Draft demutualization regulations promised, but not yet released

Economical Insurance is anticipating that long-awaited federal regulations governing demutualization in Canada’s property and casualty insurance industry will likely require some level of sharing of demutualization benefits with non-mutual policyholders.

“Economical has consistently and forcefully advocated that mutual policyholders, as the owners of mutual insurance companies, should be the sole recipients of demutualization benefits,” notes the company’s latest demutualization progress report, released Monday. Over time, though, company representatives have come to believe the federal Department of Finance is not likely to fully accept that position in the draft regulations.

Background: Economical continues preparations as it awaits draft demutualization regulations

“While we do not yet know what the regulations will provide specifically, or when they will be released, it now appears to be reasonable to anticipate that they will require some level of sharing of demutualization benefits with non-mutual policyholders. However, until the draft regulations are made public, we cannot know that for sure or what the implications may be for our policyholders.”

P&C demutualization is posing challenges for regulators, perhaps contributing to the almost two-year-long wait for draft regulations. “While we were optimistic that the needed regulations could follow the precedents set by demutualizations in the life insurance industry, p&c demutualization is posing new challenges for the regulators,” notes the progress report.

During the life insurance demutualizations, the major companies worked together towards a common goal, the update states. “By contrast, the Department of Finance received a significant number of submissions from the p&c industry that fundamentally differ from Economical’s views. We believe this is at least part of the reason for the additional time it is taking to develop regulations.”

Nonetheless, the finance department has confirmed in writing its commitment to move forward with demutualization. “We believe that, despite the substantial delay, the necessary regulations are being developed to allow for demutualization.”

The federal department “has an important and complex job to do in setting the framework for our precedent-setting demutualization, not just for Economical, but for the Canadian p&c insurance industry,” the update adds.

As in Economical’s last update, the company reports it has been “continuing to create value today and to position itself to be more competitive in the future.”

On Nov. 22, Economical announced its results for the third quarter and first nine months of the year, which ended on Sept. 30, 2012.

Read more: Third-quarter profits up, weather-related catastrophe losses down at Economical Insurance

For example, the company increased gross written premiums by 7.4% to $462.5 million in the third quarter, and more than 5% to $ 1.36 billion for the first nine months of the year over the same period in 2011. Underwriting results improved to $4.6 million for the latest quarter, compared with a loss of $7.8 million a year ago (primarily attributable to weather-related catastrophe losses), and underwriting income was $44.9 million for the first nine months of 2012 compared with $2.2 million for the same period of 2011.

With regard to net income, it was $29.0 million for the third quarter compared with $1.4 million for the same quarter in 2011. For the first nine months, net income was $109.5 million, more than doubling from the same period in 2011.

The strategic emphasis on underwriting profitability has resulted in six quarters of underwriting profits out of the past seven quarters. Only the Goderich, Ontario tornado a year ago interrupted this momentum, the update notes.

Still, the company has had to take certain steps to strengthen competitiveness. These include the decision to sell the assets of Mattei Insurance Services, Inc. and the reduction of 145 positions across Canada as part of Economical’s ongoing Business Transformation Program. “The one-time costs of approximately $6.8 million associated with this staff reduction will be recognized in the fourth quarter results,” the company adds.