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The Wealth Effect of Demutualization: Evidence From the U.S. Property-Liability and Life Insurance Industries


  • The authors can be contacted via e-mail: The authors appreciate the valuable comments from Xuanjuan Chen, Richard MacMinn (former editor), two anonymous reviewers, and the participants at the 2003 APRIA, ARIA, and WRIA meetings.


This study examines the wealth effect of demutualization initial public offerings (IPOs) by investigating underpricing and postconversion long-run stock performance. Our results suggest that there is more “money left on the table” for demutualized insurers than for non-demutualized insurers. We show that higher underpricing for demutualized firms can be explained by greater market demand, market sentiment, and the size of the offering. Further, contrary to previous research reporting an average underperformance of industrial IPOs, we show that demutualization IPOs outperform non-IPO firms with comparable size and book-to-market ratios and non-demutualized insurers. We present evidence that the outperformance in stock returns is mainly attributable to improvement in post-demutualization operating performance and demand at the time of the IPOs. The combined results of underpricing and long-term performance suggest that the wealth of policyholders who choose stock rather than cash or policy credits is not harmed by demutualization. Stockholders who purchase demutualized company shares either during or after the IPO have earned superior returns. Our findings are consistent with the efficiency improvement hypothesis.