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Decision time for MetLife policyholders

932,000 Pennsylvanians must choose cash or shares as insurer converts to stock ownership

Tuesday, January 04, 2000

By Len Boselovic, Post-Gazette Staff Writer

It used to be that in order to own a piece of The Rock, you had to own a Prudential insurance policy.

    What MetLife policyholders get

MetLife expects its 11.1 million policyholders will be entitled to receive 700 million shares of the newly created stock, which it estimates will be priced between $14 and $24 per share. Based on what policyholders of other insurers chose when they converted, MetLife expects:

Policyholders entitled to 40 million shares will receive enhanced coverage worth $560 million to $960 million.

Policyholders entitled to 84 million shares will choose the cash option and receive $1.2 billion to $2 billion.

The remaining 576 million shares will be held for policyholders in a trust, which will control 69 percent of MetLife stock after the initial public offering is completed.

Source: Metropolitan Life Insurance Co.


Not any more.

The nation's biggest insurers are "demutualizing," converting from companies owned by policyholders to companies owned by stockholders. The change makes it possible for insurers to raise capital by issuing stock. They'll use the proceeds from stock sales to enter new markets, make acquisitions and pursue other growth opportunities. They'll also use the new shares as incentives for their top executives.

The trend is being driven, in part, by the one-stop-shopping mindset that pervades the financial services industry. Banks want to offer mutual funds and insurance. Insurance companies want to be able to compete head-on with banks and mutual fund companies.

Metropolitan Life Insurance Co., the nation's largest life insurer, is the latest to get into the act. On Sept. 28, MetLife directors approved plans to convert to a stock company. Over the past few weeks, the company outlined the conversion in a mailing to its 11.1 million policyholders, including 932,000 in Pennsylvania.

The mailing included a ballot, since policyholders must approve the conversion. MetLife needs yes votes from two-thirds of policyholders voting. It also needs approval from New York insurance regulators.

MetLife says the change will have no impact on policyholders' coverage and benefits. Other insurers that have converted have promised the same.

But as more make the change, actuaries are raising more doubts about what will happen.

"There is some question about what the future dividends will be, despite what the company may say," says Glenn Daily, a New York insurance consultant.

    Stocking up on MetLife

Metropolitan Life Insurance Company is joining John Hancock and other insurers in converting from a company that's owned by policyholders to one owned by stockholders. The change allows insurers to raise capital in order to grow.

If MetLife's plans are approved, here's what policyholders will receive:

Ten shares of MetLife stock for giving up their ownership in the policyholder-owned company.

An undetermined number of additional shares based on the type of coverage they have, how long they've been a policyholder, and how much the policies are worth.

Questions? Call MetLife toll-free at 1-800-649-3593.

Instead of taking stock, some policyholders can elect to receive cash. Others are required take cash or credits that enhance their coverage. Those who have a choice and want cash must notify MetLife no later than Feb. 7. If they don't, they'll get stock.

Starting Jan. 30, policyholders can call the toll-free number to find out the number of shares they're entitled to. They'll need their MetLife investor identification number in order to get the information.

If they take cash, payments will equal the number of shares they receive times the initial public offering price of MetLife stock. Cash payments are taxable income.

If they take stock, it will be held in a trust for a year. Stock payments are not taxable income.

Source: Metropolitan Life Insurance Co.


Moreover, MetLife will have a new group of owners to keep happy.

"It's no longer going to be operated for [policyholders'] exclusive benefit. After reorganization, it will be operated for the benefit of the shareholder," says Joseph Belth, a business professor at Indiana University, in Bloomington, Ind., who writes an industry newsletter.

Like policyholders of other insurers that have converted, MetLife customers as of Sept. 28 -- the day MetLife's board approved the plan -- will get something for surrendering ownership of their company. MetLife customers who cashed in their policies before Sept. 28 won't get anything, something Daily says happens quite often. He urges consumers to ask their insurer whether they plan to convert before dropping or switching coverage.

MetLife estimates it will distribute $13.3 billion in cash, stock and policy credits to eligible policyholders. That's an average of about $1,200 per policyholder.

Most policyholders have the choice of taking either shares of newly issued MetLife stock or cash. Others will be required to take cash or credits that will enhance their coverage. Customers with individual retirement annuities, tax sheltered annuities and other types of tax-advantaged products will be given enhanced coverage rather than cash or stock.

Typically, insurers converting to stock ownership compensate policyholders two ways. They distribute a fixed number of shares -- 10 in MetLife's case -- in exchange for policyholders surrendering ownership. No matter how many policies a customer has, he or she will only get 10 shares. MetLife expects the shares to sell for $14 to $24 each when the stock is offered to the public. At those prices, the 10 shares would be worth $140 and $240.

In addition to the 10 shares, policyholders also will get an undetermined number of shares based on the number of policies they have, their value and how long they've held them. That's their compensation for helping grow MetLife over the years.

"It's a complicated actuarial formula that's going to be used on every single policyholder," says MetLife's Holly Sheffer.

Critics have had some problems with the formulas other insurers used. When State Mutual, a large Massachusetts insurer, converted in 1995, the Center for Insurance Research claimed short-term holders of large institutional policies got disproportionately more shares than long-term holders of smaller individual policies. At John Hancock, another large Massachusetts-based insurer that's converting, some policyholders with large policies will get fewer shares than people who have smaller policies, says Indiana University's Belth.

MetLife policyholders won't know how many shares they'll receive until Jan. 30. On that day, they can find out by calling 1-800-649-3593 and punching in their investor identification number. They can dial the toll-free number before if they have other questions.

Assuming they find out how many shares they're entitled to on Jan. 30, policyholders will have a little more than a week to tell MetLife whether they want stock or cash. Those who have the choice must return their ballot to MetLife by Feb. 7. If a policyholder's vote doesn't reach MetLife by that day, he will automatically get stock.

MetLife expects that about 12 percent of the policyholders will take cash, either because they want to or because they must. Another 6 percent will receive policy credits.

Those who have the choice between cash or stock should consider several factors.

Cash payments will be taxed, while people who take the stock won't be taxed until they sell shares or receive dividends on them.

People taking cash will be paid based on the initial offering price of MetLife shares. That means they won't be able to benefit from a potential increase in the stock price when it begins to trade. John Hancock is giving policyholders that chance. Hancock customers who chose cash will be paid based on the higher of two stock prices: the public offering price or the average closing price for the first 20 days of trading. Hancock expects to complete the offering this month.

MetLife policyholders who get stock won't actually receive the shares when the offering is held early this year. The stock will be held for them in a trust for a year after the initial public offering. While the shares are in the trust, policyholders can sell them without paying a commission. They can also buy more stock, commission-free, starting 90 days after the offering. However, they can't have more than 1,000 shares in the trust. Once policyholders are out of the trust, they won't be able to buy or sell shares commission-free.

Before policyholders choose stock, Louis P. Stanasolovich of Legend Financial Advisors says they should ask themselves this question: If I had the same amount of money, would I buy MetLife stock?

"If the answer is yes, then you should own the stock. If the answer is no, you should take the cash," the North Hills financial planner says.

Those who take cash will be tempted to use it as mad money, especially when Christmas bills come rolling in. But Stanasolovich urges them to resist the temptation.

"Anytime you have any kind of windfall, you should invest it."

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