Sunday, July 31, 2011

(No.162) More on Manulife & Economical Mutual Insurance

I was prompted to recall recently a couple of matters on which I have strong opinions: Canadian vs. U.S. health care and the role of life insurance agents.

I received the other day an email from a Canadian living in the U.S. who apparently had been surfing the web and read my screed a couple of years ago on the (then) health care debate in the U.S. prompted by President Obama's attempt to provide all Americans with health insurance. I had written columns on the subject for (Nos. 47,48,51 & 55) as well as an op-ed article for the Toronto Star (Sept.9,2009), Canada's largest daily newspaper.

She wrote that "as a Canadian who's been living in the U.S. for awhile, I was glad to read your comments from Sept 2009 where you spoke about right wing propaganda regarding Canadian health care. That was so frustrating for me when I moved here. I remember being stunned at the outright lies about Canadian health care which were clearly put out there by the companies with the most to lose -- the insurance companies."

"My in-laws," she concluded,"are right wing and it's just painful to have to listen to their rhetoric like 'the US is the only country in the world where people can criticize the government and not go to jail!' sigh... Thanks for putting out some reason and sanity."

I replied to her and said, in part, that the reaction I had received from Americans to my views on health care in that country compared to Canada's were split about 50-50 between those who seemed to think that I was part of some left wing conspiracy to promote socialism and those Americans who agreed with me.

The other recent 'blast from the past' for me involved agents. I was retained to provide an expert opinion involving a dispute to which the parties were a life insurance agent, a client and a life insurance company. Reviewing the extensive documentation of the case brought back many memories of my association over the years with those who sell individual life insurance policies. They arose because of my working in the field as a financial planner with agents and their clients and then as an executive with agency system involvement employed by Mutual Life, Clarica Life and Sun Life and as the founding editor of the Canadian Journal of Life Insurance.

That experience, especially the initial period working directly with agents and their clients, gave me not only a valuable education about the reality of the core activity of the life insurance business (i.e., 'selling stuff') but also aroused my interest in the business to the extent that it left my erstwhile university colleagues nonplussed when I declined a doctoral fellowship in my heretofore chosen field of study (history) in order to follow my interest in the business. Working one-on-one with career agents was, more than any other factor, responsible for that decision.

Self-styled media experts and critics of financial services, especially involving the life insurance business, only occasionally have a sufficiently broad and deep understanding of the relevant realities. The value of an experienced life insurance agent/broker to a consumer of financial products and services is one of those realities. It is understood by, among others, those who are fortunate enough to have such relationships.

In this and other columns readers may have noted that I use the word agent rather than the more recently favoured and fashionable advisor. I do so not because life insurance agents don't act as financial advisors to clients -- they do. I prefer to use the word agent for two reasons:

1. Making a career as a professional life insurance agent is an honourable, valuable and longstanding role and there is no reason not to use that traditional reference, including for references to life insurance 'brokers'.

2. In the sale of individual life insurance policies in Canada there are in fact persons licensed as life insurance agents. Those engaged in the sale and service of life insurance whether as life insurance 'brokers' supposedly shopping the market place for consumers or as either non-exclusive or exclusive career agents are all licensed by their provinces as life insurance agents. These people are not licensed as financial advisors or in any other self-descriptive role not laid down in legislation or by regulation.

I have had some interesting responses to my recent column on "Economical Mutual Insurance: sham mutuality", column No.159 on, posted July 10, 2011. The demutualization of Economical Mutual Insurance is a subject to which I will return in future columns. However, although it is still early days in the process, it does seem to me very likely that the fewer than 1,000 participating policyholders of the company (out of the hundreds of thousands of the company's policyholders) will not be allowed by Ottawa to walk away from the demutualization of this P & C company with all of the company's net equity value (a $million+ per policyholder) or even with a majority share of it. Stay tuned.

Finally I will share a response I just received from a Canadian life insurance industry person to my last column on (No.161, posted July 24) "Manulife's retrocession: 'like a dog turd in dung'?":

"And here I thought I was just being cynical about Manu's stated reasons [for selling its life retrocession business]," wrote my industry correspondent. "And if the difference in regulatory diligence HAD been the reason for the sale, it makes one wonder about the potential safety issues now facing past and future reinsured policies .... Glad you're keeping a watchful and educated eye on all this!"

Gladder than some people associated with the insurance industry.

by Alastair Rickard




Sunday, July 24, 2011

(No.161) Manulife's retrocession: "like a dog turd in dung"?

In a column last April I said that Manulife was in the hunt for a buyer during 2011 of its life retrocession (reinsurance) business, Sun Life having already exited the retrocession business in Dec. of 2010. I also indicated that Manulife would not get as good a price as Sun had ("Sun & Manulife: bye bye retrocession", column No. 149, posted April 28,2011 on www.

For readers unfamiliar with the retrocession niche of the life insurance business, here is a definition (of sorts) of 'reinsurance for reinsurers', i.e., retrocession:

an insurance company (the retrocessionaire) reinsures an amount of life insurance (retrocession) placed with it by an insurance company (the reinsurer) that has already reinsured some or most of this risk which, in turn, it has accepted from the life insurance company (the original insurer) that issued the life insurance policy for a specified amount of life insurance coverage on someone's life ( the risk).

Manulife finally found a buyer for its retrocession block -- Pacific Life based in California -- and announced with considerable 'spin' that its decision to exit the retrocession was made, as the Globe and Mail reported Manulife's spin (July 19, 2011), "in large part because Canadian insurers face tougher capital requirements than those in other countries." Sure. Perhaps those who reside in a parallel universe will find this credible, people like Manulife's board of directors who have a record of richly rewarding lousy senior executive performance (see "Manulife = another Elvis sighting", column No.143 posted March 29,2011 to

The retrocession business has been in decline and increasingly a challenge financially for the two significant Canadian players -- Manulife and Sun Life. There are a variety of reasons for this several of which I listed in my April column. In fact, for those among the financial services paparazzi who are interested in an indication of how bad a place Manulife's retrocession business had reached, there are a couple of interesting numbers not included in Manulife's press release on which the Globe report so heavily relied.

1. Sun Life was never as large a player in the retrocession business as Manulife and indeed by 2009 had virtually disappeared from the annual company rankings of new assumed retrocession business. Sun Life sold its life retrocession business in Dec. 2010 to Berkshire Hathaway Life for a gain of $310 million after taxes. Even that sale excluded blocks of in force retrocession business that Berkshire wouldn't touch and that Sun had to retain.

2. Manulife's life insurance retrocession in force had been $97.3 billion in 2003 and stands, according to Manulife's recent media statement, at a net amount of risk in force of $106 billion (U.S.). It managed on its sale to Pacific Life to get an after tax gain of only $275 million for a much bigger in force block than Sun's. That is one indication of the Manulife retrocession block's real profitability and desirability. Moreover we don't know the dimensions of any life retro business in force that Manu couldn't sell and was forced to retain and will have to run off itself. The statement said nothing on that point but it's a good bet that Pacific Life (assuming it had genuinely expert advice about retrocession as part of its due diligence) left some of the retro blocks with Manulife, as Berkshire did in the Sun Life sale.

The Globe's July 19 article was headed "Capital rules prompt Manulife to sell division". A more informative headline would have read: 'Manulife finally gets out of a business it won't admit it should have left long since'.

I received an interesting email on the Manulife sale from an experienced senior life insurance industry executive. It is frank, informative and to the point. [My insertions are within square brackets and in italics.]

"Naive buyers are often the best buyer if you are a seller [of reinsurance retrocession], " he wrote. "The retrocession business (at least the blocks that have grown over two decades) can be like a dog turd buried in a quagmire of dung. Unless you know what you are doing and understand what you are looking for, you will end up smelling for years.

"Pacific Life is as close to a naive bidder as you could get. This [purchase] looks like a great way to fatten [ a company's] in force [of total insurance] and grow a top line and indeed, if priced right, it can be. ... I would guess that in the end Pacific Life is not as "experienced" [as Berkshire Hathaway] and thus my naive label.

"One can fall back," he concluded, "on the 'regulatory' label as a reason to sell since it is hard to challenge. The days of high flying retrocessionaires are over and the new [retrocession] business is priced way too thin or is of inferior quality and subject to more volatility. Manulife, like Sun, knew the end was here -- and not just near -- and the cash infusion helps them in other areas. [The Manulife sale is] a pure financial business decision cloaked in a regulatory guise that the press will accept and thus the story ends."

To my correspondent's comments I would add this:
Manulife's senior management took far too long to wake up to the fact that the retrocession business was turning into a problem. But this is part of a pattern; senior management's judgement ultimately brought Manulife to the edge of the financial precipice through the chasing of risky additional profits by abandoning in 2004 (as Sun Life never did) the hedging of the company's risk on the billions of variable but guaranteed annuity business that it was selling. It did so in a fashion reminiscent metaphorically of a drunk oblivious of the danger inherent in excessive consumption of alcohol.

by Alastair Rickard




Sunday, July 17, 2011

(No.160) The Great Stink [and other vacation reading]

When summer vacation time arrives some people actually do read (or say they read) the sort of 'serious' books they wish to be known for reading but many more -- perhaps most of us -- prefer to relax with a mystery rather than with Proust, with one of Alan Furst's masterful evocations of pre-war Europe or with the latest adventure of Lee Child's Jack Reacher rather than long postponed Samuel Beckett or James Joyce.

I belong to the relaxation group and in my clan a book that is fun to read is worthwhile for itself; it doesn't have to be significant based on having redeeming literary qualities or social value. So, here's a list of several books I think provide enjoyable reading for vacation time. All are available in softcover.

The Great Stink (Harcourt, 2006) is the first novel by Cambridge don Clare Clarke. Set in London of the 1850s its focus is the city's sewer system, an engineer returned from the Crimean War hired to transform it and crime in this subterranean world. It is fascinating, realistic and researched so well that the reader can almost smell the sewers.

Far Cry (Arrow, 2010) is written by the English novelist John Harvey, author of a fine series of eleven crime novels featuring Nottingham's Detective Inspector Charlie Resnick. Harvey has written other non-series novels and Far Cry is a recent one. It revolves around the disappearance, years apart, of two daughters of the same mother. Harvey's plot and writing are, as always superior.

Storm Prey (Berkley,2011) is the 20th of American novelist John Sandford's crime series featuring policeman Lucas Davenport. A drug robbery occurs at a hospital in which Davenport's spouse, a surgeon, works and unwittingly sees one of the robbers. As a potential witness she becomes a target and protecting her is interwoven with catching the robbers. Pleasant enough reading but not up to the level of reader enjoyment to be derived from, say, Lee Child's Reacher novels.

Djibouti (Morrow,2010) is written by the novelist many thousands of readers have long regarded as the gold standard for well plotted American crime stories: Elmore Leonard, now in his 80s. This novel has a rather unusual plot involving an American documentary filmmaker and her sidekick who set out to make a movie about Somali pirates. As a longtime reader of Leonard's novels, I did not find this one as enjoyable as, say, Get Shorty or Rum Punch or many of the other 40 or so he has written. Still, a less enjoyable Leonard novel is still worth reading.

One Soldier's War (Grove 2007) is not a novel. Rather it is a very interesting and insightful memoir written by the Russian Arkady Babchenko (translated by Nick Allen). Now a journalist Babchenko was conscripted into the Russian army and served in some very nasty campaigns undertaken by the Russians since 1994 in Chechnya. As a sometime student of military history I was the most surprised not by the brutality faced by Russian conscripts served up by their own officers (both commissioned and non-commissioned) or even by the viciousness of the Chechen campaigns. Rather I was particularly struck by the inefficiency and logistical incompetence and incapacity of the Russian military so long after it had retreated from Afghanistan.

Lustrum (Arrow,2009) is a political thriller set in Rome ca. 63 BC told by Tiro, the secretary to the consul Cicero. Like all of Robert Harris' novels (my favourite is still Fatherland) it is a book so interesting, well researched and plotted and written that it is very hard to put down. The story told in the novel involves the struggle for power in Rome among seven men including Cicero, Julius Caesar, Pompey and Crassus.

Fatal Last Words (Portador,2009) is the umpteenth novel in Quintin Jardine's successful and long running series featuring Edinburgh policeman Bob Skinner and his loyal associates on the force. In this novel a famous Scottish crime novelist is murdered while at a book festival. Skinner, although he is now Deputy Chief Constable, naturally becomes involved in the case. Complications ensue.


by Alastair Rickard



Sunday, July 10, 2011

(No.159) Economical Mutual Insurance: sham mutuality

Economical Mutual Insurance, a group of property and casualty (P & C) insurance companies whose origins are in Kitchener Ontario in the 1870s, has for the past year and more been engaged in a struggle of sorts with a dissident minority of its par policyholder owners who want the company demutualized and its surplus released to its 'owners'.

The decision has now been made to demutualize and become a stock company but the process must wait on Ottawa to develop and set down the rules governing demutualization for this mutual company. (Economical Mutual is large and federally regulated but not all P & C companies operating in Canada are.)

More than a decade ago Ottawa (i.e., the Department of Finance in whose bureaucratic province resides the regulator OSFI -- the Office of the Superintendent of Financial Institutions) went through this same process for federally regulated life insurance companies. Four large life insurance companies did demutualize: Mutual Life of Canada (which then changed its name to the medicinal-sounding Clarica), Sun Life, Manufacturers Life and Canada Life. Another certain candidate for demutualization, Confederation Life, had already disappeared into federally-supervised insolvency.

On June 30 this year the federal Minister of Finance Jim Flaherty launched a public consultation "aimed at developing a framework for the demutualization of federally regulated property and casualty mutual insurance companies." Among other things he said that he wanted to ensure that "policyholders are treated fairly and equitably [because] mutual P & C companies are owned and governed by their policyholders ....[emphasis added]."

Indeed a mutual insurance company should be regarded as being owned by its participating policyholder owners -- if in fact the mutual insurance company has not been operated, as Economical Mutual has, as a burlesque of a genuine mutual insurance company.

With the recent demutualized life insurance companies in Canada only Mutual Life had almost no non-par policyholders. Virtually all Mutual Life's individual life insurance policies were designated as participating, even Mutual's universal life policies. Hence their owners also received a share of the distribution of company value on its demutualization.

It is true that Sun Life, Manulife and Canada Life had proportionately many fewer par policies in force than did Mutual Life but they all had a significant minority of par policyholders. As a class they did particularly well out of demutualization because the corporate largesse was spread thicker rather than more thinly over all policyholders as was the case with Mutual Life.

The fact was that these three life insurance companies had no history or culture of mutuality as Mutual Life did, having been founded as a mutual in 1868 and as Economical Mutual was in the same Ontario community in 1873.

Sun, Manu, Canada and Confederation were all founded as Canadian stock life insurance companies in the 19th century and changed to mutual status in the late 1950s and early 60s only because it was a way federal Supt. of Insurance K.R. MacGregor offered them, after they had approached him for help, of their avoiding foreign takeover. Their senior managements and boards of directors never believed in mutuality as a superior way of conducting the insurance business. Eventually the companies' senior executives began gazing longingly at the stock company model and the green pastures of executive stock bonuses -- to all of which they happily and eagerly repaired once Ottawa came up with a regime to govern demutualization of life insurance companies.

What makes the Economical Mutual situation so risible also calls into question federal regulation. Founded as a mutual the company was allowed to operate as a mutual that was de facto far nearer to a closely held private company than to anything remotely recognizable as a true policyhold-owned mutual insurance company.

By the 1970s Economical Mutual had barely 100 par policyholders owners. After a supposed campaign by the company over 30+ years to raise that number, the total of its par policyholder owners had risen all the way up to a stunning 600 or so. What a magnificent effort and result! Today the company has more than 1.3 million policyholders [sic] of whom fewer than 1,000 are holders of par policies but who are -- if you believe the company's chairman, among others -- also the owners of the company. What a farce.

How could this be?

Before the life insurance companies demutualized any Canadian who wanted to purchase a participating life insurance policy from Sun or Manu or Mutual or Canada had only to apply for a par policy (rather than for a non-par policy) and if the application passed underwriting the policyholder became an owner of the company. Not with Economical Mutual and the way Ottawa allowed it to practise its sham version of mutuality. Indeed so seemingly determined were the vested interests involved with Economical over the decades to ensure that clients did not become par policyholders and therefore owners of the company that eligibility barriers to the purchase of par policies were maintained that make new member access to a restricted country club look like 'come one, come all'.

In order to be able to purchase a par policy, even supposing the would-be client was even aware of the existence of such policies as something that could be issued by Economical and would make the purchaser an owner of the company, the bar over which the client would have to jump was comprised of a variety of requirements which ensured only rare interest and access. Perhaps the most important element in keeping down the number of par policyholders was the extent to which the several hundred 'independent' agents through which the companies' policies are sold even raised with clients the subject of taking out a par policy, assuming these agents were actually aware of the subject themselves.

The federal Dept. of Finance has posted a public consultation paper on its website [] under the heading "Demutualization Framework for federal Property and Casualty Insurance Companies"; it includes various "Issues for consideration". This was prompted by the proposed demutualization of Economical Mutual Insurance because it is the first federal mutual P & C company to demutualize.

The issues to be considered include the posing for public consultation of questions involving equitable distribution of the "benefits of demutualization"; Economical Mutual has surplus (policyholder equity) of $1.4 billion. Finance also raises questions about a "small" voting policyholder base" vis-a-vis "effective governance of a mutual company". Indeed it should.

Ottawa needs to be on guard against requests for inequitable financial treatment not just favouring the small number of Economical Mutual's par policyholders but also anything smacking of special treatment for members of the company's senior management or board. In talking with Ottawa about demutualization the major mutual life companies quietly tried out the idea of an of allocation of some of the demutualized companies' shares to members of the companies' senior executives citing an Australian precedent. Fortunately for the cause of fairness Ottawa wouldn't fall for that one.

Finance Minister Flaherty is to be congratulated for initiating a public consultation on P & C demutualization before the regime is defined. Clearly the federal regulations need to be developed so as to direct a process that requires distribution of policyholder equity to be made to all or the bulk of Economical Mutual Group policyholders ( all the policyholders of the various group companies are in the same boat in terms of phoney mutuality). As was the case with the Canadian mutual life insurance companies a formula can be devised that is equitable to policyholders of the company according to a reasonable set of assumptions involving the number of policies owned by a policyholder (individual and corporate), the length of time in force, size of the premiums paid, etc etc.

The recent public speculation about each of the handful of par policyholders receiving $1 million+ of value on a demutualization of Economical Mutual would be patently silly if it were not something they have been encouraged to take seriously. The fact is that 'ownership' of Economical Mutual by its par policyholders was maintained at restricted and ridiculously minuscule levels for decades. Nothing can justify distribution of the policyholder equity in the company to other than the bulk of its hundreds of thousands of non-par policyholders generally rather than to its platoon of par policyholders.

If I were a non-par policyholder of one of the Economical Mutual P & C companies (and I am not) I would be writing to Minister Flaherty (as I am doing) and to my MP and to the Department of Finance. I would demand that Ottawa require the company's policyholder equity be widely and fairly distributed given how the practice of mutuality has for so long been made a mockery with access to par policy ownership of the company kept out of reach of nearly all potential buyers.

It would also be appropriate to argue, as I am also doing in this column, that the governance of Canadian federally regulated P & C mutual insurance companies requires an immediate and major overhaul so that nothing like the Economical Mutual travesty can be either repeated or continued.

[Finance is inviting comments from any interested party until July 31,2010.]


the consultation paper is posted on Department of Finance's website --

email comments to --

Minister of Finance Jim Flaherty's email address is --

the email addresses of Members of Parliament are listed at -- of parliament


by Alastair Rickard



Friday, July 1, 2011

(No.158) Shaw Festival: Heartbreak House & The Admirable Crichton

The Shaw Festival, staged each year in Niagara-On-The-Lake in Ontario, is marking its 50th season. Eleven plays are being presented in its four theatres.

Pat and I recently saw George Bernard Shaw's Heartbreak House which opened May 10 and runs through Oct.7 and we attended (in preview) J.M. Barrie's The Admirable Crichton (June 22 to Oct.29). Both productions are at the Festival Theatre.

Heartbreak House, which some have ranked among Shaw's best, isn't. However this season's Shaw Festival production, directed by Christopher Newton, the Festival's former artistic director, is more interesting than the reviews and ratings of Toronto newspaper theatre critics may have led readers to believe. Both the Globe and Mail's Kelly Nestruk (May 27) and the Toronto Star's Richard Ouzounian gave it 2 1/2 stars out of 4.

As is often the case in my experience the best and most insightful of the reviews of the play that I have read was by Robert Cushman in the National Post (May 28). Cushman, like the theatre critics of the New York Times, blessedly eschews assigning a star rating to a play.

Shaw wrote the play ca 1916 during World War I but it was not produced until 1920 in New York and 1921 in London. While he intended it as an indictment of the English class system and the precipice of war over which, in his view, English society's leadership had taken a generation, the play is in parts as much a comedy drama as straight drama.

Set in a Sussex country house in Sept.1914 it sees Ellie Dunn, her father and her fiance Boss Mangan invited to the house for a dinner party. She seeks to marry wealth and her fiance is a businessman and scoundrel, her father appears to be a timid bumbler and she's actually in love with her hostess' husband.

Shaw works hard at developing the theme that reality and appearance are separated by a chasm. Faithful to Shaw's concept, the Shaw production takes place in a large room designed to replicate the interior of an old-fashioned wooden sailing ship. Its owner is an old sea captain named Shotover.

Shaw's Heartbreak House is strongest in the first act when the dialogue reminds one a bit of Oscar Wilde. The second act is a bit less effective and in the third Shaw seems to me to have been trying too hard to drive home the 'message' of his play. The latter part of the play approaches the pretentious and the sententious.

This is the sixth time the Festival has mounted this play during its half century and twenty-five years since Newton last directed it. Given the material provided by the play this Shaw Festival production of Heartbreak House is, overall, a strong one -- as is its cast. It provides an interesting evening in the theatre.

The other play we saw during our latest Festival visit, The Admirable Crichton, was written in 1902 by J.M. Barrie, the Scottish playwright better known for having written Peter Pan. It too has its focus on the English class system and, although a comedy drama, is rooted in the observation by Arthur Conan Doyle that "if a king and an able seaman were to be wrecked together on a desert island, the sailor would end as king and the monarch as servant."

Barrie turned this seed into a play about the English class system. Lord Loam, his family and servants are shown in his London mansion where his lordship insists on his servants having tea once each month with him and his family -- much to the chagrin of his butler Crichton who opposes such role reversals. Then Lord Loam and his household, having set sail together in a private yacht, are marooned on a desert island. The roles of master and butler become reversed until the point at which everyone two years on is rescued.

The Shaw production's cast, led by Steven Sutcliffe as Crichton and Nicole Underhay as Lord Loam's daughter Mary, are more than capable. However their performances carry the burden of having to offset 'enhancements' of the Barrie play with which its director Morris Panych has lumbered the production. He has turned Barrie's play into a dog's breakfast.

This could easily have been avoided by not moving the setting of the play to the 1920s, by not inserting 1920s-style pop songs plus accompanying choreography into the play and by not having a half dozen performers masked in various animal and bird heads wearing grey suits and prancing about from time to time. This production of The Admirable Crichton is a curiosity and does not work as a half-baked musical.

Presenting a long and well established piece of English literature successfully as theatre can be done without recourse to the insertion of affectation and anachronism, no matter how precious a director or even theatre critics may think they are. I recall an excellent stage presentation a couple of seasons ago based on Jane Austen's Pride and Prejudice by London, Ontario's Grand Theatre (artistic director Susan Ferley). It was a solid and enjoyable production which respected its source material and never left me wondering 'what in hell are they playing at?'.

Special note: Pat, my partner in theatre going as in life, does not agree with my critical comments about the Shaw's production of The Admirable Crichton. She enjoyed the play including the 'enhancements' in the Shaw Festival production to which I have just referred unfavourably.


Niagara-On-The-lake is a charming town in the heart of Ontario's wine country. Vineyards and good restaurants abound.

On this trip Pat and I enjoyed our meals at several restaurants:

-- Terroir La Cachette at the Strewn Winery []
-- Escabeche restaurant at the Prince of Wales Hotel []
-- Shaw Cafe and Wine Bar [www.]
-- Grill On King []
-- The Pub at the Moffat Inn []

Further contacts and resources:

-- (plays)
-- (information)
-- (B & Bs)
-- (theatre packages)

by Alastair Rickard