Thursday, October 8, 2009

(No.57) Me & mutuality: for whom the bell tolled

Before joining the life insurance business I had several jobs and along the way earned three university degrees in history. The non-financial services experience was valuable to me as was the training in history although my graduate degrees made me an object of suspicion among some people in an industry still prone to regard such ivory tower achievement as indicative of one who was apt to have only a tenuous grip on what they regarded as 'the real world'.

My study of history has, among other advantages, helped me gain an understanding of the importance of learning from the past as well as informing my understanding of the present and occasionally some possible features of the future. However, learning from the past is not something I observed as being all that common a trait among life insurance executives or, come to that, executives in other pillars of financial services.

In terms of my education in the reality of the life insurance business, at root a business dependent upon selling stuff, the most valuable part came early on working in the field as a financial planner with career agents of Mutual Life and their clients. Indeed it was that experience which both created and propelled the growth of my unlikely interest in the business.

I well remember during drinks following my defence of a thesis that my erstwhile colleagues in Milton's grove of academe made clear their view that I had lost my ability to make wise judgements, the evidence for which was my having declined a Canada Council fellowship I had won (and had deferred taking up), thereby stepping off the path to a professorship in favour of pursuing my then budding interest in the life insurance business. I was not deterred by their scepticism.

Within a very few years I had cause to reflect on the quality of my judgement compared with that of two of the professors who had shared their opinions over sherry that afternoon: one ended up in prison while another was murdered by a stranger he invited to his Mexican hotel room.

The company I had joined was the Mutual Life of Canada (founded in 1870), the first and the only significant Canadian mutual life insurance company founded as a mutual. The other big Canadian companies in this category (Sun, Manufacturers, Canada, Confederation) had all been stock companies that mutualized in the late 1950s and early 1960s as a means of avoiding foreign takeover, an optional solution to their problem devised for them by then federal Supt. of Insurance K.R. MacGregor.

By the time I entered the industry these 'stock company mutuals' were chafing at the organizational restrictions imposed by mutuality, an approach to the life insurance business and to policyholder ownership and benefit in which their senior managements (it seemed to me) did not believe and to which they paid no more than lip service in any case -- and precious little of that. Only in Mutual Life had a fairly significant tradition and reservoir of belief in and practise of mutuality survived down the years.

The tolling of the final bell for a fine, historic Canadian company, one owned by its participating policyholders in Canada, began on Dec 8,1997 when Mutual Life's senior management and board announced that the company would demutualize and become a stock company (Clarica Life). Within the company this event had been presaged some time before, a signal some picked up while most did not, by senior management's newly discovered obsession with mutual company equivalents of irrelevant stock company ROE numbers.

The tolling of the bell concluded on Dec 17,2001 with the announcement of the purchase of Clarica Life by Sun Life (also demutualized). However the disappearance of Mutual Life (like Canada Life) was inevitable once demutalization had occurred and Ottawa's short term post-demutualization protection from takeover applicable to them had expired. Neither Mutual Life nor Canada Life was the beneficiary of the sort of ongoing backstop of federal 'permission for takeover' enjoyed then and since by both Sun and Manulife.

The fact that only half of the quartet of big demutualized Canadian companies (Confederation Life having become insolvent) had protection going forward is something for which the senior managements of Mutual Life and Canada Life, so eager to have their companies become stock companies available for takeover (which of course they were), can share as much blame -- or credit, depending on one's point of view -- as the feds.

Some of us who were associated with the Mutual Life of Canada will continue to remember job satisfaction not associated with a quarterly results perspective, nor with decisions aimed at winning smiles of approval from institutional investors, financial media, rating agency analysts and various toads in the life insurance garden, nor with the priority routinely accorded in recent years to the financial aggrandizement of a financial services company's senior management group.

Alastair Rickard