Dissident Circular Provides Economical Mutual Policyholders With Compelling Reasons to Replace Current Board

Director Nominees Comprise Highly Respected and Recognized Leaders 
in Governance, Insurance and Demutualizations and Capital Markets

TORONTO, April 13 /CNW/ - VC  & Co.  Advisory Limited, which is advising the more than 100 mutual policyholders of Economical Mutual Insurance Company seeking to replace its current board of directors, confirmed today that its proxy circular and related materials have been sent to all mutual policyholders of Economical. The proxy circular and related documents can also be viewed and downloaded from www.concernedeconomical.com.

Economical's annual and special meeting is scheduled to take place on May 26, 2011. In order to ensure that their YELLOW proxy is received in time to be voted at the Meeting, mutual policyholders are asked to return their proxies to VC&Co. well in advance of the May 13, 2011 deadline.

In the circular, mutual policyholders are provided with compelling reasons why significant change is required at Economical and why they should use only the YELLOW form of proxy to elect a new board that mutual policyholders can trust to finally protect their financial interests and the interests of Economical.

The circular also outlines the track record of the current board and why it cannot be trusted to protect the interests of mutual policyholders, highlighting that:

• the  current board has never treated mutual policyholders like owners, has concealed the value of the mutual policies and has made repeated statements, including recently, that undermine and are inconsistent with the ownership rights of mutual policyholders;

• the current board has consistently failed to deliver any value to mutual policyholders;

• the current board has always opposed demutualization and worked hard to avoid it, and is only purporting to act now under the pressure of the Policyholder Proposals initiative; and

• the current board has a longstanding track record of poor governance, little transparency or accountability to mutual policyholders and financial underperformance by Economical.

The circular also highlights the disappointing lack of progress that the current board has made in the past four months towards its purported demutualization plan, as well as their complete failure to provide mutual policyholders with the "final recommendation" and "details and schedule of the demutualization plan" which the current board previously promised for the May 26, 2011 policyholders' meeting.

The circular also contains detailed information on the qualifications of the Policyholder Nominees being proposed for election to the board, including their biographies. The Policyholder Nominees include a former Chair of the Ontario Securities Commission, a former Commissioner of the RCMP and other executives with deep experience in the insurance industry, including the former Executive Vice President and Chief Investment Officer of The Canada Life Assurance Company at the time of its demutualization.

The Policyholder Nominees are:

J. Bruce Barraclough (Ontario, Canada) Corporate Director; previously with Ernst & Young LLP for more than 37 years
Stanley M. Beck, Q.C. (Ontario, Canada) President, Granville Arbitrations Limited and one of Canada's leading governance experts; previously Chairman of the Ontario Securities Commission
Kathryn A. Giffen
(Ontario, Canada)
Corporate Director; previously senior executive in insurance and financial services industry including President and Chief Operating Officer of RBC Life Insurance
Norman D. Inkster (Ontario, Canada) President, INKSTER Incorporated; previously Commissioner of the Royal Canadian Mounted Police, President of Interpol and Global Managing Partner of KPMG's international forensics practice
Kenneth W. Lalonde
(Ontario, Canada)
Corporate Director; prior senior executive roles in insurance and financial services sector including President and Chief Executive Officer of The CUMIS Group Limited
Robert W. Morrison
(Ontario, Canada)
Corporate Director; previously senior executive in insurance sector including Senior Vice-President and Chief Investment Officer of The Canada Life Assurance Company through its demutualization and initial public offering
C. Ian Ross
(Ontario, Canada)
Corporate Director; extensive board leadership, senior management and transactional experience in broad range of sectors
Michael D. Woollcombe (Ontario, Canada) Partner, Voorheis & Co. LLP, and Executive Vice-President, VC&Co.
Glen O. Wright
(Ontario, Canada)
Corporate Director; highly experienced Waterloo businessman involved in insurance and other industries who has played multitude of senior executive and board leadership roles in both private and public sectors

In a letter sent to all mutual policyholders today, Michael D. Woollcombe of VC & Co. Advisory Limited wrote, "The Policyholder Nominees are committed to responsibly unlocking and delivering the significant value of your mutual policy and, unlike the current board, they collectively have the experience and expertise to get the job done."  He continued, "With an average value of more than $1 million per mutual policyholder, you owe it to yourself to carefully consider the issues and ensure that your vote counts."

The full text of the letter sent today to all mutual policyholders is appended below.

*******

AN IMPORTANT MESSAGE TO ECONOMICAL'S MUTUAL POLICYHOLDERS

April 12, 2011

Dear Economical Mutual Policyholder,

We are VC & Co. Advisory Limited, which is in the business of providing strategic and other advice to investors in undervalued, underperforming or mismanaged Canadian public and private companies.  We are currently advising the more than 100 mutual policyholders of Economical Mutual Insurance Company - your fellow owners - who submitted the Policyholder Proposals.  We believe significant change is required at Economical.  The time is now to elect a new board that you can trust to protect your financial interests and the interests of Economical.

Your mutual policy has significant value - we believe more than $1 million, on average.  But to receive that value, you need a skilled, experienced and trustworthy board of directors that is committed to your interests as the owners of Economical.

The current board cannot be trusted to properly protect your interests:

  • the current board has never treated you like an owner and has concealed the value of your policy;
  • the current board has consistently failed to deliver any value to you;
  • the current board has always opposed demutualization and worked hard to avoid it, and is only purporting to act now under the pressure of the Policyholder Proposals initiative; and
  • the current board has a longstanding track record of poor governance, little transparency or accountability to you and financial underperformance by Economical.

The Policyholder Nominees include highly respected leaders in their respective fields, including a former Chair of the Ontario Securities Commission, a former Commissioner of the RCMP and other executives with deep experience in the insurance industry including the former Senior Vice President and Chief Investment Officer of The Canada Life Assurance Company at the time of its demutualization.  The Policyholder Nominees are committed to responsibly unlocking and delivering the significant value of your mutual policy and, unlike the current board, they collectively have the experience and expertise to get the job done.

Earlier this year, when faced with the prospect of a policyholder vote on their performance, the current directors spent hundreds of thousands of Economical's dollars pursuing litigation, all in a failed attempt to keep you - the owners of Economical - from determining who should represent their interests.

Now, a Court has ordered Economical to hold the vote and give you a choice. This is your opportunity to make a change for great purpose.  Join the more than 100 other mutual policyholders who want a board that will protect Economical and the interests of its owners. Vote your YELLOW proxy FOR replacing the current board.

The current board has undermined your ownership rights

The current board has demonstrated that it does not understand your ownership rights and cannot be trusted to protect them. This was made clear during the lawsuit Economical launched in January 2011 in an attempt to prevent a vote on its leadership. During the course of this litigation:

  • Economical's lawyer told the Court that Economical's ownership structure was akin to a private "golf club" where membership could be purchased, but not sold or cashed in;
  • Economical's Chairman of the Board gave evidence that he didn't have a view as to whether the mutual policyholders were the real owners of Economical and had never expressed a view to Economical's board as "it never came up"
  • evidence was provided that, as recently as last October, Economical's Chairman of the Board expressly told a potential buyer of Economical that no one (including the mutual policyholders) owns Economical but that the company is instead owned by the "community" and
  • Economical described the "ownership" relationship between Economical and its mutual policyholders as merely "temporary" and characterized mutual policyholders as "custodians of ownership for the next generation".

These statements undermine your ownership rights as a mutual policyholder.  They also undermine the current board's credibility when it now asserts, in its materials trying to solicit your vote, that Economical views the mutual policyholders as the "legitimate owners" of Economical.  This is an expedient reversal by the current board.  How can you trust them now?

We urge you to vote only your YELLOW proxy to replace the current board with the Policyholder Nominees who are committed to recognizing your ownership rights and protecting your interests.

The current board's reversal on demutualization

The current board has long opposed demutualization and for years worked hard to avoid it. Now the current board claims to favour demutualization in some form. This reversal was first announced to you by way of a letter dated December 10, 2010, approximately one month after the Policyholder Proposals initiative began.

The current board would like you to believe this reversal had nothing whatsoever to do with the Policyholder Proposals.  Consistent with that, Economical's management proxy circular omits any disclosure about the connection between the Policyholder Proposals and the formation of Economical's Special Committee.

In fact, we believe the current board's recent conversion to demutualization was taken out of expediency and self-preservation, and was entirely due to the pressure of the Policyholder Proposals to replace the board.  Economical has repeatedly tried to hide this linkage, a pattern dating back to last December.

You don't have to take our word for it; look at the facts learned in the recent Court proceedings.

When was the Special Committee formed?
What the current board originally said The facts
"The committee was formed to examine strategic alternatives about a potential transaction several months ago" [emphasis added] said the board in a letter to you dated December 10, 2010. In a sworn affidavit(1), Economical's Chairman Gerald Hooper admitted the Special Committee was created on November 15, 2010, the very first business day after Economical learned of the Policyholder Proposals and less than one month before the board's letter to you dated December 10, 2010.

Did the board know of the Policyholder Proposals when it created the Special Committee?
What the current board originally said The facts
In January 2011(1) Chairman Hooper claimed that the Special Committee was formed "prior to the directors of Economical being aware of any communications or solicitation efforts by VC & Co."

In a December 14, 2010 communication to all Economical brokers, Economical claimed that the Special Committee was formed "before VC & Co.'s proposals became known."
In cross examination(2) Mr. Hooper admitted:
1.     The current board in fact knew of the solicitation efforts by VC & Co. before the Special Committee was formed.
2.     The notice calling the November 15, 2010 board meeting at which the Special Committee was formed was sent on November 12, 2010, the same day that the first newspaper advertisement in respect of the Policyholder Proposals initiative appeared in The Globe and Mail.
3.     The meeting notice attached a copy of the advertisement and stated: "Gerry Hooper would like you to participate in a conference call … regarding an item in today's Globe and Mail…[PDF attached]".

(1)    Gerald Hooper affidavit dated January 12, 2011.
(2)    Cross examination of Gerald Hooper, February 28, 2011.

We also learned in the Court proceedings that Economical's board had for years ignored the recommendations of management (led by Economical's former President and Chief Executive Officer, Noel Walpole) that Economical should demutualize.  And yet, between the November 15, 2010 creation of the Special Committee and the December 14, 2010 demutualization announcement, the board did not even consult with Mr. Walpole in the course of its deliberations, even though he remained President and Chief Executive Officer.

We also learned through the Court proceedings that the current board was working to double the number of mutual policyholders right up until the Policyholder Proposals initiative became public, so as to dilute your voting interest and ensure that Economical remained structured as a mutual.

The board's efforts were deliberate.  Minutes from an October 28, 2009 board meeting reflect board deliberations about ensuring that Economical remained a mutual for "generations."  Minutes from a February 24, 2010 board meeting describe an initiative to recruit "policyholders who are believed to support the continuation of the Company as a mutual company."

Clearly, the board had considered demutualization, rejected it, and was actively seeking to implement a plan to frustrate any ability for you to elect a new board that would better protect your interests.

You, the owners of Economical, were never told about this. Instead you were told, in the board's communications last December, that the board had suddenly determined that demutualization would benefit Economical, and that "the Board has instituted a moratorium on the issuing of new mutual insurance policies."

Given these facts, do you really believe that the board's reversal had nothing to do with the pressure of the Policyholder Proposals?  If you do not vote to replace the current board at the Meeting, that pressure will be gone, and the same board that never wanted to demutualize will be left in control of your company's future.

Where is the demutualization plan?

Economical announced its intention to pursue demutualization four months ago, committing that it would "expedite" its process and "present a final recommendation as well as the details and schedule of the demutualization plan no later than the next annual meeting scheduled for May 26, 2011."

Since then, Economical has sent you numerous "Progress Updates" on its demutualization plan. They all, however, share one thing in common - they show little tangible progress being made.

Now, in their management proxy circular soliciting your vote for the Meeting, the current board claims over and over again that "significant progress" has been made towards demutualization, but provides no details to back up those claims.  In fact, little progress has been made towards demutualization over the past four months, while the board instead chose to focus on litigation strategies to avoid a vote on the Policyholder Proposals at the Meeting.

Further, contrary to what they promised you four months ago, the current board now asks for your vote but includes in their management proxy circular no "final recommendation" or even any attempt to outline "the details and schedule of the demutualization plan".  The current board also provides no guidance whatsoever with respect to what it believes is the approximate value of your mutual policy.  Instead, they ask for blind trust in a circumstance where they have not earned it.

We urge you to carefully scrutinize the board's claims regarding "significant progress" towards demutualization, and not to accept more abstract promises, platitudes and excuses. You deserve better. You deserve results.

The current board's lack of transparency

Good governance starts with transparency.  Ask yourself: prior to the Policyholder Proposals initiative, when was the last time you heard from the current board regarding your rights and entitlements as a mutual policyholder?

The current board should have provided you years ago with the basic information you needed to properly understand your entitlements as a mutual policyholder.  But they chose to keep you in the dark.  Can you imagine owning shares in a company that refused to tell you what those shares were worth or give you the information necessary to determine it?

  • The current directors have long maintained a policy of not disclosing to mutual policyholders even the approximate number of mutual policies in existence, making it impossible for you to assess the value of your mutual policy.
  • Only after we began publicly expressing our own estimate did the current board finally acknowledge, in December 2010, that there were "approximately 1,000" mutual policies in existence. Even today, the current board has still not disclosed the exact number of mutual policies. Why have they been keeping this critical piece of information from Economical's owners?

In a further clear sign that the current board only reacts under pressure, compare the disclosure on director and executive compensation in this year's management proxy circular to what you received in prior years.  This was the first year the current board has chosen to disclose how - and how much - they pay themselves.

The Policyholder Nominees are committed to reporting to you - the owners of Economical - in a timely, accurate and transparent basis so you can hold your directors to account.

The current board's lack of accountability

Good governance requires accountability. The current directors have demonstrated that they do not believe they should be accountable to you.

The objective of the Policyholder Proposals is to give mutual policyholders the opportunity to replace the current board if you wish to do so. From inception, the current board has waged a fierce campaign to prevent a vote on its leadership, spending untold hundreds of thousands of dollars of your company's money in the process.

The current board has also long hidden from the concept of director accountability by maintaining Economical's staggered board terms, where each director is elected for a three-year term, with only one-third of the directors up for re-election each year. Staggered board terms are broadly seen as serving primarily the interests of poorly performing directors by protecting them from having to face re-election on an annual basis.  Most properly governed companies eliminated staggered boards many years ago.

We believe that director accountability ultimately flows from your power to elect and remove directors.  If the Policyholder Nominees are elected at the Meeting, they intend to amend Economical's by-laws such that every one of them is required to stand for re-election, and be accountable to you, at each and every annual policyholders' meeting going forward.

Economical's financial underperformance - the legacy of the current board

The current board has recently highlighted what it described as the "significant improvement" in Economical's financial results for the year ended December 31, 2010. This is nothing but spin.  Do not be misled. Economical's financial performance only appears to be improving when compared to Economical's very poor 2008 and 2009 financial results.

In fact, under the current board's watch, Economical generated a net loss during 2008 of $102 million and net income during 2009 of only $24 million. As well, Economical's net income during 2010 was still less than half of its average net income of approximately $140 million during each of 2005, 2006 and 2007.

Economical's board may try to blame the company's poor financial performance on the recession or other external factors, but the facts do not support that argument either.  As shown on page 6 of this Circular, Economical has consistently underperformed its industry peers by a wide margin over each of the past five years.  If Economical's cost performance (as reflected by its Combined Ratio) had simply met the average of its peer group over these five years, Economical would have generated incremental pre-tax income over this period aggregating approximately $460 million.  The current board should be held accountable for this significant underperformance.

As Economical's owners, you need a board that will ensure Economical operates to its full potential.  Economical has a dedicated base of employees and a vital broker network. With a strong, experienced and credible board - the Policyholder Nominees - Economical's future can be bright.

Economical's misleading claims about fees and Westaim

To distract you from the absence of any tangible progress to report towards demutualization, Economical devotes much of its management proxy circular to misleading claims around VC&Co.'s fees and The Westaim Corporation.  Permit us to set the record straight.

VC&Co. fees

VC&Co.'s interests are fully aligned with those of mutual policyholders.  Our fee arrangement with the approximately 100 mutual policyholders who have entered into an agreement with us is that those individual mutual policyholders will pay us 12.5% of what they ultimately receive in respect of their mutual policies, if, as and when they receive it.  These arrangements, which are fully described at pages 16 to 18 of the Circular, reflect the fact that no mutual policyholder on their own could accomplish the change to the board collectively being sought, which was correctly anticipated to be fiercely resisted by the current board using Economical's own financial resources against the interests of its mutual policyholders.

Mutual policyholders who support changing the board and electing the Policyholder Nominees at the Meeting are not being asked to sign any agreement with us, and will have no financial obligation whatsoever to VC&Co.  Instead, the approximately 100 mutual policyholders who previously entered into an agreement with VC&Co. are effectively shouldering the financial burden for the benefit of all mutual policyholders.

As a matter of fairness to those approximately 100 mutual policyholders, in the event that the board is reconstituted at the Meeting, VC&Co. will ask the new board to consider having Economical assume the costs of effecting this change.  The new board will consider this request in accordance with its fiduciary obligations to Economical.  If approved, the amount that would otherwise have been paid by those approximately 100 mutual policyholders would be paid by Economical if, as and when such amount ever became payable, with the effect that the indirect cost to all mutual policyholders would be approximately 1.25%.

We encourage you not to be misled by Economical's claims in respect of fees.  We are highly confident that, under the leadership of the Policyholder Nominees, the incremental value that you will receive in respect of your mutual policy will far exceed the approximately 1.25% that Economical could end up paying to VC&Co. if the new board were to assume those obligations.

Westaim

In the management proxy circular, the current board also makes a number of misleading claims in relation to VC&Co. and its history with Westaim, repeating many of the same unsubstantiated and untrue allegations it unsuccessfully advanced in the context of the recent Court proceedings.

Contrary to the claims of the current board, the Policyholder Proposals initiative has been pursued, and continues to be pursued, solely on behalf of the mutual policyholders who submitted the Policyholder Proposals.  Further, neither VC&Co. nor any related entity nor any of their respective principals has any ongoing relationship or ties whatsoever to Westaim, or to any potential buyer, investor or other interested party, related to Economical.  While an entity related to VC&Co. provided legal advice for a period of time to Westaim related to Economical, that involvement with Westaim ended, as the evidence in the Court proceedings made abundantly clear, prior to VC&Co. beginning the Policyholder Proposals initiative.  There simply is no continuing relationship or involvement of any nature between VC&Co. and Westaim related to Economical.

The current board's claims in relation to Westaim are unfounded scare tactics.  If elected, all of the Policyholder Nominees would owe their duties to Economical.  The suggestion that the new board would pursue an improvident transaction with any party, or that VC&Co. would encourage them to do so against its own financial interests and the interests of the mutual policyholders it is engaged to protect, or that you the mutual policyholders would ultimately approve any such transaction, defies common sense.  The suggestion is neither credible nor worthy of Economical.

Moving to a brighter future - the Policyholder Nominees are the right board for Economical

With an average value of more than $1 million per mutual policyholder, you owe it to yourself to carefully consider the issues and ensure that your vote counts.  We do not think you can rely on the current board, with its long-term commitment to the mutual structure, its sudden and expedient reversal in the face of pressure, and its track record of poor governance and little transparency or accountability.

The road ahead involves a complex process.  It will only result in a positive outcome for you, and all Economical stakeholders, if it is carefully overseen and directed by an experienced and credible board of directors that is committed to your interests.

The Policyholder Nominees are well known, experienced and trusted business leaders who you can rely on to make the right decisions for you, and restore the credibility of Economical's board.  We encourage you to take the time to carefully review their qualifications and experience, which are outlined on pages 12 to 15 of the Circular.  Far from delaying the process of addressing Economical's structural issues and unlocking value for you, the election of the Policyholder Nominees will accelerate this process as all parties will know that the new board is committed to what it is saying and resolved to move forward.  The election of the Policyholder Nominees will also start the process of once again making Economical a place where employees can be proud of where they work rather than embarrassed by the actions of their board.

The Policyholder Nominees, if elected at the Meeting, are committed to an inclusive process and will openly and regularly consult with and seek the views of all interested stakeholder groups as Economical moves forward.  To facilitate that, they will establish a Special Advisory Committee of mutual policyholders and retirees.  Mr. Charles R. Appleton, a retiree from Economical after more than 25 years service and one of the mutual policyholders who supported the Policyholder Proposals, has agreed to Chair that Special Advisory Committee.  See "Removal and Election of Directors - Special Advisory Committee" below.

Economical is not a private "golf club".  It is a company with significant potential, but one that has been poorly governed for too long.  You can change that at the Meeting by electing the Policyholder Nominees.  This change will serve a fundamentally important purpose, ensuring that your financial interests are protected and building a better Economical going forward.

Complete your YELLOW proxy today

We believe the choice is clear.

The current board has always worked to maintain Economical under its mutual structure and has never well-served your interests.  They have not earned your trust.

The Policyholder Nominees will bring a fresh perspective, deep experience and trusted reputations, and the commitment and credibility needed to execute and deliver value to you.

We urge you to carefully read this Circular, complete and sign only the enclosed YELLOW proxy and return it to us. Your YELLOW proxy must be received by us no later than May 13, 2011 in order to be deposited in time to be used at the upcoming Meeting.  Return your YELLOW proxy to us in any of the following ways:

  • mail it in the enclosed postage paid return envelope or, if you are sending it after May 6, 2011, telephone us at 416-864-2274 and we will arrange for a courier or personal pick-up;  or
  • fax it to us at 416-947-1256; or
  • email it as a scanned attachment to spriemer@voorco.com.

Please take the time to do this NOW to ensure it is received in time to be voted at the Meeting.

Even if you have previously signed a form of proxy in support of the current board - the more recently dated YELLOW proxy automatically revokes the earlier one so please complete the YELLOW proxy today.

If you have any questions concerning this Circular, or in connection with the completion and delivery of your YELLOW proxy, or would just like to share your perspective regarding Economical, please telephone either Michael D. Woollcombe or Shane A. Priemer of VC & Co. Advisory Limited at 416-864-2274.  We would very much welcome the chance to speak to you. We also invite you to visit our website that is dedicated to this initiative at www.concernedeconomical.com.

In order to ensure that you receive important timely information and updates from us as this process moves forward, we also encourage you to provide us with your email or preferred contact coordinates.  You can provide us with that contact information either through the "Stay Informed" page on our website, by email to spriemer@voorco.com or by telephone at 416-864-2274.

Sincerely,


VC & Co. Advisory Limited

"Michael D. Woollcombe"

MICHAEL D. WOOLLCOMBE
Executive Vice-President
 

 

 

 

 

SOURCE VC

For further information:

Michael D. Woollcombe
Executive Vice-President, VC & Co. Advisory Limited
416-947-1700
mwoollcombe@voorco.com

Media contact:

Alan Bayless
Client Partner, Longview Communications Inc.
604-694-6035
abayless@longviewcomms.ca

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