Fear chills smaller guys

The large insurers say future acquisitions will become more manageable if they can offer shares in their companies as partial or full payment, an impossible strategy for a mutual company, which is effectively owned by policyholders.

Several smaller mutual life insurers such as Waterloo, Ont.-based Equitable Life Insurance Co. of Canada, Toronto Mutual Life Insurance Co. and Survivance Mutual Assurance Co. of St-Hyacinthe, Que., see little promise of payoff with demutualization and fear being swallowed up by one of the larger companies or a bank with deep pockets.

‘It would not do anything for us,’ says Jean Bouchard, president and chief executive officer of Survivance Mutual. Like other mutual company executives, Bouchard says his company’s small size means that even as a stock company, it could never offer sufficient shares or cash to acquire a suitable company or book of business.

Equitable Life also sees a limited market for acquisitions within its price range, says chairman Jack Weber. ‘[Large-scale] acquisition opportunities for companies of Equitable’s size are very limited,’ he said at a recent board meeting. ‘From this perspective, demutualization is not an attractive option.’

Becoming publicly held would mean disappearing from the insurance landscape, says Mark Courtepatte, vice president of group and individual operations at Equitable Life. ‘We’d be swallowed up in the blink of an eye and would disappear,’ he says.

In fact, small insurance companies have no less protection from takeover than four of the five larger companies committed to demutualization. Federal regulations prohibit hostile takeover of any of these companies for two years after demutualization. Quebec-based Industrial-Alliance Life Insurance Co. operates under provincial laws.

Under regulations adopted in 1992, other insurers do not have that safeguard, leaving Equitable and others theoretically open to Canada’s insurance-hungry banks.

Legislative restrictions also work against acquisitions by provincially chartered insurers such as St-Foy, Que.-based L’Entraide Mutual Life Insurance Co. ‘Even if I had the money, I could not do it,’ says Gaetan Gagné, the company’s president and chief executive officer.

Federal regulations prohibit federal insurers from merging with provincially chartered companies, a restriction the Canadian Life and Health Insurance Association has asked Finance Minister Paul Martin to consider changing. Converting from a provincially chartered insurer to federal status merely to sidestep this problem would involve navigating a series of political and financial hurdles including hefty start-up costs.

Equitable Life finds advantages in its mutual status including an unusual type of niche marketing. The company plans to punch up its relationships with independent brokers who prefer working with mutual companies. These brokers believe they and their customers will benefit from working with an insurer that can operate without the pressure of daily market ratings and profit figures.

‘That’s another difference between a stock and a mutual company,’ says Courtepatte. ‘As a stock company, I would have great difficulty making this type of business decision because of [having to please]shareholders. There’s a lot of pressure on quarterly earnings.’

While companies such as Equitable and Survivance take a ‘not now and not ever’ view of demutualization, Gagné at L’Entraide takes a ‘not now but maybe later’ approach.

The glare of publicity and market interest surrounding the demutualization plans of the five major insurers means L’Entraide could get lost in the shuffle if it tries to become publicly held this year.

A future decision to demutualize would depend on many factors, including the reaction of policyholders. ‘I don’t know right now what their reaction will be,’ says Gagné. The company’s status as a regional niche player may mean it does not have to grapple seriously with demutualization. Since L’Entraide has no national or international aspirations, it may be able to continue and grow by cost-cutting and forming strategic alliances that do not threaten its mutual status.

Smaller insurers looking to demutualize face the sheer market presence of the five major companies. ‘None of the smaller companies are anxious to get lost in the glare of the bigger players. They wouldn’t get as much attention,’ says Neil Parkinson, a partner in KPMG’s insurance practice.

They also do not have the kind of brand recognition to reassure analysts and conservative institutional investors, nor promise the same kinds of economies of scale, as their larger counterparts.

But if the big guys do well in their demutualizations and create a track record, analysts and bankers will have a greater comfort level and brokers will find institutional and retail investors reassured by the earlier successes.