In considering life insurance and other insurance products, consumers may be unaware of the type of company they are buying from — a mutual or a stock insurer. Knowing the differences between the two types of insurance companies is an important factor in the decision-making process.
A mutual insurer is a company “owned” by qualified policyholders, people who have purchased certain insurance products from the business. The quote marks denote that this ownership generally is not transferable except by assignment; in other words, the policyholder cannot sell his or her interest to another person. A stock insurer is a public or private company owned by shareholders, who have bought shares in the company that, in the case of a public company, trade on a stock exchange.
These dissimilar ownership interests create unique advantages and potential drawbacks for each type of insurance company. For instance, stock insurers can raise capital when needed by selling shares in the company, whereas mutual insurers do not have this ability. On the other hand, a mutual insurer is not beholden to Wall Street expectations and/or near-term shareholder targets.
“Rather than operate the business for the benefit of shareholders each quarter, the (mutual) business is run for the benefit of the policyholders on a long-term basis,” said Rob Haines, senior analyst at CreditSight, a New York-based independent provider of credit research, in an interview.
The downside of a mutual insurer is its inability to raise capital in the public markets, which can have a dampening effect on its ability to pursue such growth objectives as a large merger or acquisition.
“They generally have less financial flexibility to do a deal,” said Ken Johnson, vice president in the life/health division of A.M. Best & Co., an Oldwick, New Jersey-based independent ratings agency. “This doesn’t mean that mutual insurers have not made acquisitions, they have. Just not that many and certainly nowhere near the volume of acquisitions done by stock insurers.”
Other distinctions exist between the two types of companies. With a mutual insurance company, policyholders may have a voice in voting on management personnel and policy decisions. With a stock insurer, shareholders have a similar option to exercise discipline on management to operate as efficiently and profitably as possible, but the policyholders do not.
“They (policyowners) have no voting rights,” said Bob Detlefsen, vice president of public policy at the trade group, National Association of Mutual Insurance Companies. “Consequently, the interests of shareholders and policyholders may not be aligned.”
Haines has a similar perspective. “These two different constituencies — shareholders and policyholders — don’t always match up insofar as their goals and, in some cases, can be a lot different,” he said. “Shareholders tend to be focused on short-term investment returns and will pressure management to make decisions increasing this likelihood — decisions that may not necessarily be good for the long-term health of the insurance company.”
For example, Haines pointed to the practice of share repurchases by publicly owned insurance companies.
“We’re seeing an uptick in insurance holding companies buying back shares to appease their shareholders,” he explained. “If you’re taking capital out of an insurance subsidiary and moving it to the holding company to send it to shareholders, you’re eliminating the use of this capital to support policyholders.”
This important distinction must be weighed against a stock insurer’s chief advantage over a mutual insurance company — its ability to raise capital from the equity markets.
“In times of financial stress, this is a very important capability to have,” Haines said. “If an insurer is experiencing liquidity issues, access to a fast, ready source of capital can be very meaningful. This is not the situation with the credit markets, which is how mutual insurers typically raise capital.”
He pointed to the recent financial crisis as a case in point. “The debt markets were completely shut off from everyone, including (any) mutual insurers,” Haines said. “If a mutual needed to raise capital back in 2009, it would have been hard pressed to find it.”
This possibility explains in part why many mutual insurers tend to collect capital on the balance sheet, Johnson said. “Typically, they don’t need to access debt because they retain quite a bit of capital on the books, a lot more than stock insurers, which are running tighter to get their returns (on equity) up,” he explained. “This moderates the need for a mutual insurer to leverage the debt markets, but they do occasionally issue surplus notes for capital needs.”
Surplus notes are securities similar to a corporate bond, issued by an insurance company and subject to regulatory approval.
Making a Decision
The perceived plusses and minuses in mutual insurers and stock insurers can affect their ability to maintain efficient operations, underwrite products, and sell them at competitive rates. Despite these possible outcomes, the distinct differences between the two insurer types do not have much of an effect on their financial strength and creditworthiness. Both A.M. Best & Co., and Standard and Poor’s, another ratings agency, accord high ratings to both large stock life insurers and mutual life insurers, albeit mutual life insurers are rated slightly higher.
“The top four mutual life insurers are rated at AA-plus, which is the highest rating possible in the U.S.,” said Deep Banerjee, director of S&P Global Insurance Ratings. “By contrast, the largest public life insurers are rated AA-minus, two notches down but still a very high rating.”
Johnson affirmed similar ratings of the companies by A.M. Best & Co. “We generally rate the mutual life insurers higher than the public life insurers for financial strength and creditworthiness, but the difference is negligible,” he said. “A key factor in our decision is the amount of capital the companies retain on the books, with mutual insurers holding more. Another is the quality of this capital. There’s a little less financial engineering going on in a mutual life insurer compared to a stock company. An example is a stock company’s use of captive insurance vehicles.”
A captive insurance company is a form of reinsurance, whereby a holding insurance company sets up a separate insurance company with the specific objective of absorbing certain risks to which the parent is exposed.
While the different structures of mutual and stock insurers can be an important factor in a consumer’s purchasing decision, other issues also must be carefully weighed.
“The credit rating is important, but it is just as important to determine whether or not the product illustrations and price presented by a life insurance company fit the buyer’s profile and needs,” said Banerjee. “Just because the company is mutual or public is only one consideration in the decision-making process.”
More consumers are buying life insurance from mutual insurers, which have increased their share of the $4 trillion insurance market in the last six years, according to data compiled by Bloomberg Intelligence. From 2008 to 2014, publicly traded insurers have increased their life insurance assets an average of just 1.9 percent a year, whereas mutual insurers have increased their life insurance assets an average 6.6 percent a year.1
As always when making an insurance decision, consumers need to assess as many factors as possible in determining the optimum choice of product and company. Since life insurance proceeds will not be drawn upon for decades, in many cases, a company’s long-term financial strength is a key consideration.
Russ Banham is a Pulitzer-nominated business journalist and author who writes often on insurance consumer issues.
1 Bloomberg Intelligence, “Little-Known, AAA-Rated Firms are Beating the Insurance Giants,” May 25, 2016.