Demutualisation, Control and Efficiency in the U.S. Life Insurance Industry

Xiaoying Xie, Weili Lu, Joseph Reising () and Mark Hoven Stohs
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Xiaoying Xie: Department of Finance, Mihaylo College of Business and Economics, California State University, Fullerton, CA 92834, U.S.A. E-mails: xxie@fullerton.edu; wlu@fullerton.edu; mstohs@fullerton.edu
Weili Lu: Department of Finance, Mihaylo College of Business and Economics, California State University, Fullerton, CA 92834, U.S.A. E-mails: xxie@fullerton.edu; wlu@fullerton.edu; mstohs@fullerton.edu
Joseph Reising: Department of Finance, College of Business, Minnesota State University—Mankato, Mankato, MN 56001, U.S.A.
Mark Hoven Stohs: Department of Finance, Mihaylo College of Business and Economics, California State University, Fullerton, CA 92834, U.S.A. E-mails: xxie@fullerton.edu; wlu@fullerton.edu; mstohs@fullerton.edu

The Geneva Papers on Risk and Insurance - Issues and Practice, 2011, vol. 36, issue 2, 197-225

Abstract: This paper examines the role of corporate governance in the demutualisation wave in the U.S. life insurance industry during the 1990s and 2000s. The efficiency hypothesis suggests a firm should experience improved performance after demutualisation and managers should only gain from superior performance. Alternately, the managerial welfare hypothesis proposes that executives gain independence of company performance. This research suggests that demutualisation is value-enhancing for firms converting through initial public offerings (IPOs), but value-neutral for firms that convert but stay private. Firms converting into public companies experience increased CEO turnover that leads to efficiency improvement. CEOs of these firms receive higher compensation after demutualisation, but most of the gain is due to a jump in incentive compensation. Firms converting but staying private do not have a similar significant increase in CEO compensation. Overall, our results provide evidence that value-enhancement, not private managerial welfare, motivates demutualisation.

Date: 2011
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