Equitable Life Assurance Society, the nation’s third-largest life insurer, said Tuesday that it plans to radically alter its ownership structure in a move it hopes will enable it to quickly raise needed capital.
Equitable said it plans to transform itself from a mutual insurance company, in which policyholders essentially own most of the company, into one in which public stockholders will be the owners. If the plan is carried out, Equitable will become the largest U.S. life insurer to “demutualize.”
Insurance industry analysts said the conversion most likely will take at least two years to carry out, and possibly much longer. A formal plan must be approved by the company’s board and by regulators. It must be voted on by certain categories of policyholders. Such conversions typically give rise to major lawsuits.
But in a telephone interview, Richard H. Jenrette, Equitable’s chairman and chief executive, said the three investment banking firms that Equitable has retained have devised a plan under which the company may use the conversion to raise capital much sooner. Equitable hopes to sell debt securities that will be convertible into Equitable stock once the conversion is completed, Jenrette said.
Jenrette said the company--which, like other large insurers, is facing some significant financial problems--hopes to raise at least $500 million in several installments by selling such convertible notes or bonds. If the demutualization should fail to take place, he said, the company would be obliged to pay back investors. Jenrette said the conversion will be carried out under a new New York state law that may allow the process to be completed sometime in 1992.
The announcement follows reports about significant financial troubles at Equitable. The New York-based company is facing major losses, in part because of the declining value of its investments in real estate, mortgage loans and junk bonds.
On Tuesday, the ratings agency Standard & Poor’s lowered its rating of Equitable’s claims-paying ability to A from A+. The agency also lowered ratings on insurance and debt issued by several Equitable subsidiaries. It said the company will remain on its Credit Watch list with “negative implications” and said its rating of Equitable’s commercial paper could be downgraded soon.
S&P; said: “Today’s announcement that it plans to demutualize indicates that the company recognizes its need to seek significant external capital.”
Concern about Equitable’s financial health reached a crescendo several weeks ago, when a rumor swirled through the financial markets that the company was about to file for bankruptcy protection. The rumor was swiftly denied.
Jenrette said Tuesday that “there are some problems, but they’re not life-threatening.” He added: “Equitable is not in bad financial shape.”
Jenrette said the conversion was being carried out to give the company more flexibility in raising capital. He said the change has been under consideration since shortly after he became chief executive in May.
Analysts said Equitable’s move may prompt other big life insurers to follow suit, possibly including the two largest, Prudential Insurance and Metropolitan Life. Many are under intense pressure to raise capital, in part because of expected losses on investments.
Equitable was founded in 1859 as a stockholder-owned company. But, along with some other New York insurers, it converted to mutual ownership in 1918 at the recommendation of the New York state Legislature, after scandals that had rocked the industry.
Insurance industry analysts William Bitterli of Northington Partners and Frederick Townsend of Townsend & Schupp, both in Connecticut, said the conversion back to stock ownership is unlikely to have a negative impact on policyholders, who may realize a financial gain.
Equitable said it plans to carry out the conversion by issuing stock to policyholders who now have an ownership stake in the company. The policyholders would be able to sell the stock when Equitable makes a public offering of shares. It remains to be worked out how much stock qualified policyholders are likely to receive.
Although policyholders technically own the mutual insurance companies, in practice they have had little say over company affairs.
Jenrette, who came to Equitable after the company’s financial problems prompted the departure of Chief Executive John B. Carter, has some experience taking companies public. Jenrette is a founder of the Wall Street firm Donaldson, Lufkin & Jenrette Securities, which was the first Wall Street firm to sell its own stock to the public.