Viewpoint: Methuselah Mutuals

Precious few U.S. corporations have been in business for two centuries. Among them are King Arthur Flour (1790), CIGNA (1792), Jim Beam (1795) and Brooks Brothers (1818), although the storied suit-maker entered bankruptcy proceedings in 2020 due to a plunge in sales during the COVID-19 pandemic.

A fascinating cluster of mutual insurance companies that have reached or are approaching their 200th birthday include:

• The Philadelphia Contributionship (1752)
• Mutual Assurance Society of Virginia (1794)
• Providence Mutual (1800)
• Norfolk & Dedham (1825)
• Hingham Mutual (1826)
• Vermont Mutual (1828)

Beyond their longevity, it is remarkable that two of these insurers—Norfolk & Dedham and Vermont Mutual—are also among the top-performing insurers of any kind. They both appear on Ward’s 50, a list of 50 property and casualty insurance companies that have consistently maintained stability and delivered the best long-term results.

This piece identifies secrets behind the success of “Methuselah” mutuals and points to lessons the rest of the insurance industry can learn from them.

Mutual Insurers: The Origin Story

Immigrants from Germany, Ireland, Scotland, France, and other countries around the world came to America in the early 1800s seeking a better life. Many became farmers in the Midwest and northeast. Organized as stock companies, big city insurers typically refrained from insuring these homesteaders because their distance from fire hydrants or bodies of water made them more susceptible to losses from fire.

Those denied insurance coverage responded by forming their own companies, organizing them as cooperatives, or “mutuals.” Unlike shareholder-owned stock companies, mutual companies protected policyholders by giving them ownership interest in the business.

What Makes Mutual Insurers Special?

Four main structural characteristics are responsible for the long-term strength and stability of mutual insurers.

Alignment of Interests

The most important feature of mutual companies that sets them apart from stock insurers is alignment of interests. The conflict of interest inherent in stock companies is the practice of charging higher premiums in order to pay out less in claims. Mutual insurers are structured in a way that eliminates this conflict: Because all policyholders are also owners, it is in everyone’s best interest for losses to be minimized and claims paid fairly.

Long-Term Focus

Mutual insurance companies are built for the long term. Whereas stock companies, especially those that are publicly traded, must report their earnings every quarter and do their utmost to generate rising book value per share, mutuals are managed with the future in mind. Because they are not subject to Wall Street’s short-term pressures, their time horizon spans decades (or even centuries) rather than one quarter or one year.

Dividends

Stock companies are motivated to generate profits for their shareholders in the form of dividends and rising share prices. Conversely, when a mutual company generates a profit, it goes into retained earnings to bolster the surplus, thereby strengthening the company’s balance sheet.

Community Focus

Mutual insurers are based in the communities where their policyholders live. Their strong local ties and civic participation differentiate them from large stock national insurers. Consequently, however, these companies contend with limited access to capital, greater exposure to catastrophe losses, and limited opportunities to grow via mergers and acquisitions.

Limited Access to Capital

Mutual insurers seeking capital to expand their geographic footprint or diversify their product offerings are severely capital-constrained, which means that their structure prohibits them from selling stock or issuing bonds in the primary or secondary debt capital markets. Instead, they must deploy retained earnings accumulated from favorable underwriting results. Surplus notes are available to mutuals as a debt instrument; however, they lack flexibility and are highly subordinated.

Greater Exposure to Catastrophe Losses

A local presence is generally a blessing, but it can become a curse in areas with elevated catastrophe risk. In 2011, the Barton Mutual Insurance Company—founded in 1894 in Liberal, Missouri—endured enormous losses from the EF-5 Joplin tornado, which caused 161 deaths and $48 million in losses, compared to $32 million in premium. Barton entered temporary receivership as a result, returning to operation in 2013.

Limited Merger and Acquisition Opportunities

Unlike stock companies that pursue inorganic growth via mergers and acquisitions, mutuals have fewer opportunities to merge with other mutuals because they lack acquisition currency (i.e., stock or debt). Mutual holding companies, distribution rights mergers, and subscription rights transactions exist; however, such structures are highly complex, with varying implications regarding who owns the surplus and how it might be distributed in the event of a full demutualization.

Lessons from the Methuselah Mutuals

The fact that mutual insurers are disproportionately represented on the list of top-performing property and casualty insurers in the country is strong evidence that they are doing something right. So, what lessons can stock insurers learn from the hoary mutual industry?

1. A focus on loss prevention yields mutual benefits: Insurers benefit from lower claims, while policyholders benefit from the lower prices that eventually follow implementation of resilience measures.
2. Stick to your core business: Several Pennsylvania and New York companies focused on medical professional liability insurance—including Legion Insurance, Frontier Insurance, Phico Insurance, and Reliance Insurance—have failed when attempting to diversify into different products and states (a practice derisively referred to as “diworsification.”)

A Japanese insurance company called Kongō Gumi (578 AD) operated independently for 1,400 years prior to its recent acquisition. If any American company challenges this record longevity, it is likely to be a mutual insurer.