Economical is a Canadian Property and Casualty (P&C) Insurance Company offering, among other things, car insurance, home insurance, agriculture insurance, and surety insurance. They also own the direct-to-consumer (DTC) insurer Sonnet. In late 2021, Economical announced that they had officially completed demutualization. This is the process of transitioning from ownership by policyholders to ownership by shareholders.
According to Economical CEO Rowan Saunders, the board of directors had been discussing demutualization since early 2015. In this article, we’re going to break down Economical’s process of demutualization, the benefits, and the future-looking impact it will have on clients.
What are the benefits of demutualization?
When ownership of a company shifts from policyholders to shareholders, insurance companies have access to a variety of different advantages. Often, they can access necessary capital and become a more competitive company in the industry. Today, many mutual insurers are under pressure to raise their stakes in the financial services market since banks and insurance companies provide similar offerings.
Demutualization shifts a business into public ownership, which opens new gateways for expansion. After the policyholder vote in 2021, Saunders said that access to capital markets increases Economical’s access to financial opportunities. These opportunities can include common equity, preferred shares, and the introduction of debt into balance sheets. As a result, the public company gains access to more cash that benefits future advancements, acquisitions, and more.
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Economical hopes that demutualization will allow them to quickly rech their goals. As of right now, they are the first Canadian Property and Casualty insurer to accomplish go through demutualization.
Economical’s demutualization process: 2015 – present day
Economical’s board of directors voted in favour of demutualization in 2015. Not long after, P&C demutualization regulations were passed. One of the initial steps of the demutualization process started with Economical’s geographically targeted social media campaign. It intended to boost visibility and reach thousands of policyholders in an efficient way. Economical was trying to connect with individuals that held a policy for the 12-month period ending November 3, 2015.
In order to create an initial proposal, two court-appointed committees represented mutual and non-mutual policyholders to reach a compromised negotiation. On March 20, 2019, nearly 99% of Economical’s policyholders voted in favour of the previously discussed demutualization proposal. The proposal submitted to the Office of the Superintendent of Financial Institutions (OSFI) conferred that 20% of benefits go to mutual policyholders, $100 million go to a charitable organization, and the remaining amount goes to eligible non-mutual policyholders.
Demutualization delays
Canadian capital market changes during the pandemic delayed the demutualization process. On March 31, 2020, Economical’s Chairman, John Bowey, stated, “our Board and management are actively monitoring capital market dynamics before determining whether any re-assessment on timing is necessary for a successful initial public offering (IPO).”
At this time, Economical had to take steps to ensure demutualization and IPO completion. Finally, the company had to complete all regulatory and governmental steps while ensuring positive capital market conditions. Eventually, Economical received permission from the federal finance minister to transition to a stock company. Although 2020 was challenging, the company finished its demutualization process in 2021.
Since Economical demutualized, they will be traded on the stock exchange, and need to be ‘widely held’ for up to two years. The completed IPO was upwards of $1.6 billion. The money was distributed in the form of cash or Definity shares to over 630,000 eligible policyholders. When a company transitions from customer and client ownership to the public stock market, it’s normal to have some questions about how this will impact clients.
What Economical’s demutualization means for its clients
If you are familiar with the process Manulife, Clarica, Canada Life, or Sun Life went through 20 years ago, the same goes for Economical today. When Economical first started its demutualization efforts, they predicted the clients insured by the company could receive upwards of $300,000-$450,000 in benefits if they were an eligible mutual policyholder.
However, these numbers may fluctuate today based on the actual allocation of capital. Non-mutual policyholders will also receive benefits, but it is monetarily much less than mutual policyholders. According to Economical’s demutalization proposal, clients will need to retain their shares for 180 days before selling. The proposal states that common economical shares are also subject to market stabilization restrictions.
Policyholders of mutual insurance companies have more control over the running of the company, as well as who joins the board of directors. Since your premiums contribute to a company’s profit, you get your money back as a dividend.
Demutualization and corporate dividends
Mutual companies don’t have to disclose the details of how they calculate dividends. Usually, it’s the leftover capital after paying all expenses. When you receive dividends, you have a few options. You can get them in cash, apply the amount to your premium, purchase extended term insurance, purchase paid-up additions, or let the money accumulate with interest. u
Since Economical demutualized, some policyholders may transition to shareholders. Many insurance companies recognize the importance of policyholders and strive to give them a financial stake in the company. Most likely, Economical will be able to stay agile in the industry and respond effectively to challenges. They will have increased stock flexibility to foster improvements, responsiveness, and overall expansion efforts.
Economical strives to meet all the insurance needs of policyholders while maintaining the overall provisions of the policies, even after proposal approval. More and more insurance companies are converting to stock ownership as the industry evolves. Depending on your position as a policyholder, you may receive benefits from the transition.
Hopefully, moving forward, Economical uses this advancement to better serve and execute the insurance needs of their clients. Only time will tell the true changes the company will experience as a result of demutualization in the coming years.
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About The Author: Arthur Dubois
Passionate about personal finance and financial technology, Arthur Dubois is a writer and SEO specialist at Hardbacon. Since his arrival in Canada, he’s built his credit score from nothing.
Arthur invests in the stock market but doesn’t pay any fees because he uses National Bank Direct Brokerage online broker and Wealthsimple’s robo-advisor. He pays for his subscriptions online with his KOHO prepaid card, and uses his Tangerine credit card for most of his in-store purchases. When he buys bitcoins, it’s with the BitBuy online platform. Of course it goes without saying that he uses the Hardbacon app so that he can manage all of his finances from one convenient place.
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