What Is a Mutual Company?
Let me explain directly: a mutual company is a private firm that you, as a customer or policyholder, own. That's right, the customers are the owners here, and you're entitled to a share of the profits the company generates.
Profits get distributed typically as dividends on a pro rata basis, depending on how much business you do with the company. Some mutuals prefer to cut your premiums instead. You might hear them called cooperatives, which fits the shared ownership model.
How a Mutual Company Works
You'll find this structure most often in the insurance industry, but it also appears in savings and loans associations, banking trusts, community banks in the U.S., and credit unions in Canada.
The concept started in 17th-century England with the first mutual insurance company, where the term 'mutual' highlighted that you, the policyholder, are also the insurer and part-owner.
In the U.S., the very first insurance company was a mutual one: The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, founded by Benjamin Franklin in 1752.
Most mutual companies stay private, not publicly traded. But in recent decades, many in the U.S. and Canada have switched to joint stock corporations through demutualization. If you're a policyholder, you get a one-time stock award in the new company.
There's not much difference between the two structures in practice. A joint stock company might chase short-term profits more aggressively, while a mutual could focus on building cash reserves for high claim periods.
Key Takeaways
- A mutual company is owned by its customers, who share in the profits.
- They are most often insurance companies.
- Each policyholder is entitled to a share of the profits, paid as a dividend or a reduced premium price.
Advantages of a Mutual Company
One key advantage is the shared ownership—you get some of your premium costs back through dividends or lower prices. Many mutuals have demutualized, as I mentioned, shifting to joint stock structures.
Take Lawyers' Mutual Insurance Co. in California: they paid a 10% dividend to shareholders and have done so for 23 straight years. These companies often specialize, formed by and for professionals with similar needs, which makes their services targeted and efficient.
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