Ownership Structure and Control: Property-Casualty Insurer Conversion to Stock Charter

We examine 98 property-casualty insurance companies that convert to stock charter from a mutual or reciprocal form of organization. Our evidence shows converting firms have low surplus, significant growth in premium income, and draw down on their non-financial assets in years prior to conversion. Following conversion there is significant growth in assets and the number of States licensed. We also show by examining evidence on the riskiness of firms' operations that converting companies began operating like stock companies prior to conversion. Thus, our evidence suggests there can be important costs associated with the operation of a mutual or reciprocal insurance company. These costs can include the opportunity costs associated with foregone investments arising because of higher incremental capital costs inherent in the mutual or reciprocal forms of ownership. There also is a cost disadvantage if a mutual or reciprocal is operating in activities more appropriate for the stock ownership form. These costs can in particular circumstances offset the advantage mutual ownership affords in controlling incentives to transfer wealth from policyholders to equityholders.