ON THE COEXISTENCE OF MUTUALIST AND CAPITALIST SHAREHOLDERS IN A LIFE-INSURANCE COMPANY

This paper analyses a real-life situation where a customer-controlled firm endogenously admits outside investors. Such a situation arose in the Canadian insurance industry where a mutual insurance company transformed itself into a stock company, jointly controlled by the policyholders and external shareholders. It is argued that in this context, it can be rational for customer-owners to subsidize outside investors in what would otherwise be liquidation states. It is shown that, the structure of the subsidies being isomorphic to that of a put option, it can be valued using contingent claims analysis. Propositions are derived and a numerical illustration is presented.