Economical Insurance mutual policyholders vote to proceed to next step of demutualization

Economical Insurance is a step closer to an initial public offering of stock.

Waterloo, Ont.-based Economical announced Monday its mutual policyholders voted in favour of continuing to the next stage of demutualization. Several other steps are necessary before its demutualization is successful.

A meeting for mutual policyholders was held Monday at the Bingemans Conference Centre in Kitchener, about seven kilometres east of Economical’s head office.

The majority of eligible mutual policyholders voted “in favour of commencing negotiations with non-mutual policyholders on the allocation of demutualization benefits through court-appointed policyholder committees, surpassing the required two-thirds majority (of those voting) required for a successful vote,” Economical stated in a press release.

The board of directors of Economical Insurance formally decided Nov. 3 to proceed with demutualization.

Now that mutual policyholders have voted, the “next step in the regulatory process will see Economical prepare and mail a formal notice to all eligible policyholders,” Economical stated. That notice was approved by the federal Office of the Superintendent of Financial Institutions (OSFI).

“After approval by OSFI and mailing of the notice, Economical will file an application with the court for an initial order setting out the procedure for the negotiations,” Economical added.

Monday’s vote was held nearly six months after the federal government enacted regulations allowing for the demutualization of property & casualty insurance carriers, and five years after Economical asked the government for such regulations.

Economical is one of seven federally-regulated P&C mutual insurers. In a list of Canadian P&C insurers, Economical ranked ninth – by net premiums written in 2014 – in Canadian Underwriter’s Statistical Issue. Winnipeg-based Wawanesa ranked eighth (behind Intact, Aviva, TD, RSA, Lloyd’s, The Co-operators and Desjardins). That list is of private companies excluding life and purely A&S firms and counts Desjardins separately from State Farm.

The other five federally regulated mutual P&C insurers are Gore Mutual, Portage La Prairie Mutual, Saskatchewan Mutual, The Kings Mutual and North Waterloo Farmers, which agreed to merge with Oxford Mutual to create Heartland Farm Mutual.

For P&C mutual insurers, the issues to negotiate, on a resolution to demutualize, would include the method of allocating the value of converting the firm, and whether any benefits will be provided to persons other than eligible policyholders.

Demutualization also requires approval from the federal government.

Four Canadian insurers (Mutual Life, Canada Life, Manufacturers Life and Sun Life) demutualized between July, 1999 and March, 2000. However, no property and casualty carriers have demutualized because until July 1, the federal government did not have regulations in force allowing for a P&C carrier to demutualize.

If the demutualization of a P&C insurer is successful, federal regulations “basically preclude anything” other than an initial public offering (IPO) of stock, Economical CEO Karen Gavan suggested earlier in an interview with Canadian Underwriter.

“There is a requirement that from the point of demutualization and for at least two years (after), our shares must be widely held,” Gavan said.

One benefit is greater access to capital.

“Our industry is consolidating and we need access to capital to participate in that consolidation, so additional capital would likely be tied around acquisition activity,” Gavan told Canadian Underwriter in November after Economical’s board approved demutualization.

In July, 1999, Mutual Life was the first life insurer to demutualize. The Ottawa-based insurer changed its name to Clarica Life Insurance Company.

Two months later, Manufacturers Life converted to a stock life insurance company with common shares. Manulife Financial Corp. is now publicly traded.

Then in November, 1999, Canada Life completed its demutualization, becoming a stock company. Four months later, Sun Life Assurance Company of Canada completed its conversion from a mutual company to a stock company.

Sun Life closed its acquisition of Clarica in May, 2002. The following year, Great-West Lifeco Inc. (whose subsidiaries include London Life) completed its acquisition of Canada Life.