Dividends from a mutual insurance company are paid to whom

Insurance is also issued by fraternal benefit societies, which have existed in the United States for more than a
century.

Fraternal societies, noted primarily for their social, charitable, and benevolent activities, have memberships
based on religious, national, or ethnic lines.

Fraternals first began offering insurance to meet the needs of their poorer members, funding the benefits on a pure assessment basis.

Today, few fraternals rely on an assessment system, most having adopted the same advanced funding approach other insurers use.

To be characterized as a
fraternal benefit society, the organization must be nonprofit, have a lodge system that includes ritualistic work, and maintain a representative form of government with elected officers.

Fraternals must be formed for reasons other than obtaining insurance.

Most fraternals today issue group and annuities with many of the same provisions found in policies issued by commercial insurers.

What Is a Mutual Company?

A mutual company is a private firm that is owned by its customers or policyholders. The company's customers are also its owners. As such, they are entitled to receive a share of the profits generated by the mutual company.

The distribution of profits is typically made in the form of dividends paid on a pro rata basis, based on the amount of business each customer conducts with the mutual company. Alternately, some mutual companies choose to use their profits to reduce members' premiums.

A mutual company is sometimes referred to as a cooperative.

How a Mutual Company Works

The mutual company structure is commonly found in the insurance industry and sometimes in savings and loans associations. Many banking trusts and community banks in the U.S., as well as credit unions in Canada, also are structured as mutual companies.

The first mutual insurance company was formed in England in the 17th century. The word mutual was probably adopted to reflect the fact that the policyholder, or customer, was also the insurer, or part owner.

Key Takeaways

• A mutual company is owned by its customers, who share in the profits.
• They are most often insurance companies.
• Each policyholder is entitled to a share of the profits, paid as a dividend or a reduced premium price.

The first insurance company in the U.S. was a mutual company, The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. It was founded in 1752 by none other than Benjamin Franklin.

Most institutions that are structured as mutual companies are private entities rather than publicly traded companies. In recent decades, many mutual companies in the U.S. and Canada have opted to change from a mutual structure to a joint stock corporate structure, a process known as demutualization. As part of this process, policyholders get a one-time award of stock in the newly-created joint stock corporation.

There is little substantive difference between the two corporate structures. A joint stock corporation is generally seen as more focused on short-term profit while a mutual company may prioritize strong cash reserves in case of unusual claims levels.

Advantages of a Mutual Company

A major selling point of mutual insurance companies is its shared ownership structure. Policyholders get some of the cost of their premiums back in the form of dividends or reduced premium prices.

Many mutual companies have changed to a joint stock corporate structure. This process is called demutualization.

For example, Lawyers' Mutual Insurance Co., a California-based company, recently paid a 10% dividend to its shareholders. It has paid dividends for 23 consecutive years.

As suggested by the name of that company, mutual companies often are specialized. They were formed by and for a group of professionals who often have common needs.

Mutual vs. Stock Insurance Companies: An Overview

Insurance companies are classified as either stock or mutual depending on the ownership structure of the organization. There are also some exceptions, such as Blue Cross/Blue Shield and fraternal groups which have yet a different structure. Still, stock and mutual companies are by far the most prevalent ways that insurance companies organize themselves.

Worldwide, there are more mutual insurance companies, but in the U.S., stock insurance companies outnumber mutual insurers.

When selecting an insurance company, you should consider several factors including:

• Is the company stock or mutual?
• What are the company’s ratings from independent agencies such as Moody’s, A.M. Best, or Fitch?
• Is the company’s surplus growing, and does it have enough capital to be competitive?
• What is the company's premium persistency? (This is a measure of how many policyholders renew their coverage, which is an indication of customer satisfaction with the company’s service and products.)

Learn how stock and mutual insurance companies differ and which type to consider when purchasing a policy.

Key Takeaways

• Insurance companies are most often organized as either a stock company or a mutual company.
• In a mutual company, policyholders are co-owners of the firm and enjoy dividend income based on corporate profits.
• In a stock company, outside shareholders are the co-owners of the firm and policyholders are not entitled to dividends.
• Demutualization is the process whereby a mutual insurer becomes a stock company. This is done to gain access to capital in order to expand more rapidly and increase profitability. 

Stock Insurance Companies

A stock insurance company is a corporation owned by its stockholders or shareholders, and its objective is to make a profit for them. Policyholders do not directly share in the profits or losses of the company. To operate as a stock corporation, an insurer must have a minimum of capital and surplus on hand before receiving approval from state regulators. Other requirements must also be met if the company's shares are publicly traded.

Some well-known American stock insurers include Allstate, MetLife, and Prudential.

Mutual Insurance Companies

The idea of mutual insurance dates back to the 1600s in England. The first successful mutual insurance company in the U.S.—the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire—was founded in 1752 by Benjamin Franklin and is still in business today.

Mutual companies are often formed to fill an unfilled or unique need for insurance. They range in size from small local providers to national and international insurers. Some companies offer multiple lines of coverage including property and casualty, life, and health, while others focus on specialized markets. Mutual companies include five of the largest property and casualty insurers that make up about 25% of the U.S. market.

A mutual insurance company is a corporation owned exclusively by the policyholders who are "contractual creditors" with a right to vote on the board of directors. Generally, companies are managed and assets (insurance reserves, surplus, contingency funds, dividends) are held for the benefit and protection of the policyholders and their beneficiaries.

Management and the board of directors determine what amount of operating income is paid out each year as a dividend to the policyholders. While not guaranteed, there are companies that have paid a dividend every year, even in difficult economic times. Large mutual insurers in the U.S. include Northwestern Mutual, Guardian Life, Penn Mutual, and Mutual of Omaha.

Key Differences

Like stock companies, mutual companies have to abide by state insurance regulations and are covered by state guaranty funds in the event of insolvency. However, many people feel mutual insurers are a better choice since the company’s priority is to serve the policyholders who own the company. With a mutual company, they feel there is no conflict between the short-term financial demands of investors and the long-term interests of policyholders. 

While mutual insurance policyholders have the right to vote on the company’s management, many people don’t, and the average policyholder really doesn’t know what makes sense for the company. Policyholders also have less influence than institutional investors, who can accumulate significant ownership in a company.

Sometimes pressure from investors can be a good thing, forcing management to justify expenses, make changes, and maintain a competitive position in the market. The Boston Globe newspaper has run illuminating investigations questioning executive compensation and spending practices at Mass Mutual and Liberty Mutual, showing excesses occur at mutual companies.

Once established, a mutual insurance company raises capital by issuing debt or borrowing from policyholders. The debt must be repaid from operating profits. Operating profits are also needed to help finance future growth, maintain a reserve against future liabilities, offset rates or premiums, and maintain industry ratings, among other needs. Stock companies have more flexibility and greater access to capital. They can raise money by selling debt and issuing additional shares of stock.

Demutualization

Many mutual insurers have demutualized over the years, including two large insurers—MetLife and Prudential. Demutualization is the process by which policyholders became stockholders and the company’s shares begin trading on a public stock exchange. By becoming a stock company, insurers are able to unlock value and access capital, allowing for more rapid growth by expanding their domestic and international markets.

The Bottom Line

Investors are concerned with profits and dividends. Customers are concerned with cost, service, and coverage. The perfect model would be an insurance company that could meet both needs. Unfortunately, that company does not exist.

Some companies promote the benefits of owning a policy with a mutual insurer, and others focus on the cost of coverage and how you can save money. One possible way to deal with this dilemma is based on the kind of insurance you are buying. Policies that renew annually, such as auto or homeowner’s insurance, are easy to switch between companies if you become unhappy, so a stock insurance company may make sense for these types of coverage. For longer-term coverage such as life, disability, or long-term care insurance, you may want to select a more service-oriented company, which would most likely be a mutual insurance company.

Who receives dividends from a mutual insurer?

Who do stock insurers pay dividends to?

Do mutual insurers pay dividends to policyholders?

Who owns dividends that are paid out on a participating life insurance policy?