May 4, 2012
TOWARDS A NEW ERA FOR ECONOMICAL:
DEMUTUALIZATION PROGRESS REPORT XIV
Although it has not been long since our last report to you, we believe you should know about some
developments that have occurred recently and that are approaching.
Annual General Meeting of Mutual Policyholders: You are encouraged to join the Board of Directors and
senior management team at the Annual General Meeting of Economical Mutual Insurance Company at
10:30 a.m. on June 15, 2012 at Bingemans Ballroom, 425 Bingemans Centre Drive, Kitchener, Ontario.
There will be no vote on a demutualization proposal at this year’s Meeting since we are awaiting the
Department of Finance’s regulations that are needed for us to proceed. We will, of course, be pleased
to answer any questions you may have about the demutualization process at the Meeting. However,
the Meeting’s main purpose is to allow members to hear from management, receive the financial
statements for the year ended December 31, 2011 and vote on essential matters: the appointment of
the external auditor and the election of directors.
You will soon receive a package from Economical that includes the Annual Report and a comprehensive
and informative Proxy Circular, as well as a form of proxy you can use for voting. Mutual companies are
governed, ultimately, by their members. We encourage you to ensure that your vote is represented at
the Meeting and your views on the matters to be voted upon are made known, whether or not you are
able to attend.
Progress on demutualization regulations: The Department of Finance is continuing its complex work on
drafting these regulations and we continue to work closely with them, providing whatever assistance we
The Department has now posted a summary of the comments it received in response to its request for
public comment on demutualization of property and casualty insurance companies. Citing privacy
concerns, it has elected not to publish the full submissions at this time. The summary is available at this
Internet address: http://www.fin.gc.ca/consultresp/dffpcic-cdsamf-sumres-eng.asp. For your
convenience, we have also appended it to this Progress Report.
As part of this regulatory development process, and as we advised you in the last Progress Report, on
May 1, our CEO Karen Gavan appeared before the House of Commons Standing Committee on Finance
in Ottawa. Also appearing were other representatives of the mutual insurance industry and officials
from the Department of Finance. In both her remarks and a brief written submission, Karen explained
the facts and benefits of demutualization to legislators who may be influential in the process. We
believe Economical made a strong case for its views and the approach it has taken. We are hopeful that
the Finance Committee’s interest and our appearance has helped advance the development of the
Corporate preparation for demutualization: Economical is working with its financial advisors and
underwriters on the two tracks we consider the best routes to demutualization. We are watching and
analyzing market conditions for a potential Initial Public Offering. Concurrently, we and our financial
advisors have been providing further information about the company to strategic investors, to help
them gauge the potential for a transaction through a sponsored demutualization. Part of this
information will be Economical’s financial and operating results for the first quarter of 2012, which we
expect to announce in the last week of May.
Creating Value: A key element of Economical’s corporate strategy is to build leadership capacity at all
levels of the company. The strength of our learning and organizational development programs has been
recognized twice so far this year. Economical recently won the 2012 SkillSoft Perspectives Inspiring
Leadership Development Award. In February, the company was ranked sixth globally by Training
Magazine for excellence in workforce training and development. It is the people of Economical who
create value, and these examples of independent recognition are welcome confirmation of our
commitment to leadership development and enhanced employee engagement and productivity.
We look forward to seeing you at the annual meeting and, meanwhile, we will keep you fully informed
of further developments with these Progress Reports. If you have any questions, we invite you to
contact us or our CEO, Karen Gavan, at firstname.lastname@example.org. Thank you for your continued interest
John Bowey, MBA, FCA Gerald Hooper, FCA
Chair of the Special Committee Chairman of the Board
519-570-8500 ex 42997 519-570-8280
APPENDIX: FROM THE FEDERAL DEPARTMENT OF FINANCE WEBSITE:
SUMMARY OF CONSULTATIONS ON P&C DEMUTUALIZATION FRAMEWORK
Budget 2011 announced the Government's plan to introduce a framework to allow federal mutual
property and casualty (P&C) companies to demutualize, following the expressions of interest of some
P&C companies to convert to share companies. On June 30, 2011, the Government launched a 30-day
public consultation process to give all interested parties an opportunity to provide input on this
important issue. More than 80 submissions were received from a wide range of stakeholders (federal
mutual P&C companies, policyholders and employees, industry associations, insurance brokers,
accountants, actuaries, the cooperative sector and many other interested individuals).
Summary of Responses to Consultation Questions
1) Policy objectives
The consultation paper sought views on the appropriate policy objectives for the demutualization of
P&C companies, referencing the four objectives that support the life insurance company
demutualization framework: a) providing fair and equitable treatment to policyholders; b) maintaining
safety and soundness; c) fostering a competitive and efficient sector; and, d) establishing an orderly and
transparent process. Stakeholders generally recommended the same objectives for a P&C framework,
although differences arose in how the objectives should be reflected in the process for P&C
2) Process for Demutualization
Views were sought on the appropriate process for demutualizing in the P&C context. Regulations are
required under the Insurance Companies Act to set the terms and conditions of demutualization,
including to establish which policyholders are eligible to vote on demutualization and to receive
benefits, and the apportionment of benefits.
On the right to vote, each of the four dual policyholder companies—in which some policyholders are
mutual policyholders (i.e., have insurance policies with voting rights attached) and others are not—
recommended that only mutual policyholders be given a right to vote on demutualization. This view was
generally shared by responding mutual policyholders from these companies. Other respondents
recommended that the right to vote on demutualization be extended to all policyholders.
On the right to receive benefits, views were also divided, with two of the four dual policyholder
companies and responding mutual policyholders in general recommending that benefits be distributed
only to mutual policyholders. The other mutual companies and other stakeholders generally held the
opposite view and recommended that all policyholders share in the benefits. Some stakeholders went
further, recommending that benefits be distributed to the mutual sector or to charity.
On the apportionment of benefits, some stakeholders recommended that the framework give discretion
in apportioning benefits to reflect the unique circumstances of each case, allowing companies to take
into account factors such as premiums paid, contributions to surplus and the type of insurance policy.
Others were concerned that stakeholders could challenge a company's method of allocation and
recommended that the framework provide less flexibility and prescribe the manner of apportionment.
3) Impacts of Demutualization
The consultation paper sought views on the impacts that demutualization could have on the P&C sector,
and whether these needed to be addressed and how. Some stakeholders felt that demutualization
would increase competitiveness, such as by providing companies with access to equity to grow their
businesses. Others regarded demutualization as being driven by the prospect of windfall gains rather
than being in the company's or mutual sector's long-term interests. Concerns were expressed that
demutualization could lead to consolidation, reduce competition, access to services, and weaken ties to
the rural communities in which most mutual companies are based.
4) Number of Mutual Policyholders in Some Mutual Companies
Independent from the demutualization issue, views were sought on how companies with a dual
policyholder structure can ensure that they continue to have an effective governance structure, and
whether measures need to be taken to increase the number of mutual policyholders. This question
solicited a range of views, principally from the mutual companies.
Some companies were of the view that a small mutual policyholder base did not impact the effective
governance of their company. Other companies indicated that relatively few policyholders participate at
annual meetings, and recommended that steps be taken to increase awareness of governance rights.
Others recommended that dual policyholder companies be required to extend voting rights to
policyholders who have been with the company for a five year period or to have a minimum percentage
of mutual policyholders.