Sunday, January 26, 2014

(No.255) Economical Mutual Insurance Co.: facts vs ghost milk


"The proposed demutualization of 
the Economical Mutual Insurance Company 
of Waterloo: 
facts vs ghost milk"

by Alastair Rickard


I had not intended to return to the subject of the proposed demutualization of this Canadian federally regulated property and casualty (P & C) insurance company, at least not so soon. Doubtless there are those who would argue that I have already devoted too many columns on RickardsRead.com to the Economical Mutual Insurance Company of Waterloo, Ontario during the past three years or so. (The four most recent are column nos. 241, 245, 251 and 253.)

The RickardsRead column posted on Dec.18, 2013 prompted an email from another of that fraternity of would-be millionaires ( i.e., the fewer than 1000 "voting policyholders" out of the more than one million Economical policyholders) who seek to demutualize the company and divide -- only among themselves -- the $1 billion plus equity of the demutualized company.

This Economical "voting policyholder"called on me to be factual about Economical's "voting policyholders" and their "rights". The blindness of my Economical correpondents to the actual relevant facts prompts me to focus on what some of the facts are. But first I reprint below his email complaint in its entirety.

"Re: Economical Demutualization.  Article Dec.18/2013
I wish people would quote all the facts when attacking the rights of parties entitlement. Your article of Dec. 18, 2013 fails to mention the rights of the voting members.

"Voting members signed promissory notes to finance Economical if Economical ran into financial trouble. Did the non-voting parties take this risk? NO! If a disaster happens to policyholders of Economical we the voting parties would be out money not them. Just because no disaster took place that Economical need[ed] help with doesn't mean there wasn't risk.

"Sure you talk about windfalls for voting members, where the biggest windfall would be if non-voting holders cashed out without taking any risk. They would be the real winners.

"It's the voting members who have made Economical what it is today, it's our Company. We'll fight to keep it." 

These comments from a "voting policyholder" remind me of the observation of the late U.S. Senator from New York Daniel Patrick Moynihan: "everyone is entitled to his own opinion but not his own facts".

The facts related to my correspondent's declarations actually support the federal Minister of Finance not permitting the "voting policyholders" of Economical to divide the pot of company gold only among themselves.

Several of the facts can be considered here. For example:

1. The promissory notes signed by Economical's "voting policyholders" and associated with the right to vote obligated the "voting policyholders" to help the company financially if demanded by the company to the extent of their policy premium. This financial 'risk' was picayune in comparison to the analogous insurance-related risk borne historically by, say, the individual investors in the Lloyd's of London insurance market having to financially pledge their personal assets.

For the 'risk' (de facto non-existent) of having to cough up an amount equal to a policy premium, it is argued that today's band of brothers and sisters in the Economical Insurance 'voting fraternity' are entitled to receive a least a million dollars each.

2. By company bylaw Economical did away with the promissory notes 'obligation', coincidentally(?) not long before the company publicly announced what had already been decided: its intention to request permission from Ottawa to demutualize.

If I was Minister of Finance I would be asking the Office of the Superintendent of Financial Institutions (OSFI) with which Economical would have had to file its bylaw why nothing was done at that point by OSFI to address the fundamental governance issue, i.e., fairness to all Economical policyholders?

The fact that no steps were initiated by OSFI has permitted the (de facto) risk free beneficiaries of an historical anomaly (voting vs non-voting policyholder status) to line up at a financial trough while demanding the outright exclusion from access to it of hundreds of thousands of other Economical policyholders.

3. The "right" to vote of the fewer than 1000 of the current policyholders of Economical Insurance (and hence the basis of their claim to the company's equity) is not based on federal insurance legislation as it was in Canadian federal life insurance companies. Rather it arises from the company's charter. That is why there are, properly defined, no "participating" policyholders to share in Economical's equity on a demutualization as there were by the hundreds of thousands more than a decade ago when four big Canadian life insurance companies demutualized.

In its more than 140 years of existence Economical did not demand payment from policyholder signatories of promissory notes, i.e., its voting policyholders. The financial "risk" borne by today's group of Economical's "voting policyholders" has been effectively non-existent by both amount and likelihood of demand.

Indeed, why would Economical's board (past or present) ever choose to worsen a corporate financial problem by demanding what would amount to a small capital infusion from a relative handful of policyholders. To do so would in effect be informing stakeholders and interested parties (the regulators, the media, the public and its policyholders generally) that the company was in such severe financial condition that it thought the ad hoc infusion of the equivalent of the annual premiums from even a 1,000 policies might help?

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To what might one compare the real "financial risk" borne by the "voting policyholders" of Economical Insurance, particularly the current small fraternity?

It would have been on a par with The Queen inviting me to Balmoral and then asking me take on the role of Archbishop of Canterbury.

My correspondent's argument boils down to this: the "facts" show that the "voting policyholders" took all the financial risk for the company down the years thereby making "Economical what it is today".

The varnish he applies to the real facts is far from convincing. Indeed the argument is gormless based on factual ghost milk.

Hence (he asserts) the division of the company's equity among all policyholders would be a windfall for them but dividing it among the fewer than 1,000 current "voting policyholders" would not be a windfall for that small group.

Reality is not altered by an inability to recognize fact. There was no significant financial risk assumed by "voting policyholders" of Economical as the historical record shows, and even if one were to grant that there had been -- at least in theory -- it was a risk so limited in extent as to make laughable current claims to a million dollars each as the reward for the risk.

The "facts" of the Economical Insurance demutualization proposal rather than advancing it provide ample reason for Ottawa to require major amendments in order to achieve at least some semblance of fairness for all the company's policyholders.

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email: Alastair.Rickard@sympatico.ca

blog: www.RickardsRead.com

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