We hypothesize mutual insurers had an incentive to demutualize to avoid a unique "surplus tax" imposed by the DEFRA of 1984 when it adopted the "stock model" of taxation for mutual insurers in Section 809.
Thus, some of the insurers remain mutual over the entire sample period, while others demutualize and convert to stock organization form sometime between 1986 and 2004.1[degrees] None of the sample firms is domiciled in Alaska or Hawaii where demutualization is prohibited.
After replicating the logistic regression, we relax the assumption that a mutual life insurer could transition to the stock form using only one form of demutualization and estimate a multinomial logistic regression that allows us to compare simultaneously the incentives for the insurer to fully demutualize versus convert to a MHC.
(16) On one hand, intense competition in urban areas might make it more likely for firms in urban areas to demutualize. On the other hand, competition in rural areas may have been higher during this time period after the Office of the Comptroller of the Currency (OCC) ruling in 1986 that allowed banks in rural areas (5,000 or less population) to sell insurance to customers.
We expect that the estimated coefficient will be positive, consistent with the hypothesis that the IRS equity tax fell most heavily on large equity-based firms and therefore provided these insurers greater incentives to demutualize.
The second specification, Equation (3), allows us to test if the incentive to engage in coordinated risk management changes before and after firms demutualize relative to nonconverting mutuals.
The difference in means is statistically significant for MHC versus nonconverting firms and is consistent with our hypothesis that firms with larger than average equity bases had incentives to demutualize in order to avoid the equity tax.
Firms that fully demutualize have significantly less interest rate risk preconversion than do nonconverting mutuals, and there is a significant decrease in the interest rate risk postconversion.
The average equity base variable is positive and significant, which is consistent with the hypothesis that mutual insurers with larger average equity had greater incentives to demutualize in an effort to avoid losing the deductibility of policyholder dividend distributions.
The only change between the multinomial regression in Table 4 and the logistic regression results shown in Table 3 is our inclusion of a time-varying dummy variable for each state (labeled as MHC State) in an effort to capture the state-specific regulatory environment regarding the decision to demutualize. The MHC
Our first observation is that the evidence supporting the access-to-capital hypothesis is stronger for firms that chose to fully demutualize than it is for the MHC conversions.
The estimated marginal effects reported in the last three columns allow us to directly compare the magnitude of the relationship between the exogenous variables in the model and the likelihood that a firm chose to demutualize using a particular method.