Demutualization

Definition - What does Demutualization mean?

When a company that is owned by its clients or customers decides to join the stock market, the company undergoes a process called demutualization. In the demutualization of an insurance company, the value of the policies is turned into traded stocks and policyholders become stock investors.

Insuranceopedia explains Demutualization

A mutual company is a company where the clients or customers are the owners. They generate income from it based on how much they have invested in it. Another term for this company is the cooperative. The national government (not the state) gets to decide whether a company is mutual or not.

When the investments of the clients are publicly traded or they have turned them into stocks, then it no longer becomes mutual. Instead of dividends which the owners rely on for income before demutualization, they now depend on how the company fares in stock trading for money afterwards.

In a mutual insurance company, the policyholders are also the owners. In other words, the ones insured are also the same ones going to give insurance coverage. When an insurance company undergoes demutualization, the policyholders are given shares of stocks in the new corporate structure. When they do, they can now sell these shares. In doing so, they entirely cease being owners of the company.

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