Monday, November 28, 2011

(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 here are key excerpts from Claude Gingras' July 28 submission to Ottawa.


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 "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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Friday, November 18, 2011

(No.178) Sun Life: nails & screws

Years ago, at a time in my life when I still thought I might follow my graduate studies in history all the way to a lifetime career in the academy (I didn't), one of my favourite historians was the English don Sir Lewis Namier.

Historians are every bit as waspish in their rivalries with peers as are (I later observed) business executives trying to climb the greasy corporate pole.

Namier once said of one of his distinguished peers that "the trouble with Herbert Butterfield is, he swallows a nail and shits a screw." It was an impolite way of referring to writing that is at best unhelpful, that addresses a matter that seems clear but obscures rather than clarifies it.

I recall Sir Lewis' comment when I think about the analysis and commentary in the past decade and more about Manulife on the one hand and Sun Life on the other. Too much of it has fallen into the familiar traps of sycophancy in the case of Manulife and disdain (or at best insufficient attention) in the case of Sun Life.

As I indicated in my last column (No.176) "Manulife jabberwocky" posted Nov. 13 and in a number of previous columns, e.g., "Manulife myth & Sun Life reality" (No.173) posted Oct.1, 2011 on, the management of the two companies, especially in terms of protecting financial safety, has been rather different. Yet for years many of the financial community's analysts and commentators buzzed around Manulife under its then CEO Dominic D'Alessandro like groupies around a rock star.

I receive emails from people associated with both Sun Life and Manulife following any column dealing with one or both of the companies. When Sun's CEO Donald Stewart sent an email to Sun employees on Oct 17, the same day the company announced in advance its anticipated loss in the 3rd quarter, it was not well received in some quarters within the company.

The context that needs to be understood is this:

Sun's senior management has gone out of its way to downplay its reliance on the profits from its Canadian operation in favour of a steady stream of blather about how wonderful are Sun's operations in the ever so much more important markets outside this country. When I was still employed at Sun Life my objection to this attitude was one of my frequently exercised hobby horses.

Sun's Canadian agents, managers and staff are, of course, fully aware of the extent to which they continue to provide financial support for the often money-losing Sun operations outside this country. As their operating budgets are squeezed they would at the least appreciate receiving rather more public and internal credit from Sun corporate management where it is due.

Its insufficiency does not serve the cause of improved morale. Consider as an example what a Sun Life manager wrote to me on Oct 18 (the official Sun Q3 results were not released until Nov.2):

"I think there is a story that is being hidden by Sun Life senior management and the advisors [i.e., Sun's Canadian career agents who generate the lion's share of its individual sales] are really suspicious what the real story is! In all past emails re quarterly results, the profit or loss per country was broken down so we could see where the worldwide results came from but they are completely missing this time. Also, this loss took everyone by surprise ....

"It is true that interest rates are low but no lower than the Q1 and Q2 when we had good profits. I wonder (and many advisers are also questioning) if somehow Sun Life erred in their hedging strategy and incurred large losses with respect to the stock market and the segregated funds.

"I am convinced that these guys are not revealing what exactly went wrong and now they are also projecting a huge Q4 loss. It will be only a matter of time before they squeeze expenses again in the Canadian operations to help reduce the real reason behind the bleeding that is being masked in the clever words in Don Stewart's [Oct.17] email."

It appears to me that Sun's early sharing of a little company detail may have been, on balance, counterproductive in its effect on its Canadian sales force if not its staff generally. What explanation was offered at that time raised more questions than it answered. Sun can ill afford to have the people in the most reliable of its operations suspicious not only of facts but senior management's motives.

Among the five business segments of Sun's worldwide operation (Canada, U.S., MFS -- its American mutual fund business, Asia and Corporate) three had Q3 net income with a very modest $11 million for Canada -- but still a plus; the U.S. operation continued to be a profit drain with a loss of $569 million.

Sun Life's Sept.30 year-to-date results demonstrate yet again the importance to Sun's total results of its Canadian operation: in the first 3 quarters of the year the Canadian operation had net income of $483 million while its total operating results show a loss of $325 million.

Since Kevin Dougherty's Jan. 2010 return as president of the Sun Life Canadian operation (welcomed by most Canadian agents and staff) some progress has been made in getting a bit of 'extra' money 'invested' in agency distribution which is a key to continuing and increasing profits from this most reliable and consistently profitable part of the Sun empire (Q3 individual life and health insurance sales in Canada were up 9%).

But corporate 'investment' in the Canadian operation's key career agency distribution system has been, by comparison with the corporate treasure being sucked up by activity outside Canada, virtually invisible.

As for Sun's forecast 4th quarter negative result (involving an expected one time hit to net income of $550-$650 million), it strikes me as being consistent with Sun's longtime approach to financial safety. Sun says it is going to amend the valuation of its variable annuity and seg fund business in order to "provide for the estimated future lifetime hedging costs of those contracts in our liabilities."

One of the things Sun Life corporate management needs to do is a much better job of communicating clearly and fully with its own people, especially in Canada. Otherwise they can expect their credibility to decline further in the medium to longer term.

To paraphrase Sir Lewis Namier for the benefit of Sun Life corporate management: don't swallow nails and shit screws so that Sun's Canadian agents and staff aren't forced to parse every sentence coming from the white tower in Toronto searching for the real meaning, having to examine management's words as if they were tea leaves.

by Alastair Rickard




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Sunday, November 13, 2011

(No.177) Manulife jabberwocky

In an Oct.1, 2011 column ["Manulife myth vs Sun Life reality" on (No.173)] I commented on several matters related to Sun Life and Manulife including the role of retiring CEO Don Stewart as well as the disparity in the perception and treatment over time by the media of the companies' respective performances.

On Oct.17 Sun Life announced, ahead of the official release of its 3rd quarter results on Nov. 2, that it anticipated a loss for the quarter. It is worth noting the context established subsequently by the respective 3rd qtr 2011 results reported at the beginning of November by Sun Life and Manulife:

1. Sun Life: an operating loss of $572 million compared with operating net income of $403 million in Q3 2010;

2. Manulife: a loss of $1.28 billion compared with a loss of $2.25 billion in Q3 2010.

It is worth noting that Manulife CEO Donald Guloien served at the right hand of his predecessor Dominic D'Alessandro during a management regime, one which appeared at times to operate within a self-constructed reality, which exposed Manulife to the massive unhedged financial risk which is still hammering the company. In announcing Manulife's 3rd quarter results Guloien declared that " we are pleased [sic] that our hedging program worked during these volatile markets, eliminating the majority but not all of the risk. It gives us the resolve to extend our hedging program further ...."

Let's translate Guloien's doublespeak:

'Manulife, which ceased in 2004 to hedge the massive financial risk to the company of the $billions of guaranteed variable annuities it was selling (the effect of not hedging was to inflate profits and senior management compensation) has -- since Manu went into a financial ditch -- been trying to find the money to belatedly hedge as much of this in force risk as we can afford to do. Because we are continuing to have the financial crap kicked out of us we have to keep working toward a level of hedging protection related to that risky business which Sun Life never stopped maintaining.'

Not content with his corporate spin CEO Guloien goes on to point out how much more Manulife, a Canadian company, would have had in third quarter earnings under a U.S. regulatory regime than its Canadian one. Indeed he argues that "regulatory risk is the biggest risk to our [Canadian life insurance] industry."

Oh what a shame for poor Manulife! What codswallop.

Manulife shareholders and policyholders would have been the parties to deserve one's sympathy even more than they already do had Manulife senior management (who were happy to roll dice in Canada) been subject instead to the oh so desirable sort of 'freedom and flexibility' of a U.S. financial regulatory regime which both allowed and encouraged the 2007-2008 financial crisis. It is a regime which can now be clearly seen to be one of the inevitable outcomes of the cloud-cuckoo-land Wall Street had become -- and to a significant extent still is.

To the extent that Canadian life insurance companies will be required to maintain higher capital ratios than heretofore, so much the better for their policyholders. And the senior managements of Canadian companies would do well to spare the public their pissing and moaning (via the financial media) about the hardship imposed by mark-to-market valuations.

Security of their money, not obscene levels of executive compensation rewarding incompetent or at best mediocre management, is what informed policyholders will support. So will political interest, all the more so because of the political bows still being taken in Canada for the 'safety and superiority' of Canadian financial services during the international financial crisis.

(I will turn to the subject of Sun Life's third quarter results in a future column.)

by Alastair Rickard



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Wednesday, November 9, 2011

(No.176) Barcelona: 3 of its treasures

On the second visit Pat and I made recently to Barcelona in the Catalan region of Spain there were many worthwhile places left for us to visit -- as indeed there would be on a third, fourth or fifth visit.

One of the barcelonin best known to the world is Antoni Gaudi, the Catalan architect and designer whose church, La Sagrada Familia, is still a work in progress a century after its beginnings (see "Strange meets unusual: Barcelona's Sagrada Familia", column No. 127 posted Dec.14,2010 to Between 1885 and 1914 the work of Gaudi and Modernista movement architects help endow modern Barcelona with its unique public face.

A commercial failure with which Gaudi was associated is today a major attraction. It is the 15 hectare Park Guell. At the beginning of the 20th century Barcelona banker Count Eusebi Guell decided to construct on the slopes of Barcelona's Muntabya Pelada an English-style village of 60 homes for the wealthy to occupy.

Guell was a patron of Gaudi who took on the job and designed, among other features, a showcase home in which Gaudi actually lived for a time plus extensive landscaped gardens. The project attracted no buyers and ca 1923 Guell donated the park to the city. Only two houses were built but the park and Gaudi's designs including three curved viaducts and most of the existing vegetation were kept.

Park Guell has been an impressive and centrally located public facility in Barcelona ever since it was donated to the city. It showcases Gaudi's unique work in a nature setting. Today the spired Casa-Museu Gaudi, where the architect lived for much of the last two decades of his life (1906-1926), is a Gaudi museum which includes memorabilia and furniture he designed.

Beneath an unusual 'market square', where sellers gather to hustle stuff to tourists, is an area featuring 86 columns. The space above it is circumscribed by a "wave bench", a continuous stone bench decorated in coloured mosaic.

Park Guell is an unusual and fascinating place and, despite the crowds of tourists and barcelonin who visit, one not to be missed.

Sources, see:


If Park Guell is crowded with punters when one visits ( a distinct possibility, depending upon the day and time of year) the Monastery of Pedralbes will not be.

It is a quietly impressive complex of buildings the origin of which is in 1327 when the monastery was founded by Queen Elisenda de Montcado. From its inception the monastery was occupied by Poor Clare nuns, the female branch of the Franciscan Order. Today nuns of the Order still live in one part of the monastery.

The Monastery is one of the ten or so sites which are part of the Museu D'Historia De Barcelona. A ticket purchased to visit the monastery gives the visitor access to other sites.

The monastery is a fine example of Catalan Gothic architecture including the church and the three story cloister. The latter is considered to be one of the most spacious and graceful in this style anywhere.

Around the central cloister which is open to the sky are the day cells formerly used by the nuns. The garden and fountains of the cloister offer a quiet beauty and an impressive sense of religious and historical continuity. The church itself contains the tomb of Queen Elisenda, and it is appropriately lit by 14th century stained glass windows.

Also available for viewing are the abbey chapterhouse, the refectory, the kitchen, the Dormidor and the infirmary, one of the last examples remaining of a Renaissance hospital building.

The Dormidor, the nuns' old sleeping quarters, houses an exhibition "The Monastery Treasures". It is a selection of the artwork, furniture and religious objects accumulated over seven centuries.

The Monastery of Pedralbes is an impressive place to visit. The pleasure is enhanced by the quieter atmosphere provided by far fewer people wandering around than at Park Guell. The monastery lacks the celebrity appeal of the Gaudi name and in some respects this is a benefit for visitors seeking a quieter, less crowded site ( see "Antoni Gaudi of Barcelona", column No.125 posted Dec.2, 2010 to

sources, see:


Since 1990 the Pedralbes Palace (Palau Reial de Pedralbes) has housed the Museum of Ceramics (Museu Ceramica). Today it also has an extensive permanent exhibition of clothes through several centuries, "Dressing The Body", plus a large exhibition on design "From The One-off Object to Product Design".

The original buildings date from the 1880s and were until ca 1918 the house of the Guell family. King Alfonso XIII of Spain had the palace built by extending the buildings between 1919 and 1924. He thought there was nowhere in Barcelona at the time suitable for royal functions.

Today the neoclassical Pedralbes Palace is surrounded by the Parc del Palau Reial with its ornamental gardens and paths, impressive and extensive. The palace and its grounds are situated directly across from what has become today the main campus of the ultra-modern University of Barcelona. The stables and porter's lodge (also know as the Pavellons Guell) were, like Park Guell, designed by Gaudi.

The Ceramic Museum has a very extensive and fine collection of Spanish ceramics (including work by Picasso and Miro). 15 of the 18 galleries cover Spanish ceramics from the Caliphiate Age through the 19th century. There are 3 galleries devoted to twentieth century and contemporary ceramics.

The range of attractions at the Pedralbes Palace encompass so many interests (i.e., the palace itself and the Gaudi structures, the gardens, the ceramic, design and textile exhibitions) that a visit is virtually guaranteed to offer satisfaction to almost any visitor.

sources, see:

www. dhub -

by Alastair Rickard



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