(No.185) Class action appeal: London Life & Great-West

In Oct. of 2010 I wrote a column about the class action led by D'Alton 'Bill' Rudd, a former London Life senior executive and a man of principle and conviction. He opposed the use of London participating policyholder funds by Great-West Lifeco (controlled by the Desmarais family) in its Oct. 1997 takeover of London Life.

At the invitation of its editor Joseph Belth I subsequently wrote an article about the case for the Dec. 2010 issue of the American publication INSURANCE FORUM [see below for the footnote references].

My view, one shared by some others with experience in the Canadian life insurance industry and elsewhere, is that Canada's federal insurance regulator -- the Office of the Superintendent of Financial Institutions (OSFI) -- should not have allowed the use of ANY par policyholder funds by Great-West to help finance its takeover of London Life.

The class action finally came to trial in Sept of 2009 and the Oct. 2010 decision awarded $455 million to the par policyholders. London/Great-West appealed the Ontario Superior Court decision in Jeffery v. London Life Insurance Company.

On Nov. 3, 2011 the Ontario Court of Appeal released its decision (ONCA 683) which had the effect of largely negating the financial compensation awarded by the Superior Court judge to the par policyholders while upholding certain aspects of the appealed decision. The judgement ended up cancelling the raiding of the par policy accounts but without upholding the $400+ million payout to the policyholders.

It was at the London Life annual meeting in the spring of 1998 that Bill Rudd rose to speak and began what turned out to be a process that has lasted almost 14 years. He pointed out that what was being done with par funds was illegal under the federal Insurance Companies Act.

It's been a very long slog for those individuals challenging these large financial institutions. A person close to the class action told me that he doubts there will be an appeal, that the Appeal Court decision is a "dog's breakfast and not all clear" and that the Appeal Court made its decision in part on the basis of "some matters not tried" in the Superior Court action.

I would like to have seen in this or in some future legal action:

-- A major attack on the actuarial concept of "policyholders' reasonable expectations" which life insurance companies can and do use to curtail as well as frustrate the promises given to par policyholders by their agents -- at the time the policies are bought -- that they (the par policyholders) will share in the profits of the companies issuing the participating life insurance policies.

-- Some emphasis on the major disconnect between what buyers of participating life insurance policies are told and what the issuing life insurance companies actually do with their promise to share profits via policy dividends. As a former industry colleague of mine says, the "reasonable expectation" fiction invented and controlled by company actuaries, when combined with the absence of any third party involvement to rebalance the equation in the interests of par policyholders, produces mushroom treatment for people buying life insurance.

-- Examination of whether or not a good chance that the courts would override life insurance company directors' discretion to declare dividends would be to force the appropriate members of the life insurance companies' senior management and direction into court in order to cross-examine them about any number of questions revolving around the use and misuse of par funds.

For an illustration of a more conventional, company & regulatory-friendly commentary on the Appeal Court decision see the Nov. 9, 2011 issue of the Financial Institutions Bulletin put out by the Toronto law firm Fasken Martineau. For example, it commented that "the Court of Appeal found that the trial judge was right to conclude that the [par funds] transactions breached the ICA [Insurance Companies Act] but significantly curtailed the remedy granted. ...

" The remedy sought by the plaintiffs [in the class action] and ordered by the trial judge was tantamount to an oppression remedy and was inconsistent with the deliberate decision not to provide an oppression remedy in the ICA. The Court of Appeal found that any remedy had to ensure compliance with the ICA without giving the PAR policyholders a windfall ...."

While it may not be likely, one can still hope that the Ontario Appeals Court decision in this class action is appealed to the Supreme Court of Canada. If it is I think it likely that both the rights of par policyholders generally and a tougher look at OSFI insurance regulation might well be part of the benefit of a Supreme Court ruling.

This whole subject is actually increasing steadily in relevance these days in Canada. The big life insurance companies which demutualized a decade or so ago (London Life was always a stock company and, atypically, always sold a ton of par life) couldn't wait to stop selling par life insurance in order to increase financial benefit to their newly acquired shareholders. However, for several reasons the retail attractiveness of of selling par whole life insurance is being rediscovered, rather like Malcolm Muggeridge -- a longtime atheist -- rediscovering Jesus.

by Alastair Rickard

references:

-- "An Important Court Decision Relating to Rights of Participating Policyholders in Canadian Stock Companies" by Alastair Rickard, INSURANCE FORUM Dec. 2010 (Vol.37, No. 12).

-- "Great-West '0', par polciyholders '1' " on www.RickardsRead.com, column No.118, posted Oct.8. 2010.

-- "Names to ponder: Great-West Life, Joseph Belth, Alan Press, Primerica" on www.RickardsRead.com, column No.124, posted Nov. 28, 2010.

-- Jesus Rediscovered by Malcolm Muggeridge (1969).

-- www.fasken.com

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(No.184) Oops! 'No' to a national securities regulator

When the Canadian government decided to push ahead with establishing a national securities regulator, over the objections of several provinces but cheered on by the large financial institutions, Finance Minister Jim Flaherty (a former Ontario Treasurer) wisely decided in the spring of 2010 to refer the proposed Securities Act to the Supreme Court of Canada for a ruling on whether it fell within federal jurisdiction.

Most 'experts' in the financial media and related playpens were confident that the Supreme Court would come down on the side of the feds and not that of provincial jurisdiction. The Globe and Mail was representative:

May 27, 2010 -- "most legal experts believe the highest court will approve Ottawa's request";

May 28, 2010 -- editorially the Globe considered that the proposed federal Securities Act would be found acceptable to the Supreme Court and concluded that "probably it will say it is".

Two days later in a RickardsRead.com column (No.95 posted May 30, 2010), and because I lacked the Globe and Mail's 'expertise', I took the opposing view and argued that a Supreme Court "endorsement of Ottawa's view of the creation of a national securities regulator vis-a-vis the provincial government authority is very, very far from being a dead bang certainty."

By March 2011 the appeal courts in both Alberta and Quebec had ruled that the proposed federal legislation was unconstitutional. The 'experts' who had so confidently predicted a win by Ottawa fell largely silent. They seemed, as I pointed out in April of 2011, "to have retreated quietly into the bushes, a good place for those who wish to be able once the SCC decision is handed down to foster some appearance of wisdom even if after the fact" (RickardsRead.com, No.147).

On Dec. 22, 2011 the Supreme Court gave its opinion in response to the federal government's reference request. The opinion was unanimous: the securities laws of Canada fall exclusively under provincial authority. The proposed federal legislation was constitutionally invalid.

I was particularly interested by the fact that one of the three constitutional principles supporting the SCC opinion involved the SCC's own judgement of May 31, 2007 in the Canadian Western Bank case. In that case, involving a challenge to provincial jurisdiction over insurance by the big banks, the Supreme Court also upheld provincial jurisdiction.

It was another case in which the media 'experts', including the lawyers advising the banks, were confident that the provinces would lose. I was confident publicly (as I had been in various published comments over the years) that provincial jurisdiction over insurance would prevail if the banks were ever foolish enough to challenge provincial authority in the insurance field (see for example RickardsRead.com columns Nos. 69, 95, 114).

That the Dec. 22, 2011 Supreme Court decision received far less attention by the financial services paparazzi than did the initial reference by the feds is hardly surprising. For every financial columnist offering valuable insights -- like Eric Reguly, the Globe and Mail's Rome-based business correspondent -- there are battalions of 'experts' and cable news 'talking heads' whose erroneous analyses and predictions are rarely revisited by the host media.

The Western Bank and Securities Act cases and the SCC decisions on both illustrate a continuing theme of mine in RickardsRead.com columns. As I observed over the years as both an editor and an executive, the likelihood of most senior business excecutives being wise before the fact rather than after it is, logically, no better than the financial media whose writings provide the grist for executives' daily media 'clipping' services.

by Alastair Rickard

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(No.183) Christopher Hitchens: unworldly fluency

One of the pleasures in my life has been reading or listening to the words of highly articulate, thoughtful people. Disagreeing with a particular point of view need not diminish one's enjoyment of its expression.

There are people whose words I will always try to find an opportunity to read or hear. Those who are highly articulate writers are often not as fluent when it comes to verbal presentation. Among my favourite columnists is Toronto Star columnist Rick Salutin (formerly with The Globe and Mail). More articulate as a speaker than as a writer is Stephen Lewis, the former Ontario NDP leader and Canadian UN ambassador as is the English satirist and director Jonathan Miller from Beyond The Fringe.

Then there is the type far less frequently encountered: those who are as skilled verbally -- in debate, discussion or interview --as they are when writing a column or essay. In this category my longtime favourite was Malcolm Muggeridge (1903-1990), English writer, editor and television host. Another is the journalist and former editor of Harper's Magazine, the American Lewis Lapham.

My notional group among whom I regard Muggeridge and Lapham as charter members has another who figured in the news recently. On Dec. 15 of this month Christopher Hitchens died, age 62, after a life of heavy drinking and, as most obituarists seemed anxious to emphasize, even heavier smoking. He was, as was Muggeridge in his day, one of the most accomplished and controversial people in Anglo-American letters.

The views argued with ferocious energy by Hitchens were often controversial and as a polemicist he annoyed many right the way across the political spectrum. He wrote hundreds if not thousands of columns for publications as diverse as The New Statesman, The Nation, The Atlantic, Vanity Fair and Slate. He willingly appeared on American cable news, Fox as well as CNN, when they were not afraid to have him on.

From Hitchens' sharp criticism of targets such as Henry Kissinger, Mother Theresa and Diana, Princess of Wales through his support for Margaret Thatcher's Falklands War to support of the U.S. invasion of Iraq, perhaps nothing aroused his critics as much as his frontal assault on religion laid out in his bestseller "God Is Not Great".

As the years passed Hitchens became more difficult to categorize politically. He gained his early English reputation as an Oxford University Trotskyite but he became far less predictably left wing on issues, especially after he moved to the U.S. in 1981.

Nothing tested Hitchens' courage, beliefs and principles as did the esophagael cancer with which he was diagnosed while in the midst of a book tour promoting his 2010 memoir "Hitch 22". However he never wavered in his atheism nor in the forcefulness and articulateness of his writing and speaking, virtually to the end of his life.

Those who waited for and in some cases wanted to see him turn to religion during his public dying were disappointed. He declared: "Suppose I ditch the principles I have held for a lifetime in the hope of gaining favor at the last minute. I hope and trust that no serious person would be at all impressed by such a hucksterish choice."

I among many, many others will miss Christopher Hitchens. I cannot improve on what his longtime friend, the English novelist Ian McEwen, has written: "His unworldly fluency never deserted him, his commitment [to writing] was passionate, and he never deserted his trade."

by Alastair Rickard

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(No.182) Manulife: pigs get fat, hogs get slaughtered

In the last couple of months I have written several columns about Manulife and Sun Life and their respective performances as Canadian financial institutions. My critical comments about Manulife and its senior management in "Manulife Jabberwocky" (column No. 177, posted Nov.13, 2011 to RickardsRead.com) attracted a number of responses from the financial services community, almost all of them positive.

Just recently a Canadian college business instructor wrote to thank me "for maintaining your blog. I am sure that it seems a thankless exercise at times, but I enjoy reading it and it helps me to better understand the life insurance industry. I am quite looking forward to your comments in light of Sun's announcement of this morning [withdrawing from the sale of individual life and annuity policies in the U.S.], especially given your blog posts on Sun's U.S. business."

I have received several emails expressing similar expectations involving RickardsRead.com. I will indeed be devoting a future column (likely the next one) to comments on the changes at Sun Life since the Nov.30 retirement of CEO Don Stewart and the takeover by his successor Dean Connor. However in this column I want to share a few of the reactions I received to my comments about Manulife. [Insertions within square brackets are mine.]

A securities analyst in Toronto thought my Manulife comments were "Well said!! Let's not forget where was the central regulator [OSFI] as all of this was going on? Oh ... and if some Canadian life insurers want U.S. GAAP [I] wonder how they would feel about a U.S. P/B valuation on their shares? GAAP may have many shortcomings but markets are not that inefficient and know how to look through the weakness as the much lower valuations of some U.S. insurers can attest. ... Always enjoy your column."

This rocket came from a person associated with one of the big five Canadian banks: "Thank you -- and keep up the good work!! Bunch of goddamn [deleted] and the financial press says nothing. It was interesting to note that Berkshire [Hathaway] announced a ton of losses on derivatives on the same day that the Manulife [deleted] told us how they plan to make so much money on CDSs -- because they are 'experts' at credit?"

A life insurance broker connected with Manulife emailed to say that "I read your blog on a regular basis, and ... you are spot on with Manulife. The bloom is certainly off that rose. As a distributor for Manulife and several other insurers it has always been a puzzle as to why they consistently do what so many other manufacturers won't. I will say however from a retail perspective Manulife has done an excellent job building its brand in spite of itself. Anyway, the saying 'pigs get fat and hogs get slaughtered' fits the Manulife scenario. Insurers have always had the keys to the financial treasure chest,why is it that they must always try to blow themselves up?"

Another response to my Manulife column came from an American university professor of insurance who wrote to tell me that "you've done it again! I laughed out loud -- something that doesn't happen so often these days. Keep after 'em!"

A former senior executive at a major Canadian life insurance company also thought my Manulife comments were "well said!. Yours is at times a lonely voice as much of the financial media in Canada acts as a cheering section for the press releases of the likes of Manulife. They continue to be the darling of the analysts largely because they are the loudest of the voices at the table and have defined how to read the tea leaves."

On the other side of the matter an opinion from someone at Manulife posited that "someday the market will stop looking in the rear view mirror and start looking where Manulife is going. Interest rate sensitivity is 90% hedged, equity risk is 60% hedged. MCCSR was 241 last quarter .... I'm higher on Manulife than I have ever been and while I don't expect a great quarter, I think given the market it won't be too bad."

And finally on the subject of my comparison of Manulife with Sun Life, this flattering but hyperbolic comment from a former regulator: "Al, you have outdone yourself. Move over Conrad Black."

by Alastair Rickard

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(No.181) "The Sisters Brothers" & other reading

Many if not most regular readers of fiction have favourite authors. Some write novels featuring a continuing character who strikes a chord with the reader. I am certainly one among such readers.

In the last month or two I have been the beneficiary of many hours of reading pleasure provided by the recent novels of several of my favourite writers plus a couple of newcomers to my bookshelf. In this column I share references to several of these novels, all of which are recently published; some are not yet available in paperback. I enjoyed them all in varying degrees and I recommend them all.

Ian Rankin, "The Impossible Dead".

In the crime/police genre my longtime favourite fictional character is the now retired Scottish Detective Inspector John Rebus of the Border And Lothian (Edinburgh) police. He is the superb creation through numerous novels of Ian Rankin, a Scot who has now written a second novel featuring D.I. Malcolm Fox. He works in the Edinburgh police department referred to as "the Complaints", what in American terminology is usually called Internal Affairs -- the police who investigate the police. Fox has some similarities to Rebus but also significant differences. This Fox novel is even better than the first; a textured and multi-layered tale that suggests that the Fox novels will become as addictive as were those featuring Rebus.

Patrick DeWitt, "The Sisters Brothers".

Dewitt is a Canadian living in Oregon and this is his first novel. It has been a great success and was shortlisted for the Giller Prize and the Man Booker Prize and won both the Governor-General's Literary Award and the Writers' Trust Prize. This novel has been referred to by some critics as a "concept western", a reference that I think cloaks a fashionable unwillingness to acknowledge having enjoyed a 'western' set in mid-19th century Oregon and California. It is in fact a fascinating, well written novel that is certainly different in tone and style from what the reader may think of as a 'western' novel. Two brothers whose family name is Sisters are hired regularly as killers by an Oregon businessman. This story follows their travels on assignment down to and back from San Francisco during the California gold rush. Marvellous narrative.

T. Jefferson Parker, "The Border Lords".

For some years Parker wrote crime novels set in southern California, particularly Orange County. Generally his characters did not reappear in subsequent stories. However three novels ago he began a series featuring an L.A. Sheriff's deputy named Charlie Hood who has latterly been working along the California border with the ATF and involved with the violent world of drug cartels and cross-border smuggling of drugs and guns to and from Mexico. The Border Lords is the fourth in the Hood novels and maintains the standard of the earlier novels in the series.

Lee Child, "The Affair".

This is the latest novel in the series about the adventures of the loner Jack Reacher. What distinguishes it from its predecessors in the Reacher series is that it looks back and tells the story of how Reacher, a U.S. Army major in the military police, arrives at the point of leaving the army and beginning his aimless travels around America carrying just a toothbrush (although latterly reality has forced him to add ID and an ATM card). It is as violent and tough as any of Child's previous Reacher novels and just as absorbing. It is already a bestseller.

Peter Robinson, "Before The Poison".

Robinson, a Yorkshireman who came to Canada to pursue his graduate studies in English, is best known for more than a dozen novels set in Yorkshire featuring Inspector Alan Banks. They have been translated into 15 languages and published around the world. His latest novel, while set in Yorkshire, is not a Banks story. As its focus it has a recently widowed Englishman returned from a successful career as a Hollywood movie music composer. He buys a restored house in Yorkshire and becomes absorbed in examining a murder case involving a previous resident. The novel is both interesting and complicated.

Guy Vanderhaeghe, "A Good Man".

In my opinion A Good Man should have won the Giller Prize this year; it wasn't even short listed. It is the third novel in a trilogy set in the Canadian prairies in the late 1800s that began with The Englishman's Boy in 1996 and was followed by The Last Crossing in 2001. Much of this third novel takes place in Montana but it is as Canadian in tone and content as the first two novels. Vanderhaeghe, a Saskatchewan resident, is a superb storyteller and ranks as a fine novelist in this country or elsewhere.

John Sandford, "Bad Blood".

Sandford is the author of the "Prey" series of police novels. Bad Blood is the fourth in a newer series featuring Virgil Flowers, a detective in the state of Minnesota's special department whose members are sent to handle difficult cases in various locations in the state. Bad Blood sees Virgil sent to a small town to deal with a case that comes to involve a religious cult that practises paedophilia. The pace is brisk and there is a good deal of violence. In some ways Virgil Flowers represents an American opposite to Scotland's John Rebus.

Martin Walker, "Black Diamond".

Walker is a former journalist and author of a number of non-fiction books. Beginning in 2008 he published the first in a series of novels: Bruno, Chief of Police is the first, The Dark Vineyard is the second and Black Diamond is the third. The lead character is Captain Bruno Correges, the chief of police in a small French town in the Dordogne in the southwest of the country. There are mysteries to be solved but Bruno is up to it (his military background elevates his skill and experience well above what one might expect from a small town policeman). I have just discovered this series and it is most enjoyable reading: well written, gentler (if that word can be applied to crime stories) and more slowly paced reflecting its location. Lots of interesting information about wine and truffles and rural France today, all presented as part of a novel with a good plot.

by Alastair Rickard

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(No.180) J. Edgar Hoover, Clint Eastwood & Creepy Karpis

Recently to be found in movie theatres has been "J. Edgar", a biographical drama directed by Hollywood legend Clint Eastwood with Leonardo DiCaprio as J.Edgar Hoover. The film has received mixed reviews, perhaps to be expected when it is about a man whose self-created image as the leading American "G-man" of the last century began to crumble soon after his death at age 77 in 1972, still FBI director thanks to his secret files he used to blackmail American presidents and other politicians to keep him in office.

Whenever Hoover comes to my attention I think of an incident involving Hoover and Alvin Karpis (dubbed "Creepy Karpis" by cops and the media in the 1930s), an anecdote that Hoover ensured did not surface until many years after the incident occurred.

Karpis, who was actually a Canadian born in Montreal, became a famous American gangster in the 1930s, especially after he was elevated by the FBI to the status of "Public Enemy No.1" following the death of John Dillinger.

He was a bank and train robber who was said by the government to have killed at least 14 people. This was never proven although he was tried and convicted in Minnesota for a kidnapping for which he was given a life sentence and ended up in Alcatraz. He was captured in New Orleans by a squad of two dozen or so FBI agents at about 5 p.m. on a May 1936 afternoon. Hoover told the media that he had personally reached into Karpis' car, grabbed him and then disarmed him.

After Karpis was finally released from prison in Dec. of 1968 and then deported to Canada he related what had really happened that afternoon in 1936.

Karpis had been captured by the FBI agents and held standing beside his car. He looked over his shoulder towards a nearby street corner and saw Hoover peeking around a corner. An FBI agent called to him "Come on out boss, we got him" at which point Karpis relates that Hoover and his longtime second in command Clyde Tolson, "the gold dust twins" as Karpis referred to them in a Canadian interview (one I well remember seeing at the time), came down the street to where Karpis was being held prisoner.

Karpis ended up settling in Malaga Spain in 1973 and died there in 1979 under suspicious circumstances. He had lived modestly on the money he made from collaborating on a couple of books including his autobiography Public Enemy Number One published in 1971. He wrote it following his deportation to Canada. His second book published after his death, On The Rock (1980), was about his time in Alcatraz.

I read both these books (I think one or both have been reissued) and recommend them as no nonsense and interesting counterbalances both to Hoover's self-mythologizing and to any number of Hollywood myths involving people Karpis knew or worked with such as Ma Barker (a harmless woman shot to pieces by the FBI in 1935 and subsequently elevated to mythical status) and the 'Birdman of Alcatraz', Robert Stroud (a vicious head case).

Karpis was refused the parole he would likely have received sooner had it not been for Hoover's opposition (no mystery as to why). Karpis was incarcerated for 33 years (1933-69) and therefore was unable to say anything to the press about the phoniness of Hoover's personal crime-busting reputation.

After Karpis had been returned to Canada it was a different circumstance. Today one can read his books and also watch on YouTube excerpts from interviews done with him including his description of his capture in 1936 and Hoover's peek-a-boo part in it.

by Alastair Rickard

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(No.179) Economical Mutual & demutualization rules

In two previous columns (Nos. 159 & 166) I wrote about the demutualization of Economical Mutual Insurance, a large federally regulated property and casualty (P & C) insurance company based in Waterloo, Ontario. Its demutalization was proposed by the company board and senior management who are among the relative handful of people who hold less than 1000 voting ('ownership') policies in the company. Some of them apparently believe that the surplus/'equity' in the company can -- on demutualization -- be shared among the few to the disadvantage of the company's tens of thousands of non-voting policyholders.

This prospect was apparently such a stench in the nostrils of those who value fairness that the federal government, in the person of Finance Minister Jim Flaherty, announced at the end of June that it was launching a public consultation on what ought to be the framework for the demutualization of federal P & C insurance companies. This would be a regime that would apply to all such companies looking to demutualize, not just to Economical Mutual.

I urged those interested in the issues involved to write to the Minister of Finance. A number of people, including both insurance brokers and non-voting Economical Mutual policyholders, have since indicated to me that they have done so.

One person who made a submission needed no urging to do so. I refer to a former colleague of mine Claude Gingras, LL.L.,LL.B.,LL.M. who in my view is Canada's leading expert on the subject of insurance company demutualization. He was General Counsel for the Mutual Life of Canada from 1977 to 1995 and, thereafter, Special Advisor to Canada's Dept. of Finance until mid-2003. In this latter capacity he assisted the federal government in establishing a demutualization regime for life insurance companies that was used by the four major mutual life insurance companies (Manulife, Sun Life, Canada Life and Mutual Life of Canada) to convert to stock companies.

I agree with and endorse the points in Mr. Gingras' submission. Their cogency should make them irresistible to all but those most financially or politically self-interested in the proposed Economical Mutual Insurance demutualization.

For those who have followed this issue on www.RickardsRead.com here are key excerpts from Claude Gingras' July 28 submission to Ottawa.

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He notes that the June 30, 2011 announcement from the federal government asks: "Independent from the demutualization issue, the Government is seeking views on how mutual P & C companies can ensure that they continue to have an effective governance structure and whether measures need to be taken to increase the number of voting policyholders."

That the Department of Finance asks this question [Gingras states] and in these terms, is somewhat intriguing. The fact is that at least half of the mutual P & C companies under federal jurisdiction currently have a seriously defective governance structure that does not deserve to be "continued" at all, and this situation has been well known to the Government for a long time.

While the Insurance Companies Act (ICA) determines who has voting rights in a mutual life company, it is silent on this crucial governance matter for P & C mutual companies. Each P & C mutual is therefore free to determine to whom they will issue a voting policy. A number of mutual P & C companies have granted voting rights to all their policyholders by by-law, including for instance Wawanesa, a major company. However Economical [Mutual Insurance], another major P & C company, ... and a few smaller ones have reserved their voting policies mostly for directors, officers, staff and friends of the company, thus ensuring a very convenient and cosy entrenchment of management.

Aware of this disturbing situation, the Department of Finance put forward a proposal for legislation in its Consultation Paper of Jan. 2003 entitled "Corporate Governance of Financial Institutions" .... [It proposed] to "extend by legislation the right to vote to all policyholders of P & C mutual companies, subject to certain exclusions (e.g., policies of short duration or that fall below a certain premium value). One practical approach would be to extend the right to vote to policyholders upon purchase of a policy or renewal of an existing policy."

[Mr. Gingras then notes that] this 2003 proposal, together with others intended to protect and strengthen the rights and interests of policyholders following the massive demutualization movement that occurred in the life sector, was never implemented as the Government chose to give in to the powerful lobbies of the insurance industry ... which opposed all these measures. The industry even opposed a proposal, also abandoned, that companies be required either to consider the interests of participating policyholders in managing their participating funds or to act in a manner that is fair and equitable when managing these funds.

... I submit that the Government should implement the [2003] proposal in the ICA before even attempting to establish a P & C demutualization regime. Such a provision would not only facilitate the drafting of a P & C demutualization regime but would also ensure that the decision to demutualize is taken solely for the right reasons.

... Human nature being what it is, faced with the prospect of receiving humongous windfalls in the form of demutualization benefits and becoming instant millionaires, these [few P & C voting] policyholders may approve, or incite, demutualization without having the future well-being of their company in mind. ...

Many generations of policyholders have contributed to the accumulated surplus of their company and, ideally, should receive their share of the value of the company in the form of shares or as a portion of the proceeds of the sale of the entity on demutualization. Obviously that is not feasible and, in practice, participation in the benefits of demutualization is limited by the availability of records.

In a number of foreign jurisdictions the regulations require that all policyholders of the last 3 to 5 years be included in the payout of benefits but only the current policyholders are entitled to vote on the conversion. Benefits representing the value of the company are allocated to all these policyholders in proportion to the premiums they have paid during the whole period chosen.

This appears to be the most fair and equitable way to treat policyholders upon a P & C demutualization [emphasis added], taking into account that P & C policies are mostly short term contracts, while life insurance policies generally have much longer duration. ...

P & C companies have no participating policyholders as this expression is defined in the ICA. P & C policyholders entitled to vote carry exactly the same risk -- insolvency of the company -- as those without that right. ... Thus those voting policyholders have no greater claim to "ownership" of the company than those without voting rights. Consequently, they should not receive a greater benefit upon demutualization by virtue of their voting rights than the other policyholders [emphasis added].

Since 1997 a Canadian mutual insurance company has been allowed to issue equity instruments in the form of participating shares .... Therefore a mutual insurance company is not forced to resort to demutualization if it needs to access share capital for expansion or safety or soundness purposes.

In the information material to be provided to policyholders by a company seeking their approval of its demutualization, management should explain in detail why demutualization is sought, beyond platitudes such as "this is the right thing to do" and "the need to give the company to its rightful owners". The other options of the company beyond demutualization, including issuance of participating shares, should not only be explained to policyholders but policyholders should be told why these options have been rejected by management.

For smaller P & C mutual companies unable to effect a successful initial public offering and maintain a presence in the stock market, but wishing to demutualize, merger or sale of all the assets of the company to another entity could be the only avenue. ...

There is no doubt that the disappearance of mutual companies in the insurance sector will greatly reduce competition. Indeed, the presence of entities in which policyholders do not have to pay rent to shareholders forces stock insurers to keep premiums at a lower level than they would otherwise have set them. This was well understood in the countries that experienced a wave of demutualization in the life sector, as did Canada in the late 1990s. ....

Surely, if the current voting policyholders of the company [i.e., Economical Mutual] that first announces its intention to demutualize are allowed by Ottawa to become instant millionaires for no valid reason, the pressure will be great for the other P & C mutuals, where also only a small minority of policyholders have the right to vote, to follow suit.

The P & C sector in Canada is already dominated by foreign companies. It is reasonable to assume that most Canadian P & C demutualized companies would then pass into foreign hands. This would further reduce the market share of the Canadian companies in the P & C sector.... [and] the responsibility of the federal government [is] to ensure that demutualization does not occur mainly for the unjust enrichment of few policyholders.

Let's hope that Ottawa will find the courage to resist the pressure and establish a P & C demutualization regime that will be fair and equitable to all policyholders and that would not permit demutualization for the wrong reasons. ...

In a recent decision reversing corporate transactions involving policyholders' funds, which had been approved by Ottawa, an Ontario judge [Johanne Morissette of Ontario Superior Court] felt the need to remind the Office of the Superintendent of Financial Institutions of its duty to protect the rights and interests of policyholders when carrying out its mandate. Let's hope someone in Ottawa has been paying attention.

[The reference above is to an Oct.10, 2010 Ontario Superior Court judgement involving a class action by London Life policyholders against Great-West Life led by former London Life executive Bill Rudd; on this subject see also column No.118 posted Oct.8, 2010 to RickardsRead.com: "Great-West 0, par policyholders 1". The case was also the subject of an article by R.A. Rickard in the Dec., 2010 issue of Joseph Belth's periodical The Insurance Forum.]

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email: Alastair.Rickard@sympatico.ca

blog: www.RickardsRead.com

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