Monday, March 31, 2014

(No.260) Demutualization revisited: Economical Insurance & Mutual Life of Canada

"Demutualization of insurance companies in Canada revisited;

Economical Mutual Insurance Company & 

The Mutual Life Assurance Company of Canada"

by Alastair Rickard

In several recent RickardsRead columns (Nos. 257 & 258) I have referred to the demutualization and subsequent disappearance (via Sun Life purchase) of the Mutual Life Assurance Co. of Canada of Waterloo, Ontario.

Also, yet again, I devoted space to the proposed demutualization of the general insurance company Economical Mutual Insurance Co., also of Waterloo ( most recently Nos. 251, 253 & 255).

As usual I received comments in response to my columns on both subjects. I have presented below some excerpts from selected emails.


I received an email from one writer who chose to keep himself/herself completely clothed in anonymity including use of an email address composed of numbers and letters.

This correspondent may or may not be one of Economical Insurance's fewer than 1000 "voting policyholders' who seek to have the company demutualize and then to divide its equity among themselves. In any event he/she seems to have been unable or unwilling to appreciate the factual points I advanced in my column "Economical Mutual Insurance Co.: facts vs ghost milk" (No.255). 

" After reading this column," he/she wrote, " I research [sic] into Economical bylaws. It seems that voting policy holders (mutual's) were the only one's to sign and take risk. The risk's were real and could have been called on if a disaster to Economical policy holders did in fact happened. Isn't this what insurance and taking risks are all about? Myself have been insured for over 30 years. Never have I made a claim to a home insurance policy. With your theory I should get some of my money back since the insurance company never had any loss. 

" Further I found in the bylaws of Economical that only voting policies will benefit from any financial growth of the company. The voting policies are the one's who elect the board members who run Economical. In a recent court case the voting policies holders won the right to vote out the present board and bring in a new one. They voted not to and stayed with the same board. Sure sounds like they own the company to me. I do agree with you that only a small number may receive benefits. Is this fair? Yes, if risk was taken by the voting holder. Any major weather event could have caused a loss. Thank god to us it never happened."

Reacting to the same RickardsRead column a former life insurance company executive assured me that there was " no need to apologize for re-visiting this topic . The basic unfairness -- not to mention greed -- inherent in this situation warrants your continued attention.  

"The paucity of risk undertaken by fewer than 1000 insiders makes the promissory note argument laughable.  And as noted in one of your earlier columns, the company seemed to take pains to obscure the fact that it was even possible to buy a contract that would entitle the holder to become a 'voting policyholder'.  That action alone shows that Economical did not regard those promissory notes as a significant means of protecting solvency, and had the added benefit of ensuring that the number of individuals entitled to a share of equity in the event of demutualization would remain wonderfully small.   

"It would also be interesting to know how many of these 'voting policyholders' purchased their policies in the past fifteen years when the concept of demutualization was on every insurance insider's radar.   Makes you wonder!"

 In two recent columns (Nos. 257 & 258) I reiterated my negative view of the demutualization of the Mutual Life of Canada, the company by which I was employed during much of my working life as a life insurance company "salaryman" (to use the Japanese style).  These columns prompted responses from several former 'Mutualists' . I have chosen some representative excerpts from selected emails. 

 " This is message is long overdue but here it is nonetheless. Just wanted to
 say I read your blog regularly and love your valuable insights into our
 industry. I particularly enjoy your blogs on Mutual Life and the
 demutualization of it as well as the other [life insurance] companies.

 "As a former Mutual Life advisor (currently Sun Life), I only wish the
 executives would have listened to you! But then, if they did, they would
 not have filled their pockets (if I read between the lines of your blogs.

 "Keep up the good work.  PS -- I hope Sun Life is not monitoring my e-mail to see if we are
 communicating with you LOL"

 A former Mutual Life agency manager agreed with the views I expressed in (No.257) of RickardsRead: "Some reflections on 'what if?' history & an insurance business odyssey". 

"How UNFORTUNATELY true my friend and former “Mutualist”. Regrettably  for us the senior executives made a lot of $s".

Another of Mutual Life's former managers declared that we "are on the same page. ...  we were told that Mutual had to do this for 'protection purposes' from the 'Big Bad' stock companies.  This was nothing more than a cleverly schemed ruse to buy additional companies Pru of England and Met Life to fatten the cow before taking it to market for slaughter. " 

Reacting to "Some reflections on 'what if?' history & an insurance business odyssey" (No.257) a senior American agency manager of long experience wrote that the column was " Another superlative history lesson from you. Fortunately for those of us who respect, admire, and are grateful to him, Al Rickard has NOT departed."

Most of the RickardsRead column " Insurance company demutualization in Canada" (No.258) was taken up with comments by Claude Gingras, a lawyer with extensive experience in Ottawa as well (before that time) as General Counsel of the Mutual Life of Canada. 

Another life insurance industry lawyer of long experience followed the references in column No.258 to a previous RickardsRead column in which I published in its entirety Mr. Gingras' July 2012 submission to the federal Dept. of Finance. It was a submission which Finance had refused to post to its website unless Mr. Gingras removed certain parts of it to which Finance objected. He refused. 

The entire Gingras submission appeared on RickardsRead (No. 209). In order that readers could see the nature of Finance's sensitivities and requested redactions I underlined the parts which Finance had unsuccessfully demanded be redacted. 

This life industry lawyer to whom I referred above wrote recently to say they were " Very interesting comments from Claude, i.e., the underlined stuff. Claude's refusal to participate in this government cover up was the "right thing" to do. I'm glad you made his submission public. It was worth reading. However, I had to search hard for it by number and month. The year is 2012, not 2011." [I ran a correction at the beginning of column No. 259]

Finally, Joseph Belth -- for 40 years the editor and publisher of THE INSURANCE FORUM in the U.S. -- wrote that " I found your No. 258 about "Insurance company demutualization in Canada" fascinating not only because of your comments but also because of the comments by Claude Gingras.  He made a fleeting reference to a demutualization approach in Michigan but otherwise said nothing about the U.S. take on the subject.

"I have not studied the subject intensively, but my recollection is that New York State -- in the late 1980s the home of several big mutual life companies, including Metropolitan Life, New York Life, Mutual Life of New York, and Equitable -- had no law allowing demutualization.  In fact, I don't think the word had even been invented.  I vaguely remember writing an article mentioning the concept and calling it "stockization" and thought I was coining a word parallel to "mutualization," which had been accomplished by many stock companies over the years.  

"Then came severe financial troubles at Equitable.  So the company rushed to the New York State legislature and got a law passed allowing demutualization so that Equitable could demutualize under the sponsorship of AXA and bring in some much needed capital from that French company.  In other words, I think it was financial trouble at Equitable that launched the huge wave of demutualizations in the U.S., just as mutualization was, as Mr. Gingras points out, created as a nationalistic measure to prevent U.S. takeover of Canadian mutuals [i.e.,Canadian stock companies that mutualized in the 1950s] and later [demutualization] as an effort to rescue Confederation Life.  

"By the way, Mr. Gingras mentioned real estate problems at Confederation.  My recollection is that it was real estate problems at Equitable that led to its financial difficulties.  

"Finally, once New York had a demutualization law, it did not take long for the top brass of other big mutuals to see the opportunity to line their own pockets through the process.  In short, I agree with the notion that demutualization had nothing to do with creating a better form of organization and had everything to do with creating a financial windfall for senior executives of the big mutuals."




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