A demutualization hell awaits any financial advisor or insurance broker with a client who owns a policy originally written by a company that was acquired by any of the five major insurers that now plan to go public.
Passing from policyholder to shareholder is complicated as it is. In many cases, the policyholder can opt for cash, common stock or a combination of the two in return for surrendering voting rights. That means advisors should check the client’s tax position, current holdings and investment philosophy, as well as the market outlook for the insurer’s shares after the initial public offering, before the client makes his or her choice.
The equation becomes more complex for those who hold policies with companies such as North American Life Assurance Co., acquired by Manufacturers Life Insurance Co. in January 1996, Prudential of England, absorbed by the Mutual Life Assurance Company of Canada in April 1995, or New York Life, officially absorbed by Canada Life Assurance Co. in April 1994.
Headaches are also in store for policyholders of Metropolitan Life Insurance Co. of New York’s Canadian unit, bought by Mutual Life in March 1998, and the Canadian Union Insurance Co., which was swallowed by the Industrial-Alliance Insurance Co. in December 1996. The fifth insurer planning to demutualize, Sun Life Assurance Co. of Canada, has yet to say how it will handle policies it acquired from Confederation Life. That headache intensifies if a policyholder happens to own policies drawn on both companies that were involved in the takeover.
In other cases, clients may hold policies with more than one of the big five insurers. Since the criteria for the final decision include the market outlook for each of the insurers, it may be best to take cash in one case and stock in the other.
The main problem involves the duration and the policy’s cash value, two of the criteria used to calculate the policyholder’s payout. The issue had occasionally surfaced before Mutual’s policyholders approved its demutualization plan in a June 10 vote in Waterloo, Ont.
Mutual’s decision to calculate the duration factor in Prudential policies as starting from its takeover date, regardless of actual life of the policy, is similar to the approach taken by Canada Life and Industrial-Alliance. Since the MetLife deal closed after the eligibility cutoff date of Dec. 29, 1997, Mutual says it has no obligation to provide payouts to MetLife policyholders. The U.S. parent company has started planning its own demutualization but has not decided how to treat its former Canadian customers.
At the Waterloo meeting, Mutual’s decision led to a series of questions from Ted Snider, a former Prudential agent and now president of Toronto-based Snider Financial Group Inc.
Snider unsuccessfully demanded a better deal for Prudential policyholders and says he may ask the federal government to examine the deal.
‘The Department of Finance needs to be satisfied that it is being done correctly,’ says Snider, who is investigating the possibility of a classaction suit on behalf of all eligible Prudential of England policyholders.
‘We can try to seek fairness for Prudential policyholders which I am totally convinced is not now happening,’ he says. ‘This one would be looking for significant damages.’
Mutual says Prudential of England and its shareholders received the retained earnings of its Canadian division at the time of the deal and that Mutual received only policy liabilities and matching assets, the book of business.
Manufacturers Life plans to calculate the duration component of North American Life’s policy payouts starting from the original date of the contract. However, Manulife plans to adjust the formula when computing the policy’s cash value for purposes of calculating the payout of North American Life contracts. This reflects the assigned book value of $321 million on the North American policies at the time of the takeover, says Peter Rubenovitch, chief financial officer. ‘That was a small fraction of the value of Manulife at the time,’ he says.
In practical terms, this means that for purposes of calculating the value of policy duration as part of the total payout, the clock starts on a North American policy with its actual start date, which could be decades before the takeover.
On the downside, an eligible North American policy and an eligible Manulife policy of equal cash value would not receive the same credit. ‘All of our categories get their whole pie. It’s just that their pie is less opulent,’ he says.
The debate then turns to other issues, including ownership of the historic value created in a mutual insurance company. Canada Life’s current policyholders – in effect – share in value that began accumulating 152 years ago, while New York Life policyholders do not have that opportunity. It also involves a fixed number of dollars. Since demutualization means apportioning the assets of the insurer, paying more to the disgruntled policyholders would mean paying less to policyholders who chose the stronger company at the outset.
‘It’s hard for us to distribute more to New York Life people when they weren’t part of the company before April 1, 1994,’ insists Rob Smithen, Canada Life’s chief financial
‘They didn’t build up any value in Canada Life until then.’