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

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.