Mutual Vs. Publically Traded Insurance Companies

When selecting an insurance company, you should consider several factors including:

  • Is the company stock or mutual?

  • What are the company’s ratings from independent agencies such as Moody’s, A.M. Best or Fitch? (See also: Insurance Company Credit Rating)

  • Is the company’s surplus growing, and does it have enough capital to remain be competitive?

  • What is the company's premium persistency? This is a measure of how many policy holders renew their coverage, which is an indication of customer satisfaction with the company’s service and products.

Insurance companies are classified as either stock or mutual. There are some exceptions, such as Blue Cross/Blue Shield and fraternal groups. Worldwide there are more mutual insurance companies; however in the U.S., stock insurance companies outnumber mutual insurers.

Stock Insurance Companies

A stock insurance company is a publicly traded corporation owned by its stockholders. However, a stock company can be owned by other stock or mutual companies. The objective of a stock company is to make a profit for the stockholders. The policyholders do not directly share in the profits or losses of the company. To operate as a stock corporation, an insurer must have a minimum of capital and surplus on hand before receiving approval from state regulators.

Mutual Insurance Companies

The idea of mutual insurance dates back to the 17th century in England. The first successful mutual insurance company in the U.S. -- the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire -- was founded in 1752 by Benjamin Franklin and is still in business today.

Mutual companies are often formed to fill an unfilled or unique need for insurance. They range in size from small local providers to national and international insurers. Some companies offer multiple lines of coverage including property and casualty, life, and health, while others focus on specialized markets. Mutual companies include five of the largest property and casualty insurers with about 25% of the U.S. market.

A mutual insurance company is a corporation owned exclusively by the policyholders who are "contractual creditors" with a right to vote for the Board of Directors. Generally companies are managed, and assets -- insurance reserves, surplus, contingency funds, dividends -- are held for the benefit and protection of the policyholders and their beneficiaries. Management and the Board of Directors determine what amount of operating income is paid out each year as a dividend to the policyholders. While not guaranteed, there are companies that have paid a dividend every year, even in difficult economic times.                                                             

Stock versus Mutual

Like stock companies, mutual companies have to abide by state insurance regulations and are covered by state guaranty funds in the event of insolvency. (See also: State Guarantee Associations: The Payer of Last Resort.) However, many people feel that mutual insurers are a better choice since the company’s priority is to serve the policyholders who own the company. With a mutual company, they feel there is no conflict between the short-term financial demands of investors and the long-term interests of policyholders.  

While policyholders have a vote in the company’s management, many people don’t vote and the average policyholder really doesn’t know what makes sense for the company. Policyholders also have less influence than do institutional investors, who can accumulate significant ownership in a stock company. Sometimes pressure from investors can be a good thing, forcing management to justify expenses, make changes and maintain a competitive position in the market. The Boston Globe newspaper has run illuminating investigations questioning executive compensation and spending practices at the Mass Mutual and Liberty Mutual insurance companies, showing excesses occur at mutual companies as well.

Once established, a mutual insurance company raises capital by issuing debt or borrowing from policyholders. Debt must be repaid from operating profits. Operating profits are also needed to help finance future growth, maintain a reserve against future liabilities, offset rates or premiums, and maintain industry ratings among other needs. On the other hand, stock companies have more flexibility and greater access to capital. Stock companies can raise money by selling debt and issuing additional shares of stock.

Demutualization

Over the years many mutual insurers have demutualized, including two large insurers, MetLife and Prudential. Demutualization is the process by which policyholders became stockholders and the company’s shares began trading on a public stock exchange. By becoming a stock company, insurers are able to unlock value and access capital, allowing for more rapid growth by expanding their domestic and international markets.

The Bottom Line

Investors are concerned with profits and dividends. Customers are concerned with cost, service and the coverage. The perfect model would be an insurance company that could meet both needs. Unfortunately that company does not exist.

Some companies promote the benefits of owning a policy with a mutual insurer, and others focus on the cost of coverage and how you can save money. One possible way to deal this dilemma is based on the kind of insurance you are buying. Insurance that renews annually, such as auto or homeowner’s, is easy to switch between companies if you are not happy with an insurer. Other coverage is long term, such as life, disability or long-term care insurance, and for these products you may want to select a more service-oriented company. In the end, you want a company that does more than just collect your premiums.