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Ownership Structure Changes in the Insurance Industry: An Analysis of Demutualization

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  • Krupa S. Viswanathan
  • J. David Cummins
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    Abstract

    This article focuses on the demutualization process and investigates why certain mutuals undergo this organizational structure change. The primary motivation for conversion is access to capital. By statute, mutual firms are limited in their capital-raising activities while stock firms can attract funds through a variety of stock and debt offerings. By examining the financial characteristics of firms that demutualize, changes in business practices in the years surrounding conversion can be observed. Determinants of the conversion decision are explored through logistic regression. In the years before demutualization, converting property-liability mutuals exhibit significantly lower surplus-to-asset ratios. This capital constraint eases after demutualization. Converting life-health mutuals hold a significantly lower proportion of liquid assets; in addition, they have a higher proportion of separate accounts under management. This liquidity constraint and increased focus on a higher managerial discretion activity drive the demutualization decision. For both property-liability and life-health converting mutuals, support for the access to capital hypothesis is found. Copyright The Journal of Risk and Insurance.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/1539-6975.t01-1-00058
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    Bibliographic Info

    Article provided by The American Risk and Insurance Association in its journal The Journal of Risk and Insurance.

    Volume (Year): 70 (2003)
    Issue (Month): 3 ()
    Pages: 401-437

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    Handle: RePEc:bla:jrinsu:v:70:y:2003:i:3:p:401-437

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    Cited by:
    1. Luigi Buzzacchi & Gilberto Turati, 2009. "Collective Risks in Local Administrations: Can a Private Insurer Be Better than a Public Mutual Fund?," Working papers 3, Former Department of Economics and Public Finance "G. Prato", University of Torino.
    2. Laux, Christian & Muermann, Alexander, 2006. "Mutual versus stock insurers: Fair premium, capital, and solvency," CFS Working Paper Series 2006/26, Center for Financial Studies (CFS).
    3. Patricia C. Mosser & Joseph Tracy & Joshua Wright, 2013. "The capital structure and governance of a mortgage securitization utility," Staff Reports 644, Federal Reserve Bank of New York.
    4. Xie, Xiaoying, 2010. "Are publicly held firms less efficient? Evidence from the US property-liability insurance industry," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1549-1563, July.
    5. Fabrice Roth, 2012. "Crise et r├ęgulation des march├ęs financiers : Quel impact sur les formes mutuelles dans l'assurance ?," Working Papers halshs-00692342, HAL.
    6. Laux, Christian & Muermann, Alexander, 2010. "Financing risk transfer under governance problems: Mutual versus stock insurers," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 333-354, July.
    7. Cummins, J. David & Rubio-Misas, Maria & Zi, Hongmin, 2004. "The effect of organizational structure on efficiency: Evidence from the Spanish insurance industry," Journal of Banking & Finance, Elsevier, vol. 28(12), pages 3113-3150, December.
    8. Joseph W. Meador & Emery A. Trahan, 2008. "The Intra-Industry Effects of Life Insurance Company Demutualizaton," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 1(1), pages 77-99, December.

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