What is 'Demutualization'

Demutualization is when a mutual company owned by its members converts into a company owned by shareholders

BREAKING DOWN 'Demutualization'

Demutualization is a complex process that involves transitioning a company’s financial structuring from a mutual company structure to a shareholder supported structure. A mutual company (not to be confused with a mutual fund) is a company created to provide specific services that are supported through investment by its members and also utilized by its members as customers. Mutual company structures are often utilized by insurance companies, savings and loan associations and banking trusts. Credit unions are also typically structured as a mutual company.

The first life insurance company in the United States was structured as a mutual company and called the Presbyterian Minister’s Fund. Mutual insurance companies have long since been known for collecting policyholder premiums from their members and spreading risk and profits through various mechanisms. Membership benefits of mutual companies are primarily focused in the rates and services they receive and the distributions they are paid as member clients. Over the years, numerous court cases and regulatory legislations have been debated involving the rights and ownership conversion of members in a demutualization.

Some of the industry’s most noteworthy demutualizations occurred in 2000 and 2001 with the demutualization of Prudential Insurance Company, Sun Life Assurance Company, Phoenix Home Life Mutual Insurance Company, Principal Life Insurance Company and the Metropolitan Life Insurance Company (MetLife).

The Demutualization Process

In a demutualization a mutual company chooses to change its corporate structure to a stock company. Members can receive a structured compensation and/or ownership conversion rights in the transition. After demutualization the capital raising ownership focus shifts to the company’s new shareholders.

There are a few methods a demutualization process may follow. In a full demutualization, the company holds an initial public offering whereby its stock is auctioned to shareholders and shares become traded on a public market exchange. The mutual structure is nullified and previous members can buy shares in the company through the IPO. In a full demutualization no shares are typically granted to previous members. 

Other methods of demutualization may also be followed including a sponsored demutualization. In a sponsored demutualization, the company often grants various forms of structured stock options to the members for conversion during the company’s initial public offering. In a sponsored demutualization, members typically receive greater compensation for their previous membership and usually do not have to invest personal capital in the newly issued shares, however they may buy additional shares if they choose.

When a demutualization occurs, members are typically compensated in some way, often with a closing distribution commensurate upon the terms guided by the individual company’s demutualization. A demutualization can include the granting of shares to previous members in the new IPO but it is not required. Products and services contracted by members typically continue to be held with the company however terms of customers’ products and services may change with the demutualization.

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