WATERLOO, ON, April 16, 2012 /CNW/ - The Economical Insurance Group today issued the following statement in response to an April 14 article in the Financial Post which contains significant errors of fact and demonstrates a fundamental misunderstanding of the demutualization of property and casualty (P&C) insurance companies.
Economical believes its stakeholders deserve to hear the facts directly from the Company.
The decision to demutualize
The Board of Economical Mutual Insurance Company announced its intention to pursue demutualization in December 2010 because it believed such a step was in the best long-term interests of the Company. Among other advantages, demutualization will provide Economical with greatly enhanced access to capital markets to fund growth and to compete more successfully against non-mutual P&C companies operating in Canada. (The Post incorrectly reported that the decision was made in May 2011.)
Distribution of demutualization benefits
The Post mistakenly implies that demutualization could result in the distribution of all the Company's mutual policyholders' equity or "surplus" and that this could amount to more than $1 million to each mutual policyholder. Neither is the case.
Demutualization makes no change to the Company's equity or surplus. Mutual policyholders would receive common shares of a new stock company. They can choose to keep those shares and remain investors or sell them to another investor. What proceeds they receive for their shares are paid by the buyer, not out of the surplus of the company.
Whether through an initial public offering or a sponsored demutualization, mutual policyholders would receive an allocation of the total transaction proceeds, which would be dictated by capital market conditions. As the Company has previously stated, whatever the total proceeds, they would be allocated through a formula developed by Economical to be approved by regulators and that will include both a fixed portion and a probably much larger variable component that would consider a number of factors including how long each individual has been a mutual policyholder with the Company. There will be significant variation between what is received by longer-term and shorter-term mutual policyholders. At this time, it is not possible to estimate the size of the distributions.
The composition of Mutual Policyholders
There are 943 Economical mutual policyholders. The Post misstates Company figures by claiming one-third are "company executives and brokers". In fact, employees - at all levels in the Company - account for only about 17%. Brokers represent just 3%. The vast majority of mutual policyholders are long-term customers with no employment or other business affiliation with the Company. Over 75% of mutual policies have been in place for more than 10 years, and 45% have been in place for more than 20 years.
The number of mutual policyholders reflects the reality that mutual policies have had limited appeal to customers over the years. Until 2008, mutual policyholders were required to sign a promissory Premium Note that exposed them to financial risk that cash policyholders did not face. Mutual policies were only offered for homeowners' fire coverage on a principal residence, to customers who were claims-free for five years, and who were prepared to make a three-year policy commitment and sign the promissory note. The restrictions related to the type of coverage and the form of promissory note was the common practice due to historical provisions in the Insurance Act (Ontario). Because homeowners' insurance represents only 18% of Economical's outstanding policies, it is misleading to compare the number of mutual policies to the entire universe of Economical policies.
Economical's mutual policyholders are the owners of the Company, as determined by law, the Company's by-laws and by the precedent of the mutual life companies which were allowed to demutualize in the 1990s. As the legal owners, Economical's mutual policyholders have the right to vote on the demutualization proposal and to share in the allocation of its benefits.
Claims from CAMIC
Economical is not a member of the Canadian Association of Mutual Insurance Companies (CAMIC) which is quoted extensively in the Post article and has stated its opposition to demutualization on behalf of a relatively small segment of the P&C insurance industry.
Economical's decision to demutualize affects no one but Economical. No other mutual insurance company is required to follow our lead and they can simply choose not to. CAMIC members can remain mutual companies if they believe that is in their best interests. Economical believes its best interests lie in demutualization.
The president of CAMIC is quoted asking how an individual can purchase an Economical mutual policy. Economical has previously announced it placed a moratorium on new mutual policies in November 2010, prior to the demutualization decision. He also questions how individuals would know mutual policies even existed if they were not "connected" to the Company. In fact, Economical made significant efforts over several years to increase the number of its mutual policyholders which, at one time, had declined to approximately 100. Its experience was that, even among qualified customers with principal residence fire coverage, the disadvantages of longer terms, added administrative burden, and potential financial risk outweighed any advantages of mutual policies.
It is also inconsistent to question mutual policy ownership among the board and employees when it is a basic tenet of good governance that the interests of a company's leadership should be aligned with the interests of its owners, whether they are shareholders or mutual policyholders. As part of its preparation for demutualization, Economical has taken major steps to put its governance in line with the best practices of Canadian public companies.
Progress on demutualization regulations
We have worked closely with the Department of Finance and other regulators since announcing our intention to demutualize. We recognize the challenges in developing a fair and transparent regulatory framework that is needed to give P&C companies the strategic option to demutualize should they choose to do so.
Based on our experience, we see no reason to doubt the stated commitment of the Federal government to develop demutualization regulations as soon as practically possible.
Economical is committed to pursuing demutualization, provided that regulations can be developed that allow it to proceed in the best interests of the Company. The path we have chosen and our approach to it is correct in law and is good public policy: it encourages competitiveness, financial strength and innovation in Canada's P&C industry. Demutualization is in the best interests of the communities we serve across the country.
About The Economical Insurance Group
Founded in 1871, The Economical Insurance Group is one of Canada's largest property and casualty insurers, with $1.7 billion in premiums and $4.6 billion in assets. Based in Waterloo, this Canadian-owned and operated group services the insurance needs of more than one million customers through 19 branches and service offices across the country. In 2010, Economical announced its decision to become the first federally-regulated mutual property and casualty insurance company to demutualize. Economical is currently reviewing strategic options and will submit a comprehensive demutualization proposal for mutual policyholder approval after the federal government's development of regulations and regulatory approval.
The Economical Insurance Group's member companies include: Economical Mutual Insurance Company® (including Western General® Farm Division), Waterloo Insurance Company®, Perth Insurance Company®, The Missisquoi Insurance Company®, Federation Insurance Company of Canada™, Family Insurance Solutions and The Mattei Companies.
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