A new land: today's mutuals are blending their traditional business model into a changing world.

Mutual insurance companies date back to the 1700s, but as times have changed, so have mutuals. In many ways, they're still carrying on the theme of common need on which their foundation was built. However, changes including the urbanization of farming communities are having an impact on the 21st century mutual, particularly small, regional farm companies.

21st Century Models

The National Association of Mutual Insurance Companies sees growth in both membership and share of the property/casualty market written by its members. "NAMIC's membership growth is a direct result of the people who work for our member companies and our effectiveness on the issues that affect our member companies, dike SOX and TRIA" said Charles Chamness, president and chief executive officer of the national trade association of more than 1,400 members that represent all types of insurers and underwrite more than 40% of the U.S. property/casualty insurance premium.

Chamness said many of its members serve specific niches within the industry. "They bring specialization and expertise to markets and policyholder groups." He said all of its members--not just mutuals--bring consumer choice to the marketplace.

While the majority of mutuals have been around for many years, a few have more recent roots. Last year, Brickstreet Mutual Insurance Co.--a new NAMIC member--was formed as the result of a bill passed by the West Virginia Legislature and signed by Gov. Joe Manchin to privatize the workers' compensation system in the state. As a result, Brickstreet is the only carrier allowed to issue workers' compensation until July 1, 2008, when the market opens up to all private carriers. The company is an offshoot of an old monopolistic state-run system, said Greg Burton, president and CEO. "The company was created as an avenue for employers in the state to have a carrier in the marketplace." As a result of the unique structure, the company is able to take advantage of some tax benefits until 2008. "As long as we're the insurer of last resort and the governor appoints our board, we're able to be tax exempt through legislation in the tax code," he said. Today, with about $550 million in premium, Brickstreet Mutual is among the 20 largest workers' comp carriers in the United States, according to the company.

Creating a new mutual is "not significantly different than creating any type of new insurance company," said Chamness." Mutuals have capitalization and admittance requirements as do stock companies." The difference, he said, lies in a mutual's foundation--a group of individuals or businesses that share a common risk or need and band together--something not unlike Benjamin Franklin's foundation of the first successful mutual more than 250 years ago.

Mutuals come in various shapes and sizes. For smaller mutuals, such as Tennessee Valley Mutual, their size may cause them to operate on a part-time basis. As the third-smallest mutual in Tennessee, the niche carrier primarily writes properties valued under $75,000. "However, as a mutual, most of the time we have a lot of flexibility and are able to do things that other companies won't do because it's not in their books of business," said President Charles Gardner.

However, a company with a part-time manager is the exception rather than the norm, said Chamness. "For some very small mutual companies, a full-time staff isn't required. Their business models do not require the same type of management or operations infrastructures as do their larger cousins. The primary reason is that their mission is to serve only their policyholders, which in some cases can be a very small defined niche. As a result, these mutual companies can effectively serve their policyholders without full-time associates." The major advantage, he said, is lower operating costs that allow more of the collected premiums to be devoted to paying claims, not staff.

A Changing World

While farms were historically the backbones to most mutuals, the operation of farming has changed over the years.

That's having some effects on mutuals, said Patrick Bradley, general manager of Georgia Farm Bureau Insurance Cos. In addition to being a personal-lines writer, the single-state operator writes about 75% of the Georgia farm market. "The challenge we're now facing is focusing on our niche market in an ever-increasing urbanizing state. We need to move toward how to deal with urbanization with a commodity that's focused on the farming aspect." In addition, he said farming as a whole is changing. "A number of our farmers, for instance poultry farmers, now farm in the mornings and evenings and work in banks and other places at day. They're doing multiple tasks."

A new movement may present new challenges to some mutuals, he said. "Agritourism," which involves land-based farms or businesses that are open to the public, is becoming a growing part of many communities. "It's a retreat back to rural life," said Bradley. Examples of agritourism include tourists picking fruits and vegetables, riding horses, wine tasting and shopping at local farm stands for produce or handmade crafts.

Gardner of Tennessee Valley Mutual also is feeling the effects of farming changes. "In our area now, if I wrote every farmer here I would starve to death because there just aren't many left today. Mutuals started out serving the farm market and they pretty much stayed in that situation until recently. Now it's a matter of survival and it's forced some companies to make some changes."

But NAMIC thinks farming changes have little impact on mutuals. "The changing face of the farm industry in the United States is not a mutual-specific issue as many different types of insurance companies write farm coverages," said Chamness. "For companies that are chartered in their respective states as farm or township mutuals, modernization of the state farm-mutual regulatory environment is important to allow these companies to offer products to meet the needs of their changing customer base."

A Model That Works

Despite changes, most mutuals are comfortable with their structure and don't plan on shedding their models to become publicly-owned companies anytime soon.

"We determined in 1899 that we would be a preferable alternative to stock companies in Toronto and we've stuck by that vision for the past 107 years," said Cameron Ross, CEO and manager of Canada-based Algoma Mutual. He said mutuals' tight bond with brokers is a key to success. "Sales are equivalent to trust. If [brokers] trust us, they'll place business with us." That trust, he said, also involves companies sticking with brokers through difficult times.

Personal relationships with members are another advantage to the mutual model. Because mutuals have no shareholders, there's no conflict of interest between shareholders and policyholders. Financial demands are also less stringent because mutuals don't have to satisfy demands of outside investors.

Tennessee Valley Mutual said its close relationship with constituents has been a draw for remaining a mutual. Unlike many of its mutual counterparts, the company markets strictly through independent agents, as opposed to captive agents. "You don't have to train independent agents, they usually own their own agencies and are established in the community and have customers, in addition to cutting down advertising costs. I think that's one reason we're able to grow so much," said Gardner. He said in the past two years, the company has tripled its size.

Some companies have taken a different approach from the traditional mutual model. Overland Park, Kansas-based MutualAid eXchange operates as a reciprocal. The difference between a reciprocal and a mutual, said President and CEO David Wine, is that a reciprocal can define membership without any discriminatory issues assigned to the company. "It allows us to keep alive the historical context of serving a niche market and strengthen the church community in the process." The company's predecessor began in the 1800s when the Amish and Mennonite communities, rather than wanting to belong to public farm mutuals, felt the need to create a mutual that stayed with the church family and had a defined membership with the group. "It was the best of both worlds--the company provided an insurance mechanism and a way to strengthen the church community at the same time," said Wine. "Reciprocals are owned and managed by the members they serve and operate on a grassroots, participatory level." He said reciprocals allow profits to be passed down to members in the form of subscriber accounts, such as patronage dividends. MutualAid eXchange was formed in 2001 by merging several small mutual aid programs. It began converting business in 2002, and the conversion will be completed this year.

While mutuals enjoy many advantages in their structures, there are a few downsides. "If you need cash infusion, the only way to do that is by assessing all your policyholders," said Burton of Brickstreet Mutual. "They may then have the option to pick up and leave and go elsewhere."

Over their more than 250-year history, mutuals continue to prosper.

That's something NAMIC's Chamness doesn't see changing anytime soon. "[Mutuals'] growth strategies and financial goals are generally long-term focused," he said. "Otherwise, mutual companies are affected by the market, legislators, regulators, reinsurance markets and the risk environment as are other companies."

The First Mutual

In 1736, Benjamin Franklin created the Union Fire Company as an organized volunteer fire company. Several years later, in an attempt to save Philadelphia from the threat of fire, Franklin gathered citizens to address the need of protection against fire for homeowners--thus creating the Philadelphia Contributionship, the first mutual insurance company to insure members' property. The company continues to operate today.

Key Points

* Farming changes and a retreat to urban areas are changing the business strategies of some small, regional farm mutuals.

* A few new mutuals are forming.

* Some small mutuals operate on a part-time basis.

* Mutuals believe in their mission to serve specific niches and aren't looking to change their models anytime soon.

Learn More

Algoma Mutual Insurance Co.

A.M. Best Company # 87771

Distribution: Brokers

Georgia Farm Bureau Mutual Insurance Cos.

A.M, Best Company # 00412

Distribution: Captive agents

MutualAid eXchange

A.M. Best Company # 03165

Distribution: Direct, captive agents, brokers and independent agents

For ratings and other financial strength information about these companies, visit www.ambest.com.