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There are two kinds of life insurance companies: Mutual insurers and publicly traded insurers. Does it make a difference which kind you do business with?
Like the answers to many financial questions, the answer is: It depends.
“Life insurance happens to be a business that benefits greatly from the mutual business model,” said J. Todd Gentry, a financial professional with Synergy Wealth Solutions in Chesterfield, Missouri. “That’s something I emphasize with my clients.”
Here are three areas where mutual life insurers differ from those life insurers with stock traded on public exchanges.
1. Ownership and voting
One of the biggest differences is how insurance companies are organized.
- A mutual life insurance company doesn’t have shareholders. Instead, it has members and participating policyowners that are often described as sharing in the ownership of the company. As an example, this generally means that, if a person is insured under one of a mutual company’s individual, participating whole life insurance policies, they are a member entitled to vote for the Board of Directors. And if they also own that participating policy, they may be eligible to share in any dividends that are declared.
- A publicly traded life insurance company is owned by stockholders — who may or may not actually be customers of the company and who may or may not own that company’s participating insurance products.
Both groups, through voting, have a say on their respective life insurer’s leadership and significant corporate matters. But each group will have a different set of goals and interest.
- Policyowners are more inclined to want a company strategy that benefits customers (i.e. themselves) in the long run.
- Stockholders tend to focus on immediate, short-term financial results. They are, after all, investors and not necessarily customers of the company.
As a result of these differences, mutual and stock life insurance companies tend to have different business and investment strategies with different time horizons.
Indeed, mutual life insurers, like MassMutual, focus for the most part on investment and business strategies that provide long term value to policyowners while maintaining a high level of financial strength to meet future financial obligations to policyowners. (Read MassMutual’s investment philosophy here)
“Mutual life insurers make decisions based on the long-term interests of their policyowners,” said Gentry. “That means they naturally have a customer focus — and it’s not just lip service.”
Publicly traded life insurers, on the other hand, tend to look for investment and performance that will support their stock price. And they may have more flexibility in raising capital.
2. Changing ownership …
Stockholders, of course, can always sell their stock and often do. And publicly traded companies can also securitize and sell specific units or holdings.
In fact, there has been a wave of deals and stock purchases in the life insurance industry where venture capital and private equity (PE) firms have taken control of life insurers or acquired an ownership interest in particular life insurer units or portfolios.
Indeed, more than two dozen investment firms took control of 50 U.S. life-insurance companies out of just over 400, according to a 2021 Wall Street Journal analysis of data from ratings firm A.M. Best. Another analysis by the National Association of Insurance Commissioners estimated that 177 insurance firms were controlled by private equity firms at the end of 2020.
Why would insurers sell? Prior to 2022, the long-running low interest rate environment meant some insurers didn’t have significant returns on bond holdings and other interest-rate sensitive investments in their portfolios. That sometimes made it hard for them to both maintain statutorily required capital reserves to cover future insurance benefits while also meeting stockholder expectations for profits. An ownership deal for the insurer or a block of the insurer’s business brought in needed capital in some instances. (Related: Why an insurer’s financial strength matters)
For their part, investment firms and PE outfits see a chance to add to their asset base, where insurance premiums and contract fees can form a steady revenue stream. At the same time, they believe they can have a higher return on capital reserves owing to a wider range and better management of investments than what would be typical for a life insurer.
For customers, changes in ownership shouldn’t affect their life insurance or annuity policies, which are regulated by state insurance commissions. New owners of the insurers have to abide by policy contract terms. (Related: How life insurance is regulated)
… and resulting private equity concerns
And new ownership can sometimes make a publicly traded life insurer more stable by bringing in fresh capital and investment expertise.
“Being PE-owned, U.S. insurers’ investment portfolios can potentially achieve higher investment returns and improved access to capital via the PE firms’ capital markets networks,” NAIC noted in its analysis. “However, as a result, U.S. insurer investments could shift toward higher returning, higher risk assets that are also less liquid and potentially more volatile.”
Specific worries for customers are that it’s possible that some investment firm buyers may increase premiums or fees on existing policies, where allowed. And the new owners may not be as experienced or focused on running sound operations for the long term.
“Policyholders of acquired businesses often face private equity buyers that have weaker credit characteristics and greater risk appetites than the life insurers they originally transacted with, which might put them at a greater risk of loss,” said Moody’s Investors Service in a recent analysis.
By contrast, mutual insurers, with their policyowner focus, aren’t the subject of takeover efforts or offers by private equity firms and other investment outfits. Policyowners can’t assign or redistribute their voting rights. And while mutual insurers can become public by being demutualized, with policyowners receiving subsequent stock distributions, it’s a long and involved process. And it requires approval of the majority of policyowners.
Also, many mutual insurers have focused on long-term investment strategies and building up strong capital cushions. Many also have built or acquired other profitable financial services businesses, such as investment companies and overseas insurance operations. This financial strength and diversification of operations helps them to weather certain headwinds, like a low interest rate environment. (Check out MassMutual’s financial strength here)
3. Dividends
A mutual insurer offers certain policyowners another advantageous feature: the opportunity for dividends.
True, shareholders in a publicly traded insurer may also earn dividends. In fact, dividends from stock companies can be paid in two ways — the shareholder may receive dividends on the stocks that they hold, and if the shareholder also owns a participating insurance policy, they may also be eligible to receive policy dividends.
But, as noted earlier, shareholder recipients aren’t necessarily customers of the company. And the actual dividend payout for a publicly traded outfit can be influenced by factors beyond the company’s actual operations — like the need to bolster a stock price or meet analyst expectations.
Dividends on a life insurance policy, whether issued by a mutual or publicly traded company, also have conditions.
- First, dividends aren’t guaranteed. The amount of the dividend and the dividend payout itself are subject to change, depending on the operating experience of the insurance carrier in a given year. (Related: What goes into whole life insurance dividends?)
- Second, the policy must be “participating,” that is, designated by the insurance company as eligible to receive dividends.
Although dividends are not guaranteed, most insurance carriers try to pay them consistently to eligible participating policyowners. MassMutual, for instance, has paid out dividends every year since 1869. (Learn about MassMutual's latest dividend announcement here)
“The stability of the dividend is key to the viability of a mutual insurer so, again, you see decisions being made that are in the best long-term interest of the policyowner,” said Gentry.
Conclusion
The three main advantages of mutual insurers — customer focus, stable ownership, and the opportunity to receive dividends uninfluenced by Wall Street factors — doesn’t necessarily mean they are the right choice for everyone interested in purchasing life insurance.
In fact, stock life insurance companies may be able to raise needed capital more quickly. And the constant Wall Street and shareholder oversight may prompt them to be more vigilant about maintaining expense control and efficient operations. That, in turn, could lead to advantages on the pricing front.
But life insurance is a long-term obligation. The advantages of a mutual insurance company may be well worth looking at.
Discover more from MassMutual …
How whole life insurance help through life stages
Mutual vs. stock insurance companies: Pros and cons
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