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Demutualization (or demutualisation) is the process by which a customer-owned mutual organization (mutual) changes legal form to a shareholder-owned public company. As part of the demutualization process, members of a mutual usually receive a "windfall" payout, in the form of shares in the successor company, a cash payment, or a mixture of both.

The mutual traditionally raises capital from its members in order to provide services to them (eg building societies, where members' savings enable the provision of mortgages to members), and redistributes any profits to its members. By contrast the public company raises capital from the stock market and other financial sources in order to provide services to its customers, with profits distributed to shareholders. In a mutual organization, therefore, the legal roles of customer and owner are united in one form ("members"), whereas in the public company the roles are distinct. This permits a much wider capital base and improved responsiveness of management to the needs of investors, but can also lead to a decline in customer service to the extent that customers' and shareholders' interests diverge.^[1]

(Mutualization or mutualisation is the opposite process, wherein a public company is converted into a mutual organization, typically through takeover by an existing mutual organization.)

Contents 1 Types of demutualizations 2 Examples 2.1 Security exchanges 2.2 Life insurers 3 See also 4 References 5 External links

There are three general methods in which an organization might demutualize, full demutualization, sponsored demutualization, and into a mutual holding company (MHC). In any type of demutualization, insurance policies, outstanding loans, etc, are not directly affected by the organization's change of legal form.

• In a full demutualization, the mutual completely converts to a stock company, and passes on its own (newly issued) stock, cash, and/or policy credits to the members or policyholders. No attempt is made to preserve mutuality in any form.

• A sponsored demutualization is similar; the mutual is fully demutualized and its policyholders or members are compensated. The difference is that the mutuality is essentially bought by a stock corporation. Instead of receiving stock in the formerly mutual company, stock in the new parent company is granted instead.

• A mutual holding company is a hybrid concept, part stock company and part mutual company. Technically, the members still own over 50% of the company as a whole. Because of this, they are generally not significantly compensated for what would otherwise be viewed as loss of property. (This is also why many jurisdictions, including Canada,^[2] disallow the formation of MHCs.) The core participants are isolated into a special segment of the company, still viewed as "mutual". The rest is a stock company. This part of the business might be publicly traded, or held as a wholly owned subsidiary until such time that the organization should choose to go public.

Mutual holding companies are not allowed in New York where attempts by mutual insurance to pass permissible legislation failed. Opponents of mutual insurance holding companies referred to the establishment of mutual holding companies in New York as “Legalized Theft.”

Some MHC demutualizations have been planned as the first of a two-stage process. The second stage would be full demutualization once the transition pains into MHC status are complete. In other cases, the MHC is the final stage.

Note that some mutual companies, such as Nationwide and the MassMutual, own stock companies and are listed on a stock exchange. These are not MHCs, however; they are simply mutual companies which have majority control over one or more stock companies. Other mutual companies may own some of another company's stock, but as simply an asset, not something they actually control. Finally, many mutual companies, including Nationwide and MassMutual, have wholly owned subsidiaries. The subsidiaries may technically be stock companies, but the mutual owns all the stock. For example, the New York Life Insurance and Annuity Corporation (NYLIAC) is a wholly owned subsidiary of the New York Life Insurance Company (NYLIC). A person may purchase an insurance policy from either company, but only those who own participating policies from NYLIC are mutual members. Other policyholders are customers.

The Chicago Mercantile Exchange became a shareholder-owned corporation in 2000 through a public offering. "The road to this initial public offering began in June 2000, when Exchange members voted overwhelmingly to transform the then not-for-profit, membership-owned organization into a for-profit, shareholder-owned corporation. On November 13, 2000, CME became the first U.S. financial exchange to demutualize into a shareholder-owned corporation" [1]. The Chicago Mercantile Exchange had its IPO on December 6, 2002.

The Chicago Board of Trade similarly carried out an IPO in 2005, having previously been "... a self-governing, self-regulated Delaware not-for-profit, non-stock corporation that serves individuals and member firms."[2].

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Over 200 US mutual life insurance companies have demutualized since 1930. At the end of the 20th century and beginning of the 21st century numerous large mutuals such as Prudential, MetLife, John Hancock, Mutual of New York, Manufacturers Life, Sun Life, Principal, and Phoenix Mutual decided to demutualize and return to policyowners all the profits they had accumulated as mutual life insurers. Policyowners were awarded cash, stock and policy credits exceeding $100 billion in a wave of demutualizations, which have been regarded by some as socially desirable.

Other large mutual life insurance companies decided to not return their accumulated profits to policyowners. The boards of directors of these other companies, which include Northwestern Mutual, Massachusetts Mutual Life Insurance CompanyMassachusetts Mutual, New York Life, Pacific Life, Penn Mutual, Guardian Life, Minnesota Life, Ohio National Life, National Life of Vermont, Union Central Life, Acacia Life, and Ameritas Life decided to either remain mutual or they decided to form mutual insurance holding companies. At the end of 2006 there were fewer than 80 mutual life insurers in the United States.

• Financial institution
• Carpetbagger (UK usage)
• Thatcherism
• Mutual life insurance

• John W. Carson, Conflicts of Interest in Self-Regulation
• Andreas M. Fleckner, Stock Exchanges at the Crossroads

• The Feeling's Not Mutual An Analysis of Governor Pataki’s Proposed Mutual Holding Company Legislation (New York State Assembly, 1998)
• Policyowners for Demutualization of Mutual Life Insurance Companies
• Reorganization Status of Mutual Life Insurance Companies (USA)