In 2010, Economical Mutual Insurance Company became the first property and casualty (P&C) company to announce an intention to pursue demutualization. Demutualization is the process through which a mutual company converts to a company with common shares. The Insurance Companies Act (ICA), which is the federal statute that governs most insurance companies in Canada, provides for demutualization, but the regulations necessary to give effect to a conversion of a P&C company were never put in place. As such, Economical and the other mutual P&C companies have been forced to wait while the Government considered an appropriate demutualization regime.

On February 28, 2015, the Government released its proposed P&C demutualization regulations. In many ways, the long delay in releasing these regulations seems curious, particularly because regulations governing the demutualization of life insurance companies have been in place since the late 1990s (which facilitated the demutualization of four of the largest life insurance companies in Canada in the early 2000s). There are, of course, many reasons why the Government may have delayed in creating comparable regulations for the P&C industry. And indeed, a review of the proposed regulations makes clear that the Government has taken a significantly different approach to the demutualization of P&C companies from life insurance companies.

Two sets of P&C regulations were released: one set for companies that are purely mutual, in the sense that all of their policyholders are mutual policyholders; and another set for hybrid companies that have both mutual and non-mutual policyholders. As Economical and most of the large mutual P&C companies are hybrid companies, it is the second set of regulations that are most interesting, and it is this set of regulations that reflect the change in the Government’s approach.

Demutualization of Hybrid Companies

Under the proposed regulations for hybrid companies, there are five essential steps to the demutualization process:

  • The directors must authorize the commencement of the process and obtain the approval of the mutual policyholders to proceed.
  • If approved, the company must file an application with a court and the court must appoint two policyholder committees, one to represent mutual policyholders and the other to represent non-mutual policyholders.
  • The two committees must then negotiate the terms of the demutualization proposal, including determining the benefits to be provided to the two groups of policyholders, and anyone else they feel should receive benefits, as well as the plan for issuing the initial common shares of the company.
  • Once the proposal is complete, the mutual policyholders must authorize an amendment to the by-laws of the company which permit non-mutual policyholders to vote on the proposal. If the by-law is confirmed, the demutualization proposal must be approved at a meeting of both the mutual and non-mutual policyholders.
  • Finally, the Minister of Finance must approve the proposal and issue letters patent making it effective.

P&C Companies versus Life Companies

Both the proposed P&C regulations and the original life insurance company regulations provide that a proposal must indicate the benefits that will flow to “eligible policyholders” as a result of demutualization. Under the life insurance company regulations, an eligible policyholder is an individual that holds a voting policy. Comparatively, under the proposed regulations for a hybrid P&C company, both voting and non-voting policyholders are eligible policyholders. This difference in approach is what has presumably necessitated the more complex process mandated by the P&C regulations: as non-voting policyholders did not participate in the demutualization of life insurance companies, the regulations did not provide for the establishment of separate policyholder committees. The demutualization proposal was developed and recommended by the directors and put to the voting policyholders (and ultimately the Minister) for approval.

Are the P&C Company Regulations Workable?

As noted above, in the case of life insurance companies, the directors, assisted by management, develop the demutualization proposal and present it to the policyholders. Safeguards are in place to reduce any conflict of interest, including a bar on directors and officers directly benefiting from the proposal. Under the P&C regulations, the policyholder committees must negotiate the benefits that the policyholders will receive, including, potentially, shares of the company, cash, policy benefits such as reduced premiums or any other benefit. Furthermore, the proposal is to include the mechanism for issuing the first common shares of the company. In the case of life insurance companies, in order to support the formation of an orderly market for the shares, this included an initial public offering of the shares. For P&C companies, it would appear that it would be up to the policyholder committees to develop this aspect of the proposal as well. The structure of these benefits and the approach to the issuance of common shares could have a long lasting effect on the future of the company. Of course, policyholders, unlike directors, have no statutory duty to act in the best interests of the company. Will the policyholder committees be up to these tasks? Hopefully, counsel and the other advisers will be highly experienced with demutualization and the capital markets and in a position to offer strong advice.

The process set out in the proposed regulations also potentially creates a significant cost burden for the company. The company must support the cost of the two policyholder committees and the counsel appointed to assist them. The company must hold three meetings of policyholders to approve aspects of the process and the proposal, and prepare extremely detailed information in support of these meetings. The company must also cover the cost of any experts that the committees might require, and this is in addition to retaining and paying for three independent opinions, including actuarial, valuation and capital markets opinions. While some of the mutual P&C companies can be considered large, they are nowhere near as large as the mutual life companies were at the time of their demutualizations, which leads one to wonder whether the cost associated with the demutualization process will be a significant impediment for some companies.

The comment period on the proposed regulations closed on March 30, 2015. Presumably, there has been considerable discussion with the mutual companies and other interested parties about the approach that has been taken in the regulations. No announcement has been made on when the regulations will become final.

For a link to the proposed regulations click here.