WP 2010-12 Form over Matter: Differences in the Incentives to Convert Using Full versus Partial Demutualization in the U.S. Life Insurance Industry
ABSTRACT. The recent wave of demutualizations has led to the declining significance of the mutual organizational form in the U.S. life insurance industry. Although the prior literature is fairly conclusive regarding the motivations that life insurers had to demutualize, previous research has only considered the decision of whether to convert from the mutual to the stock form of ownership but not the method of conversion. In this paper, we consider the different methods of conversion to explore if the motivations were similar across the firms that chose to fully demutualize versus those that chose to adopt the mutual holding company (MHC) form. Based on a sample of 108 life insurer demutualizations during 1986–2004, overall, we find that demutualizing insurers converted to the stock organizational form largely consistent with the maximization of firm value hypotheses. However our analysis suggests that mutual insurers, which chose to fully demutualize, were primarily motivated by a desire to gain access to external capital markets, while the decision by firms that chose to convert to the mutual holding company form can be explained by other motivations including, most notably, a tax-based incentive. We also find that demutualizing life insurers more aggressively hedge their interest rate risk and increase their exposure to the risks that they are likely to have a comparative advantage to bear—so-called core business risks—both before and after conversion. This coordination between interest rate risk and core business risk is stronger for firms that chose to fully demutualize than for firms that converted to the mutual holding company form.