Small world: the number of mutual life insurance companies is declining and the future holds more change.

Key Points

* The number of mutual life insurance companies is shrinking because of the growth of independent agents and demutualization/consolidation within the mutual sector.

* Fifteen years ago many mutual life insurance companies chose to demutualize.

* There are many different types of mutual or mutual-like life insurance companies--mutual holding companies, closed blocks or fraternals.

The past 15 years has been a time of substantial change within the ever-decreasing universe of mutual life insurance companies. Fifteen years ago, demutualization was being examined by many mutual company boards. Subsequently, a number of mutuals have converted to a stock form--both directly (such as MetLife and Prudential) and through sponsorship (such as Axa's sponsored demutualization of Equitable).

Other options also were considered in this period of change, such as joint ventures or mergers with other mutuals. Examples include Cuna Mutual's affiliation with Century Mutual; the sale of equity in downstream subsidiaries, such as Kemper; and even the development of management company structures like that of Farmers Insurance Group.

Who Are the Life Mutuals Today?

Whether a life company is or isn't classified as a mutual depends upon one's choice of criteria. Consider the following possibilities for inclusion in the mutual category:

* Traditional life mutuals (Northwestern Mutual)

* Fraternals (Thrivent and Catholic Knights)

* Blue Cross Plans mat nave converted to a mutual form (Blue Cross Blue Shield of Mississippi)

* Stock subsidiaries of mutual life companies, mutual property/casualty companies or even savings and loans (State Farm Life)

* Other nonpublic companies (the Wisconsin State Life Fund and the Savings Bank Life Insurance Company of Massachusetts)

* Stock companies that behaved like mutuals (TIAA or a company such as the Equitable of Iowa several decades ago when it was controlled by a trust).

A further complication in this classification exercise is how one wants to address the results of mutual life company operations involving situations such as:

* Closed blocks (comprised of former mutual company members) which represent transformed participating policies resulting from a demutualization; and

* Mutual holding companies (where membership rights are in a different company than contract rights).

Why Does It Matter Who's a Mutual?

For many years, the bulk of the life-insurance industry's assets and revenue was created by its mutual company universe. However, as a result of the growth of independent agents, proliferation of new products and other fundamental changes in the industry, as well as the rampant demutualization/consolidation within the mutual sector, mutual companies represented only 16% of the life insurance industry's assets as of Dec. 31, 2002. This was down from well over 75% of industry assets a couple of decades ago.

Theoretically, the mutual company form offers advantages of a structure that is "cooperative" in nature, with its absence of shareholders (and required shareholder returns) and annual member dividend returns. Also, because mutual companies can set their traditional par policy premiums higher (reflecting expected future dividend payments), risks on their products are typically lower--with a commensurate lower return requirement.

However, relatively few mutual life companies have developed into strong, lean organizations. Some would attribute this unfortunate evolution to the lack of accountability present in companies that have no shareholder or public market pressures. Others would attribute this condition to the many decades of development during which mutuals dominated the life insurance business with limited competitive pressure. When the mutuals expanded their product lines and distribution systems in response to competition, they often became more bloated, bureaucratic, complex entities.

Today's insurance company environment creates pressure for companies to be strong, low cost and transparent. Events such as the recent U.K. Equitable Life situation challenge mutuals to achieve their theoretically possible, but often historically unattained, excellence. One analyst of the U.K. Equitable Life situation commented that the mutual company's obligation to its members is comparable to the stock company's obligation to its shareholders.

Future Considerations

Between 50 and 75 mutual life companies exist today (excluding fraternals), depending on how one does the counting. The expectation is that these numbers, regardless of how they are counted, will continue to decline over the next decade. The survivors will tend to be stronger, well-managed organizations that have a clear strategic focus. They will not be all things to all people like many of the large mutuals were years ago. Many will seek more and more homogeneous membership characteristics to enable them to serve their members distinctively. They will take their commitment to members very seriously.

As evidenced from many of the demutualizations of the past decade, a change in structure does not change culture or immediately increase accountability. Over time, usually very slowly, accountability and commensurate improved performance begin to take hold under good management. For mutuals that are struggling, or don't have adequate capital or time to change, a merger or sponsored demutualization may be the only answer.

Contributor Robert D. Shapiro is president of The Shapiro Network. He can be reached at [e-mail].

Progression of Selected U.S. Mutual Life Insurance Companies,
1995-2006

1995 *                  Mutual Holding Company (year)

Prudential
Metropolitan Life
New York Life
Northwestern Mutual
John Hancock

Principal Mutual Life   Principal Financial Group (1998)
Massachusetts Mutual
Pacific Mutual          Pacific Mutual Group (1997)
New England Mutual
Guardian Life

Mutual of New York
Connecticut Mutual
Phoenix Home Life
General American Life   GenAmerica Corp. (1997)
Mutual of Omaha

1995 *                  Demutualized [ticker] (year)

Prudential              Prudential Financial [PRU] (2001)
Metropolitan Life       MetLife Inc. [MET] (2000)
New York Life
Northwestern Mutual
John Hancock            John Hancock Financial [JHF] (1999)

Principal Mutual Life   Principal Financial Group [PFG] (2001)
Massachusetts Mutual
Pacific Mutual
New England Mutual
Guardian Life

Mutual of New York      MONY Life Insurance Co. [MNY] (1998)
Connecticut Mutual
Phoenix Home Life       Phoenix Companies Inc. [PNX] (2001)
General American Life
Mutual of Omaha

1995 *                  Acquired/Merged (year)

Prudential
Metropolitan Life
New York Life
Northwestern Mutual
John Hancock            Acquired by ManuLife Financial (2004)

Principal Mutual Life
Massachusetts Mutual
Pacific Mutual
New England Mutual      Merged into Metropolitan Life (1996)
Guardian Life

Mutual of New York      Acquired by Axa Financial Inc. (2004)
Connecticut Mutual      Merged into Massachusetts Mutual (1996)
Phoenix Home Life
General American Life   Acquired by Metropolitan Life (2000)
Mutual of Omaha

                        Remaining
1995 *                  Pure Mutuals 2006

Prudential
Metropolitan Life
New York Life           New York Life
Northwestern Mutual     Northwestern Mutual
John Hancock

Principal Mutual Life
Massachusetts Mutual    Massachusetts Mutual
Pacific Mutual
New England Mutual
Guardian Life           Guardian Life

Mutual of New York
Connecticut Mutual
Phoenix Home Life
General American Life
Mutual of Omaha         Mutual of Omaha

* Ranked by Group Admitted Assets as of 1995

Note: List includes only Life/Annuity companies; trade
names are shown where the company rebranded the enterprise.

Source: A.M. Best Special Report Mutual Life Insurance
Companies--Staying the Course

Admitted Assets,
U.S. Life Insurers

                   1995   2005

Mutual Companies    39%    16%
Stock Companies     61%    84%

Source: A.M. Best's Aggregates & Averages

Note: Table made from pie chart.