What demutualization means for policyholders
Are mutual insurance companies becoming a thing of the past?
Several mutual insurers, facing lukewarm investment returns and limited opportunities to acquire competitors, have become publicly traded companies. Ownership of the company switches from policyholders to stockholders.
While demutualization can help insurance companies raise needed capital and become more competitive, is it beneficial for the policyholders?
As a policyholder with a mutual insurance company, you have a say in how the company is run and even elect the board of directors. Your premiums contribute to the company's profit. So, your return on that profit (your equity) comes to you as a dividend. (Policyholders who own only term life insurance never participate in dividend distribution.) You get a dividend after the company figures out how much money is left after mortality, administrative, and policy expenses are paid. You're at the mercy of your insurer here, because mutual companies aren't required to disclose exactly how their dividends are calculated.
You decide what happens to your dividends, but generally you have five choices:
- get them in cash
- apply them to your premium
- buy extended term insurance
- buy paid-up additions to your insurance policy
- let them accumulate with interest.
Once a mutual company is converted to a public company, or demutualized, ownership shifts from policyholders to stockholders. It’s possible that as a result of demutualization, policyholders would receive shares of the company and become stockholders as well.
Why do companies do it?
Changing to a publicly held company gives insurers access to capital, allowing them to participate more aggressively in the mergers and acquisitions that have become increasingly common. Because banks and insurance companies are now allowed to provide similar services, mutual insurers are feeling more pressure to compete in the financial services marketplace. Theoretically, the money gained from an initial public offering (IPO) results in a stronger and more competitive company.
The demutualization process can take anywhere from 18 to 24 months. Insurers contemplating conversion spend a good deal of time working on a draft proposal that must be approved by the company's board of directors. Then the proposal must be submitted to the state insurance department. Usually the company will hold information meetings in the state where its home office is. Policyholders are then notified about their eligibility to vote on the proposal. If you are eligible, you can generally opt for cash, a policy enhancement, or stock. The state insurance department reviews the plan after the final policyholder vote.
Robert Minto, President and CEO of Attorneys Liability Protection Society (ALPS), explained to his policyholders why demutualization of their insurance company was the right move for them. “As a stock company, ALPS will be better able to recognize the important contributions of its policyholders, by offering them a direct financial stake in the Company. In addition, the increased flexibility of the stock form will enhance ALPS ability to respond to future challenges, resulting in a stronger and more responsive insurance company. ALPS will remain committed to meeting the insurance needs of its policyholders, and none of the provisions of your ALPS insurance policy will be affected by this proposal,” Minto told policyholders.
Not everyone in the mutual insurance business is ready to become publicly traded. The National Association of Mutual Insurance Companies (NAMIC) looked at the challenges facing its member companies, and issued a report on how mutual companies can gain the financial resources they need to compete. The NAMIC report concludes, “In order for mutual insurance companies to continue to thrive and prosper, they must not be denied the same ability to access the various capital markets as their stock competitors. NAMIC also believes it is important to recognize and protect the membership interest of mutual policyholders. It is equally important, however, to acknowledge that the ultimate interest of any policyholder is the continued financial viability of the insurance company.”
While the NAMIC insists there will always be a place for mutual companies in the insurance market, the association admits in some cases policyholders are better off when their mutual companies convert to stock ownership.