Hammering out workable P&C solutions

As time went on, other perils were added and now most mutual insurers provide a broad range of coverage, including auto and business insurance.

Most of these insurers are deeply rooted in the respected traditions of mutuality – and say they want to keep it that way. Well-capitalized and fiercely independent, they see no reason to switch their corporate structure from a mutual company, in which policyholders are the owners, to a stock-held company owned by shareholders.

But the federal and some provincial governments are at least talking to P&C insurers to put rules and regulations in place in case the companies decide to shrug off mutuality and become stock-held in the future.

For example, officials at Alberta Treasury say a new insurance act, including a section on demutualization, was passed in mid-May. The legislation is being discussed with stakeholders who will provide input to the government on demutualization regulations that still need to be finalized. Those regulations are expected to come into force in the first quarter of next year. Some other provinces are also looking at the issue or say some form of legislation allowing the conversion already exists in one form or another.

There are about 230 property and casualty insurers in Canada. About 110 are mutual companies, either federally or provincially regulated, says Normand Lefrenière, president of Ottawa-based Canadian Association of Mutual Insurance Companies. The rest are generally foreign-based mutuals, such as State Farm Mutual Insurance and Liberty Mutual Insurance Co., while others are stock-owned by foreign parents, such as Allstate Insurance Co.

Seven of the largest P&C insurers are Canadian-based companies regulated by federal jurisdiction. The P&C lobby group, the Insurance Bureau of Canada, has had some preliminary talks with the Department of Finance to set up demutualization regulations – the same kind of process officials held with Canada’s largest mutual life insurers. Legislation for life insurers was completed in March.

But some of the issues for life insurers don’t apply to P&C companies, a Finance spokesman says. For example, in the recent demutualization legislation for life insurers, companies give ‘participating’ policyholders money or shares in exchange for voting rights: in P&C companies, there’s no such thing as a participating policyholder. Then, there’s the question of whether former policyholders should be included in any distribution, as has been the case in at least one instance in the U.S. How to value a demutualizing company is another concern that would have to be handled, he says.

Still, Randy Bundus, vice president and general counsel with the IBC, says he expects the next year to bring some ‘workable solutions for the P&C sector’ in terms of demutualization legislation for these companies. Bundus says talks with the federal government may not get going until the end of September or early October.

While officials from the seven federally regulated mutual companies say they are not interested in demutualizing now, most want to be in on the regulation discussions between the IBC and Finance.

‘Our approach is that while we have no immediate interest in demutualization, I think if we ever did consider it, it would be a good idea to have the regulations in place,’ says Noel Walpole, president and chief executive of Economical Insurance Group in Waterloo, Ont. ‘So we are in fact working through IBC and Finance to begin the process of [getting regulations for] demutualization.’

Shunning the demutualization trend has benefits, the insurers say. The main one is that remaining a mutual makes an insurer immune to hostile overtures.

‘We’d be subject to takeover,’ says Ray Simmer, vice president at Saskatchewan Mutual Insurance Co. in Saskatoon. ‘We’re a small mutual and one of our fears is we’d be swallowed up by one of the larger companies.’

Staying a mutual also means the company doesn’t have to worry about any conflict that could arise between the contract needs of policyholders and the more profit-oriented interests of shareholders, says Gregg Hanson, president of Winnipeg-based Wawa-nesa Mutual Insurance Co.

As well, a mutual has the luxury of taking a long-term perspective, instead of being preoccupied with the next set of financial results. ‘We’re building this company for the next generation, not the next quarter,’ Hanson says.

Add to the mix the fact that institutional investors are becoming more active in the business of companies. That means a need for a constant flow of information, including spin doctors and a communications department – which adds to expenses. ‘The price of dissemination of information can increase costs with no underlying value for the customer,’ Hanson says.

But while the mutuals cannot be taken over, they can still buy up other companies or merge with other mutuals. Wawanesa, for example, has built up a surplus over its 102-year history, giving it an $800-million warchest. (Surplus is similar to retained earnings in a public company.)

That surplus can be used to buy another company, build strength in the insurer or be returned to policyholders in special dividends. It can also employ the surplus to take additional risks. So, says Hanson, instead of paying someone else to take up risks through reinsurance, a mutual with a healthy surplus can pick up the tab itself – at less cost. Taking additional risks may mean increased volatility, but robust retained earnings help make the ride smoother.

Hanson isn’t concerned that others – maybe even the companies that decide to demutualize – will surpass Wawanesa in growth. Hanson says Wawanesa, which had no M&A activity from 1988 to 1997, grew more than all but one of the other top 10 companies, most of which had significant M&A activity during that period. In that 10-year timeframe, Wawanesa’s annual written premiums increased by 113%, he says. The only other insurer to surpass it was General Accident Assurance Co. of Canada, whose written premiums rose by 115%, a large part of that through acquisitions, he adds.

One company keeping an eye on demutualization happenings is Liberty Insurance Co. of Canada, based in Unionville, Ont. But because it is a branch operation, its ownership structure must follow the desires of its U.S. parent, says president and chief executive officer Richard Evans.

He says parent Liberty Mutual Group has no interest in demutualizing now, although it’s a trend that should be watched for competitive reasons.

Glen Johnson, president of the Ontario Mutual Insurance Association in Cambridge, Ont., says the farm mutuals that make up the membership of his provincial organization also aren’t looking to demutualize.

‘Our companies don’t have the same motives [as life insurers],’ Johnson says.

‘We are very well capitalized and we don’t really need the funding to do other business ventures. Maybe we’re not as aggressive as doing business as the federal life insurers are,’ he says.