Who owns the surplus if a mutual company demutualizes?

In the event that a mutual company decides to demutualize, there is some debate over what happens with that insurer’s surplus. Current regulations do not address what happens in the event of a conversion.

“The Insurance Companies Act and associated regulations do not specify what becomes of the surplus of a converting company upon its conversion from a P&C mutual company to a P&C stock company, nor do they specify any particular entitlement to the surplus of a P&C mutual company or converted P&C company by any person or group of persons,” noted a spokesperson from the Office of the Superintendent of Financial Institutions (OSFI).

Since OSFI’s role is to oversee and administer the demutualization regime according to the regulations in place and as detailed in the regulator’s Guide for the Demutualization of Mutual Property and Casualty Insurance Companies with Non-mutual Policyholders, “OSFI cannot provide information on who may be legally entitled to the surplus of a mutual P&C company,” the spokesperson added.

Related: Mutual mergers: stepping stone to demutualization?

Normand Lafrenière, president of the Canadian Association of Mutual Insurance Companies (CAMIC), said that the association has submitted a proposal to the government outlining their position on the matter.

“We haven’t found a real solution,” he said, explaining that the surplus of a mutual company has been built over many generations. “The current slate of policyholders should not own the surplus, because that surplus has been built over many generations. So, it is a debate.”

It may be a moot question, since Lafrenière reports that he hasn’t heard “any interest at all” in demutualizing from any of the association’s members. “We’re pleased with that, because the last thing we want is to see the system disappear over time. We’re gaining market share, so we’re happy to see where the system is going.”

Even so, Lafrenière would like to see the issue of who owns the surplus clarified, since “we wish to have regulations that reflect our values, even though there is no interest in demutualization.”

Economical Insurance is the first Canadian P&C insurer to initiate the demutualization process, which prompted OSFI to create its guidelines for P&C demutualization.

In a 2015 statement, Economical said that “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, for instance through which some or all of the newly issued shares would be sold by way of an initial public offering and stock exchange listing.”

The allocation of demutualization benefits, the financial benefits that eligible policyholders would receive in a demutualization, will be negotiated by court-appointed and supervised policyholder committees representing the two categories of eligible policyholders, Economical reported. The amount of benefits any person would receive depends on various factors including the:

• total amount of demutualization benefits to be distributed
• total number of eligible policyholders, and
• negotiated allocation methodology.