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The plans of Principal Mutual Holding Co. to convert from a mutual company to a stock insurance company, which had been sailing smoothly through the demutualization process, may have to weather some storms before the deal is done.

When the policyholder voting closed on July 25, 2001, the results were overwhelmingly in favor of the conversion. Ninety-two percent of the policyholders who voted were in favor of the plan to transform Principal from a mutual company that is owned by the policyholders into a shareholder-owned stock insurance company.

Just over a month later, Principal scored another coup. On Aug. 28, Iowa insurance commissioner Therese Vaughan granted her approval to the insurer's plan, ruling that "the few criticisms of the proposed demutualization raised during the course of the public hearing and through documents submitted by PMHC's policyholders, members of the public, and others through the July 25 hearing date are sufficiently addressed and overcome by the plan."

That may prove to have been the end of the smooth sailing for Principal's plan. The Sept. 11, 2001, terrorist attacks on the World Trade Center and the Pentagon have shaken public confidence in insurance stocks as loss estimates following the attacks have spiraled to more than $30 billion.

Principal still plans to go ahead with its initial public offering (IPO) this year — an event that would mark the completion of the insurer's demutualization. On Sept. 28, 2001, the insurer cut the estimated price range of the IPO and announced plans to go public within 30 days.

While a drop from a range of $18.50 to $20.50 per share to a range of $17 to $20 per share might not seem like much, when it is spread over 100 million shares of common stock it adds up. The $1 drop in the average range results in an IPO that would raise $100 million less than earlier projections, according to Principal.

Additionally, Principal's demutualization plan calls for the company to issue shares of stock to the company's policyholders. The revised price represents a loss of $260 million to the policyholders who approved Principal's plan.

"While we are deeply saddened by the terrorist attacks, we are compelled to move forward because that is what we all must do as part of the rebuilding process," said J. Barry Griswell, president and chief executive officer of Principal.

Compounding the insurer's market concerns, a policyholder from Illinois filed a lawsuit on Sept. 28, 2001, claiming that the demutualization plan violates the constitutional rights of Principal's insurance policyholders. The lawsuit, filed in the U.S. District Court for Northern Illinois, seeks nationwide class action status.

According to the suit, the method by which Principal plans to distribute the proceeds of the demutualization and IPO, and the fact that it was done under the auspices of the state of Iowa — through both the legislature and the insurance commissioner — represents an "unconstitutional 'taking' and 'impairment' of the participating policyholders' ownership interests and contract rights," in violation of the Fifth and Fourteenth Amendments to the U.S. Constitution.

"These policies were marketed as giving ownership rights in the company," says Jim Pietz, an attorney with Malakoff, Doyle & Finberg P.C., one of the law firms involved in the suit. "Demutualizations like this one take away those ownership rights without giving the policyholders the fair value in return."

Furthermore, the suit also alleges that the use of an Iowa law to change the terms of insurance contracts issued in other states violates the Commerce Clause (Article I, Section 8) of the Constitution.

"Many of these insurance policies were delivered in states other than where the insurance commissioner has the power to regulate," says Pietz. "It is a serious concern that the insurance commissioner might have the power to approve changes in other states."

Representatives for Principal declined to comment on the lawsuit, citing corporate policy.