Sunday, March 29, 2015

(No.285) "Part 2 -- Economical Insurance Co, & the draft regime for P & C demutualization"

"Part 2 -- The Economical Mutual Insurance Co. of 
Waterloo, Ontario and the new draft regulations for the 
demutualization of federally regulated property and 
casualty insurance companies in Canada"

by Alastair Rickard


In the previous RickardsRead column on this subject (No. 284, posted March 15, 2015) I should have made clear (but did not) in my introduction of comments by Claude Gingras about the draft federal regulations governing the demutualization of federally regulated property and casualty (P & C) insurance companies that his comments -- and mine -- specifically related to the set of draft regulations involving companies with both non-voting policyholders and voting/mutual policyholders like Economical Mutual Insurance.

Our comments did not and do not apply to the other set of draft regulations relating to those P & C companies all of whose policyholders have mutual/voting status.

I will also repeat here for readers' information what I have stated previously: I am not now nor have I ever been a policyholder of Economical Mutual Insurance Co. or any of its subsidiary P & C companies. I have no financial interest in the outcome of any demutualization of Economical under the federal Finance Department's yet-to-be finalized regulatory regime.


I do not intend to rehearse here either the comments I made in the previous column or those of Claude Gingras (both in No.284). I expressed my agreement with all of his analysis.

However there are other aspects of and changes needed to the draft federal regulations which would govern any attempt to demutualize by the Economical Mutual Insurance Co. -- or indeed any other P & C company in the same category.

I will offer a few comments here for consideration. I will send this column (as I did the previous one - "Part 1") as a formal submission to the Dept. of Finance prior to the end of the 30 day comment period deadline set by Finance when it published the draft regulations on Feb, 28, 2015.

1. It should be noted by both Finance mandarins and those (likely relatively few) among the millions of potentially affected P & C policyholders who are actually aware of the publication of the draft regulations that the 30 day comment period is ridiculously short and needs extension, especially given the fact that the draft regulations about which stakeholder comment must be made within that 30 day period took the Minister of Finance and his department more than 4 years to develop and make available for public comment.

2. In its "Regulatory Impact Analysis Statement" the Dept. of Finance received input during the original consultation period from four federal P & C companies which had both voting ("mutual") and non-voting policyholders.

According to Finance two of the four companies told Finance that "benefits [i.e., company equity on demutualization] be distributed only to mutual policyholders. The other mutual companies and other stakeholders generally held the opposite view and recommended that all policyholders share the benefits."

The two federal P & C companies referred to by Finance who favoured dividing the "benefits" of demutualization only among voting policyholders are not named. However one does not need to be a clairvoyant to know that both have a comparatively small number of voting policyholders but many more non-voting policyholders.

Which companies?

Obviously one is the company which set the demutualization ball rolling with its request to Ottawa back in late 2010 -- Economical Insurance. My guess is that the second is Gore Mutual Insurance Company of Cambridge, Ontario (founded 1839).

3. Although Minister of Finance Joe Oliver at the end of the day was unwilling to allow a ridiculous approach to demutualization, he ought to have ensured (as I think his predecessor Jim Flaherty would have done) that the mandarins in Finance drafting the regulations gave less weight than they seem to have done here and there to the views and desires of those P & C insurance company insiders who want to keep the demutualization playing field tilted as far as at all possible in the direction of a distinct minority of voting policyholders in a company with both policyholder types.

Case in point: the proposed regulations would require that non-voting policyholders must have held their policies for 12 months from the date the company's board decided to recommend demutualization to "be considered as eligible non-mutual [non-voting] policyholders", i.e., in order to be eligible to share in the "benefits".

Reason for this given by Finance:  "The time requirement discourages speculative policy purchases and ensures that policyholders have a reasonable commitment to the company."

Then why not apply using specific regulation the same 12 month period requirement to holders of voting policies? Such a difference in the treatment of voting and non-voting policyholders cannot be justified and requires change before the regulations are finalized.

4. For more than four years two Ministers of Finance and their department's mandarins have avoided by delay bringing forward a demutualization regime for federal P & C insurance companies. I can understand why.

Still, when a draft regime for companies with voting and non-voting policyholders finally sees the light of day, what's on view?

It is a draft regulatory regime with a striking (if politically understandable) absence of genuine leadership. Instead of presenting a regime that prescribed formulae to ensure equitable distribution to all policyholders of company value on any demutualization Finance kicked the can down the road.

What P & C policyholders now have before them instead is a serpentine process requiring, inter alia, the appointment of a legal counsel and a 3 to 9 member policyholder committee for each side (i.e., voting and non-voting policyholders). I will not review here this tortuous demutualization process; readers can consult the draft regulations published in the Canada Gazette and cited in my previous column.

At this point it is sufficient to note that at Economical Insurance, for example, there would not on a demutualization under the proposed regime be any genuine proportionality or practical fairness of process. Fewer than 1,000 voting policyholders can organize themselves easily and effectively in order to have ongoing direct input to and influence on the process of negotiation. Contrast that with the challenge to meaningful participation and representation confronting one million non-voting policyholders.

For this reason alone -- among several others related to the process the draft regime prescribes -- I would expect (if Economical were to proceed with demutualization) that various non-voting policyholders -- individuals and sub-groups of various sizes -- will sooner rather than later seek legal advice and/representationn of their interests before and/or during the demutualization process.

Nor would I be surprised to see legal action(s) if either the process of negotiation or its result is considered unsatisfactory. If this seems unlikely it is worth noting the incentive for Economical's non-voting policyholders to take the demutualization process very seriously indeed:  $1.7+ billion of equity.

5. The possibility of a regime that could produce a result approaching the equitable treatment of non-voting policyholders plus a court-supervised process of negotiation between the legal representatives and policyholder committees of the voting and non-voting policyholders in a P & C company already seems to have reduced the once unalloyed enthusiasm within Economical Insurance's senior management for a demutualization regime, the creation of which Economical forced on the federal government.

After the release of the draft regulations John Bowey, Economical's board vice-chair and head of the company's demutualization committee reacted. Unsurprisingly, for the head of a group of insiders who kicked off this attempted financial grab with an expressed declaration that all the company's equity belonged to them, the reaction seemed to be one of rather diminished enthusiasm, not least for a proposed regulatory regime under which the division of that equity with the many non-voting policyholders would have to be negotiated and voted upon if demutualization is to occur.

Declared Mr. Bowey: "The way the rules [for demutualization] are proposed now the company would have very little input and opportunity to make recommendations, which, to be frank, is one of the concerns that we have." My translation: 'on behalf of the fewer than 1000 insiders of the company we -- representing the insider group -- will have an impossible task under the proposed regulatory regime obtaining even a lion's share of the company's equity'.

6. Today, as previously, the Economical insider group have sought to camouflage with an unconvincing rationale the alleged need to demutualize and divvy up the company's equity among themselves. Why their obviously financially self-interested views enjoyed any credibility with Finance remains a mystery, all the more so since Finance acknowledges that except for one other P & C company (Gore Mutual?) the other submissions in the government's original consultation were opposed to what they sought.

Perhaps the leading reason advanced by Economical for demutualization is to make it possible for the company to raise capital for company growth via acquisition. This from a company with current equity of more than $1.7 billion and assets of $5+ billion; and from a large mutual company that as a mutual has acquired a number of P & C companies as subsidiaries.

Their argument reminds me of the similarly transparent nonsense advanced by the board and senior management of the Mutual Life Assurance Co. of Canada for its demutualization, while blithely ignoring publicly the fact that Mutual Life -- as a mutual -- had recently had no difficulty buying the long established and substantial Canadian operations of both Prudential of England and Metropolitan Life.

Economical's board vice-chair is still advancing the gormless argument that the "company is too big to be a mutual company [sic] in some ways and yet too small to compete with the big non-mutual companies. So we are caught in the middle."

That does not seem well grounded. Indeed if Mr. Bowey's comments indicate his actual grasp of the relevant facts, there is cause for at least mild alarm. They fall more than embarrassingly short of even tenuous contact with industry reality and are as insubstantial as the smile of the Cheshire Cat in "Alice's Adventures In Wonderland".

Then again those who post-2010 have advanced arguments pushing for the allocation of the (now) $1.7 billion among fewer than 1000 Economical voting  policyholders have rarely allowed facts to detain them for long. Doubtless they felt encouraged by the nearly complete absence of critical analysis of their plan in the mainstream media both regionally and nationally.

As the past four years have shown: in this sort of non-critical environment a self-constructed reality, indeed a cognitive illusion, is easier to maintain.

7. I am less than satisfied with the draft demutualization regime. It is awkward and convoluted in terms of going about getting equitable treatment for non-voting policyholders in a company like Economical. This RickardsRead column and the previous one (No.284) have pointed to a number of points to consider before the draft regulations are finalized.

However, if Economical Insurance proceeds to demutualize the negotiated division to be required by the regulations of the company's value between fewer than 1,000 voting policyholders on the one side and the company's hundreds of thousands of non-voting policyholders on the other at the very least guarantees that this gang of Economical insiders will not be walking away from a demutualization with $1 million+ each.

But then, as I have pointed out more than once in RickardsRead columns during the past several years, only those Economical insiders who resided in cloud-cuckoo-land were likely to have thought that their desired financial grab using company demutualization would proceed unimpeded.

RickardsRead will return to the subject of Economical Mutual insurance Co.
and Ottawa's demutualization regime.




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