Mutual Company

A mutual company is a private company whose ownership base is made of its clients or policyholders. The defining feature of a mutual company is since its customers are also its owners, they are entitled to receive profits or income generated by the mutual company. Such distribution of profits may typically be in the form of dividends made on a pro rata basis, based on the amount of business each customer conducts with the mutual company. Also referred to as a "cooperative."

The mutual company structure is commonly found in the insurance industry, as well as in savings and loans associations. In addition, many banking trusts and community banks in the U.S., and credit unions in Canada are also structured as mutual companies.

The term "mutual" is believed to arise from the fact that in an insurance mutual company, for instance, a policyholder is both the insured party (as the company's customer) and the insurer (as part owner).

Most institutions that are structured as mutual companies are private entities rather than publicly traded companies. In recent decades, many mutual companies in the U.S. and Canada have opted to change from a mutual structure to a joint stock corporate structure, a process known as demutualization.

The oldest existing insurance company in the United States is believed to be The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, a mutual insurance company, founded in 1752 by none other than Benjamin Franklin.

A major selling point of mutual insurance companies is an ownership structure shared among policyholders. As a result, capital can be returned directly to them in the form of either policyholder dividends or premium credits. For example, since 2011, Lawyers Mutual, a liability insurance company in North Carolina, has given back $6 million in capital to policyholders in the form of dividends. And since its formation in 1977, the company has returned nearly $13 million in dividends to its policyholders.

Another advantage of the mutual company structure is specialization. Many mutual insurance companies are formed by associations or groups of domain-specific professionals, which tilts their focus to a singular purpose they know best. A monolithic management style can help mutual companies from straying from areas they have no business or competitive advantage.