In an effort to raise badly needed capital, Equitable Life Assurance Society of the United States announced yesterday that it plans to convert from a mutual company, owned by its policyholders, to a stock company, owned by stockholders.
The move by the nation's third-largest life insurance company, which requires regulatory approval and is expected to take 18 months, is intended to offset its losses on poorly designed insurance products and on investments in the depressed junk bond and real estate markets.
Equitable Chairman Richard H. Jenrette said the company has not said formally how much capital it hopes to raise, but something "on the order of $500 million" would be the target. He said that the amount could be raised in stages: "We don't have to get it all at once."
At the same time, Standard & Poor's Insurance Rating Services Inc. lowered its assessment of Equitable's claims-paying ability from A+ to A. The shift does not mean that S&P believes Equitable, with some $62 billion in assets, cannot meet its obligations, but it is well below the top AAA rating and means that S&P has some concerns about the company in the long run. S&P also left the company on its "credit watch negative implications" list, meaning that there might be further downgrades in the future.
Equitable has been suffering for the past few years from losses generated by a type of guaranteed investment contract it offered in the early 1980s. Such contracts, known as GICs, promise a certain rate of return for a specified period. Equitable's offered very high rates early in the decade -- as many insurers did -- but allowed holders to renew at high rates for many years so the company lost money when general interest rates declined.
"Essentially, the company has one problem going forward -- it needs additional capital. If it has additional capital, it is well positioned to do fairly well in future," said William J. Cavanagh of S&P. "It needs additional capital because of the losses it took on its long ... GICs. If they had never sold those contracts, they'd be in a very different position."
Cavanagh also said that S&P expects further problems to appear on the asset side of Equitable's ledger, especially in high-yield, high-risk "junk" bonds and real estate.
Jenrette said in a statement, "We believe demutualization is very much in the interests of our policyholders. First and foremost, it will permit us to raise additional capital ..." He also said conversion would allow the company more flexibility with both sources of capital and investments it could engage in.
He said that in today's environment of deregulation and merger in financial services, with banks and insurance companies becoming closer and closer, "we are handicapped ... by being a mutual company." He noted that as a mutual, Equitable has no stock to use in acquisitions -- "we can only acquire ... for cash" -- nor could Equitable be acquired.
Mutual insurance companies are declining dramatically in today's marketplace, he added. In 1970, mutuals accounted for slightly more than half the capital in the life insurance industry, but by the end of last year the figure was below 30 percent, he said.
"If the Equitable is successful in raising significant capital, there will be many other mutuals that will follow," Jenrette said.
Equitable is the first company to take advantage of a 1988 New York law that allows mutual insurers to convert to stockholder ownership. Under that law, Equitable will have to present a plan to the New York state superintendent of insurance. The plan would have to offer some "consideration" to policyholders for their ownership interest -- an Equitable spokesman said the company could not specify what that would be at the moment -- and the policyholders would have to approve the arrangement.