Mutual Company: Definition, How It Works, Advantages

What Is a Mutual Company?

A mutual company is a private firm that is owned by its customers or policyholders. The company's customers are also its owners. As such, they are entitled to receive a share of the profits generated by the mutual company.

The distribution of profits is typically made in the form of dividends paid on a pro rata basis, based on the amount of business each customer conducts with the mutual company. Alternately, some mutual companies choose to use their profits to reduce members' premiums.

A mutual company is sometimes referred to as a cooperative.

How a Mutual Company Works

The mutual company structure is commonly found in the insurance industry and sometimes in savings and loans associations. Many banking trusts and community banks in the U.S., as well as credit unions in Canada, also are structured as mutual companies.

The first mutual insurance company was formed in England in the 17th century. The word mutual was probably adopted to reflect the fact that the policyholder, or customer, was also the insurer, or part owner.

The first insurance company in the U.S. was a mutual company, The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. It was founded in 1752 by none other than Benjamin Franklin.

Most institutions that are structured as mutual companies are private entities rather than publicly traded companies. In recent decades, many mutual companies in the U.S. and Canada have opted to change from a mutual structure to a joint stock corporate structure, a process known as demutualization. As part of this process, policyholders get a one-time award of stock in the newly-created joint stock corporation.

There is little substantive difference between the two corporate structures. A joint stock corporation is generally seen as more focused on short-term profit while a mutual company may prioritize strong cash reserves in case of unusual claims levels.

Advantages of a Mutual Company

A major selling point of mutual insurance companies is its shared ownership structure. Policyholders get some of the cost of their premiums back in the form of dividends or reduced premium prices.

For example, Lawyers' Mutual Insurance Co., a California-based company, recently paid a 10% dividend to its shareholders. It has paid dividends for 23 consecutive years.

As suggested by the name of that company, mutual companies often are specialized. They were formed by and for a group of professionals who often have common needs.