Economical Insurance to schedule mutual policyholders’ vote on demutualization

Economical Insurance’s board of directors “formally decided” Tuesday to proceed with demutualization, and if successful, the money raised from demutualization would “likely be tied around acquisition activity,” the Waterloo, Ont.-based insurer’s chief executive officer suggested.

Economical’s announcement comes four months after the federal government enacted regulations allowing for the demutualization of property & casualty insurance carriers. In addition to approval from its board of directors, a mutual P&C insurer requires several additional steps before demutualizing, including approval of its mutual policyholders and approval from the federal government.

“The next step is the special meeting of policyholders where eligible mutual policyholders will decide whether to continue with the demutualization process,” Economical stated Tuesday in a release. “Details of the meeting will be announced once the meeting has been called by the board.”

Company officials are “just working on the scheduling and logistics,” of the eligible mutual policyholders’ meeting, Economical president and CEO Karen Gavan said in an interview. “We expect to be able to make an announcement shortly.”

Economical is one of seven insurers in the federally-regulated property & casualty insurance sector, the government stated last February, in a regulatory impact analysis statement published with its draft regulations. Although four life insurers demutualized in 1999 and 2000, none of Canada’s federally-regulated P&C insurers have demutualized because the regulations paving the way for P&C demutualization only came into force July 1. Those regulations are the Mutual Property and Casualty Insurance Company Having Only Mutual Policyholders Conversion Regulations and the Mutual Property and Casualty Insurance Company with Non-mutual Policyholders Conversion Regulations.

Economical Insurance said earlier it expects it would take at least two years, “from the date the board decides to proceed with demutualization to the date the Minister of Finance approves the final conversion proposal,” assuming that each step is successful.

The regulations “basically preclude anything” other than an initial public offering (IPO) of stock, if the demutualization is successful, Gavan suggested.

“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.

Right now, is too early to tell how much cash Economical could raise from an IPO.

Related: Federal demutualization regulations now in effect, Economical Insurance to consider options

“Two years is a long time into the future, so we have to ensure the capital markets are strong when we do an IPO,” Gavan said. “But doing an IPO of a Canadian company that is 144 years old is a pretty compelling proposition for the Canadian market.”

Economical initially announced in 2010 it was pursuing a process to convert from its mutual structure. Economical asked the federal finance department to develop regulations allowing for such a conversion, the government stated last February in its analysis statement.

“For Economical, the primary focus of demutualization is to become a share company so that it has access to capital that would allow it to better compete with other insurers,” Economical stated in a release last March. “While there is a distribution of benefits, a demutualization is not about the distribution of a company’s surplus. The financial benefits of demutualization derive from a transaction accompanying the demutualization process,” such as an IPO.

Gavan told Canadian Underwriter Tuesday that Economical Insurance is “well capitalized” today.

“However 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,” she added.

On Tuesday, Economical chairman Gerald Hooper stated in a release that he and his fellow directors have “unanimously determined that demutualization is in the best interests of the company.”

“This is tremendous news for our organization,” Gavan (pictured below right) said.

Demutualization would “allow Economical to unlock its full potential and compete with the top players in the P&C insurance industry,” Hooper stated in a release.

Economical Insurance has both mutual and non-mutual policyholders. There are roughly 900 eligible mutual policyholders, Gavan said Tuesday.

The new regulations stipulate that in order to demutualize, the “eligible mutual policyholders” of a P&C firm – with both mutual and non-mutual policyholders – must vote by special resolution on whether to negotiate with the eligible non-mutual policyholders. The issues to negotiate 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.

On Tuesday, Economical noted that under the new regulations, an “eligible policyholder must, at a minimum, have held a policy on November 3, 2015, the date of the board decision (non-mutual policyholders would also had to have done so for the 12-month period ending on that date).”

But a policyholder “might lose their eligibility if their policy is cancelled or lapses after the board decision date,” the firm noted. So Economical has “requested guidance from the Office of the Superintendent of Financial Institutions (OSFI), on whether policies must be held past the board decision date in order for policyholders to remain eligible,” Economical stated, adding that more information will be made available once OSFI provides such guidance.

“At this point in time we are advising our brokers with eligible policyholders to continue to hold those policies until we have that clarification from our regulator,” Gavan said.

If the eligible mutual policyholders’ vote passes, Economical “will send a notice to all eligible mutual and non-mutual policyholders to inform them of the decision and outline the process for commencement of allocation negotiations,” Economical stated in a backgrounder released Tuesday. “Invitations and information circulars will be mailed to all eligible mutual policyholders. Attendance at this meeting is by invitation only.”

Economical noted that “for the purposes of eligibility, only policyholders of Economical Mutual Insurance Company will be eligible to participate in demutualization. These policies include policies sold by Family Insurance Solutions Inc. or under the Western General brand, but exclude policies issued by our subsidiaries (Perth Insurance Company, Waterloo Insurance Company (also known as Economical Select), Missisquoi Insurance Company, and Federation Insurance Company of Canada).”

Economical noted Tuesday that mutual insurers “do not have access to capital markets when they need it, for example, to recover from catastrophe-related insurance claims or extreme market events,” and must rely on their own retained earnings.”

In its regulatory impact statement last February, the government noted that the other federally-regulated P&C mutual insurance companies are: Winnipeg-based Wawanesa Mutual; Cambridge, Ont.-based Gore Mutual; Portage La Prairie, Man.-based Portage La Prairie Mutual (which has branches in Edmonton, St. Catharines, Ont. and Halifax); Saskatoon-based Saskatchewan Mutual; The Kings Mutual, based in Berwick, N.S., west of Kentville; and North Waterloo Farmers Mutual.

Waterloo, Ont.-based North Waterloo Farmers has since agreed to merge with Thamesford, Ont.-based Oxford Mutual Insurance Company to create Heartland Farm Mutual Insurance Inc.

Related: Draft P&C demutualization rules aim to treat non-mutual policyholders fairly: Economical

Wawanesa and Economical were ranked the 8th and 9th insurers (excluding life and purely A&S insurers) respectively in Canada – by net premiums written in 2014 – in Canadian Underwriter’s Statistical Issue.

The federal regulations that took effect last summer stipulate that a P&C insurer which is demutualizing “prepares the “conversion proposal” containing detailed terms for a company’s demutualization, including the allocation of benefits negotiated by the two policyholder committees,” Economical stated in a backgrounder. “The conversion proposal is then submitted for approval by (OSFI), after which it is put to a vote of eligible policyholders.”

“The demutualization framework in the final regulations is complex and involves many steps,” Economical Insurance stated June 30. “Assuming each step is successful, we estimate at this point that the process will take at least two years from the date the board decides to proceed with demutualization to the date the Minister of Finance approves the final conversion proposal.”

Four life insurers – Manufacturer’s Life, Canada Life, Sun Life and Clarica (formerly known as Mutual Life) -demutualized more than 15 years ago. Sun Life and Clarica merged, while Manufacturer’s Life and Canada Life are now ultimately owned by Manulife Financial Corp. and Great-West Lifeco Inc. respectively.

Clarica Life Insurance Company completed its initial public offering in July, 1999, which completed the demutualization of Mutual Life. Clarica’s agreement, to be acquired by Sun Life Financial Services of Canada Inc., closed in May, 2002.

Sun Life Assurance Company of Canada completed its conversion from a mutual company to a stock company in March, 2000 and became a wholly owned subsidiary of Sun Life Financial Services of Canada Inc., Sun Life noted in its annual report for 2000.

In September, 1999, Manufacturers Life “converted to a stock life insurance company with common shares following approval of its plan to demutualize by policyholders and the Minister of Finance (Canada),” Manulife Financial stated in its annual report for 2000. Manulife Financial had been incorporated in April, 1999 and then in September, Manulife became an insurance holding company owning all of the outstanding shares of Manufacturers Life. Manulife had “issued a total of 501 million common shares, of which 38 million were issued to certain underwriters at $18.00 per share and 100 million common shares were sold in a secondary offering by a custodian on behalf of certain policyholders who elected, or were otherwise required, to sell their common shares pursuant to the Plan of Demutualization,” Manulife stated in its annual report for 1999.

In its annual report for 1999, Canada Life Financial Corp. stated that Canada Life became a stock company in November, 1999 “primarily to give it increased access to capital markets.”

Great West completed its acquisition of Canada Life in 2003. Great West is majority-owned by Power Financial Corp., which in turn is majority-owned by the Desmarais Family Residuary Trust.

“Eligible policyholders of Canada Life received common shares issued by the Company from treasury, received cash or were granted policy credits,” Canada Life said at the time. “The demutualization benefits received by eligible policyholders in exchange for their ownership rights and interests were in addition to the contractual benefits received as eligible policyholders. The Company also issued common shares from treasury in an initial public offering to fund payments to policyholders and to help pay for the costs of demutualization.”