Mutual Organizations - Background

Background

The primary form of financial business set up as a mutual company in the United States has been mutual insurance. Some insurance companies are set up as stock companies and then mutualized, their ownership passing to their policy owners. In mutual insurance companies, what would have been profits are instead rebated to the clients in the form of dividend distributions, reduced future premiums or paid up additions to the policy value.

This is a competitive advantage to such companies — the idea of owning a piece of the company could be more attractive to some potential clients than the idea of being a source of profits for investors. In the typical stock company, profits go to shareholders. In contrast, a mutual manages the company in the best interests of the customers. Furthermore a mutual company is able to focus on a longer horizon than a typical company. Northwestern Mutual, a mutual insurance company, makes this claim explicitly, "Because we have no shareholders, we can take a longer-term investment approach in our general account investment portfolio. Over time, this strategy has produced higher returns in our portfolio and greater policyowner value."

In more general terms, mutual organizations are able to minimize the Principal–agent problem by removing one stakeholder, the investor-owner, in favor of one of the other stakeholders, usually the customer, who becomes both user and joint owner of the business.

However, the mutual form of ownership also has disadvantages. One example is that mutual companies have no shares to sell and hence no access to equity markets.

At one time, most major U.S. life insurers were mutual companies. For many years, the tax status of such organizations was open to dispute, as they were technically nonprofit organizations. Eventually, it was agreed that federal taxation would be based on their share of business: for instance, in years in which mutual companies represented half of the business, they would be responsible for half of the taxes paid by the industry.

Many savings and loan associations were also mutual companies, owned by their depositors.

As a form of corporate ownership the mutual has fallen out of favor in the U.S. since the 1980s. Savings and loan industry deregulation and the late 1980s S&L crisis led many to change to stock ownership, or in some cases into banks. Many large U.S.-based insurance companies, such as the Prudential Insurance Company of America and the Metropolitan Life Insurance Company have demutualized, with shares of stock being distributed to their policyholders to represent the ownership interest they formerly had in the form of their interest as mutual policyholders.

The Mutual of Omaha Insurance Company has also investigated demutualization, even though its form of ownership is embedded in its name. It is noted that other formerly mutual companies such as Washington Mutual, a former savings and loan association, have been allowed to demutualize and yet retain their names.

The approximate British equivalent of the Saving and Loan is the building society. Building societies also went through an era of demutualisation in the 1980s and 1990s, leaving only one large national building society and currently 52 (Jan 2010) smaller regional and local ones. Significant demutualisation also occurred in Australia in the same era.

Cooperatives are very similar to mutual companies. They tend to deal in primarily tangible goods and services such as agricultural commodities or utilities rather than intangible products such as financial services. Nevertheless, banking institutions with close ties to the cooperative movement are usually known as credit unions or cooperative banks rather than mutuals.