Information on Demutualization

Demutualization, also known as stocking, occurs when a mutual group or cooperative changes its legal status into a joint company or corporation.

In a mutual company, the main goals of the organization in raising capital are to provide services to members and sometimes to redistribute a portion of the profits to customers. Meanwhile, in a corporate setting, the organization’s thrust is to earn good profits that will then be distributed to shareholders and other equity financiers. Many mutual organizations decide to demutualize to get access to a bigger capital inflow. This is especially true if members or customers are unable to provide much-needed funding to finance the growth and continued operations of the mutual organization. Below are three ways in which a company can demutualize.

1. Traditional or Full Demutualization

In this method, a mutual company completely converts its ownership structure from policyholders or customers into stockholders. A mutual organization will offer cash, policy credits, stocks, or a combination of various marketable securities in exchange for the interests of the members of the company. On the downside, this method is considered as the most expensive and time-consuming manner of converting a mutual company. It also requires complicated changes in administering and managing the newly converted company. In the past, however, the traditional method was widely used, particularly in the states of New York, Maine, and Oregon.

2. Sponsored Demutualization

The sponsored method is very similar to the traditional or full demutualization in the sense that the legal status of the mutual group will be totally transformed into a stock company and the members will be given full compensation in exchange for their ownership of the mutual company. However, under the sponsored method, a mutual company is bought or acquired by a stock company and not by various stockholders. The decision to demutualize using the sponsored method is often influenced by the perceived advantages of being acquired or taken over by an existing corporation.

This method is ideal for mutual organizations that have a strong customer base and good financial footing, but will not likely be able to expand their businesses without the help of a stronger and more stable stock company. For big corporations, acquiring a mutual company makes sense because it allows them to gain foothold in a new industry without starting from scratch. This is particularly true if a corporation plans to join the insurance industry.

3. Hybrid or Mutual Holding Company

In this method, a mutual company does not completely shed off its mutual status. The converted mutual group is changed into a hybrid or a cross between a mutual and a stock entity. The members will retain ownership of a part of the company, while the remaining portion will be owned by stockholders. Since members do not completely lose ownership of the restructured mutual organization, they do not receive full compensation for their ownership rights. For this reason, most mutual policyholders are not happy with this demutualization method. Investors are also wary of putting their money in a mutual holding company because the management board of the reorganized group may not always work in favor of stockholder interests.

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