Economical makes history by submitting demutualization proposal to Ottawa

Economical Insurance has made history as the first property and casualty insurer in Canada to officially ask the federal government for permission to demutualize.

The Waterloo, Ont.-based carrier announced Tuesday it has submitted a proposal to the country’s financial regulator to convert from its current status (collective ownership by a small minority of policyholders) to a stock company.

The ball is now in the court of Canada’s solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI), which is not commenting on what is in the proposal. OSFI “does not discuss the affairs of institutions it supervises nor can we disclose details of applications we receive because of their proprietary nature,” an OSFI spokesperson wrote Wednesday in an email to Canadian Underwriter.

Even the proposal is approved, it will no doubt be a couple of years at least before Economical launches an initial public offering of stock. If this happens, federal law stipulates that no more than 10% of Economical’s shares could be beneficially owned by any one person or firm for another two years.

Economical’s conversion proposal is the culmination of more than a year of negotiating between two committees appointed by the Ontario Superior Court of Justice. One committee represents eligible non-mutual policyholders while the other represents the owners of the company (the mutual policyholders).

“The conversion plan contains the agreed-upon method of allocating financial benefits resulting from demutualization, opinions from actuarial and financial experts, and the detailed legal particulars to effect demutualization,” Economical said Tuesday in a release.

The deadline to submit the proposal was recently extended from Feb. 22, 2018 to June 30. Several more steps, including more policyholder votes, remain before Economical could demutualize.

OSFI “will be diligent and they will be thorough” in reviewing the conversion proposal,  said John Bowey, chairman of the board of Economical, in May at the firm’s annual meeting in Kitchener. “We expect this to be a lengthy review.”

Fewer than 1,000 of Economical’s customers hold mutual policies.

Related – Who owns the surplus if a mutual company demutualizes?

Economical’s mutual policyholders voted in late 2015 to proceed with demutualization, the same year the federal government passed regulations allowing federally-regulated P&C carriers to demutualize. Four life insurers (Manulife, Sun Life, Clarica and Canada Life) demutualized in the 1999 and 2000.

Canada’s largest mutual P&C insurer, Winnipeg-based Wawanesa, has no plans to demutualize, the company’s CEO Jeff Goy told Canadian Underwriter earlier. Cambridge, Ont.-based Gore Mutual is another federally-regulated P&C insurer that is not planning to demutualize. Gore’s CEO, Heidi Sevcik, confirmed the company plans to remain a mutual while speaking at the CEO Panel at the Insurance Brokers Association of Ontario’s annual convention in Ottawa last October.

For Economical, once OSFI reviews the conversion proposal, “our anticipation is they will come back and say ‘You are good to go,'” Bowey said this past May at the annual meeting. In alternate possible scenarios, OSFI might say it is fine with the proposal with some exceptions, or it could tell Economical “we are not fine with it at all,” Bowey said.

“Mutual policies have had limited appeal to customers over the years,” Economical stated in a press release in 2012. Economical has said in the past that mutual policyholders must sign a promissory note “that exposed them to financial risk that cash policyholders did not face.”