The dependent variable in the multinomial regression takes on the value zero when the insurer remains a mutual, a value of one for all years after the insurer converts via MHC conversion, or a value of two after the insurer fully demutualizes.
2] Notes: The dependent variable takes the value of zero while the insurer remains a mutual (label: Nonconverting) and one for all years after the insurer converts via MHC conversion (label: MHC Conversions) or two for all years after the insurer fully demutualizes (label: Full Conversions).
In reality, however, not only did the managers of a mutual life insurance company have to decide whether to demutualize, they also had to choose from different types of demutualization, including a full (or traditional) demutualization (2) and a mutual holding company (MHC) conversion.
First, we improve on the existing literature by considering the method of conversion in an effort to gain additional insight into what motivated insurers to demutualize generally and then to explore if the motivations were similar across the firms that chose to fully demutualize versus those that chose to adopt the MHC form.
A second way that we improve upon the previous literature is by hypothesizing that the federal tax code provided mutual insurers an incentive to demutualize after Congress passed Internal Revenue Code (IRC) Section 809 in 1984.
Since the insurance industry is regulated at the state level, it is the laws of each individual state that govern the process for a mutual insurance company to demutualize and convert to the stock form of ownership.
The ability of a mutual company to demutualize was further facilitated by Section 312 of the Financial Services Modernization Act of 1999, which allows a mutual insurer that wishes to demutualize but is prohibited from doing so under the laws of its domiciliary state to redomesticate to a state that allows demutualization (see Harman, Adney, and Keene, 2001).
The theories posited to explain why a mutual insurer would demutualize can generally be split into two categories: those that suggest mutual insurers converted to the stock organizational form in an attempt to increase firm value and those that suggest the demutualization process allowed the firm's management to extract value for themselves.
We hypothesize mutual insurers had an incentive to demutualize to avoid a unique "surplus tax" imposed by the DEFRA of 1984 when it adopted the "stock model" of taxation for mutual insurers in Section 809.
Unless the mutual company demutualizes and returns this surplus or reserve equity, the policyowners will never realize these profits.
In these situations, vulnerable management eschews demutualization as a way to protect itself If a mutual demutualizes to cover trouble or save jobs, the process can set up the demutualizing entity as a hostage to be taken out of the game.
In addition to expanding geographically and into new lines of business, insurers that demutualize are in a better position to broaden their distribution channels.