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Form Over Matter: Differences in the Incentives to Convert Using Full Versus Partial Demutualization in the U.S. Life Insurance Industry

The recent wave of demutualizations has led to the declining significance of the mutual organizational form in the U.S. life insurance industry. 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 period, we find that life insurers converted to the stock organizational form largely consistent with the maximization of firm value hypotheses. However our analysis suggests that fully demutualizing insurers were primarily motivated by a desire to gain access to external capital markets, while the decision by firms that chose the MHC 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 MHC form.