ECONOMICAL Insurance has submitted its demutualization conversion proposal to the federal regulator and its contents will remain confidential until a review is completed.
The Office of the Superintendent of Financial Institutions has not offered a timeline for how long that may take.
The proposal contains a method of allocating financial benefits resulting from demutualization, as agreed upon by two separate committees of mutual and non-mutual policyholders.
OSFI had originally set a deadline of Feb. 22 for the submission of a demutualization proposal. That deadline was later extended to June 30.
“The conversion plan is a key piece of our demutualization, and its submission to our principal regulator meets an important deadline and maintains our momentum on the path to becoming a public company,” said John Bowey, board chair of Economical.
“We are gratified by the effort, creativity, and commitment that has gone into achieving this significant milestone.
“Now, we remain focused on the considerable work ahead that will be required to complete the demutualization process and a successful initial public offering.”
If OSFI approves the conversion proposal, Economical expects to call another special meeting on demutualization at which eligible mutual policyholders decide whether the process will continue.
If that vote is successful, all eligible policyholders will be invited to a third special meeting to vote on the conversion plan and proceed with demutualization.
If both meetings are successful, Economical may then apply to the federal finance minister for final approval to demutualize.
“As the process continues, Economical will actively monitor market conditions that may affect the timing and outcome of the initial public offering which would follow the demutualization,” the insurer said.
This is but the latest step in a laborious — and, at times, litigious — process that began in December 2010, when a group of so-called mutual policyholders raised the prospect of demutualization.
Generally speaking, ‘customers’ of a mutual insurance company are considered members, and thus co-owners.
But Economical’s mutual policyholders constitute a special class of members, who in decades past agreed to chip in financial support if the insurer ever ran short of funds.
At one time this was a fairly common feature of mutuals, but Economical is the last mutual of any size in Canada to retain separate classes of members.
It is a large and stable company and no mutual policyholder has ever been called upon to bail it out.
But some of the mutual policyholders saw in demutualization an opportunity to convert their particular memberships into ‘shares’ of a cash surplus of up to $1bn in surplus assets.
Initially the board and management of Economical opposed this idea, and in late 2010 and early 2011 this disagreement erupted into open warfare as the dissident policyholders engaged a venture capital firm called VC & Co. that led the charge to replace the board.
There followed a flurry of competing information circulars and court battles.
The dissident policyholders won a couple of skirmishes but ultimately lost the battle of the boardroom.
The victorious board members then launched their own campaign for demutualization in 2011. No Canadian p&c mutual has ever converted to a share-based company.
Several major life insurance companies did so in 1999, but the federal Finance Department determined that the rules governing those transitions did not apply to p&c mutuals.
The federal regulator also made it clear early in the process that there would be no exclusive windfall for mutual policyholders.
Eventually an Ontario Superior Court judge worked out the convoluted process for drawing up two committees, one for each class of policyholder.
Federal regulations provide that a converted company must be widely held, with no one having more than 10% of any class of shares, for at least two years after the conversion.
This rule was designed to prevent a hostile takeover of the company shortly after conversion, and to prevent ‘sponsored demutualization,’ in which an investor agrees to buy a controlling interest in the company as part of the process.
Last February the negotiating committees arrived at an agreement in principle — which, like almost every aspect of the glacial process, has remained shrouded in secrecy.
An Ontario Superior Court order bars company officials, committee members and their advisers from revealing anything of substance about the negoti-ations.
All that is known about the document sent to OSFI late last month is that it must set forth exactly how Economical Insurance will convert to a public company with share capital.
It must include the negotiated method of allocation, the manner of distributing benefits, and opinions from financial and actuarial experts.
OSFI will then review Economical’s submission, as well as all other information required by the demutualization regulations, before authorizing Economical to call the next special policyholder meeting on demutualization.
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