@Risk Management and Review, 2000, Vol. 3, No. 2,135-154

INSURERS’DEMUTUALIZATION DECISIONS Richard J. Butler Yijing Cui Andrew Whitman

ABSTRACT Several explanations of why mutual insurers choose to demutualize their businesses are examined with a recent survey of mutual insurers. This study adds to the literature by surveying mutual insurers’ executives on those factors that would lead them to demutualize their companies. Both univariate and multivariate techniques are applied to analyze those responses. Demutualization is most strongly influenced by access to markets, increased organizational flexibility, and the chance for company officers to increase their pay, as prior literature has suggested. MUTUALINSURANCE REORGANIZATION Joe Belth, in his The Insurance Forum, suggests four reasons a mutual insurer would demutualize: access to capital, organizational flexibility, avoidance of the income tax setback, and aligning the interests of managers with those of company shareholders. Demutualization provides insurers with access to external capital sources that are currently not available to them. A mutual company’s only means of access to capital markets is through the issuance of surplus contribution notes (Dumm and Hoyt, 1999). Moreover, the issuance of surplus notes is restricted by regulatory requirements. It is subject to ”the prior approval of the regulator in the company’s state of domicile, interest and principal payments are subject to the regulator’s prior approval, and surplus notes are subordinate to the issuing insurance company’s obligationsto policy

Richard J. Butler is professor of economics at Brigham Young University, Provo, Utah. Yijing Cui is with the Industrial Relations Center at the University of Minnesota-Twin Cities. Andrew Whitman is professor of insurance at the Industrial Relations Center at the University of Minnesota-Twin Cities. The authors wish to thank the National Association of Companies and especially Susan Brudvig for their support in printing and mailing the questionnaires for this survey. Joe Belth, professor emeritus, Indiana University, Bloomington, also kindly provided some useful commentary on mutual insurers and their decisions to reorganize, and Phil Bromiley and the referees made excellent suggestions on previous drafts. Research support from the Industrial Relations Center at the University of Minnesota-Twin Cities is gratefully acknowledged. All shortcomings associated with the questionnaire development and data processing are the authors’ alone.

135 136 RISK MANAGEMENTAND INSURANCE REVIEW owners” (Belth, vol. 24, no. 3, p. 172). A stock company, on the other hand, can raise capital through issuance of additional equity securities.l A second reason for demutualizing is that it provides the insurers with greater strate- gic and organizational flexibility to pursue growth through acquisitions, business combinations, and other strategic alliances. The additional flexibility should better position insurers to take advantage of diversification opportunities that have arisen as the legal barriers between financial institutions and insurance companies have been reduced or eliminated (Belth, vol. 24, no. 3, p. 171).’ A third reason for demutualizing is that the insurers can escape an income tax set- back. In 1984, Congress revised the Internal Revenue Code treatment of the income of companies. One aspect of the revision has come to be called the ”differential earnings-rate tax” on the mutual companies. Previously, dividends paid to policyholders in a mutual company were completely deductible in the cal- culation of the company’s taxable income. With the differential earnings-rate tax, this deduction was eliminated, eroding an advantage to being a mutual. The mutuals say it is unfair, because they feel that policyowner dividends should be fully de- ductible. A stock company, therefore, can escape this differential earnings-rate tax (Belth, vol. 25, no. 5). A fourth reason for demutualizing is that it may be easier for a stock company to motivate its management team by making stock available to officers and directors so that management interests are better aligned with those of the company. Many believe that the stock form of organizing aligns management and shareholder interests at the expense of policyowners (Mayers and Smith, 1988; Pottier and Sommer, 1997). The issue of agency conflicts is addressed in fairly extensive prior literature, includ- ing: Boose (1990),Scordis and Pritchett (1998),Pottier and Sommer (1997),McNamara and Rhee (1992), Mayers and Smith (1994), Lamm-Tennant and Starks (1993), and Mayers and Smith (1986). Several issues that warrant empirical examination are whether policyholders benefit from demutualization and whether insurance agents are harmed by possible concomitant changes in the distribution system accompany- ing demutualization. While the authors do not examine policyholders’ welfare under demutualization in this article, they do report the most important factors affecting demutualization as

Some mutuals may reorganize into mutual holding companies, whereby they choose if and when to issue an . A mutual that undergoes a full demutualization is generally expected to issue an initial public offering at the time of conversion. Strategic advantage of the existing mutual structure may explain why some companies do not demutualize. For example, one reason has not demutualized is its objective of providing cash accumulation products to upscale customers, and its existing general agency marketing system needed to serve these customers. The value of the agency force as an important factor in life insurers’ strategic restructuring decisions was noted at a forum on demutualization on April 20,2000, sponsored by Minnesota Center for Insurance Research. INSURERS’DEMUTUALIZATION DECISIONS 137 reported in the authors’ nationwide survey of mutual insurers’ executive^.^ Only Alaska and Hawaii prohibit mutual companies from converting to stock; mutual holding company laws exist in 22 states and the District of Columbia (PricewaterhouseCoopers, 1998).

DEMUTUALIZATIONAND FINANCIAL RATING One way in which capital access may be improved by demutualizing is that a company’s financial ratings may impr~ve.~Tables 1 and 2 indicate that recent reorganizations re- sult in little change in the financial rating of mutual insurance companies. Tables 1 and 2 present the ratings of life and health insurance companies before and after demutualization. The list of companies, which either have demutualized or re- organized in the past several years, or announced their intention to do so, was ob- tained from Mutual Companies-A Vanishing Breed (PricewaterhouseCoopers, 1998). Of the 21 life and health groups, 8 have demutualized, 2 have announced demutualizations, and 11 have reorganized to mutual holding companies. The ratings, ranging from A to D, are A.M. Best Ratings, and the 1-9 scale is A.M. Best’s Financial Performance Rating. The authors also examine the subordinate com- panies’ ratings for those groups, which have experienced some change, since strate- gic asset management is undoubtedly set for the whole group rather than subsidiar- ies in isolation. Table 1 (Demutualizations) and Table 2 (Reorganizations) present the ratings for the year of change or announcement and for the three years both before and after the change. Omitted from many companies that are experiencing a recent switch are the “after change” ratings, which are not yet available. Among the 49 life and health insurance companies, 8 do not have financial ratings in all of the 7 years (labeled as NR-1, NR-2, NR-3, or NR-4). In the remaining 41 companies, only 7 experience a slight fluctuation. Although the ratings are somewhat limited in their range (most are from A- to A+++),there is virtually no change over this period: PM Group went from A to A’ and Educators’ Mutual from A to A- the year of the change, but all other insurers experienced no change in their financial ratings. The results for the property-liability insurers given in Table 3 are similar to those for the life and health insurance mutuals. Of the seven mutual property-liability insurance groups and their twelve subsidiaries, five have demutualized, one has an- nounced a demutualization, and one has reorganized. Again, there is virtually no change in their financial ratings.

Of the respondents, 31 percent were CEOs/presidents; 30 percent were managers; 25 percent were secretary/treasurers; 6 percent were CFO/COO/Executive VPs; and the remainder were secretaries and vice presidents. For the relationship between insolvency and organizational form, see Pottier, 1998; BarNiv and Hathorn, 1997; Carson and Hoyt, 1995; and Ambrose and Seward, 1988. 138 RISK MANAGEMENTAND INSURANCE REVIEW

TABLE1 Life and Health insurance Companies: Demutualizations

Years before Year of Years after COMPANY NAME -3 -2 -1 change 1 2 3 DEMUTUALIZED UNION MUTUAL LIFE INSURANCE COMPANY / 1986 UNUM LIFE INSURANCE COMPANY A+ A+ A+ A+ A+ A+ At

THE MIDLAND MUTUAL LIFE INSURANCE 1994 COMPANY/THE MIDLAND LIFE INSURANCE A A A- A- A- A- A COMPANY

ALLMERICA FINANCIAL CORPORATION 1995 (stock holding company) FIRST ALLMERICA FINANCIAL LIFE INSURANCE 1995 COMPANY (head, demutualized) AAAAAAA ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY AAAAAAA

GUARANTEE LIFE GROUP (stock holding company)* 1995 GUARANTEE MUTUAL LIFE COMPANY / 1995 GUARANTEE LIFE INSURANCE COMPANY AAAAAA-A- (demutualized, and owns the following two) GUARANTEE AMERICAN LIFE COMPANY * NA-4 NA-4 NA-4 NR-3 * * $ GUARANTEE PROTECTIVE LIFE COMPANY NA-3 7 7 7 7 6 B++

JOHN HANCOCK FINANCIAL SERVICES GROUP JOHN HANCOCK MUTUAL LIFE INSURANCE 1998 COMPANY (owns the two below) A++ A++ A++ A++ INVESTORS PARTNER LIFE INSURANCE COMPANY 8888 JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY A++ A++ A++ A++

MONY GROUP MUTUAL LIFE INSURANCE COMPANY OF NEW 1998 YORK/MONY LIFE INSURANCE COMPANY A- A- A- A- (demutualized, and owns the following one) MONY LIFE INSURANCE COMPANY OF AMERICA A- A- A- A-

METROPOLITAN LIFE INSURANCE COMPANY A+ A+ A+ 1999

STANDARD INSURANCE COMPANY A A A 1999 ANNOUNCED A DEMUTUALIZAION PRUDENTIAL OF AMERICA GROUP 1998 PRUDENTIAL INSURANCE COMPANY OF AMERICA AAAA (announced to demutualize, and owns the six below) PRUCO LIFE INSURANCE COMPANY AAAA PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY AAAA PRUDENTIAL HEALTHCARE LIFE INSURANCE COMPANY OF AMERICA NR-1 NR-1 NR-2 NR-2 PRUDENTIAL LIFE INSURANCE COMPANY OF ARIZONA NR-3 NR-3 NR-3 NR-3 PRUDENTIAL SELECT LIFE INSURANCE COMPANY OF AMERICA NR-3 NR-3 NR-3 NR-3 PRUDENTIAL UNIFORMED SERVICES ADMINISTRATORS, INC. NR-3 NR-3 NR-3 NR-3

1998 EDUCATORS MUTUAL LIFE INSURANCE COMPANY A A A A- * The company does not exist anymore. INSURERS’DEMUTUALIZATION DECISIONS 1 39

TABLE2 Life and Health Insurance Companies: MHC Reorganizations

Years before Year of Years after COMPANY NAME -3 -2 -1 change 1 2 3

REORGANIZED AMERUS LIFE GROUP AMERUS MUTUAL LIFE INSURANCE COMPANY/ AMERUS LIFE INSURANCE COMPANY 1996 (reorganized under AMERICAN MUTUAL HOLDING A * A A A A COMPANY, became a stock company, and owns the following two) AMERICAN VANGUARD LIFE INSURANCE COMPANY 6 6 A A A A CLA ASSURANCE COMPANY

ACACIA GROUP ACACIA MUTUAL LIFE INSURANCE COMPANY/ ACACIA LIFE INSURANCE COMPANY (re- 1997 organized under ACACIA MUTUAL HOLDING AAAAA CORPORATION, became a stock company, and owns the following one) ACACIA NATIONAL LIFE INSURANCE COMPANY AAAAA

GENERAL AMERICAN LIFE GROUP GENERAL AMERICAN LIFE INSURANCE COMPANY (reorganized under GENERAL AMERICAN MUTUAL 1997 HOLDING COMPANY, became a stock company and A+ A+ A+ A+ A+ owns the following four) GENERAL LIFE INSURANCE COMPANY NA-4 A+ A+ A+ A+ GENERAL LIFE INSURANCE COMPANY OF AMERICA NA-4 A+ A+ A+ A+ PARAGON LIFE INSURANCE COMPANY A+ A+ A+ A+ A+ RGA REINSURANCE COMPANY A+ A+ A+ A+ A+

PACIFIC MUTUAL LIFE INSURANCE COMPANY PACIFIC LIFE INSURANCE COMPANY (reorganized 1997 under PACIFIC MUTUAL HOLDING COMPANY, A+ A+ A+ A+ A++ became a stock company and owns the one below) PM GROUP LIFE INSURANCE COMPANY A+ A A A+ A+

MINNESOTA MUTUAL GROUP MINNESOTA MUTUAL LIFE INSURANCE COMPANY 1998 (owns the three below) A++ A++ A++ A++ MIMLIC LIFE INSURANCE COMPANY NR-2 NR-2 NR-2 NR-2 MINISTERS LIFE INSURANCE COMPANY A+ A+ A+ A+ NORTHSTAR LIFE INSURANCE COMPANY A+ A+ A+ A+

AMERITAS GROUP AMERITAS LIFE INSURANCE CORP. (reorganized 1998 under AMERITAS HOLDING COMPANY, became a A+ A+ A+ A+ AMERITAS VARIABLE LIFE INSURANCE COMPANY A A A A stock company, and owns the three below) FIRST AMERITAS LIFE INSURANCE COW, OF NEW YORK A+ A+ A+ A+ PATHMARK ASSURANCE COMPANY NR-3 NR-3 NR-3 NR-3 PRINCIPAL LIFE INSURANCE COMPANY (under PRINCIPAL MUTUAL HOLDING COMPANY) A+ A+ A+ A+

OHIO NATIONAL LIFE GROUP OHIO NATIONAL LIFE INSURANCE COMPANY 1998 (reorganized under OHIO NATIONAL MUTUAL A+ A+ A+ A+ HOLDINGS, INC., became a stock company, and owns the one below) 1998 OHIO NATIONAL LIFE ASSURANCE CORPORATION A+ A+ A+ A+ Continued on next page. 140 RISK MANAGEMENTAND INSURANCE REVIEW

Years before Year of Years after COMPANY NAME -3 -2 -1 change 1 2 3 SECURITY BENEFIT GROUP SECURITY BENEFIT LIFE INSURANCE COMPANY (reorganized under SECURITY BENEFIT MUTUAL 1998 HOLDING COMPANY, became a stock company, and A+ A+ A+ A+ owns the one below) FIRST SECURITY BENEFIT LIFE INSURANCE AND ANNUITY COMPANY OF NEW YORK A+ A+ A+ A+

PROVIDENT MUTUAL LIFE INSURANCE COMPANY PROVIDENT MUTUAL LIFE INSURANCE COMPANY (/PROVFIRST AMERICAN LIFE INSURANCE COMPANY) (owns the two below, and the conversion plan has 1998 bee9 approved) AAAA PROVIDENT MUTUAL LIFE AND ANNUITY COMPANY OF AMERICA (/PROVFIRST AMERICAN LIFE AND ANNUITY COMPANY) AAAA PROVIDENT MUTUAL INTERNATIONAL LIFE INSURANCE COMPANY NR-2 NR-2 NR-2 NR-2

NATIONAL LIFE INSURANCE COMPANY OF VERMONT A A A- 1999

A.M. BEST RATINGS: A++ and A+: Superior A and A-: Excellent B++ and B+: Very Good B and B-: Fair C++ and C+: Marginal C and C-: Weak D: Poor E: Under Regulatory Supervision F: In Liquidation S: Rating Suspended A.M. BEST’S FINANCIAL PERFORMANCE RATINGS 9: Very Strong 8 and 7 Strong 6 and 5: Good 4: Fair 3: Marginal 2: Weak 1: Poor NR-1: Insufficient Data NR-2: Insufficient Size and/or Operating Experience NR-3: Rating Procedure Inapplicable NR-4: Company Request INSURERS’DEMUTUALIZATION DECISIONS 1 4 1

TABLE3 Property and Casualty Insurance Companies: Dernutualizations and MHC Reorganizations

COMPANY NAME Years before Year of Years after -3 -2 -1 change 1 2 3

DEMUTUALIZED MUTUAL ASSURANCE, INC. 1991 A+ A+ A+ A+ A+ A+ A+ OLD GUARD FIRE INSURANCE COMPANY 1997 A- A- A- A- A-

THE SCPIE COMPANIES 1997 AMERICAN HEALTHCARE INDEMNITY COMPANY AAA AMERICAN HEALTHCARE SPECIALTY INSURANCE COMPANY AAA SCPIE INDEMNITY COMPANY AAA

MEDICAL INTER-INSURANCE EXCHANGE GROUP 1998 MEDICAL INTER-INSURANCE EXCHANGE OF NEW JERSEY AAAA AMERICAN MEDICAL MUTUAL INC RISK RETENTION GROUP AAAA

1998 PIONEER MUTUAL INSURANCE COMPANY (NY) CCCA

ANNOUNCED A DEMUTUALIZAION MERCER MUTUAL GROUP A- A- A- A- MERCER MUTUAL INSURANCE COMPANY 1997 (the lead) A- A- A- A- A- MERCER INSURANCE COMPANY A- A- A- A- A-

REORGANIZED FCCI INSURANCE GROUP A- A- A- A- FCCI MUTUAL INSURANCE COMPANY (reorganized 1998 under FCCI MUTUAL INSURANCE COMPANY, (approved) became a stock company, and owns the following one) A- A- A- A- NATIONAL TRUST INSURANCE CO. ? A- A- A- Note: See the footnote for Table 1 for interpretation of the financial ratings. Mercer Mutual’s demutualization was rejected by policyholders in March 1999.

Among the 12 property-liability companies, only 1 [Pioneer Mutual Insurance Com- pany (NY)]jumped to A after three years of Cs. Most companies have A ratings, and because there is so little variation in the rat- ings, most companies must be demutualizing and reorganizing for reasons other than to improve their financial ratings. In fact, some large mutuals, e.g., Mutual Benefit, had high financial ratings in the years before their financial demise. The authors’ survey examined some of the other reasons that would lead mutual insur- ers to reorganize their firms. SURVEYRESULTS If the financial ratings of demutualized companies do not improve, what factors in- fluence the decision to reorganize? To address this issue, the Minnesota Center for Insurance Research (MCIR),in partnership with the National Association of Mutual 142 RISK MANAGEMENTAND INSURANCE REVIEW

Insurance Companies (NAMIC),developed a ”Survey of Mutual Insurers.” This sur- vey, a two-page questionnaire, was sent to all companies on the NAMIC mailing list (including all NAMIC members as well as some nonmembers) on October 25,1999, on University of Minnesota letterhead. A postcard preceded this survey on October 21,1999, from NAMIC, informing their members that the survey would be arriving shortly and that all information from the survey on individual insurers would be kept strictly confidential. Of the 1,418 questionnaires sent out, 341 companies (24 percent) responded. See the Appendix for a discussion of sample response by state and insurer size. Using a five-point scale from 1 (Would Never Be Considered) to 5 (Very Important), the survey asked the mutual insurers to indicate which would be important items within the following broad areas: Section 1: What items make it beneficial to be a mutual insurer rather than a stock insurer? (17 items); and Section 2: What items would make it beneficial to change to a stock insurer? (18 items) Table 4 summarizes the results from Section 1.Eleven hypothesized factors (i.e., those factors listed from “Policyholder Participation” at the top down to “Acquisition by Other Firms” in about the middle of Table 4) received a mean score higher than 3, where a 3 indicates no difference between being a mutual insurer or a stock insurer. Four factors-Policyholder Participation, Policyholder Interest, Working Environment, and Rate Regulation-have a score higher than 3.5 and seem to indicate that the most important factors to being a mutual insurer are policyholder well-being and the “in- surance working” en~ironment.~ Six other factors had mean scores less than 3, indicating that they are detrimental to being a mutual insurer. These detrimental factors include things generally represent- ing forgone opportunities and presumably would increase the likelihood of being a stock insurer, including: issuance of surplus notes, other affiliations, market volatility, better pay for officers, long-term stock market growth, and access to capi- tal. Notice that this list includes three of the four reasons for demutualization listed in the first section of the article: access to capital, organizational flexibility, and agency concerns (including better pay for management). For the authors’ sample of smaller and medium-sized mutuals, policyholder participa- tion is the number one reason listed for remaining a mutual. This would be surprising for large mutual insurers, as the level of corporate governance by policyholders is thought to be low and policyholder attendance at meetings seems to be rare, but it may

While the authors know of no significant difference in the rate regulation standards applied to stock and mutual companies, a key difference in rate filings is in the use of dividends. In life insurance, the rate filings of mutual companies are more likely than stock companies to include participating (dividend paying) policies. Dividends can be a key element in the company’s premium structure, advertising, and sales illustrations. In casualty and workers compensation insurance, the dividends scales appear in mutual company rate filings and are not likely to appear in stock company filings. This is one reason mutual companies believe demutualization may make a difference in the presence of rate regulation. INSURERS‘DEMUTUALIZATION DECISIONS 143 not be so surprising for smaller mutual insurers if the policyholders are less geographi- cally dispersed or if size is endogenously small because of specialized interests. Table 5 summarizes responses from Section 2 of the survey. These indicate factors that would lead a company to move from a mutual insurer to a stock insurer. The four factors that received the highest scores are business structure flexibility, long- term stock market growth, acquisition by other firms, and other affiliations with firms. Again, access to market capital and other affiliations seem to be the principal drivers in demutualization. Agent licensing (the last line) and insurer taxation and regulation get the lowest scores in Table 5, indicating that these are reasons to re- main a mutual insurer (in preference to becoming a stock insurer). The authors included both Section 1 and Section 2 (Tables 4 and 5) in our survey for consistency checks: these sections asked for essentially the same information in different ways. The results indicate that the responses between these tables were not only consis- tent, but that the most important reasons to demutualize include access to capital, increased organizational flexibility, and aligning the financial interests of the company’s officers.

TABLE4 Which Factors Make It Beneficial To Be a Mutual Rather Than a Stock Insurer?

Mutual Versus Stock Form of Ownership Mean Score Policyholder Participation 3.95 Policyholder Interest 3.94 Working Environment 3.85 Rate Regulation 3.64 Premium Taxes 3.42 Income Taxes 3.42 Business Structure Flexibility 3.40 Operating Expenses 3.29 Distribution System 3.28 Cash-Value Products 3.20 Acquisition by Other Firms 3.05 Issuance of Surplus Notes 2.94 Other Affiliations With Firms 2.94 Short-Term Stock Market Volatility 2.88 Better Pay for Company Officers 2.62 Long-Term Stock Market Growth 2.61 Capital Access 2.47 144 RISK MANAGEMENTAND INSURANCE REVIEW

TABLE5 Which Factors Make It Beneficial To Go From a Mutual to a Stock Insurance Company?

Demutualization Mean Score Business Structure Flexibility 3.33 Long-Term Stock Market Growth 3.25 Acquisition by Other Firms 3.23 Other Affiliations With Firms 3.12 Better Pay for Company Officers 3.02 Capital and Surplus Regulation 2.98 Short-Term Stock Market Volatility 2.94 Issuance of Surplus Notes 2.68 Operating Expenses 2.67 Income Taxes 2.61 Policyholder Interest 2.48 Working Environment 2.46 Policyholder Participation 2.37 Distribution System 2.33 Product Regulation 2.29 Premium Taxes 2.28 Rate Regulation 2.04 Agent Licensing 1.84

MULTIVARIATEANALYSIS OF SURVEYRESPONSES Tables 4 and 5 represent mutual insurers’ self-reported ranking of factors important to organizational choice. To see how these reported rankings vary with external factors, the authors collected data on the respondents’ surplus, direct written premiums, and location. The premium and surplus data were provided by NAMIC; the other vari- ables in the analysis were generated from the mutual insurers’ state of domicile. Interest in demutualization was captured by two dependent variables: structural flex- ibility and preference of demutualization. Structural flexibility is measured as the sum of three items in Section 2 of the Survey: Business Structure Flexibility, Acquisition by Other Firms, and Other Affiliations with Firms. The more interest the respondent has in organizational flexibility, the higher its score would have been on these three items. The score ranges from 3 to 15; a higher score indicates greater interest in demutualization as a means of pursuing growth through acquisitions,business combinations, and other strategic alliances. Table 7 shows that, among the 267 valid observations, the structural flexibility variable has a mean of 8.37 and a standard deviation of 3.7. Preference of demutualizationis the general tendency of a mutual insurer to demutualize, for any of the 18 factors listed in Table 5. The score varies from 18 to 90; a higher score represents a stronger overall interest in demutualization. Table 7, likewise, shows that the mean and standard deviation of this variable are 41.9 and 16.19, respectively. INSURERS’DEMUTUALIZATION DECISIONS 145

The five independent variables examined can be classified into one of three groups: capital access, regulatory conditions in the state, and economic conditions in the state. The discussion above suggests that the insurers’ capital access and regulatory envi- ronment will have at least as large an effect on a mutual insurer’s interest in demutualizing as the economic conditions in a state. Capital access is measured by the company-specific ratio of policyholders’ surplus to direct premiums written (SUR-DPW). Data on premiums and surplus were provided by NAMIC, representing 1998 firm-specific premium and surplus values. SLIR-DPW has a mean of 2.33 and a standard deviation of 2.74, as indicated in Table 7. If this ratio is high, the company has relatively adequate assets. Therefore, it is likely that the mu- tual insurer has less need to obtain capital from external sources and so would be less interested in demutualization. Since demutualization is considered a major means of access to external capital, this variable should have a negative relationship with the pref- erence of demutualization variable. The square of this variable is also included in the analysis to capture any nonlinearity in the relationship: the authors expect the coeffi- cient on SUR-DPW to be negative and the coefficient on SQUR-S-D to be positive if interest in demutualization falls at a decreasing rate. The other four variables are state-specific variables. Average annual pay of the state where the company is located (ANNUPAY) and gross state product per capita (GSP-PER) are included to capture the influence of state economic conditions.6The authors’ univariate analysis of Table 5 suggests that these factors are less important than the regulatory environment. To proxy the regulatory environment for demutualization, the authors include a dummy variable that is one for states with subscription-rights-only demutualization laws (SROD) and a dummy variable that is one for states with anti-takeover provisions (ANTIACQ). As shown in Table 7, ANNUPAY (average annual pay) has a mean of $27,414 and a standard deviation of $3,789; GSP-PER (gross state product per capita) has a mean of $27,653 and a standard deviation of $2,754. If the economy is booming in the state where the mutual insurer is domiciled, the insurer will be more inclined to expand its business. For example, a company may pursue this growth by further investment or by business combinations or acquisitions. These business needs in good economic circumstances will be more readily obtained by conversion to a stock company, both because it can issue stock and because it has more flexibility to pursue business com- binations or acquisitions. Hence, the authors hypothesize that these two variables will have a positive effect on their dependent variables. The subscription-rights-onlydemutualization dummy variable (SROD)and the anti- takeover dummy variable (ANTIACQ) proxy the regulatory environment for demutualization. Subscriptionrights demutualization is a method of demutualization. Under this method, ”the policyholders receive the right to purchase shares for cash in

Average Annual Pay of the domicile state was obtained from the U.S. Census Bureau, Statistical Abstract of the United States: 2999. The authors used the statistics of 1996 in current dollars. Gross State Product per Capita was the ratio of the gross state product in 1996 in current dollars (US.Census Bureau, Statistical Abstract ofthe United States: 2999) to the State Population Estimates of 1996 (http:/ /www.census.gov/population/estimates/states/st-99-3.txt). 146 RISK MANAGEMENTAND INSURANCE REVIEW advance of a required offering to the general public. The shares may, but are not required to, be offered to policyholders at a discount to the market price” (PricewaterhouseCoopers, 1998, p. 38). Some state laws mandate this form of demutualization as opposed to traditional demutualization under which policyhold- ers are permitted to receive cash, stock, and/or policy credits, but not necessarily on a preferred basis. SXOD may have different influences on life insurance and on property-liability insurance. However, the advantages and disadvantages of this method for both in- dustries are listed in Table 6.

TABLE6 Subscription Rights Demutualization

Advantages Disadvantages Does not erode surplus Lack of successful precedent Policyholders are the initial source Controversy and litigation potential for capital-raising efforts IPO generally required, rendering Achieves effects of full transaction subject to market conditions demutualization Recognizes management’s contributions

Source: PricewaterhouseCoopers, 1998, p. 38.

As is shown in Table 7, the mean for SXOD is small, and 6.37 percent of the 267 valid observations are located in states with only subscription rights. For states allowing subscription-rights-only demutualization, the mutual insurers will have less flexibil- ity in demutualizing. Hence, mutual insurers domiciled in subscription-rights-only states will have less interest in demutualizing; the SROD coefficient is expected to be negative in either of the demutualization specifications. The last state variable is anti-takeover provisions (ANTIACQ).Table 7 reveals that 33 percent of the valid sample companies are located in the states that, by law, explic- itly restrict takeovers. Among the states that allow a mutual insurance company to reorganize as a mutual holding company, some state statutes have explicit provisions restricting the amount of the ownership of the company stock, protecting the com- pany from being taken over. Although converting to a stock company increases the insurer’s possibility of acquiring other companies through the stock market, it also exposes the insurer to being taken over by other competitors in the stock market. The explicit provision in the state statute, however, should reduce this risk. This will in- crease the mutual insurer’s interest in demutualizing when there is the potential threat of a hostile takeover bid, but it decreases the mutual insurer’s interest in demutualizing when there is the potential for a friendly takeover. As a result, the effect of ANTIACQ on either of the dependent variables is ambiguous. INSURERS’DEMUTUALIZATION DECISIONS 147

TABLE7 Descriptive Statistics for the Demutualization Regressions

Variable N Minimum Maximum Mean Std. Deviation DEMUTUA” 267 18 90 41.90 16.19 FLEXb 267 3 15 8.37 3.70 SUR DPW 267 .oo 20.22 2.3294 2.74 ANNUPAYd 267 20724.00 36816.00 27413.76 3789.33 GSP-PER‘ 267 20450.99 37954.96 27653.11 2754.20 SRODf 267 0 1 6.37E-02 0.24 ANTIACQg 267 0 1 0.33 0.47 DEMUTUA is an index of overall interest in demutualization. FLEX is an index of interest in demutualization for business flexibility reasons. SUR-DPW is the ratio of surplus to direct premiums written. dANNUPAY is the average annual wage/salaries in the state of domicile. GSP-PER is the gross state product per capita in the state of domicile. SROD is a dummy variable for subscription-rights-only demutualization laws in the state of domicile. g ANTIACQ is a dummy variable for anti-takeover laws in the state of domicile.

Methodology and Empirical Results. Among the 341 respondents, some did not answer all the items of the questions in Section 2 of the survey, and they are excluded from the analysis. One obvious outlier was excluded as well. A total of 267 valid observa- tions remain. Preference of demutualization (DEMUTUA) and structural flexibility (FLEX) were regressed on the five independent variables discussed above. Preference of Demutualization. Table 8 summarizes the results for dependent variable ”DEMUTUA.” The model R2 indicates that only 8.7 percent of the variation in the answers is explained by the authors’ independent variables. Obviously, many other considerations influence an insurer’s decision to demutualize. However, the F value (4.146) for the overall model is statistically significant at better than the 1 percent level. All the coefficients are consistent with the authors’ hypotheses. SUR-DPW has a negative effect on interest in demutualization, though the marginal impact of surplus to premiums diminishes at higher levels of the variable, as indi- cated by the estimated positive coefficient on the SQUR-S-D variable. Consistent with reported responses, companies with adequate surplus are less interested in demutualizing. The greater their access to capital, the less will be the mutual insur- ers’ interest in converting to a stock company. The two economic environment indi- ces-ANNUPAY and GSP-PER-have positive estimated coefficients as expected, though the coefficients are statistically insignificant. Though not as significant as the surplus measure, the regulatory environment vari- ables were ”more significant” in a statistical sense than were the economic environ- ment variables, with the expected sign. The subscription-rights-only demutualization dummy variable had a negative estimated coefficient: mutual insurers domiciled in 148 RISK MANAGEMENTAND INSURANCE REVIEW subscription-rights-only demutualization states had a 9 point lower indexed response to demutualization than mutual insurers domiciled in states without a subscription- rights-only law. The estimated positive coefficient for the anti-takeover dummy vari- able, ANTIACQ, suggests that mutual insurers favor that protection when forming a mutual holding company, even at the cost of more complications in terms of friendly acquisitions. This suggests that when the mutual insurer is protected from being taken over by others, it is more interested in demut~alization.~

Unstandardized Standardized Coefficients Coefficients B Std. Error Beta t P-value (Constant) 16.39 10.041 1.632 0.104 SUR-DP Wb -2.585 0.832 -0.438 -3.106 0.002 SQUR-S-Dc 1 0.154 0.056 1 0.384 2.729 0.007 ANNUPAY” I 5.033E-04 0.000 I 0.118 1.122 0.263 GSPPER‘ 5.429E-04 0.001 0.092 0.968 0.334 SRODf -9.192 4.492 -0.139 -2.046 0.042 ANTIACOg I 4.049 1 2.592 1 0.117 1 1.562 1 0.12

F I F=4.146 P-value=0.003 a DEMUTUA is an index of overall interest in demutualization. SUR-DPW is the ratio of surplus to direct premiums written. SQUR-S-D is the square of the ratio of surplus to direct premiums written. *ANNUPAY is the average annual wage/salaries in the state of domicile. GSP-PER is the gross state product per capita in the state of domicile. SROD is a dummy variable for subscription-rights-only demutualization laws in the state of domicile. g ANTIACQ is a dummy variable for anti-takeover laws in the state of domicile.

Structural Flexibility. The results of structural flexibility are summarized in Table 9. This dependent variable attempts to measure the advantages demutualization could bring in terms of organizational flexibility. The R2 value indicates that 11.6 percent of the variation in the rankings in Table 5 is explained by the author‘s independent variables; the F value (5.711) indicates that these relationships are statistically signifi- cant overall. The signs of the estimated coefficients are the same as those for the demutualization specification, with coefficients consistent with the authors’ hypothesized values. This

The authors actually included an MHC dummy variable in an earlier specification, but it was multicollinear with the other regressors (with a smaller t-value), and its exclusion does not affect the results much. INSURERS'DEMUTUALIZATION DECISIONS 149 specification pursues the more specific issue of demutualizing in order to pursue business flexibility. The results are the same as before: surplus to premiums (access to capital) has a large effect on demutualization interest and the regulatory variables have a moderate effect, but a statistically more significant effect on demutualization than do the economic environmental variables.

Unstandardized Standardized Coefficients Coefficients B Std. Error Beta t P-value (Constant) 1.794 2.261 0.793 0.428 SUR-D P Wb -0.741 0.187 -0.549 -3.956 0.000 SQUR-S-D' 4.365E-02 0.013 0.477 3.445 0.001 ANNUPAYd 9.83E-05 0.000 0.101 0.973 0.332 GSP-PER' 1.794E-04 0.000 0.133 1.421 0.157 SROD' -1.779 1.011 -0.117 -1.759 0.080 ANTlACQg 0.618 I 0.584 I 0.078 I 1.059 I 0.29 R2 0.116 F value I F=5.711 P-value=O a FLEX is an index of interest in demutualization for business flexibility reasons. SUR-DPW is the ratio of surplus to direct premiums written. SQUR-S-D is the square of the ratio of surplus to direct premiums written. dANNUPAY is the average annual wage/salaries in the state of domicile. GSP-PER is the gross state product per capita in the state of domicile. SROD is a dummy variable for subscription-rights-only demutualization laws in the state of domicile. g ANTIACQ is a dummy variable for anti-takeover laws in the state of domicile.

CONCLUSIONS There is increased interest in mergers and acquisitions following the enactment of the Financial Institutions Modernization Act of 1999, which repeals the 1933 Glass- Steagall Act and allows insurers and banks greater flexibility to form financial ser- vices organizations. Since mutual insurers do not have sufficient organizational flex- ibility to participate in the emerging integrated financial services market, the factors influencing their interest in converting to stock insurers become important. This study surveyed the factors that interested mutual insurance executives in their demutualization decisions. Several factors identified by mutual insurance executives as reasons to demutualize were examined, using both univariate and multivariate techniques. Factors associ- ated with the greatest interest in demutualization included access to capital markets, increased organizational flexibility, and the chance for company officers to increase 150 RISK MANAGEMENTAND INSURANCE REVIEW their pay. The responses were consistent whether the authors asked factors to be ranked on the basis of ”factors beneficial to being a mutual insurer” (Table 4) or ”factors beneficial to go from a mutual to a stock insurer” (Table 5). In addition to examining the insurers’ survey responses, the authors also correlated the degree of interest in demutualization (given by the respondents) to factors exter- nal to the firm. These include current access to capital (the surplus to premiums ra- tio), state economic environmental variables (annual average age and output per capita), and mutual insurance regulatory environmental variables (dummy variables for subscription-rights-onlyjurisdictions and for anti-takeover provisions for mutual insurance holding companies). The authors found, again, that access to capital was very important: interest in demutualization fell as the surplus to premium ratio in- creased, though interest declined at a decreasing rate.*Mutual insurance regulatory factors were also important: the subscription-rights-onlylegislation lessened interest in demutualization, while anti-takeover legislation heightened interest in demutualization, as expected. The economic environmental factors were never sta- tistically significant. The finding that regulatory factors are more important than eco- nomic environmental factors is good news: factors generally outside the control of state regulators (such as state-wide economic forces) are not as important to mutual executives as factors over which state regulators have a lot of control, namely regula- tions affecting the demutualization process.

APPENDIX

Sample The Survey of Mutual Insurers, a two-page questionnaire, was sent to all of the 1,418 companies on the National Association of Mutual Insurance Companies’ (NAMIC) mailing list (including all NAMIC members as well as some nonmembers). A total of 341 companies responded. The respondent mutual insurers are evenly located across the United States with an exception that the Deep South region has a lower response rate. The response rates by state are listed in Appendix Table 1. The “Total” column indicates the number of companies located in a state among all the 1,418, with the number of respondents (R) and the number of nonrespondents (NR) in the next two columns. The sample response rate by state is given in the P-R column, with the expected number of respondents [E(R)] in the far right column. Appendix Table 1 shows that among the 49 states that have mutual insurers, 10 states have 5 or fewer. These 10 states are listed in italics at the bottom of the list and are excluded from the statistical analysis of the geographical response rates because of a too-small sample size. The average response rate of the remaining 39 states is 24.2 per- cent, with a standard deviation of 15 percent. Two states, Maine (57.1 percent) and West Virginia (55.6 percent), are above two standard deviations of the average (54.2 percent), and they are labeled with ”+”; four states, Georgia, Louisiana, Missis- sippi, and Vermont, labeled with ”-,” have 0 response rates. Three states out of the four very low responders coming from the Deep South is the only discernible trend

Interest bottoms out at a surplus to premium ratio of 8.5, well beyond two standard deviations above the mean of the surplus to premium ratio. INSURERS’DEMUTUALIZATION DECISIONS 1 5 1 in the data. States in the Deep South region of the United States have a much lower response rate than elsewhere in the country. The Chi-square statistic of the responding rate is 82.832, with a degree of freedom of 38. Although this statistic indicates a rejection of the hypothesis that response rates are uniform throughout the United States, in samples this large, the Chi-square sta- tistic almost universally rejects the null hypothesis. Again, except for the low response rate in the Deep South, there do not seem to be any regional trends in the survey responses.

APPENDIXTABLE 1 Response Rates by States

State Total R NR P-NR P-R E(RI ~~ ~~ AL 8 2 6 0.750 0.250 1.936 AR 14 2 12 0.857 0.143 3.388 CA 16 2 14 0.875 0.125 3.872 CT 9 2 7 0.778 0.222 2.178 FL 17 1 16 0.941 0.059 4.114 GA (-) south 20 0 20 1.000 0.000 4.84 IA 147 38 109 0.741 0.259 35.574 ID 9 3 6 0.667 0.333 2.178 IL 137 31 106 0.774 0.226 33.154 IN 47 11 36 0.766 0.234 11.374 KS 13 7 6 0.462 0.538 3.146 KY 19 1 18 0.947 0.053 4.598 LA(-) south 7 0 7 1.ooo 0.000 1.694 MA 30 2 28 0.933 0.067 7.26 MD 16 2 14 0.875 0.125 3.872 ME (+) northeast 7 4 3 0.429 0.571 1.694 MI 31 6 25 0.806 0.194 7.502 ~ ______~ ____ ~ 124 51 73 0.589 0.411 30.008 MO 89 21 68 0.764 0.236 21.538 MS (-) northeast 6 0 6 1.000 0.000 1.452 MT 13 5 8 0.615 0.385 3.146 NC 28 6 22 0.786 0.214 6.776 ND 23 3 20 0.870 0.130 5.566 NE 40 13 27 0.675 0.325 9.68 NH 7 1 6 0.857 0.143 1.694 NJ 11 3 8 0.727 0.273 2.662 NY 69 19 50 0.725 0.275 16.698 OH 73 14 59 0.808 0.192 17.666 Continued on next page. 152 RISK MANAGEMENTAND INSURANCE REVIEW

~ ~ ~ ~~

State Total R NR P-NR P-R E(R) OR 6 3 3 0.500 0.500 1.452

~ ~ PA 94 12 82 0.872 0.128 22.748 sc 7 2 5 0.714 0.286 1.694 SD 26 9 17 0.654 0.346 6.292 TN 17 5 12 0.706 0.294 4.114 TX 43 10 33 0.767 0.233 10.406 UT 11 1 10 0.909 0.091 2.662 VA 15 2 13 0.867 0.133 3.63 VT (-) northeast 7 0 7 1.000 0.000 1.694 Wi 121 36 85 0.702 0.298 29.282 WV (+) south 9 5 4 0.444 0.556 2.178 Subtotal/ Average 1,386 335 1,051 0.758 0.242 335.412 CHI-TEST Chi-Sq=82.832, DF=38, P-Value=O Standard 0.15 Deviation AZ 2 1 1 0.500 0.500 0.484 co 4 1 3 0.750 0.250 0.968 Dc 2 0 2 1.000 0.000 0.484 DE 4 0 4 1.000 0.000 0.968 HI 2 0 2 1.000 0.000 0.484 NM 3 1 2 0.667 0.333 0.726 OK 5 0 5 1.000 0.000 1.21 RI 5 1 4 0.800 0.200 1.21 WA 4 0 4 1.000 0.000 0.968 WY 1 0 1 1.ooo 0.000 0.242

While there do not seem to be regional response differences in the survey, except for the Deep South, Appendix Table 2 indicates that there are differences by firm size, and small and medium-sized companies have a stronger tendency to respond. Col- umns DWP98, ASSETS98, and SURPL98 represent, respectively, the Direct Written Premium, the Total Admitted Assets, and the Policyholder Surplus of the companies in 1998. The means of the three indexes of the respondent group are all smaller than the nonrespondent group. The standard deviations of the three indexes are huge, both in the respondent group and in the nonrespondent group, making the differ- ences in the means only marginally significant (and not significant for differences in the Policyholder Surplus). Systematically, however, the respondent group has less Direct Written Premium, fewer Total Admitted Assets, and smaller Policyholder Sur- plus than the nonrespondent group. This suggests that the responses are differen- tially reflecting the behavior of the smaller and medium-sized mutual insurers in the sample. INSURERS’DEMUTUALIZATION DECISIONS 153

DWP98 ASSETS98 SURPL98 Non- Non- Non- Respondents Respondents Respondents Respondents Respondents Respondents Number 329 947 216 539 120 411 Mean 19087807 71285261 7.39E+10 3.84E+11 5.87E+10 2.45E+11 St. Dev. 72755303 795010516 2.54E+11 3.46E+12 1.48E+ll 2.15E+12 T-Value -2.00 -2.07 -1.74 P-Value 0.046 0.039 0.083

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McNamara, Michael J., and Ghon S. Rhee, 1992, Ownership Structure and Perfor- mance: The Demutualization of Life Insurers, Journal of Risk and Insurance, 59(2): 221-238. Pottier, Steven W., 1998, Life Insurer Financial Distress, Best’s Ratings and Financial Ratios, Journal of Risk and Insurance, 65(2): 275-288. Pottier, Steven W., and David W. Sommer, 1997, Agency Theory and Life Insurer Ownership Structure, Journal of Risk and Insurance, 64(3): 529-543. PricewaterhouseCoopers, 1998, “Mutual Companies-A Vanishing Breed.” Scordis, Nicos A., and S. Travis Pritchett, 1998, Policyholder Dividend Policy and the Costs of Managerial Discretion, Journal of Risk and Insurance, 65(2): 319-330. Wells, Brenda P., Larry A. Cox, and Kenneth M. Gaver, 1995, Free Cash Flow in the Life Insurance Industry, Journal of Risk and Insurance, 62(1): 50-66. Willens, Robert, 1998, Demutualization and Tax Deductions, Journal of Accountancy, 185(3):32. 本文献由“学霸图书馆-文献云下载”收集自网络，仅供学习交流使用。

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