| The objective of this study is to empirically test if a mutual life insurer, through its policyholder dividend policy, chooses surplus so that the marginal agency costs of surplus equal the marginal benefits of surplus. Although mutual life insurers hold less surplus than stock life insurers empirical evidence can not refute the existence of agency costs associated with the surplus of mutual life insurers. The agency costs of surplus are high when the insurer has a volatile cash flow, few positive net present value projects available, and cash flow is high. Accumulation of surplus, however, benefits policyholders because as surplus increases the probability of insolvency decreases, and because surplus provides the financial resources a mutual life insurer needs to achieve economies of scale and/or operating efficiencies. A time-series cross-sectional sample of sixty U.S. mutual life insurers between the years 1986 and 1992 is used to test the proposed hypothesis. The empirical evidence is weak, but it consistently fails to provide support for the proposition that policyholder dividend policies of mutual life insurers are explained by the variability of cash flow and the availability of positive net present value projects. The short-term cash position of the insurer, however, is directly related to the size of the policyholder dividends paid by the sample. |
