Form Over Matter: Differences in the Incentives to Convert Using Full Versus Partial Demutualization in the U.S. Life Insurance Industry

Journal of Risk & Insurance, Forthcoming

40 Pages Posted: 5 Aug 2010 Last revised: 20 Feb 2011

See all articles by Otgontsetseg Erhemjamts

Otgontsetseg Erhemjamts

Bentley University - Department of Finance; Bentley University

Richard D. Phillips

Georgia State University - Risk Management & Insurance Department

Multiple version iconThere are 2 versions of this paper

Date Written: January 2011

Abstract

The recent wave of demutualizations has led to the declining significance of the mutual organizational form in the U.S. life insurance industry. In this paper, we consider the different methods of conversion to explore if the motivations were similar across the firms that chose to fully demutualize versus those that chose to adopt the mutual holding company (MHC) form. Based on a sample of 108 life insurer demutualizations during 1986-2004 period, we find that life insurers converted to the stock organizational form largely consistent with the maximization of firm value hypotheses. However our analysis suggests that fully demutualizing insurers were primarily motivated by a desire to gain access to external capital markets, while the decision by firms that chose the MHC form can be explained by other motivations including, most notably, a tax-based incentive. We also find that demutualizing life insurers more aggressively hedge their interest rate risk and increase their exposure to the risks that they are likely to have a comparative advantage to bear — so-called core business risks — both before and after conversion. This coordination between interest rate risk and core business risk is stronger for firms that chose to fully demutualize than for firms that converted to the MHC form.

Keywords: Demutualization, full conversion, MHC conversion

JEL Classification: G22, G32

Suggested Citation

Erhemjamts, Otgontsetseg and Phillips, Richard D., Form Over Matter: Differences in the Incentives to Convert Using Full Versus Partial Demutualization in the U.S. Life Insurance Industry (January 2011). Journal of Risk & Insurance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1653412

Otgontsetseg Erhemjamts (Contact Author)

Bentley University - Department of Finance ( email )

175 Forest Street
Waltham, MA 02154
United States
781-891-2823 (Phone)

Bentley University ( email )

175 Forest Street
Waltham, MA 02145
United States
781-891-2823 (Phone)
781-891-2896 (Fax)

Richard D. Phillips

Georgia State University - Risk Management & Insurance Department ( email )

P.O. Box 4036
Atlanta, GA 30303
United States
404-413-7009 (Phone)

HOME PAGE: http://robinson.gsu.edu/profile/richard-d-phillips/

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