Highlights of developments since February 2015 draft regulations:
- Scope of conversion proposal terms to be negotiated by policyholder committees narrowed - now to include only terms related to the allocation of demutualization benefits and the selection of beneficiaries - all other conversion proposal terms to be drafted by the company itself.
- Conversion proposal to now include two-year plan of the converting company to promote share liquidity.
- Eligibility of non-mutual policyholders to participate in demutualization proceeds confirmed by government.
- Government to weigh benefits of sponsored demutualizations against benefits of takeover protection - may in the future propose sponsored demutualization regulations.
On July 1, 2015, the Government of Canada finalized the long-awaited regulations providing a framework for the demutualization of Canadian mutual property and casualty (P&C) insurance companies. The Mutual Property and Casualty Insurance Company Having Only Mutual Policyholders Conversion Regulations and the Mutual Property and Casualty Insurance Company with Non-mutual Policyholders Conversion Regulations (the finalized regulations), now in force, are intended to establish a transparent process for demutualization of P&C insurance companies, while ensuring that policyholders are treated fairly and equitably.
Released in draft in late February of this year, the regulations were open for public comment for 30 days and were discussed in detail in our March 2015 Insurance Law Update available here. Over 40 submissions were made to the Department of Finance (the Department) by federal mutual P&C companies, policyholders, employees, industry associations, actuaries and the cooperative sector. While the finalized regulations remain broadly unchanged, certain minor adjustments and clarifications were made in response to the comments received, as summarized below.
Comments accepted: adjustments and clarifications to the finalized regulations
Certain stakeholders of companies with a dual policyholder structure, such as Economical Insurance, were concerned that the mandate of the proposed committee of policyholders was to include conversion proposal provisions relating to the post-conversion structure and strategy of the converted company. These stakeholders noted that such provisions are better left to drafting by the company itself, which is better placed to develop concepts such as valuation, IPO terms and share structure. The finalized regulations now specify that only terms related to the allocation of benefits and the selection of demutualization beneficiaries will be negotiated between the mutual and non-mutual policyholder committees. All other terms will be drafted by the company.
Certain industry stakeholders pointed out the difficulty demutualization beneficiaries may have selling their new shares on public markets. As a result, the finalized regulations now require that, as part of a company's conversion proposal, it must describe the steps it will take to promote share liquidity within the first two years following conversion.
In response to requests for clarification, the Department has clarified within the regulations that the court may specify the purposes for which policyholder committees can use confidential information, and that such committees must be comprised of not less than three and not more than nine members. Further, the provisions respecting contracts related to demutualization were reworded to clarify that contracts between the demutualizing company and any associated entity, however associated, must be on market terms.
Certain stakeholders were emphatically concerned with respect to the obligations of actuaries in the demutualization process, including the rendering of the actuary's opinion on the allocation of benefits to eligible policyholders based on the factors set out in the regulations. The Office of the Superintendent of Financial Institutions (Canada) consequently intends to release a transaction instruction designed to provide greater guidance to actuaries taking part in the demutualization process.
Stakeholders were, by the numbers, most focused on the criteria for eligibility to receive the benefits of demutualization and, for companies with a dual policyholder structure, the distribution of those benefits as between mutual and non-mutual policyholders. Over half of the submissions received during the comment period related to these concerns.
Many responding mutual policyholders of companies with a dual policyholder structure expressed a desire to keep the right to vote on demutualization, as well as the benefits of demutualization, exclusive to mutual policyholders. Others wanted the regulations to prescribe the portion of demutualization benefits eligible for distribution to non-mutual policyholders. The Department heard from individuals concerned that their specific type of policy (such as a policy of a subsidiary of a mutual P&C company) would not meet the eligibility criteria, thus disqualifying them from receiving the benefits of demutualization.
The Department sought to ameliorate the concerns relating to the distribution of demutualization benefits by reiterating its position that the proposed four-step negotiated process strikes the appropriate balance between the corporate governance rights of the mutual policyholders and the ability for policyholders with a reasonable interest in the company to participate in, and benefit from, demutualization. It further stated that eligibility concerns are adequately addressed by the proposed framework's inherent flexibility, which allows policyholder committees to propose distribution of demutualization benefits to persons or classes of persons other than typical eligible policyholders.
Comments taken under consideration
The proposed regulations' two-year restriction on converting companies having a major shareholder, meant to preclude both sponsored demutualizations and takeovers, also drew significant commentary. While the Department rejected outright a request that the restriction be increased to five years (on the basis that it would unduly restrict the future options of the converted company), it has taken under consideration comments arguing that the ban on sponsored demutualizations could impose, on smaller mutual companies, a significant cost barrier to demutualization (due to the high cost of complying with the regulations). The Department conceded that it remains unclear whether the benefits of sponsored demutualizations outweigh the benefits of the takeover protections, and has decided to examine this question in greater detail at a later date to determine whether it should bring forward a proposal on sponsored demutualizations.
Finally, the government refused to adopt requests to allow a converting company to incorporate holding companies under the Canada Business Corporations Act rather than the Insurance Companies Act (to avoid the company suffering a competitive disadvantage against its new peer group (which would include companies with business corporation holding companies)). It also refused requests to include in the regulations a mechanism for resolving disputes related to benefits eligibility. The Department stated it would revisit these issues in the future as needed.