C  The Journal of Risk and Insurance, 2003, Vol. 70, No. 3, 401-437 OWNERSHIP STRUCTURE CHANGES IN THE INSURANCE INDUSTRY:AN ANALYSIS OF DEMUTUALIZATION Krupa S. Viswanathan J. David Cummins ABSTRACT This article focuses on the demutualization process and investigates why certain mutuals undergo this organizational structure change. The primary motivation for conversion is access to capital. By statute, mutual firms are limited in their capital-raising activities while stock firms can attract funds through a variety of stock and debt offerings. By examining the financial characteristics of firms that demutualize, changes in business practices in the years surrounding conversion can be observed. Determinants of the conver- sion decision are explored through logistic regression. In the years before demutualization, converting property-liability mutuals exhibit significantly lower surplus-to-asset ratios. This capital constraint eases after demutualiza- tion. Converting life-health mutuals hold a significantly lower proportion of liquid assets; in addition, they have a higher proportion of separate accounts under management. This liquidity constraint and increased focus on a higher managerial discretion activity drive the demutualization decision. For both property-liability and life-health converting mutuals, support for the access to capital hypothesis is found. INTRODUCTION The insurance industry in the United States is currently experiencing a wave of orga- nizational structure changes as many property-liability and life-health mutual com- panies are converting to stock charter, a process known as demutualization. Given that this is an industry where mutual firms and stock firms have coexisted for more than 100 years, these conversions are receiving much attention from insurance regula- tors, investors, and consumers. This research focuses on the demutualization process and by examining the business practices of these demutualizing insurers in the years surrounding conversion, investigates why they undergo this change. Krupa S. Viswanathan is an assistant professor in the Risk, Insurance and Healthcare Manage- ment Department at Temple University. J. David Cummins is the Harry J. Loman Professor of Insurance and Risk Management at the Wharton School, University of Pennsylvania. The authors thank Franklin Allen, David Babbel, Neil Doherty, and Harry Panger for their helpful comments. In addition, the authors thank Richard MacMinn and the anonymous referees for their constructive suggestions. 401