Evidence of meeting #55 for Finance in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was company.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Jeremy Rudin  Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance
Normand Lafrenière  President, Canadian Association of Mutual Insurance Companies
Karen Gavan  President and Chief Executive Officer, Economical Insurance Group
Dan Lister  President and Chief Executive Officer, Kings Mutual Insurance Company
James Wu  Chief, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance

4:40 p.m.

NDP

Hoang Mai NDP Brossard—La Prairie, QC

Right.

Ms. Gavan, could you explain to us in terms of concentration regionally where your holders are?

4:40 p.m.

President and Chief Executive Officer, Economical Insurance Group

Karen Gavan

Yes. Our roots are in southwestern Ontario. We have a significant policyholder base in Ontario, the whole of southwestern Ontario, the GTA area, and it's quite extensive in the Ottawa Valley as well.

4:40 p.m.

NDP

Hoang Mai NDP Brossard—La Prairie, QC

Why is it so regional?

4:40 p.m.

President and Chief Executive Officer, Economical Insurance Group

Karen Gavan

That's really where we started. It was later in our history that we expanded nationally. We have operations from coast to coast.

4:40 p.m.

NDP

Hoang Mai NDP Brossard—La Prairie, QC

I have a question for Mr. Lafrenière and Mr. Lister.

Since you are not saying you are against demutualization, but you are concerned about some of the issues, what would be something you would be in favour of if we allowed demutualization?

4:40 p.m.

President, Canadian Association of Mutual Insurance Companies

Normand Lafrenière

We're not against a company that wishes to demutualize, if they say that is the route to follow. What we're saying is that company, first of all, should at least look at the possibility of merging with other mutual insurance companies. This is how we have operated for the last 170 years. There have been a whole lot of amalgamations within the mutuals. We're asking, as part of the regulations, that the company that wishes to demutualize go through the process of looking at the possibility of merging with an existing mutual insurance company. It could be a co-operative insurance company as well, because they have values similar to ours. That process should be there. If ever that doesn't work, then maybe demutualization should be considered. The surplus of that company has been built by 100% of the policyholders over many generations. It should stay within the mutual system.

When you sell the company, if you look at the example of AXA and Intact that was talked about, the price paid at that time was 1.8 times the value. We're not talking $1.3 billion in this case, but maybe $2 billion now. It's political because it may never be realized, but the potential is there. When you look at the history, this is what they sell for.

4:40 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you.

We will go to Mr. Jean now, please.

May 1st, 2012 / 4:40 p.m.

Conservative

Brian Jean Conservative Fort McMurray—Athabasca, AB

Mr. Chair, thank you for the opportunity to question these witnesses and to listen to their testimony.

I am interested in what you said earlier, Mr. Lafrenière. You said that even though these mutual holders own the company, and in essence, they own the voting rights to the company, they don't own the money. Who would own it, then?

4:40 p.m.

President, Canadian Association of Mutual Insurance Companies

Normand Lafrenière

Well, the mutual community. They don't own the company.

This is the surplus of the company we are talking about. Once the money is transferred to the surplus of the company, it is owned by the company and not the policyholders. The policyholders use the services of the company, and for the time that they are the users of that company, they can control what the company is doing, but they don't own the surplus of the company. That is owned by the company itself.

4:40 p.m.

Conservative

Brian Jean Conservative Fort McMurray—Athabasca, AB

My understanding is that the very essence of the mutual share is that they have a voting control. They have the right to vote on the goings-on of the company. They also have the right to share in company surpluses and to decide, in essence, what that company's surplus is at an annual vote. They don't decide, but they vote in the directors who decide what the surplus is.

4:45 p.m.

President, Canadian Association of Mutual Insurance Companies

Normand Lafrenière

They cannot vote on sharing the surplus. They can vote on sharing the profit generated in the last year. When you generate a profit, that profit can be used in three different manners.

4:45 p.m.

Conservative

Brian Jean Conservative Fort McMurray—Athabasca, AB

You could play with profits. You can hold 150%, or you can hold 265%, or you can hold 400%, but as a shareholder of the company—and you have to excuse me as I haven't owned many shares in a mutual company, but I have in a lot of companies, and as a lawyer, I certainly have dealt with the structure—my understanding is they have the right to share in the proceeds, and the directors have the right to determine what those surpluses are.

4:45 p.m.

President, Canadian Association of Mutual Insurance Companies

Normand Lafrenière

Well, the only proceeds they can share are the profits of the last year. This is where you decide what to do with them.

4:45 p.m.

Conservative

Brian Jean Conservative Fort McMurray—Athabasca, AB

They cannot reallocate—

4:45 p.m.

President, Canadian Association of Mutual Insurance Companies

Normand Lafrenière

They cannot take money out of the surplus and give it to the policyholders.

4:45 p.m.

Conservative

Brian Jean Conservative Fort McMurray—Athabasca, AB

They can't reallocate the term of that money in the surplus, to decide what to do with that money?

4:45 p.m.

President, Canadian Association of Mutual Insurance Companies

Normand Lafrenière

No, no. When you transfer it to the surplus, it stays in the surplus.

4:45 p.m.

Conservative

Brian Jean Conservative Fort McMurray—Athabasca, AB

And it can't ever be changed.

4:45 p.m.

President, Canadian Association of Mutual Insurance Companies

Normand Lafrenière

Well, it is used when you make a loss in the year. You can take a profit—

4:45 p.m.

Conservative

Brian Jean Conservative Fort McMurray—Athabasca, AB

Exactly. But also you can redesignate what that surplus is and what percentage you want to keep, can you not, as a director of the company?

I mean, somebody's got to be able to do it, and I don't think it's the government that has the right to do that in private corporations.

Ms. Gavan, could you comment on that?

4:45 p.m.

President and Chief Executive Officer, Economical Insurance Group

Karen Gavan

I understand your track exactly, and that's the point we've made from the outset. The mutual policyholders have the right to vote, so they control—

4:45 p.m.

Conservative

Brian Jean Conservative Fort McMurray—Athabasca, AB

And to elect the directors.

4:45 p.m.

President and Chief Executive Officer, Economical Insurance Group

Karen Gavan

Yes, and elect the directors. They have the right to receive distributions from the company. Our bylaws certainly don't limit it to the current year's earnings.

Furthermore, they also have the right to any surplus assets on dissolution. That's even repeated in the winding-up act.

4:45 p.m.

Conservative

Brian Jean Conservative Fort McMurray—Athabasca, AB

In fact, as a director being elected by the shareholders, who they can elect themselves, they could actually vote to dissolve the company itself and to share in those proceeds immediately.

How do I buy some of these shares?

4:45 p.m.

A voice

Too late.