Small Canadian mutual insurers ‘may not realize’ all benefits of demutualization: A.M. Best

While Economical Insurance plans to submit next year a conversion proposal outlining a proposal to demutualize, if a smaller mutual property and casualty insurer were to go through the same process as Economical, it “may not realize the benefits when all practicalities are considered,” A.M. Best Company Inc. suggested in a report released Thursday.

Economical Insurance announced this past February it expects to submit its conversion proposal, to the federal Office of the Superintendent of Financial Institutions (OSFI), before Feb. 22, 2018. The majority of Economical’s mutual policyholders voted in 2015 in favour of proceeding with demutualization, several months after the federal government put in force regulations allowing federally regulated mutual P&C insurers to demutualize. Four major Canadian life insurers demutualized in 1999 and 2000.

In an order released this past February, the Ontario Superior Court of Justice appointed two policyholder committees. A committee of nine represents eligible mutual policyholders and a second committee of six represents eligible non-mutual policyholders, Economical reported earlier.

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.

“While the committees negotiate, Economical will prepare the rest of its conversion proposal,” A.M. Best said in its special report, Canadian Property/Casualty and Life Remain Stable as Economy Rebounds, While Housing Market Bears Watching.

“Once completed, the conversion proposal, which will include the negotiated allocation and required actuarial opinions, will be sent to the regulator for review,” Oldwick, N.J.-based A.M. Best added in its report on the Canadian industry released Aug. 31.

“Economical has noted that the demutualization process has taken longer to complete than the demutualization of life insurance entities in the 1990s due to opposition that simply did not exist in the past,” A.M. Best added. “Organizations both external and internal to the industry have expressed opposition, making the demutualization process more difficult than it had been, but not impossible.”

Before the federal regulations were released in 2015, Economical noted that demutualization is not about the distribution of a company’s surplus but rather that benefits derive from “a transaction accompanying the demutualization process.”

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In December, 2015, Karen Gavan, then CEO of Economical, told Canadian Underwriter that if Economical completes its demutualization, federal regulations “basically preclude anything” other than an initial public offering (IPO) of stock.

“Our industry is consolidating and we need access to capital to participate in that consolidation,” Gavan told Canadian Underwriter at the time.

In its 2015 regulatory impact analysis statement, the federal government reported that in addition to Economical, there were six other federally-regulated P&C mutual insurers: Wawanesa Mutual, Gore Mutual, Portage La Prairie Mutual, North Waterloo Farmers Mutual, Saskatchewan Mutual, and The Kings Mutual.

Since then, Heartland Farm Mutual was formed through the merger of North Waterloo Farmers and Oxford Mutual.

“Although Economical Mutual may have the size and scale to accomplish the process favorably, smaller mutual companies that attempt to demutualize may not realize the benefits when all practicalities are considered,” A.M. Best said in its Aug. 31, 2017 special report on the Canadian industry.

Before 1999, Manufacturers Life, Mutual Life, Canada Life and Sun Life were mutual life insurers. Now Manulife Financial Corp. and Sun Life Financial Inc. are publicly traded. Mutual Life was renamed Clarica and acquired by Sun Life in 2002. Canada Life is now owned by a publicly-traded corporation, Great-West Lifeco Inc.

Economical’s conversion proposal to OSFI “will include the negotiated allocation and required actuarial opinions,” A.M. Best added.

“Following this phase and authorization from the regulator, two policyholder votes will be held—the first vote by eligible mutual policyholders to change the bylaws of the company, to allow eligible non-mutual policyholders to vote on the conversion proposal, and a second vote by both eligible mutual and non-mutual policyholders to approve the conversion proposal,” A.M. Best noted. “If these votes pass, an application to demutualize will be sent to the Finance Minister.”