Finance Committee on May 1st, 2012

[Karen Gavan]

At this point in time it's too difficult to estimate the total value that outside investors would be prepared to pay for Economical. We have refrained from speculating on that on purpose, because individuals, like the reporter in the National Post, incorrectly make assumptions and calculations. It is also dependent on the actual demutualization rules.

We would expect there would be a formula that would comprise a fixed component that would relate to the policyholders losing their voting right, and a variable component, which in our submission to the Department of Finance, we suggested would likely be weighted on a number of factors. From looking at our business, we would think the duration that the policy had been in force is a very important factor.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

So all in all, policyholders will lose their vote, won't get any of those proceeds eventually, because the shares will go to the 943 people. As a rule of thumb, in terms of the value of what the company would become, we're still talking about, currently, a surplus of $1.3 billion. It might not be exactly that at the end, but it will be close to that.

In the end, the shares, when there is a first submission, will actually likely have a value that will be close to that $1.3 billion, which is currently the value you would extract from the company if you decided to de-incorporate. Those 943 individuals—

[The Chair, Conservative, James Rajotte]

You have 30 seconds left.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

My last question is this.

You mentioned that brokers provided an opportunity to become mutualized, but that people were put off by the fact that they might have to pay money out in difficult situations.

Generally speaking, when brokers try to sell mutual insurance policies, do they promote the benefits, such as having a substantial right to vote in the mutual company?

[Karen Gavan]

From all of my discussions I have had with brokers who have sold these policies over the years, I don't believe there was ever any anticipation that there might be significant proceeds from demutualization. I don't think that was a factor at all.

I believe those who were willing to sign the premium note and chose to participate as mutual policyholders did so with a community of interest, with the company.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Hoback, please.

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you, Chair.

Thank you, witnesses.

This is actually a very interesting debate. You go through the weeds and it can be a little confusing. I know my colleagues are getting a little confused on the assets you're actually carrying on hand, the $1.3 billion versus the established market value, which the market would establish at that point when you put those shares for sale. It may be $1.3 billion. It might be $5.4 billion. It might be $100 million. We really don't know. Is that correct to say?

[Karen Gavan]

That's correct.

[Randy Hoback, Conservative, Prince Albert, SK]

I think it's also correct to say, it seems like everybody at the table is in agreement that demutualization is a tool that should be an option for mutuals to utilize, if that's the next stage in the growth of their company. Is that fair to say? Would I have consensus? I think I sense that.

[Karen Gavan]

Yes.

[Randy Hoback, Conservative, Prince Albert, SK]

Normand, would you agree? There are some disagreements about how, but—

[Normand Lafrenière]

Yes, I disagree as to where the money should go. A mutual that wishes to demutualize should be allowed to do so.

[Randy Hoback, Conservative, Prince Albert, SK]

I only have five minutes; I don't mean to be rude.

This is where I'm going to go with this, then. When I hold a mutual, do I receive a dividend? Do I ever see a payment? You're carrying $1.3 billion, approximately, in cash. Maybe that's right; maybe it's wrong. Let's use that number, anyway. I'm holding a mutual in your company.

First of all, what do you require to carry in cash? Do you need to carry $1.3 billion? Or is it only $500 million? Let's say, if it were $500 million, could you pay out the $800-million excess to the mutuals at that point in time?

[Karen Gavan]

Yes, so of the $1.3 billion, that represents a 269% MCT ratio, where our regulatory requirement is a minimum of 150%. In realistic terms you would never operate at the 150% level.

So there is excess capital in there. Yes, our mutual policyholders are entitled to distributions from the earnings of the company. We have, in at least the last 30 years, always paid a small distribution.

[Randy Hoback, Conservative, Prince Albert, SK]

Again, at the start of your mutual company, you had these mutual policyholders. I just want to know the access for people to become a mutual policyholder or not to become a mutual holder. Can a guy walk in off the street and say, “I want to buy a mutual in your company tomorrow.”? Or are these mutual policies handed down from family member to family member through generations, which some of the other witnesses are saying?

[Karen Gavan]

No. They're non-transferable policies. When Economical started, in history, we started solely issuing mutual policies, but as we expanded beyond what was then Berlin, Ontario, which is now Kitchener-Waterloo, people were unwilling to sign the premium notes.

Furthermore, the Ontario Insurance Act governed our operations in Ontario. It restricted the issuance of policies on the mutual system to, I think, fire, livestock, and weather risk. If you wanted to sell any other type of policy, it had to be a cash policy. We have extensive history in our board minutes, going back, about how consumers were unwilling to buy mutual policies and how difficult it was, and that it was only where the broker was very trusted by the policyholder, I think, they were successful. You will see that our mutual policies are centralized in southwestern Ontario given our roots.

It's people within a community of interest to the company, people who lived and worked in the community and knew that we gave back lots to the community. So it tended to be very localized.

[Randy Hoback, Conservative, Prince Albert, SK]

When we go to demutualization, for example, in your company, again they establish a market value, the shareholders would take and turn the mutuals basically into shares of x number, that would be again sold on the TSX, I assume, or the market. The $1.3 billion that you have sitting in cash would stay in the company. Is that correct?

[Karen Gavan]

Yes.

[Randy Hoback, Conservative, Prince Albert, SK]

So as far as your requirements for what you have to keep on hand, it still stays the same, does it not?

[Karen Gavan]

Yes.

[Randy Hoback, Conservative, Prince Albert, SK]

What is the big benefit then for you as an organization? By demutualizing what is the next step you're taking that allows you to grow? What is it about that?

[Karen Gavan]

For example, at 269% MCT we have excess capital, but it is nowhere near enough capital to participate in some of the consolidation that has been occurring in our industry.

If you look in 2011, AXA sold their Canadian operations. Intact bought it, one of our competitors. They went to the market and they raised capital to buy it. As a mutual company we couldn't even entertain looking at an acquisition of that size.

[The Chair, Conservative, James Rajotte]

Very briefly, Mr. Hoback....

[Randy Hoback, Conservative, Prince Albert, SK]

Talking to my local agent, he said there was something like one mutual company for every 100,000 Canadians. Is that a fair statement? Is there a lot of competition in the sector? Maybe it's not fair to ask you that.

[Karen Gavan]

I'm not sure that's the right statistic. I don't know relative to Canadians, but I know in total there are over 300 P and C insurance companies licensed to do business in Canada. There's lots of competition.