Wednesday, December 18, 2013

(No.253) the Economical Insurance Co. & demutualization: what might we watch for?


"The Economical Insurance Compamy and its proposed 
demutualization: what might we watch for? 
Plus some other views including the previous demutualization of
The Mutual Life Assurance Co. of Canada "

by Alastair Rickard

Each of my three most recent RickardsRead.com columns (Nos. 241, 245 & 251)) concerning the property and casualty insurance (P & C) company Economical Mutual and its proposed demutualization prompted a number of emails from readers.

As advanced by the company's board and supported by its fewer than 1,000 "voting shareholders" what is being sought is to divide among themselves the company's equity ( which could be equal to $1 million plus per voting policyholder).

Having previously presented comments critical of my negative views on the subject, this column will present some other views. Consistent with my usual practice I have withheld the names of the correspondents but have identified them generally in terms of their connection to or basis of interest in the subject.

An insurance expert on demutualization emailed to say that "I always read you with great interest, even when you push your natural kindness to take the time to answer stupid letters!

"I read recently in FlashFinance.ca that Economical is in its 4th wave of closing offices and reducing expenses. This may be in connection with the larger than expected amount of claims but there could be another explanation, suspicious me would suspect: not only the reduction of expenses for a better [share] price but also the smoothing out of the approval process on a transfer of a block of business. The note said that this trend started soon after they announced their intention to demutualize.

"Establishing a demutualization regime [by the federal government] for P & Cs is a complex job (many companies and politicians have been educated with the life [insurance mutual company demutualization] regime), one with great visibility -- and compliance is tedious.

"Selling all the non-voting policies [of Economical Insurance] to, say, Intact Insurance, and distributing the proceeds to the voting policyholders [of Economical] who would have remained in the skeletal Economical is a single deed, a simple transaction and a less visible one. But it still needs the approval of the minister ... and of the Competition Bureau. However it's nothing like the long process of demutualization.

"The [regional Economical] offices being closed now are in Moncton and Hamilton. Should we know the intended purchaser it would be interesting to see if it has offices in these relatively small cities, especially Moncton. Well all this is worth watching for now."

A former manager with the Mutual Life of Canada, now an insurance industry consultant, responded to my views with "Amen Al, Amen. Thanks for the great read on Economical's demutualization attempt. I appreciate it as a longtime non-voting policyholder and interested insurance industry observer.

" And I daresay this piece included something I have thought for a long time but don't recall seeing -- that the demutualization of MLC [Mutual Life of Canada] was unnecessary. It was a shame.

"To me it was worse than unnecessary. It changed the nature of the industry and not for the better. That same greed at work at Economical is the code of the day in all life [insurance] companies today. It hasn't helped."

A longtime consulting actuary involved in the Canadian life insurance business wrote to declare that "I can proudly say I had absolutely no role in any [Canadian life insurance company] demutualization,

"There was no big money in demutualization for actuaries or anybody else for that matter, as we saw it, until the big brain actuaries made it so.

"As it was a windfall for [participating] policyholders, 1 vote = 1 share was the logical way to go. The market will value the shares. Have a nice day.

"Anything else was entirely arbitrary. It wasn't their money. Policy size and location did not and should not matter until the actuaries made it so, and crunched local and foreign asset shares going back 100 years and blasted out embedded values going forward another 100 years, and made out like bandits. ....

"In my view demutualization was an actuarial scam up there with the good old days of hawking defined benefit pension plans by overvaluing the assets, as only they can. Nobody else has that insidious power but pretty much everybody else has to pay for it, including transforming the nature of the entity ....

"But with Economical as you describe, there's years of scheming and manoeuvring setting it up with few votes for lucky insiders .... "

A very successful agent of many years experience with the Mutual Life of Canada wrote to agree with my unfavourable view of the demutualization of the Mutual Life of Canada more than a decade ago.

"The only point I would make [ref. RickardsRead column No. 245] is that you have been through a demutualization. You understand the process and repercussions.

"In the life insurance industry we lost one of the best run, productive and philosophically innovative insurance companies in Canada and North America. In retrospect I feel the process was motivated by greed. The policyholders were essentially forgotten. In the long run the industry and policyholders were the losers."

An American insurance educator wrote to thank me for "a nice Thanksgiving present. Nothing like a series of good belly laughs. And it is possible to laugh even at situations as absurd and deplorable as this one [i.e., the Economical Insurance Company demutualization]. I only hope the federal regulators do the right thing -- when they get around to it."

From a fomer life insurance company executive who lives in the Waterloo region in which Economical has its head office came this: "I guess if I were anticipating a payout of approximately 1 million dollars for simply owning an insurance policy I would have some strong concerns about someone with a national audience who is effectively pointing out the inequity of such a payout, particularly if I thought the Minister of Finance might be inclined to both read and agree with the [criticism about the] inequity."

While from one side of the 'discussion' I published the view of an Economical voting policyholder who thought I was a blatant liar and crackpot who crawled out from under a rock,  another correpondent from the life insurance side of the business viewed my status as being somewhat above that: "You have a unique ability to go to the heart of the matter. Apparently this has an effect of pissing some people off. My sense is that you don't give a fig about that. You are a modern day Diogenes."

Another resident of the Waterloo Ontario area, but one who is not involved with the insurance business, thought the most recent column on Economical was an "excellent, balanced article; the profits of the company should benefit all the shareholders, not just a select few. You can only hope that what you've written here reaches the right people in Ottawa ...."

Finally my friend Joe Belth, editor and publisher for 40 years of the Insurance Forum based in Indiana, wrote (to comfort me?):

"Dear Blatant Liar and Crackpot -- I cannot tell you how big a charge I got out of the comment you received after your latest blog about Economical Insurance. I am jealous, because I have not received anything like that in at least 20 years from any of my 40 or so subscribers. My subscribers are much better behaved and much smarter, because they know from past experience that I publish such comments complete with the name of the writer.

"All the best to you,

"Your Ellettsville Stringer."

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About this column:

email: Alastair.Rickard@sympatico.ca

blog: www.RickardsRead.com

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links.

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