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The financial services sector is intensely competitive, and even the strongest of companies must adapt to changing circumstances if they're going to thrive. For example, many mutual insurance companies choose to convert their ownership structure into a stock-based structure, comparable to other publicly traded corporations. This provides several benefits to the insurance company itself and also to you as a policyholder.
Mutual vs. Stock Companies
The first mutual insurance organizations were loose-knit groups of merchants who pooled emergency funds for their mutual benefit in case of fire. Modern mutual insurance companies are run as cooperatives, in some ways resembling credit unions. Every policyholder is also a part owner in the company and enjoys better dividends or cash values when the company flourishes. Stock companies sell shares in the business, like other companies, and the shareholders own the company. This creates a potential conflict between the shareholders' interests and the policyholders' interests, and well-run companies are careful to address the needs of both groups.
Although several of the industry's largest players are mutual companies, they operate at a disadvantage in the corporate marketplace. Borrowing is their only option for raising large quantities of capital, and it's not always possible to fund a proposed acquisition or expansion through borrowing. To overcome this difficulty, some companies choose to convert to a publicly traded structure, a process called "demutualization." A majority of policyholders must vote to support the decision, and an initial public offering must be underwritten. The policyholders' stake in the new company is calculated through a formula that accounts for the quantity of insurance they own and the length of time they've made premium payments.
Advantages of Demutualization
Demutualization typically takes 18 to 24 months. Once the process is complete, the newly reorganized company can trade its shares on the open market and float new issues as needed to generate capital. That makes stock-based companies nimbler and better able to respond to changing market conditions. It's easier for them to make an acquisition, attract a takeover bid, or -- if necessary -- repel a takeover bid. A stock company can benefit from any increase in its share price, as well as the performance of its own investment portfolio. At least in theory, it results in a stronger company that's capable of faster growth.
When a company proposes demutualization, policyholders are offered compensation for their ownership stake. The company's proposal will outline a variety of options, usually including a cash settlement, stock in the new company, increased cash value in your policies or a combination of several benefits. Policyholders who accept stock in the new company continue to hold an ownership stake. Those who accept cash can reinvest it as they please. Any existing policies will remain unchanged, as long as they're kept in force.
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