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Demutualization—Can't Do It Alone

Updating and modifying financial reporting systems requires significant manpower and time investments, from inside and outside the insurance company.

One thing is for sure—when it comes to the demutualization of an insurance company, the road to going public is a long and complex one. Whether the company is small or large, the process of enhancing financial technology systems in order to meet the requirements of both state and federal regulators can stretch from three to even five years.

And most of the time spent on the technology involves actually preparing systems for a variety of financial reporting functions. "The first challenge we faced was scoping the size of the overall effort," says Frank DeVito, vice president of information technology services at MetLife ($302.5 billion in assets under management), of the New York-based firm's demutualization, which occurred about a year ago.

"We had to find out how many and what type of systems we were looking at before we could formulate a plan."

Orchestrating the Participants

At MetLife, DeVito says the demutualization project included more than 200 systems. "Some of the systems were large, but some were so small they only handled a few hundred policies," he says.

After successfully analyzing all the systems, DeVito says, one of the most difficult aspects of demutualization was "orchestrating the ballet of departments and people." At times, up to 300 people were working on various demutualization-related projects. "All of the groups had existing project priorities," he says. "We had to schedule a lot of work on nights and weekends" so the demutualization preparation would not interfere with normal operations. "It was really a process and management challenge, more than a technology challenge." DeVito also notes that MetLife's demutualization coincided with Y2K, resulting in an even greater strain on the carrier's technology resources.

Seth Rachlin, president of Connect Systems, an IT management consulting and technology services firm that specializes in demutualization, says grasping the size of the project is important. "From a project management standpoint, demutualization is a fairly significant task," he says. "The two major projects associated with demutualization are the development of the eligible policyholder lists," for the distribution of stock or cash, "and the new requirements for financial reporting to satisfy Wall Street and federal regulators."

For an insurer, the development of a single policyholder list can be quite a challenge. "In order to distribute value to eligible policyholders, the first challenge is to gather all of the policyholder records," says Michael Gersie, chief financial officer at Principal Financial (Des Moines, $117 billion in assets under management). "The next challenge, because many policyholders will have more than one policy, is to accumulate the information by policyholder, not by policy type," Gersie adds. "You have to extract the information from many different systems, cross-reference the information and form a single customer database."

Limited Selection of Products

Unfortunately, an off-the-shelf system to extract and consolidate policyholder information from a variety of systems is not available for purchase, Gersie says. "Each insurance company is unique, so that makes the development of a software package very difficult," he says.

At MetLife, New York-based PricewaterhouseCoopers and KPMG—two firms that have experience in demutualizations, DeVito says—were called upon to "help with the actuarial equity calculation."

Principal Financial combined its own "large in-house development effort," Gersie says, with expertise of Milliman and Robertson, now Milliman USA (Hartford), "a global actuarial consulting firm with a wealth of knowledge in demutualization," Gersie adds.

Insurers can, however, lean on product and services vendors to make the process work. "We worked with a number of companies for the demutualization," says Mike Lerner, director, product processing, John Hancock Financial Services (Boston, $125.2 billion in assets). "The main subcontractor was IBM. They helped us build the system to determine the value for the policyholders." Cap Gemini Ernst & Young (New York) audited John Hancock's systems to make sure the proper value was given to policyholders.

Steve Kelley, vice president, corporate and financial systems, John Hancock, says the company used Hyperion's (Sunnyvale, CA) Enterprise reporting solution "to pull together all of the financial information to produce the reports for the SEC and Wall Street. Enterprise allows us to take information from many different systems."

In fact, says Murtz Kizilbash, group manager, insurance, Sun Microsystems (Palo Alto, CA), "Most of the technology for demutualization centers on reporting to the SEC and other financials. The core applications—the policy administration and underwriting applications—do not change," Kizilbash says.

And almost as important as gathering the data for reporting is reporting the information quickly. "As a public company, reporting requires greater detail, quicker timing and a refined analysis, because the capital markets have more demand for financial information," says Principal's Gersie.

John Hancock has shortened the close of financial reporting significantly. "We still have a clear objective to shorten the close cycle," according to Kelley. "We had to do a lot of business reengineering to cut our reporting time from one month to about two weeks."

In fact, one of the biggest surprises for John Hancock was how different departments calculated numbers.

"There were many different methodologies for how people calculated yields," Kelley says. "Each area was convinced that their approach was correct, so there was a lot of political discussion about developing a consistent reporting methodology. Modifying the process required a significant change."

The good news for insurers is that some of the technology developed solely for demutualization can be reused for other applications. "The demographic data system was built exclusively for demutualization," John Hancock's Lerner says. "But we were able to use the system to comply with the new privacy laws." The system was able to consolidate all of the data so John Hancock could send one privacy statement to each customer.

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio

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