop a stock, reflects the inherent conflict of interest between
policyholders and public shareholders.

The conflict exists, he and other critics say, because policyholders naturally
seek low premiums and high dividends on their policies, as well as a sense of
confidence that the company will be able to pay claims. Shareholders, in
contrast, seek higher earnings, partly through higher premiums and buybacks,
and a different kind of dividend: cash payments on common stock.

A lawyer for AmerUs appeared to confirm this distinction in a February letter
to the Internal Revenue Service seeking a tax ruling. Washington lawyer
Richard W. Skillman, of the firm Caplin & Drysdale, stated: "The real world
facts are that the directors and officers of a life insurance company with publicly
traded stock are keenly aware of, and perhaps personally interested in, the
value and per share earnings of that stock and have no incentive whatsoever to
distribute greater policyholder dividends than required for contractual or
competitive purposes."

Mr. Brooks rejects the suggestion that management might side with
shareholders to the detriment of policyholders. He says competitive pressures
ensure that policyholders will get adequate policy dividends.

As to dividends on stock, while public shareholders of AmerUs have been
receiving 10 cents a share quarterly, individual policyholders who don't own
shares haven't received any stock dividends, even though they control the
holding company. The law authorizing the AmerUs demutualization didn't
address whether its policyholders would be entitled to a share of dividends on
stock.

If policyholders don't like what management is doing, they can't do much about
it; bylaws make it exceedingly difficult for policyholders to oust directors. But
shareholders also can't do much about management, because the holding
company, not the shareholders, controls a majority of the voting stock. A
benefit of this setup, Mr. Brooks says, is to guard against hostile takeovers.

The chief executive says such protections benefit shareholders and
policyholders alike by enabling managers to plan for the long term. "I know if I
keep doing the right stuff here," Mr. Brooks says, "I'm going to increase the
value of this company."
 

-- Richard Gibson contributed to this article.