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The Economical says “no turning back” from demutualization now


May 27, 2011   by Canadian Underwriter


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The Economical is continuing its dual-track approach to demutualization, which could either take the form of an initial public offering (IPO) or a “sponsored demutualization,” through a sale of some or all of the company to strategic partners.
“I want to emphasize one thing to everyone in this room today,” said Karen Gavan, a board member of The Economical and chair of a special committee working on the demutualization. She was speaking to mutual policyholders attending the company’s annual general meeting in Kitchener on May 26.
“We are totally committed to demutualization. There is no turning back.”
Gavan said the company is working on both tracks at once and can be ready to make a final proposal for approval by the federal solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI), within six months of the Canadian Department of Finance creating and approving new regulations for the demutualization of a property and casualty company.
(Currently, no such rules exist, and the Department of Finance is expected to start work on these once its next budget is approved.)
Gavan reported that the wild card in the timing of the demutualization is the federal government’s schedule for creating the new regulations. The finance minister has said no P&C company will be allowed to demutualize until regulations are in place.
Gavan suggested regulations could be in place by the end of 2011, at the earliest, depending on the length of public consultations (which could push the timeline into early 2012). Once that is done, the company can then submit a proposal for demutualization for OSFI’s approval. The company would then be able to present the proposal to mutual policyholders for a vote.
In the meantime, the company has done work on both the IPO and sponsored demutualization options.
“Upon demutualization, the surplus in the company remains in the company,” said Gavan. “The value to be distributed to mutual policyholders will be the amount that a third party pays for the ownership interest – either a purchase price, in the case of a sponsored demutualization, or the IPO prices for the shares.”
All estimated valuation ranges of the company’s value thus far have been based upon a multiple of the company’s book value, Gavan said. The Economical’s book value was $1.25 billion as of the end of March 2011.
Based on assessment of 16 publicly-traded North American property and casualty company multiples, Gavan noted typical multiples start as low as 0.7 and go as high as 2.2, based on a number of different factors. Using the average multiple of 1.2 times book value, The Economical would be valued at $1.5 billion.
The Economical has been talking with the regulator about a two-step process for allocating value to the mutual policyholders.
First, a uniform, fixed amount of the company’s value would be distributed equally among all mutual policyholders.
Second, an amount of the company’s value would be distributed in a fashion that would vary from policyholder to policyholder, based on a formula that would consider a number of criteria, including the length of time a policyholder was with The Economical. Other variables might include the amount and type of coverage and the policy premium.
Gavan said the criteria to be followed would be determined based on the government’s regulations, and not determined by The Economical.
When life insurers demutualized, Gavan noted, the fixed amount split among mutual policyholders was typically between 15% and 25% of the company’s value. The variable amount to mutual policyholders represented 75% to 85% of the company’s aggregate value.
Speaking about the sponsored demutualization option, Gavan said the company had received expressions of interest and proposals from interested partners. The names of the partners are unknown.
Gavan said the company is seeking partners committed to maintaining the company’s operations in Kitchener-Waterloo. Also, the company wants partners committed to maintaining the broker distribution network.
Gavan said the company was seeking to modify some restrictions placed on life insurance company demutualizations, because they did not fit the P&C model.
“Takeover protection should be at least two years from the date of IPO, rather than from the day the regulations come into force,” said Gavan. “We also think some allowances for ownership greater than 10% in the event of a partially-sponsored IPO, should be allowed.
“We think the takeover protection should apply to all demutualized P&C insurers, not just those between $1 billion to $5 billion of surplus, because the P&C companies are smaller than the life companies.
“We also feel that the restrictions on foreign sponsors is not appropriate, as the P&C market is highly international, with many global players operating in Canada with significant market shares.”


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