When deciding which insurance company’s annuity to buy, most people don’t distinguish between companies that are publicly held, mutually owned or privately owned. But the difference can be significant.
A public company is owned, in principle, by its shareholders. (I say in principle because their rights are limited.) A private company is owned by a group of investors. A mutual company is owned, though not run, by its policyholders. For the moment, let’s leave private companies out of the conversation.
Sometimes it’s easy to tell which companies are mutuals: the name “mutual” will be part of its name (like MassMutual or Mutual of Omaha). Sometimes it’s not so easy to tell (as with New York Life and Guardian Life, both of which are mutuals).
To make things more complicated, companies can morph from one to the other. In the 1990s, when it became easy for companies to raise money in the stock market, many mutual companies “demutualized” and issued common stock. MetLife is one such company; the giant multi-line insurer demutualized in 2000. To make matters more confusing, a mutual insurance company might be owned by a larger, publicly held financial services company.
Ownership structure matters, and here’s why. Public companies face intense pressure to generate profits for shareholders as well as to provide value for policyholders and attractive compensation for employees. Mutual companies don’t have shareholders, and can focus more on the needs of their policyholders and employees. That can be important.
A public company’s products also tend to be more complex and innovative, like high-performance racecars. Why? Because it usually requires substantial complexity and innovation to build an insurance product that delivers value to all the stakeholders without creating dangerous levels of risk for the organization as a whole.
A mutual company’s products tend to be simpler, like reliable family sedans, because the demands are different. In driving for profits, a public company tries to put as much capital to work as possible. Mutual companies may hold more reserves. Holding more in reserve protects them from insolvency but it may also drive up their costs and their prices.
Ultimately, you should work with an insurance company whose business structure, corporate culture, products, and sales approach fits your own personality. If you’re more financially aggressive and feel comfortable with complex products, you might favor a public company. If you’re more conservative and prefer simpler products, a mutual company might suit you best.
Written by Kerry Pechter