David D’Alessandro knew little about insurance when he joined John Hancock’s senior management, but his brash, fresh outlook helped carry the company through an IPO.
Now, as CEO, he faces tough questions about strategy and survival.
Some meals you just don’t forget.
Over a lunch in 1986, James Morton, chairman of what was then John Hancock Mutual Life Insurance Co., popped a shocking question to one of his vice presidents, David D’Alessandro: Would he be interested in running Hancock’s ailing group health business? D’Alessandro was just 34. He had been with the Boston institution all of two years and was not exactly experienced in running an insurance unit. He was, of all things, head of the public relations department. “I’m glad to do this,” said D’Alessandro. “Just tell me, what is the group business, anyway?”
In short order, D’Alessandro was eating everyone’s lunch at Hancock, climbing the management ladder in record time. By 1991 he was running the retail business unit, Hancock’s largest. This May he reached the top rung of what is now John Hancock Financial Services. The youngest CEO in the company’s history, D’Alessandro, 49, would seem to have a long and bright future ahead of him. But he finds himself in a rapidly consolidating industry that is increasingly dominated by companies far larger than John Hancock - and considerably more diversified. D’Alessandro faces more questions and pressures than any of his predecessors about the company’s strategies and directions. The actuarial tables are not running in this 138-year-old insurer’s favor.
D’Alessandro, however, has faced long odds before. His superiors took a gamble on someone “very different from the normal image of an insurance executive,” says Stephen Brown, who preceded D’Alessandro as CEO and succeeded Morton as chairman in 1992. And the wager paid off as D’Alessandro, with Brown and Morton’s encouragement, rose to the challenges they presented despite a lack of financial, actuarial and management experience.
From the start, he questioned conventional wisdom. Within months of digging into the nitty-gritty of the group health business, for example, he recommended that it be sold; he argued that it was too small and not profitable enough. Moving at the slow speed typical of mutual insurance companies, Hancock took a couple of years to pull the trigger on the sale. But that decision started a trend, new to the conservative mutual sector, of reassessing business lines, selling off those deemed unprofitable or uncompetitive and buying others to fill in the gaps.
Such deal making, however, may not insure John Hancock’s survival. With $85 billion in assets, it ranks a distant ninth in the insurance industry even as it considers itself to be a peer of financial services giants like American International Group, Bank of America, Citigroup, Merrill Lynch & Co., Morgan Stanley Dean Witter and Prudential Insurance Co. of America. All have hundreds of billions of dollars in assets and workforces that far outnumber Hancock’s 5,800 employees. Most appear far more capable than Hancock of making bold merger moves that will make them even more imposing.
But amid the upheaval of the financial industry, D’Alessandro has something of a life insurance policy. In January Hancock made an initial public offering of stock, raising $1.7 billion through the process known as demutualization. The IPO provisions include a covenant with the commonwealth of Massachusetts that protects Hancock from any unsolicited takeover through the end of 2002.
Realistic about Hancock’s long-term prospects, D’Alessandro says, “I think it’s inevitable that companies like ours will probably merge or be acquired at some point.” It could even happen before 2003, if both the Hancock board and Massachusetts regulators approve. But with the freedom not to give in just yet, D’Alessandro aims at the very least to drive up Hancock’s stock price on the merits of performance, making it hard for an acquirer to swallow. “The biggest risk is that you lose control of the company to a bigger entity because you haven’t performed,” he says.
DAVID D’ALESSANDRO TURNED OUT TO BE JUST the sort of mold-breaking personality that Brown and Morton wanted to turn loose on Hancock and its conservatism. His 59th-floor office is replete with conversation pieces from his personal memorabilia collection. Three strands of Abraham Lincoln’s hair keep company with a red electric guitar once owned by the Rolling Stones’ Ron Wood, boxing trunks worn by Muhammad Ali and a silver compact that belonged to Marilyn Monroe. D’Alessandro’s $1 million annual salary lets him indulge his passion for history and popular culture. Sports-mad with a business purpose, he spent part of last month at the Olympic Games in Sydney, keeping watch over the four-year, $55 million corporate sponsorship that, in his view, keeps the John Hancock name in the public eye.
Open, accessible and something of a free spirit, D’Alessandro is also a shrewd, image-conscious strategist. He has won the admiration of outside observers while working diligently at changing his company’s internal culture. Salomon Smith Barney analyst Colin Devine calls him “street-smart” and adds, “I think David’s a moneymaker. He has great instincts.” Analysts praise Hancock’s management quality - largely reflecting faith in the very hands-on D’Alessandro, who has all business lines reporting to him. (The company has no chief operating officer.) Says Douglas Elliott, a merger specialist at Sandler O’Neill & Partners, “I look at John Hancock and see a good, clean franchise with a great brand name.”
Questions about where D’Alessandro and Hancock are heading revolve around the critical yardstick of market capitalization, and the company went through a lot to get one. Its demutualization, the tenth by a U.S. insurer, took 18 months to complete. It came more than 13 years after Unum Corp. did the first one and ranked third in size behind those of Equitable Cos. (now AXA Financial) in 1992 and Metropolitan Life Insurance Co. in April. Three million Hancock policyholders became shareholders. After paying the $110 million cost of demutualization and issuing cash to customers who chose not to take shares, Hancock at long last has currency - more than $8 billion in market cap as of late September - to pursue acquisitions. Mutuals were never prevented from making deals. Hancock had done a few, and MetLife paid $1.2 billion for GenAmerica Corp. before its IPO. But the high price MetLife paid for GenAmerica was an exception; shareholder ownership confers greater flexibility to do more deals, and bigger ones. A mutual that must pay cash can take on too much leverage, jeopardizing its all-important claims-paying and credit ratings.
Hancock’s market valuation rose about 10 percent in the first half of September, in line with other financial stocks that are perceived as merger candidates. “Size will be important,” says D’Alessandro, as he ponders his deal-making potential.
But how can that $8 billion war chest possibly stack up against, say, the $250 billion valuation of Citigroup or the $200 billion of AIG? Brushing aside those comparisons, D’Alessandro focuses on the “public market discipline” imposed by investors. He is convinced that if Hancock had stayed mutual, “we would have been uncompetitive in five or six years.”
He adds: “I felt quite strongly, and I also think the management team here felt strongly, that we were performing as well as we could as a mutual company. We were starting to hit the cap in terms of being able to have enough pressure on the internal organization. Mutual companies are fundamentally driven by executives who think in terms of retiring safely at 60. That’s their mentality. Therefore you back up all your decisions against how to run the company safely. You cannot attract great talent that way. You will not make a mark as a company by running it as a private club.”
He has grabbed employees’ attention by issuing options - 200 each up to the junior manager level and more to middle managers, based on length of service. (D’Alessandro and five other top executives are not eligible for options until after February 1, 2001; as yet, no plan has been announced.) Kiosks on every floor of every Hancock building display the share price, updated four times an hour. Chief financial officer Thomas Moloney says the message about shareholder accountability is loud and clear: “Managers can’t just do five things and hope that one of them works. They have to make a choice, and they’re on the hook for delivering results.”
They also know well that D’Alessandro has set a “stretch target” of 15 percent return on equity and 15 percent annual growth in earnings per share, known internally as “15-by-15.” Many people wear cuff links and lapel pins emblazoned with the numbers. Says Moloney, “We actually go through a lot of our project and capital allocation meetings now and say, ‘Okay, what does this do for meeting 15-by-15?’”
Hancock is progressing but is far from a consistent 15-by-15. Net operating income rose a healthy 22 percent last year, to $613 million, and operating ROE improved to 13.2 percent, from 11.5 percent in 1998. The ROE rose to 16.7 percent in the first quarter of this year before slipping to 14.1 percent in the second. Net income in the second quarter increased 14 percent from a year earlier, to 73 cents a share, but when excluding extraordinary items such as investment gains and a tax credit, the gain was only one cent (2 percent), to 58 cents. At $1.94 billion, total revenues were off 8 percent - premiums and net investment income slumped, offsetting healthy gains in retail product sales, including long-term-care insurance (41 percent) and individual variable life (20 percent).
“I want people to remain conscious that they can’t go backwards - they can’t run an 8 percent business,” D’Alessandro says. “The question is, do you want to piddle along as a mutual company, dragging as many people as you can to 60 safely, or do you want to actually accomplish something in your life?”
D’ALESSANDRO GREW UP IN EAST UTICA, NEW York, a close-knit Italian-American community where his father ran the family grocery store by day and taught business law at a local community college in the evenings. After graduating from Utica College in 1972 with a degree in journalism and public relations, D’Alessandro joined the Daniel J. Edelman PR agency in New York as an account supervisor. Two years later he took a senior communications position at Commercial Credit Co. in Baltimore, which later became a linchpin of the Travelers Group empire that would evolve into Citigroup.
D’Alessandro accepted the public relations post at Hancock in 1984 and made an immediate impression. “He dressed sharper. He was outspoken. He was very creative,” says chairman Brown, who was then president-elect. When D’Alessandro took over the group health and life unit in 1987, he held on to his PR duties. “We wanted to have the business shaken up and thought it would be a good test for David,” Brown explains.
Influenced by D’Alessandro’s hard-nosed recommendation to drop the first insurance business that he headed, Brown and the Hancock board approved a series of transactions during the next decade that significantly altered and tightened the business mix. Gone are property/casualty and group medical, which have caused major headaches for many insurers in recent years, as well as the health maintenance organization and individual disability lines. Hancock also sold an equity real estate business and the Tucker Anthony regional brokerage.
Expanding in what it considers core or growth markets, Hancock in 1999 acquired life insurer Aetna Canada and Essex Corp., a distributor of annuities and mutual funds to banks. In March it added the U.S. individual long-term-care business of European financial services giant Fortis Group.
But D’Alessandro finally snared the CEO’s job through his aggressive management of the retail group, as well as his marketing acumen.
Between 1991 and 1998, the years D’Alessandro headed the retail group, its net income nearly tripled, to $338 million from $117 million. Like many mutuals, Hancock was selling most of its life and annuity products through career agents. D’Alessandro made what was at the time a dramatic departure for a mutual company, turning the agents into independent financial planners, renaming the group Signator and letting it sell other companies’ products as well as Hancock’s. He also added other distributors, including banks and independent broker-dealers.
D’Alessandro’s marketing strategies were just as bold - and more visible to the consumers, investors and other constituencies that he is trying to impress through the power of the Hancock name. For him, Hancock’s corporate logo, the iconic signature from the Declaration of Independence, is only a start. Much of the additional brand recognition he seeks comes from linking Hancock with sports, and D’Alessandro is unquestionably a leader in this league.
While still running PR in 1985, D’Alessandro was hailed as the financial savior of the Boston Marathon after Hancock stepped in with a corporate sponsorship. He ratcheted up sports marketing in the late 1980s, when the insurer became one of the first companies to put its name on a postseason college football matchup. The Sun Bowl was rechristened the John Hancock Bowl.
College football and television could not satisfy D’Alessandro’s ambitions. Hancock bought perhaps the most valuable corporate sponsorship in the sports world in 1993, joining Coca-Cola Co., IBM Corp., McDonald’s Corp., Visa International and a few others in an elite circle of companies known as TOP - the Olympic Partners. And D’Alessandro has not been a silent partner. When a bribery scandal cast a harsh light on the International Olympic Committee’s site-selection process, D’Alessandro raised more of a ruckus than any other sponsor and threatened to pull out unless significant reforms were made. That prompted a war of words in the press with IOC defender Dick Ebersol, the president of NBC Sports. D’Alessandro stood his ground and was instrumental in winning an ethics clause that allows sponsors to withdraw their support if the IOC does something that sullies their reputations.
The battle won Hancock loads of publicity and put D’Alessandro squarely on the side of truth, justice and the American way. Hancock recently reupped as a TOP sponsor through 2004, committing an estimated $65 million. Last month New York Times columnist George Vecsey touted D’Alessandro as a candidate to succeed Juan Antonio Samaranch as IOC president.
As CEO, D’Alessandro has been just as single-minded in honing Hancock’s strategies. The company serves both retail and institutional customers and makes most of its money from such products as investment-oriented life insurance, long-term-care coverage, annuities, mutual funds, guaranteed investment contracts and investment advisory services. The streamlined portfolio is very much in keeping with D’Alessandro’s vision of Hancock as a specialized manufacturer of financial products distributed through a multiplicity of channels, including agents, banks and the Internet. “We make product well, we service it well, and we know how to support our brand,” he says.
Recently, Hancock used Internet technology to tie its 3,000 Signator representatives into a news and information network. In August it announced an agreement to offer DLJdirect online brokerage services to clients of John Hancock Retirement Services. Already selling life insurance on the Net, Hancock is planning in coming months to add simplified long-term-care, variable life and annuity programs. D’Alessandro is “way ahead of most other CEOs in the industry, most of whom are still trying to spell Internet,” says Devine at Salomon Smith Barney.
In the financial market Olympics, D’Alessandro so far has a winning record - at least, against other insurers that have demutualized. Most of these stocks open at discounts to book value and slowly appreciate over time. Mony Group, which converted in 1998, started trading at 62.7 percent of book value. As of early September it was still trading at only 94 percent of book. MetLife, which raised $2.9 billion in its IPO this year, started at 70 percent of book value and climbed to 132 percent by mid-August. The problem with most newly converted mutuals is substandard ROEs, attributable to high costs and the fact that they carry on their books big blocks of low-yielding whole life policies. The irony is that most companies demutualize in order to do deals yet emerge from IPOs with limited buying power.
Hancock is the only one of these whose initial offering price exceeded book value - by 3 percent, to be exact, at $17 a share. The shares have been holding steady above $20, toward the high end of a trading range of roughly $14 to $28. Hancock apparently benefited by divesting the unwanted businesses and lopping costs well before it demutualized. “We were trying to run the company like a stock company as much as possible,” says Brown. “We didn’t have as far to go as some of the other mutuals did.”
FOR ALL HIS PIZZAZZ, D’ALESSANDRO HAS moved cautiously. He prefers to be in businesses that are predictable and safe, yet even in his current comfort zone, hazards abound. Getting out of the disability market was an easy call, he says, because “any insurance business where it’s in the best interests of the consumer to abuse a claim is a business I don’t want to be in.” He adds that life insurance, by contrast, “is the mother’s milk of this company. While it’s not growing dramatically as an industry, we continue to grow aggressively by stealing market share. The predictability in this business is that people die when they’re supposed to and aren’t around to complain afterwards. You’re in a business where it’s not in the best interests of the person paying the policy to actually trigger the claim.”
By June Hancock had improved its U.S. life insurance market share to 2.3 percent, from 1.9 percent in 1996. But the downside here is a $12 billion block of traditional whole life policies with a meager 6 percent ROE. It cannot easily be sold; the best D’Alessandro can do is increase the returns of other businesses. “The traditional block is 20 percent of our earnings,” he says. “If you take that out, we’d be at a 15 percent ROE now.”
D’Alessandro also faces a declining mutual fund business. Assets under management, $32 billion at midyear, have been eroding. The business lacks sufficient scale, and Hancock will find it hard to stand out in a crowded field. “There are a whole lot more complexes out there than the world needs,” says Arthur Fliegelman, a credit analyst at Moody’s Investors Service. Though an acquisition might be the quickest way for Hancock to bulk up, D’Alessandro seems to be turned off by the challenges of integrating an independent advisory firm into Hancock’s institutional culture.
Salomon Smith Barney’s Devine says that Hancock needs to build scale in its variable annuity operation, which ranked 39th in industry sales last year. The purchase of the wholesaler Essex Corp. helps - Hancock’s market share is up to 1.2 percent from 0.9 percent in 1996 - as should agreements to sell John Hancock annuities that D’Alessandro negotiated with members of the IPO syndicate. Devine says that Hancock should consider an acquisition.
Even if D’Alessandro makes all the right moves, will Hancock survive as an independent company? Devine covers 16 life companies and speculates that all but one - MetLife, whose legal takeover protection extends until 2005 - will be acquired within three years. Sandler O’Neill’s Elliott also expects a rash of mergers, albeit at a slower pace. Assets and market caps may be less of an issue than the ability of a company like Hancock to invest in the technology it needs to keep up with the Citigroups of the world. Branding and marketing can also be costly, though Hancock has proven to be pretty adept in these areas. Should the company ever be acquired, its name might well endure.
Like its larger peers, Hancock enjoys more flexibility thanks to the Gramm-Leach-Bliley Act of 1999, which removed the legal barriers among commercial banking, investment banking and insurance. But D’Alessandro expresses no desire to acquire a bank or to return to securities brokerage, which Hancock exited with the sale of Tucker Anthony in 1996.
D’Alessandro’s positioning might be called “deal neutral.” Although he has a team scouting for acquisitions, “there is nothing in Hancock’s financial plans that ever requires an acquisition to attain our growth,” he says. “I think it’s a dangerous way to run a company. When a company is being run on the basis that, ‘Gee, I’m going to grow it next year by making an acquisition,’ you put your executive team in a very tough position, because they’ll probably make a bad acquisition.”
At the end of the day, D’Alessandro might just sell. He says the days are long gone “when companies could actually bulk up and prevent a takeover because they were too big to swallow. There are no life insurance companies that I know of that aren’t considered fodder.” Yet he is not resigned to that fate, nor does he resort to the survival-at-any-cost rhetoric of some defiantly independent CEOs. “There are some managements that you know are going to do everything in their power not to sell the company,” says an investment banker who worked closely with D’Alessandro on Hancock’s IPO. “David’s not like that. He’s shareholder-focused.”
D’Alessandro’s desire to hang on and make Hancock stronger, combined with the Massachusetts takeover protections, suggests that the company will stay independent for a while. Analyst Devine says, “I doubt it will be sold - until David has his stock options.” In other words, not before February. “But once he has his options, there’s going to be a bidding war.”
Devine adds: “I could give a dozen names, with very deep pockets, that would jump at the chance to own John Hancock. There will be no shortage of bidders.” There are worse fates, D’Alessandro suggests. “If we continue to build value for this company, then a sale would be great for our investors, because someone’s going to have to pay a premium for us.”
