Although a substantial proportion of the property and casualty insurers of the United States are owned by their policyholders, the current industry trend for these mutual insurers is to demutualize. They want to become publicly held stock companies so that they can compete more effectively, diversify, engage in mergers and acquisitions, and get access to their huge reserves of capital. For example, Prudential, one of the country’s biggest insurance companies, announced in March that it intended to demutualize.

Being a publicly held company puts much more performance pressure on management, often to the good of the company and the policyholders. But demutualization is a time-consuming and expensive process, and not every mutual insurer wants to experience the rigors of public ownership. There is another solution, one that will give mutuals many of the same benefits, with less risk and cost.

The capital burden

The return on the equity of US mutual insurers has declined from as much as 30 percent, in the 1970s, to around 5 percent in 2001 (Exhibit 1). Mutuals have limited freedom to use their surplus capital,1 because of regulations protecting policyholders and creditors, so over time they have amassed huge amounts of excess capital:...