Owning a life insurance policy from a mutual insurance company vs. a stock insurance company has unique implications based on the different structures. Let’s first share the official definitions of a mutual insurer and a stock insurer:
Wikipedia defines them as follows:
Definition of a Mutual Insurance Company: A mutual insurer is owned entirely by its policyholders. Any profits earned by a mutual insurance company are either retained within the company or rebated to policyholders in the form of dividend distributions or reduced future premiums.
Definition of a Stock Insurance Company: In contrast, a stock insurer is owned by investors who have bought company stock; any profits generated by a stock insurance company are distributed to the investors without necessarily benefiting the policyholders
OK, if you’re looking into buying some sort of permanent life insurance policy how do the different types of insurance company ownership structures impact you?
How Mutual Insurance Companies vs. Stock Insurance Companies Invest their General Account
Traditionally, mutual life insurance companies tend to be more conservative in their investment strategies and focused on the long-term. This is because the only commitment of a mutual insurer is to serve the ongoing obligation to different generations of policyholders.
Unlike stock insurers, mutual insurance companies cannot easily raise capital by simply issuing new shares of stock. For these reasons, mutual insurers tend to take a much more conservative approach with investment strategies that support long-term solvency.
Stock insurance companies, on the other hand, take a much different approach since they serve an entirely different master. Every 90 days stock insurers come under the scrutiny of Wall Street with quarterly earnings reports. This can cause major shifts in a stock insurer’s value depending on how market analysts interpret their financial statements.
Because of this, stock insurance companies tend to take a shorter-term approach on investing. It’s also common to find stock insurers taking on incrementally more risk in their investment portfolios.
More on why this is in the next section.
Mutual Insurance Companies vs. Stock Insurance Companies with Management Structures
Obviously, the executives have a fiduciary duty to the stockholders they serve. However, the desire to time the company’s stock price with the vesting of their stock options must at times present some conflicts of interests that do not always align with the long-term needs of policyholders. This factor puts a much shorter-term view of how to invest company assets at the forefront of their leadership team’s mind.
Conversely, stock options are non-existent with mutual insurers, even large mutual insurance companies, since these companies are all owned by their policyholders and their corresponding amount of equity through qualifying policy values.
Surveys have shown that mutual insurers are much tighter on the purse-strings when it comes to executive compensation than their stock insurer counterparts. This is due to the purveyance of that conservative stance in the overall culture of mutual insurance companies whether it be investment styles, management styles, product offerings, etc..
Take a look at the infographic below from National Underwriter magazine, a life insurance industry news source. The annotated red circles indicate the Chairmen and CEO’s of stock insurance companies vs. mutual insurance companies indicated by the green circles.
You can click here to access the entire article on life insurance executive compensation by National Underwriter.
Let’s discuss how these executives are chosen. Since mutual insurers are owned by their policyholders, every qualifying policyholder gets votes for the board of directors. The mutual insurance company’s elected board will ultimately appoint executives that they believe will benefit the long-term interests of the mutual insurance company’s policyholders. With this primary purpose in mind, it’s no wonder then that mutual company executive compensation is often less than half that of a peer stock insurance company.
Conversely, stock insurance companies are not owned by policyholders unless the policyholders also happen to own stock in the same insurance company. The investors that collectively own the company have either bought stock outright, or they are employees who have earned stock via bonus or stock options. The primary purpose of a stock insurers’ stockholders and executives is not to boost policyholder value, but rather to increase stockholder value and increase profits.
Mutual Insurance Companies vs. Stock Insurance Companies with Dividends, Surplus, and Policyholder Value
Most of the old and solid mutual companies in the U.S. have already built a very robust surplus over their liabilities since their main focus is on delivering continued long-term policyholder value. One of the ways they do this is by offering their policyholders competitive dividends. These annual dividends are not guaranteed to be paid. However, all of the oldest and the largest mutual companies in the US have consistently paid a dividend every single year for well over the last hundred and fifty years in spite of:
- World Wars
Since dividends are technically a return of premium to the policyholder, these dividends receive special tax treatment per the IRS. Learn more about how Whole Life policy dividends work from mutual insurance companies. With one less hand in the cookie jar, it is easier for mutual insurers to deliver consistent policyholder value. On average, mutual insurers tend to maintain larger surpluses as a percentage of total assets than their stock insurer peers. This is in line with a mutual company’s long-term commitment to multiple generations of policyholders.
It’s common for mutual insurance companies to treat their entire book of policyholders similarly. As prevailing interest rates have been falling, it’s typical for any insurance company to lower their payout rates to policyholders. However, some of the largest mutual companies in the US are known for treating the goose similar to the gander. This means that when they lower payout rates for an old block of policies, they do the same for the new and current product offerings.
Stock insurance companies pay dividends as well. However, a stock company’s dividends are not paid to policyholders, but to their stockholders. Remember that their primary purpose is to enhance stockholder value, not policyholder value. These payments come off the top of a stock insurance companies’ profits every quarter often resulting in lower average surpluses held by stockholders (as expressed by the percentage of total assets & liabilities).
Don’t get me wrong, stock insurance companies are still incentivized to be competitive, and this often results in strong current offerings. However, we often find that older products from past blocks of business aren’t held to the same standards.
What Happens When a Mutual Insurance Company Changes into a Stock Insurance Company
Regardless of the ownership structure, life insurance companies tend to be a very stable, predictable, and profitable businesses for the most part. To illustrate this, we are going to look at two stock charts below of stock insurers that once were mutual insurers. In fact, both of these charts are set on the “Max” time-frame, meaning the chart goes back to their inception on the New York Stock Exchange not to the beginning of their existence as a company.
Since both of these insurers have been around for over 100 years, you would expect these charts to go back much further than the early 2000’s. That is because only the history after demutualizing will show up on a historical stock chart. (Demutualization is the process of transforming a private mutual company into a public stock company.)
See how these stock insurance companies steadily climb from the moment they demutualized until the recession of 2008. Afterward, they both start climbing again toward new highs nearly a decade later.
We’ve seen this same pattern time and time again with other mutual insurers who elect to legally transform themselves into stock companies. Let’s just say that prior to the demutualization process, the only way to “get a piece of this rock” was to buy one of the company’s whole life policies. However, once this company demutualized, anyone off the street could immediately become part owner of this company by buying shares of their stock on the New York Stock Exchange regardless of whether they are a policyholder or not.
What is really interesting is that at the time this particular company demutualized, every single whole life policyholder was issued shares of stock proportionate to their policy values in addition to being able to keep their whole life policies intact. This practice is commonplace when mutual companies demutualize into stock companies. After all, the Whole Life policyholders are all part owners of the company, so they must receive comparable equity when there is a new public offering.
As you can probably see from the charts above, acquiring an exclusive piece of ownership in a mutual company can be a profitable venture. Unless they go public, you can only do so by owning certain qualifying policy types (mainly their participating Whole Life policies).
Don’t get me wrong, life insurance products sold by stock companies can also grow safely and predictably, but all things being equal, I think you can clearly see the advantage of buying into a mutual company by owning one of their participating policies.
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John “Hutch” Hutchinson
ChFC®, CLU®, EA, AEP®, CExPs®
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