Conversion Could Boost Prudential's Competitiveness, Spur Other Mutuals to Follow Suit, Analyst Says

Prudential Insurance Company of America's announcement that it plans to demutualize is a watershed event that could lead other large mutual insurers to reassess their corporate structures, acknowledged Larry Mayewski, senior vice president of A.M. Best Co. If successful, the plan to convert from a mutual company owned by its customers to a public company owned by stockholders could make the Newark, N.J.-based company more competitive.

"The steps they are taking today make them better positioned to add value to policyholders and shareholders in the long term," Mayweski said.

Prudential's "A" (Excellent) A.M. Best financial rating is not affected by the announcement, the rating firm says, as full demutualization could be two years away. The rating remains under review with developing implications pending completion of a review of Prudential's 1997 financial results and finalization of a policyholder-restitution process related to the company's market-conduct settlement.

Many mutual companies are considering changing to a publicly held corporate structure. The most common reason for mutual companies to convert is access to capital, A.M. Best said in a release.

"Prudential has always been able to raise capital through the issuance of surplus notes and debt in its downstream subsidiaries," Mayewski said, "but they always had limits in what they could do."

Through demutualization, the company would be positioned to raise equity capital or use its stock as currency to strengthen its competitive position in the life and retirement savings areas. By acquiring a mutual fund company, for example, Prudential would increase its presence and round out its financial services operations, Mayewski said.

The 1997 life/health edition of "Best's Aggregates and Averages," lists 1,046 stock companies, compared with 92 mutuals. Many of the largest players, however, are mutual companies, including Metropolitan Life Insurance Co., New York; New York Life Insurance Co., New York; and Northwestern Mutual Life Insurance Co., Milwaukee.

Mayweski said Prudential's decision might provide the impetus for others to demutualize. "I think Prudential's announcement will cause some of the other large mutuals to take notice and may cause them to reassess their corporate structures sooner, rather than later," he said.