|
© Copyright 2000 Rogers Media. The following article first appeared in the April 2000 edition of
BENEFITS CANADA magazine.
Demutualization proceeds
Demutualization means billions in proceeds. But its impact on the group market has only
begun.
By Murray Gold
Five of Canada's largest mutual life insurance companies--Mutual Life (now Clarica), Manulife, Canada Life,
Sun Life and Industrial-Alliance--have already or will soon complete the process of demutualization.
Until now, they have been owned by their participating (or par) policyholders. With demutualization, these
companies become publicly traded corporations and will distribute shares or cash to their policyholders.
Some of these affected policyholders are employers or employer organizations who hold group life and
disability insurance policies, and group annuity and group registered retirement savings plan contracts
pursuant to which their employees receive benefits. This intersection of demutualization with employee
benefits has already generated a number of questions and issues.
Only par policyholders will receive proceeds from the demutualization. Par policyholders are those who held
a voting policy, i.e. a policy that entitled them to vote at a meeting of policyholders. Further, an
entitlement under the policy to participate in profits is also significant to the policyholder's
entitlement to a distribution. Policyholders may wish to carefully review the terms of their policies to
determine whether or not they have these features.
The next major question relates to how the proceeds of demutualization are divided among the par
policyholders. The regulation under the Insurance Companies Act requires that a detailed description of the
method of allocation be disclosed in a conversion proposal. However, the regulations do not prescribe a
single distribution formula. In other words, the regulations do not require that the value of the
demutualizing company be allocated among par policyholders in any particular way. They simply require that
the formula used to distribute the company's value be, in the opinion of an actuary, fair and equitable.
Group policyholders may wish to review the formula, and to confirm that it is fair and equitable in its
application to them.
A third important issue arising with respect to group policies, is who is entitled to the proceeds of
demutualization. Is the employer entitled to keep all of the proceeds because it is the named policyholder?
Are the employees entitled to the proceeds because premiums were paid by them? Are employers and employees
entitled to an equitable share of the proceeds based on their respective premium payments? Do the
demutualizing insurers have an obligation of disclosure to employees covered by group policies? Do
employers have obligations of disclosure towards trade unions that represent their covered employees, or to
the employees themselves?
Some or all of these issues are likely to be litigated sooner rather than later. Although numbers are hard
to come by, one might guess that the value of demutualization proceeds is about $11 billion. Of course, a
relatively small part of that may be attributable to group policies. In some cases, the value of
demutualization proceeds may be so small as to not warrant much attention. But, in other cases, the amount
of the proceeds will be significant, and care must be taken as to their proper disposition.
Over the longer term, demutualization may also have implications for the group insurance market. In the
past, management may have been less accountable to policyholders of mutual companies than to shareholders
of publicly traded shared capital companies. Shareholders have clearly identified interests, and legal
mechanisms for pursuing and protecting those interests, whereas mutual insurance company policyholders may
have paid less attention to their ownership interests and responsibilities to the benefits under their
policies. This will change with demutualization.
Accordingly, we may see that the converted mutual companies now have greater financial discipline than they
did in the past. This may imply higher premium rates, and tougher benefits policies. In an already
difficult market for group disability policies, these changes may make things even tougher for plan
sponsors.
Murray Gold is a partner in the pension law section of Koskie Minsky in Toronto.
|
News
News
