Sunday, August 31, 2014

(No.271) "Joe Oliver's omelette: a demutualization regime for the Economical Insurance Co."

"Canada's federal Minister of Finance Joe Oliver and
a demutualization regime for the Economical Mutual Insurance Company"

by Alastair Rickard

Since my most recent column (No. 268, posted July 15, 2014) on the subject of a yet to be created Canadian federal government regime to govern the process of demutualizing a Canadian property and casualty ( P & C) insurance company, I have been asked my opinion by several correspondents about this:
will the appointment of Joe Oliver as federal Minister of Finance in Stephen Harper's Conservative cabinet likely make any substantive difference to the eventual result?

It's true that Oliver's predecessor, the late Jim Flaherty, was far more politically experienced than Oliver as well as more independent-minded and with a background connection to the insurance business and related law. I think Oliver, with his sophomoric attachment to Bay St. capitalist myths and verities, is less politically sophisticated than Flaherty and more susceptible to pleas to hurry up and produce the draft of a federal regime to govern P & C demutualization.

But will the Prime Minister's Office (PMO) be as accommodating? Is this Finance file really even on the political radar of the PMO yet?

The most strident and whining of the supplicants are to be found among the fewer than 1000 'voting' policyholders who control and seek to divide among themselves the equity of the Economical Mutual Insurance Co. of Waterloo, Ontario, the company whose announcement in December 2010 that it intended to demutualize made necessary the creation of a federal regime to govern that process for federally regulated P & C mutual insurance companies.

A real question is whether the federal government of Canada and its regulatory Office of the Superintendent of Financial Institutions (OSFI) will continue a pattern going back decades under both Liberal and Conservative governments: slighting what ought to have been regarded and enforced as key rights and interests of insurance company policyholders (participating policyholders of life insurance companies in particular, q.v. life insurance company demutualization) in favour of corporate desires and interests lobbied for by the life insurance industry and particularly the senior managements of the life companies seeking to demutualize ca. 2000 -- Mutual Life, Sun Life, Manulife, and Canada Life.

The biggest winners over time under the feds' life insurance company demutualization regime have included major shareholders and senior executives, but certainly not the participating policyholders --especially under the post-demutalization policy dividend approaches and related matters with which OSFI and of course the demutualized companies' managements have been happy.

Indeed one gauge of OSFI's interest in looking out for par policyholders' interests was their rubber stamping of the financial injustice borne by London Life par policyholders in the Power Corp./Great-West takeover. It was a major fault that took a decade for a class action led by former London executive Bill Rudd seeking redress for policyholders to have the courts identify and demarcate.

To review more about that class action case and related issues (about which Canadian business media  reported pathetically little over ten years) the interested reader may consult, for example, the article I wrote for Joe Belth's "The Insurance Forum" -- an American periodical -- in its Dec. 2010 issue (Vol. 37, No.12). See also various RickardsRead columns including Nos. 118,185,195 & 206.

The inadequate record of successive federal governments when it comes to stepping up on behalf of  the rights and best interests of all or even a majority of an insurance company's policyholders is not one that encourages me to be all that optimistic about what will emerge as a regime from Joe Oliver's Dept. of Finance.

The biggest caveat I have to my pessimism is that even Mr. Oliver and the senior Finance mandarins working for him on this file should be able to sense the political danger and legal challenges from going too far in the direction of enriching the few at the expense of the many. Even if they don't the antennae in the PMO may.

The mainstream media may even do what it has conspicuously failed to do thus far in this whole matter: wake up and show some journalistic interest, and do so in a form that would be useful to more than a million policyholders of Economical and potentially millions more policyholders in other mutual companies. Thus far there has been a near total absence of published critical analysis and opinion.


Also as a response to my previous column on this subject I received some comments from an Ontario lawyer with a particular interest in the subject.

He referred to the federal government's omnibus Budget Bill which included (among many other non-budgetary matters) amendments to Section 237 of the Insurance Companies Act, highlighting that "... regulations may be made …. concerning the fair and equitable treatment of policyholders under a conversion proposal ...."

"I understand" he continued, "the argument that 943 policyholders do not deserve the fruits of demutualization because their risk respecting contributions was minimal in relation to those fruits, and that all policyholders contributed to the current surplus.

"The key question will be who is given voting rights regarding demutualization? Will there be any consideration proffered to policyholders who did not have the risk of contributions?"

I replied (in part) that "as I have indicated in previous columns on this topic what has been prospectively interesting to me among other points was not that the govt. would have to provide itself with certain powers in order to create (as it did for life insurance companies) a regime to govern P & C demutualization; or whether that govt. would likely bow in the direction of genuinely "fair and equitable" treatment of all policyholders but whether that proposed regime would directly and specifically set forth how and to whom the value of a converted P & C company had to be distributed.

"Will the govt. try to deal with the subject of equity among policyholders consistent with the comments of the Conservative-controlled Senate Standing Committee on National Finance?

"Briefly, in its 12th report re Bill C31 (June 17, ref Part 6, Division 14, Insurance Companies Act), the Senate Committee recommended that 'The Minister of Finance should, after consulting the parties involved, consider establishing principles concerning property rights on accumulated surpluses BEFORE [emphasis added] establishing the rules for the demutualization of Economical or of any mutual property and casualty insurance company because property rights on accumulated surpluses are not clearly defined at this time. If the courts are asked to intervene, they should make sure that all stakeholders (among others, mutual property and casualty companies, cooperatives, insurance brokers and their associations) are able to present their case on the divisibility of these surpluses since the community as a whole could be impacted by any such rulings' [end of excerpt]."

"If [I continued] the Harper government -- and I think the key decisions on what a P & C demutualization regime will and will not embrace will come from the PMO not the Finance Minister's office -- actually wants to address the fairness issue head on it might decide to do so not through regulations but with greater strength by statute. It could for example use legislation to give voting rights to all of Economical's policyholders (and other companies which may want to follow its lead) and it could also use this avenue to set the level of the bar at which the shares of companies that demutualize must be widely held.

"I would not be surprised if the Tories used the public comment period on a draft set of regulations/legislation -- and the media and public reaction -- to set the stage for the final form in which action will be taken (and perhaps even the final decision on actual content and approach).

"Since those 'entitled' in the company's view to vote on the demutualization of Economical have done so in favour of it long since, I foresee no further vote on whether or not to demutualize per se UNLESS it is mandated by Ottawa or the courts.

"However the Economical board and CEO are currently going through the motions of declaring that THEY will not decide whether or not to act on the previous vote to demutualize by  the voting policyholders (i.e., to proceed with demutualization) until after THEY have assessed what comes down from Ottawa in terms of a P & C regime.

"Short of a P & C demutualization process so extremely negative vis-s-vis the financial expectations of the corporal's guard of policyholders who forced demutualization on Economical I think I have a better chance of being asked to serve as an Economical director than the chance that Economical will not at least try to proceed to convert."




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