What Is a Mutual Company?
A mutual company is a private entity owned by its customers or policyholders. Essentially, when you are a customer of a mutual company, you are also a part owner. This unique relationship entitles you to a share of the company’s profits.
Profits are typically distributed as dividends, calculated on a pro rata basis according to the volume of business each customer has with the company. Alternatively, some mutual companies opt to use their earnings to decrease premiums for their members.
Mutual companies are often referred to as cooperatives due to their member-based ownership structure.
The Inner Workings of Mutual Companies: A Deep Dive
Mutual companies are prevalent in the insurance industry and are occasionally seen in savings and loan associations. Community banks in the U.S. and credit unions in Canada frequently adopt a mutual company structure.
The concept of the mutual insurance company dates back to 17th century England. Here, the term “mutual” emphasized that the policyholder also played the role of insurer, making them part owners.
Key Takeaways
- Mutual Company Ownership: Owned by customers and profits are shared among these customer-owners.
- Commonly Insurance Firms: Predominantly found in insurance but also in banking trusts and credit unions.
- Profit Sharing: Through dividends or reduced premiums, each policyholder earns their share.
The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, established in 1752 by Benjamin Franklin, stands as America’s inaugural mutual insurance company.
More often than not, mutual companies operate as private entities rather than listed public companies. However, in recent decades, several mutual companies from the U.S. and Canada have transitioned to a joint stock corporate structure in a procedure known as demutualization. In this transformation, policyholders are granted a one-time stock award in the newly formed joint stock corporation.
There is a nuanced distinction between the two structures. A joint stock corporation generally targets short-term profit generation, whereas a mutual company may focus on robust cash reserves to handle instability in claims.
Advantages of a Mutual Company: Ownership and Dividends
One of the major attractions of mutual insurance companies is their shared ownership architecture. Policyholders benefit directly from dividends or through reduced premium costs.
For instance, Lawyers’ Mutual Insurance Co., based in California, awarded its shareholders a 10% dividend while marking its 23rd consecutive year of such payouts.
True to their roots, mutual companies are often tailored to specific professional groups. They emerge from a desire among professionals sharing common needs, forming entities that cater directly to their unique requirements.
Related Terms: Private Firm, Dividends, Trusts, Joint Stock Corporation, Cooperative, Credit Unions.
