Thursday, July 18, 2013

(No.241) Economical Insurance Co. -- insiders with more nerve than a canal horse


"Economical Insurance Company of Waterloo, Ontario and demutualization:

its insiders have more nerve than a canal horse"                 

by Alastair Rickard


My maternal grandmother, who was too proper to use an epithet to refer to an obnoxious or wrong-headed person, did have a favourite phrase for such people: she would say they "had more nerve than a canal horse".

Her phrase came to me as I read the report (June 25, 2012) by Chuck Howitt in the Waterloo Region Record of the June 24 annual meeting of  the large Canadian mutual property and casualty insurance company Economical Insurance (founded 1871).

It should be noted that Howitt has written most of the (too few) useful newspaper articles about the proposed demutualization of the company (announced in Dec. 2010) and the fundamentally important issues related to it. In the national media most of Canada's financial services paparazzi have been too busy risking hernias carrying water for the Bay and Wall Street crowds to comment on or even take public note of this proposed demutualization.

Yet this move, if permitted by Ottawa, would -- if carried out as the company's board and management propose -- amount to the financial exclusion of hundreds of thousands of Economical's policyholders in favour of a group of 943 company insiders (i.e., "voting policyholders") who now seek to benefit richly from the accumulation of policyholder equity since 1871 and by the fact that policies carrying 'ownership' status were restricted to very limited numbers by keeping such special status policies a de facto secret for decades from most clients and company brokers alike.

Because of the paucity of attention to this matter in the financial media, including the role that must be played by the federal Dept. of Finance and its minister in coming up with a regime to govern such a P & C company demualization (this is the first), I have devoted a number of columns on RickardsRead.com to the proposed demutualization of Economical Insurance and the creation by Ottawa of a regulatory regime to govern such moves by any Canadian mutual P & C insurance company [see, via the links beside all RickardsRead.com columns, the columns numbered 159, 166, 179, 206, 208, 209 & 213]

The best detailed analysis anywhere of the key issues raised by the proposed demutualization of Economical Insurance, issues that should be addressed by the federal government, was prepared and submitted to the Finance Department by Claude Gingras, a former life insurance company general counsel as well as a former advisor on life insurance company demutualization to Finance. Gingras is Canada's leading expert on the subject.

The Minister of Finance had invited the public and interested stakeholders to make submissions on the subject of P & C demutualization. However Finance Dept. gatekeepers refused to post on the Finance website  Mr.Gingras'  comments. In certain areas his views were apparently too well informed for certain people in Finance. He refused to allow Finance to post an expurgated version of his submission. His submission was published in its entirety on RickardsRead.com (No.209).

My own submission on the issue to Finance ( it was essentially one of my previous columns on the subject) was posted by Finance but with certain passages removed. I subsequently republished my submission with the deleted passages marked.

Minister of Finance Jim Flaherty, who occupied the same role for some years in the Ontario provincial government, still has not brought forward for comment a proposed regime for demutualization.

As Howitt wrote in his June 24 Record report of the Economical Insurance annual meeting a number of the 943 voting policyholders of Economical who want to divvy up the "mutual policyholders' equity" among themselves ($1.46 billion at the end of 2012) are getting antsy. They think the wait -- for what they apparently believe will be a windfall of $1+million each -- has gone on too long; the company should hire a lawyer and sue; or bring Flaherty to their meeting; do something. They really want 'their' money.

This corporal's guard of Economical policyholders appear to be dwelling in some sort of  cloud-cuckoo-land. They actually seem to believe that Minister Flaherty will come down from the mountain carrying a tablet on which will be inscribed a demutualization approach that will enrich them -- and only them -- while ignoring the absence of a legitimate basis for doing so while at the same time dismissing the financial interests of the company's many thousands of policyholders.

And how do the members of Economcal Insurance's board of directors and senior management explain and seek to justify what they propose to do in the service of such narrow financial interests? I quote from the company's annual report for 2012 (my comments are in italics):

-- "We see demutualization as the key strategy to sustain the future success and growth of Economical ... we have made progress [with Finance] in furthering the interests of our mutual policyholders [i.e, the interests of the holders of 943 out of Economical's 1.1 million policies] and combating the many arguments by others against demutualization as we have proposed."

-- "We are demutualizing because it is the right thing to do [for whom other than the 943?] ... We will either grow or risk becoming marginalized" [nonsense; for Economical to become a stock company virtually guarantees its subsequent takeover, likely by foreign ownership, of this already large company and its post-takeover disappearance, q.v. the demutualized and then soon disappeared Mutual Life of Canada, founded 1870 also in Waterloo, Ontario]

-- "Demutualization will allow us to make the strategic acquisitions at a scale necessary to place Economical among the five largest property and casualty insurance companies in Canada [it's already in the top 10 and has over the years acquired a stable of p&c companies as subsidiaries]. Demutualization will deliver greater strength and stability for our industry and that's good for all of us."

[Economical, with assets of almost $5 billion and double the regulatory capital requirement, has ample resources as a mutual company -- including $1.4 billion retained earnings -- to use to acquire whatever it actually needs to grow at an even faster pace in Canada. Such cant from the company reminds me of one of several empty rationales used to try to justify the demutualization and inevitable subsequent disappearance of the Mutual Life of Canada which had, as a mutual and not long before its unnecessary demutualization, purchased the Canadian operations of both Prudential of England and Metropolitan Life].

Such lame attempts at explanation offered by Economical's insider group to justify their gormless attempt to divide the company's "mutual policyholders' equity" among themselves are entirely unconvncing. Their arguments are not merely pretentious crap, they are transparently so.

In fact there is a singularly conventional motive available to explain this particular proposal to demutualize generated by the small insider group:  plain, old-fashioned greed.

Consistent with this reality is the apparent celebration of 2012's 12.6% increase in "mutual policyholders' equity" by the May 2013 announcement of the termination of 143 company staff. Perhaps we are to understand that company expenses must be reduced in order to allow for increased but vitally important costs like much higher CEO compensation ($1.5 million in 2011 increased to $2.6 million in 2012).

The proposal from Economical is risible. The desire to divide $1.46 billion of "mutual policyholders' equity" among 943 "voting policyholders"  to the exclusion of others would (if accepted by Ottawa) preclude any dilution of their narrow financial self-aggrandizement by evcn the tossing of some crumbs to the holders of the company's 1.1 million policies who are outside the tight little group. Be assured that, among other clangers, Ottawa has taken note of that one.

Of course one does not need to have the forecasting skills of the 'Amazing Kreskin' to predict that if they were to somehow obtain Ottawa's permission for such a massive financial grab it would be followed by a shit storm politically for Minister Flaherty and the government and legally by what would almost certainly be the launching of a class action on behalf of all or many of Economical's 'non-voting' policyholders. Indeed, depending upon how much of the company's treasury Ottawa allows the Economical insiders to divvy among themselves, there could well be a suit(s) anyway.

Economical Insurance's 2012 annual report is distinctly perverse in its highly selective references to the demutualization so eagerly sought by the company insiders. It is as if the company's board and senior management wished the report's readers to think not in terms of realistic outcomes but rather of what the shit was doing just before it hit the fan.

Those who control and direct Economical Insurance will not get from Ottawa the sort of demutualization formula for which they so eagerly petitioned  if only because Minister Flaherty is far too wary to make such a misstep. He has been in the game of politics too long to fall into the trap of allowing his department to produce, even for public comment, the outline of what would be bound to be widely viewed as a seriously defective regulatory regime but one that would become the vade-mecum for senior executives in terms of federal P & C demutualizations.

Nor will Flaherty, I predict, fall for the cack-handed attempt by some associated with Economical Insurance to grab all or even most of the demutualization pie for themselves.

At its June 2013 annual meeting, 2 1/2 years after the announcement  of the company's proposed  demutualization, it was reported that the chair of the board's committee on demutualization declared that "we are convinced [the regulations on demutualization] are coming."

Perhaps but be careful what you wish for ....


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email: Alastair.Rickard@sympatico.ca

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