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The road not taken

David D'Alessandro, the one-of-a-kind chief executive of John Hancock Financial Services, spent much of the last year in search of a merger partner, based on his often-stated belief that his company, like others, must get bigger or face being marginalized in the years ahead by the giants in the industry. The chief executive of the state's other big life insurer, MassMutual Financial Group, begs to differ. "We believe there is an excellent opportunity for the medium-sized players to increase market share, and we have demonstrated that over the last four to five years," says MassMutual boss Robert J. O'Connell. "We frequently take business away from those large companies. Size is not what makes customers buy products. . . . You can create a very large company and not create a very successful company."

If Hancock is hard to miss -- from its 60-story headquarters to those brilliant ties around its CEO's neck -- Springfield-based MassMutual is just as easy to overlook, at least among those of us who tend to think the world that matters ends somewhere west of Mass. Ave. But by most measures MassMutual dwarfs John Hancock: MassMutual is number 84 on the Fortune 500 list; Hancock is number 208. At $240 billion, MassMutual has nearly twice the assets of Hancock. MassMutual has 13,000 employees; Hancock has about 8,000. D'Alessandro did make more than O'Connell last year, $21.7 million to $4.1 million.

Another key difference emerged this week: The 141-year-old Hancock agreed to sell itself to a Canadian acquirer; MassMutual, founded 151 years ago, remains an independent company.

Five years ago Hancock and MassMutual were on the same page as they contemplated their futures. Together the two big insurers teamed up to muscle a bad bill through the Legislature that allowed them to go public but not give up control, a kind of have-your-cake-and-eat-it-too strategy that was all the rage at the time in the industry. The law was good for the companies, which could use it to raise billions in the equity market, but bad for policyholders, the company owners, who would get nothing in return for sharing their ownership interests.

For all the noise at the time, neither company used the law they lobbied so hard to win. Instead, they headed in very different directions. Hancock, rather than forming a holding company, went public the right way, through a traditional demutualization in early 2000, which put 69 percent of the stock in the hands of policyholders. Just 3 1/2 years later, however, Hancock agreed to sell itself to Manulife Financial Corp. MassMutual, meanwhile, opted to remain a mutual company, just as it began.

Bob O'Connell says he sleeps well these days.

"There are no current plans to either become a holding company or demutualize," O'Connell, who came to MassMutual in 1998 from publicly held industry giant American International Group, told me yesterday. "The only situation we would demutualize for is a truly revolutionary event, something that would double or triple us. The likelihood of that happening is very remote. We would never demutualize to get access to capital; we have all the capital we need. We would never demutualize to pay our employees more money; that is not a good reason. The worst thing to do is to demutualize without a good strategic reason."

And did it make sense for Hancock?

"It is already done," he said. "But to the extent that demutualization ended with them becoming absorbed by a large Canadian company, I don't think that is a good idea." Hancock's D'Alessandro, it turns out, isn't the only top insurance executive who can dish out a zinger from time to time. Added O'Connell: "We didn't view them as strong competitors before. We don't think combining them changes that."

O'Connell, 60, says he never talked to D'Alessandro, 52, about a combination of the two Massachusetts companies, but said he would not have been interested. Merging two companies "is an enormously difficult project," he said. "You are better off growing your own business than fixing other companies' problems."

The strategic differences between D'Alessandro and O'Connell on how to compete in a changing world reflect the debate now going on industrywide. Is it a game of scale and consolidation, as D'Alessandro says, where behemoths like AIG, Citigroup, and (hopefully) Manulife will dominate? Or does that very consolidation create all kinds of opportunities for "passionate" -- O'Connell's word -- companies like MassMutual, which each year aims to create one-third of its revenue from products and services that didn't exist three years earlier?

For now, there are no right answers, only best guesses. Michael Gross, a credit analyst with Standard & Poor's, which monitors the industry, says D'Alessandro is correct. "There is a clear competitive advantage to scale and operational efficiency. Those who are unable to maintain such scale and efficiency will find their operating returns will be marginalized over time," he says. Arthur Fliegelman, a senior vice president for Moody's Investor Service, isn't buying it. Companies like MassMutual and Hancock "are plenty big for most reasonable purposes. . . . It is clear that the biggest companies are not always the most effective or best-run companies," he says. "Was General Motors the best of the auto companies?"

Here at home we won't know for five years -- maybe more -- who was right, David D'Alessandro or Bob O'Connell. But this we do know now: The decisions that matter most about Hancock's future will be made in Toronto going forward. At MassMutual, those calls are still being made in Springfield.

Steve Bailey is a Globe columnist. He can be reached at 617-929-2902 or at bailey@globe.com.

Hancock sold

(Globe Staff Graphic / John Bohn)
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