Mutual insurance companies scramble to expand
By: Mahebub M. Rupani – July 15, 1999
As an insurance professional, I was struck by the realization that one has to be inside an insurance company to notice major changes that are taking place in the affluent and practically exclusive industry that insurance has always been. Seven years after landing in my new country of adoption, I was able to get my “foot in the door” of the insurance industry of Canada as a programmer analyst . Almost immediately, on joining Canada Life Assurance Company, I became aware of major upheavals taking place in the insurance industry. Four of the largest mutual insurers were planning to convert to stock companies. At Canada Life ‘demutualization’ and ‘Crown Life acquisition’ seemed to dominate the day-to-day function of senior management.
While the term ‘acquisition’ is self-explanatory and understood by most people, ‘demutualization’  needs to be explained. Demutualization is the process of changing the corporate structure of a mutual insurance company to a stock company. A mutual company belongs to the policyholders who have the right to determine the terms that the company may offer for conducting its business. Mutual companies are known to offer highly competitive rates of premium to their policyholders.
When a mutual company demutualizes, the ownership of the company passes from the policyholders to shareholders. The shareholders have a different approach to the conduct of business: they are more concerned with return on equity. The question of competitive rates of premiums has little significance if higher returns on equity are achieved.
Canada Life announced the intention to change its corporate structure from a mutual company to a stock company about the same time as announcing the acquisition of Crown Life Assurance Company. The dual announcements came in the wake of similar announcements (and accomplished conversions) by other insurance companies across North America. The fervour with which these processes were being pursued, prompted my desire to study the demutualization and acquisition phenomena closely.
Companies on the path to demutualize can choose between two forms of reorganization: the mutual holding company and full demutualization. Both change the policyholders’ ownership rights either limiting them or eliminating them. In a mutual holding company form, a new mutual tier is placed over the converted stock company and the policyholders continue to control, theoretically, the new holding company that must hold at least 51% of the demutualized company. In this form of reorganization there is no distribution of the assets among the policyholders (owners) of the demutualizing company.
Full demutualization, in contrast, affords the policyholders tangible benefit from a distribution of the company’s assets. In return the policyholders give up their ownership rights, trading them for cash, stock or other liquid considerations. “Eventually, either kind of entity can float a public stock offering. Demutualization demands this so as to raise the money to compensate the policyholders. A mutual holding company may or may not ever go public.” - (Feature Story: June 1998 Life Association News, The End of Mutuals by Jeffrey R. Kosnett, LAN Editor)
The process of demutualization
A number of steps have to be followed in the lengthy and complex demutualization process in Canada. These steps include the following:
· The company develops a plan for converting to a stock company
· The plan is reviewed by external actuaries and investment experts
· The Board of Directors receives the plan for approval
· Regulators in the countries where the demutualizing company is operating review the plan
· Participating policyholders are asked to vote on the plan
· Canada’s Minister of Finance approves the plan
Canadian insurance industry is regulated at federal level. In 1993 regulations were drafted that allowed smaller insurers, with assets not exceeding Cdn$750 million, to demutualize These regulations made it possible for North American Life Assurance Co. and Confederation Life Insurance Co. to demutualize, but they did not. Instead, North American merged with Manulife. Confederation Life failed, and its business was acquired by Manulife. (In the US, Confederation Life’s business was acquired by Pacific Mutual Life).
With the four of the largest mutual companies, that were not covered by the regulations, announcing their desire to demutualize, new regulations were needed. A task force comprising the four companies worked with government officials to develop regulations that would make conversions possible for larger than Cdn$750 million companies.
The enabling legislation is making it possible for Mutual Life of Canada to accomplish the stock-company status subject to approval by the policyholders at the forthcoming meeting, scheduled for July 29, 1999.
Competition from non-traditional insurance providers
My study of the changes taking place in the insurance industry aroused a gut feeling that the intense competition of the nineties, from the banking industry and department stores, all wanting a share of the shrinking pie, drove the traditional insurers to consolidate their respective positions in the marketplace. For some, changing the corporate structure was a matter of survival, while for some others it was a question of gathering momentum for future growth.
Competition had heightened as customers found two relatively new alternative sources for buying insurance:
a. “over the counter” from their favourite bank tellers (or the banks’ web-sites on the Internet) and
b. insurance departments of their much frequented supermarkets where they bought their household requirements.
The certainty of losing business to the banking industry and to the department stores must have dominated boardroom discussions in several insurance companies that were, and are, doing business only through intermediaries. Banks and department stores have a distinct advantage over the traditional insurers in reaching the individual households through direct contact. Such contacts make it possible to provide personalized service to a large section of the insurance-seeking public.
Recently, my inquiry on the web-site of CIBC Insurance, the insurance arm of one of Canada’s largest commercial banks, for a quotation for car insurance resulted in a quotation being flashed back by e-mail and a follow-up letter that read, in part, “At CIBC Insurance, we’re here for you - 24 hours a day, 7 days a week! ………You can contact CIBC Insurance toll-free right from the scene of an accident and we will send a tow truck, emergency services, even a taxi – whatever it takes to get you home safely.”
The letter from CIBC Insurance specifically drew attention to the fact that their “salaried insurance professionals make the difference. Because we operate with salaried insurance professionals – instead of commissioned brokers or agents – we can offer you excellent value. ……… By tailoring our policies to people like you, we can offer flexible programs, good rates and fast, efficient service.”
There are increasing signs that senior management of traditional insurance companies are beginning to see the advantages of conducting direct business, a crucial strategy to ensure continuous growth, and web-sites have been set up to compete with the banks.
At the annual staff meeting of Canada Life in early 1998, I had the opportunity to ask a panel of vice-presidents two questions:
First, in the context of Canada Life’s plans to establish offices in Brazil, China and India, whether the company possessed the required expertise to be able to compete in countries where insurance companies opened their doors to the public, in contrast to the North American practice of not dealing directly with the policyholders.
Second, referring to the paper by Kerrie O’Brien ,(Supermarket Sweep, The Journal, The Chartered Insurance Institute, November 1997)  on rapidly increasing competition from insurance departments of supermarkets, whether any plans were in place at Canada Life to compete in the changing marketplace.
The gist of the vice-presidents’ replies was that studies were continuing to enhance the steps already taken to place Canada Life in a competitive position in both situations. In response specifically to the second question, the staff were informed that Canada Life was already engaged in selling some products through non-insurance entities that were fronting for the company.
Needless to say, when its territory is being invaded by non-traditional insurance providers, much internal refinement of technology and development of suitable human resource expertise would be needed by any insurance company wanting to stay ahead in the game, both at home and globally. Greater access to capital markets was seen by most mutual insurance companies as the only approach that would create an enabling environment for growth.
Demutualization the best method
For mutual companies, demutualization appeared to be the best method for acquiring the capital that they would need for expansion. Expansion would largely occur through acquisitions, and acquisitions would more than compensate the dwindling organic growth brought about by the proliferation of non-traditional insurance providers. Mutual companies’ need for rapid growth also arose from fears of being outdone by the banking industry that already commanded a considerable lead over the insurance industry.
Donald Guloien, senior vice president, business development, for Toronto-based Manulife Financial, seems to have summed up the concerns of mutual companies adequately when he said that without demutualization, insurers would fall further behind banks in Canada. Banks already had a stronghold on the financial services market, where the nation's five biggest banks alone controlled 54% of financial service assets and they "want to control it all." He pointed out that the top four mutual insurers combined were smaller than the Royal Bank of Canada.
While the insurance marketplace has been reeling with competition from non-traditional insurers, North America has witnessed some dramatic events, including a wave of acquisitions, conversions from mutual status to stock company structure and the collapse of at least three major insurance companies in 1991/1994 period (Executive Life Insurance Company, Mutual Benefit Life Insurance Company and Confederation Life Insurance Company). North American insurance market continues to be highly volatile, to say the least.
In the USA, after Confederation Life Insurance Company was declared insolvent in August 1994, two major events took place at Pacific Mutual Life Insurance Company, who, with its subsidiaries and affiliates, managed more than US$136 billion in assets. First, on April 22, 1997 Pacific Mutual submitted an application to convert to a mutual holding company structure and, second, in June of 1997 Pacific Mutual acquired “approximately US$1.7 billion in COLI policyholder cash values from Confederation Life Insurance Company (U.S.)”.
In just about a decade and half, out of at least five full and sixteen holding-company demutualizations, some of the major reorganizations have included
· Unum Life Insurance of America - previously Union Mutual; demutualized in 1986; assets US$15.1 billion (1998),
· Equitable Life Insurance - demutualized in 1992; over US$239 billion of individual life insurance and US$38 billion of annuity contracts in force at year-end 1997, and
· Allmerica Financial - previously State Mutual; demutualized in 1995; assets US$22.5 billion (1997).
Around the third/fourth quarters of 1998 “The Prudential Insurance Company of America and John Hancock Mutual Life Insurance, two of the nation’s largest life insurance companies, said they are considering demutualizing.” - (Analyst: Elena Shlugleyt (10/21/98) Individual Investor Online).
In Canada, of the four largest mutual insurance companies to announce the intention to demutualize, Canada Life was the last, preceded by Mutual Life, Sun Life and Manufacturers Life of Canada. All four had the intention to attain the status of stock companies during 1999.
There was much similarity in the official reason statements issued by the Directors of the demutualizing Canadian companies, all stressing the need for access to capital markets and growth through acquisitions. All four emphasized gains for participating policyholders, making the latter holders of equity.
The first to announce (December 8, 1997) its intention to demutualize was the fifth largest life insurance company in Canada, Mutual Life of Canada, with total assets under management of Cdn$42 billion, including Cdn$2 billion in total policyholder equity and human resource of 5,800 staff and agents. Robert M. Astley, Mutual’s President and CEO called the process “a winning proposition for Mutual’s approximately 800,000 participating policyholders, who will now be able to realize fully the value of their ownership in the company.” Mr. Astley saw great opportunity for growth through acquisition, development of new products and services, attracting investors and generating greater value for future shareholders.
Mr. Astley further stated that The Mutual’s foundation was solid in “our unquestioned financial strength, premier sales force, operational excellence and technology leadership. Becoming a stock company will allow us to build on these strengths to benefit current and future customers……For Mutual and, more importantly for the policyholders, this is the right thing to do and now is the right time to do it."
At the Mutual's 128th Annual Meeting on March 26, 1998 Robert Astley said, "We were first out of the gate with demutualization and we continue to lead the charge; the new opportunities this will bring include growth in both the U.S. and Canada. Our agreement to purchase the Canadian operations of MetLife, subject to regulatory approval, is an example of this growth. We are strengthening what we do best, and will be a Canadian powerhouse with a sales force no one can match."
In January 1998, Manufacturers Life Insurance Co. with assets under administration by the company and its subsidiaries of Cdn$77.8 billion (Sept. 30, 1997) was the second of the large mutual companies to announce its plans to demutualize. Making the announcement and a prediction that Sun Life Assurance Company of Canada and Canada Life Assurance Company would also seek to demutualize, Dominic D'Alessandro, Manulife's president and chief executive officer said, "This (demutualization) is a terrific thing, it puts the company in a position to put equity in the hands of the policyholders and to make the company a flexible and stronger entity going forward……… We've grown very well over the past four to five years, and all around we see companies of substantial size coming together," D'Alessandro said. "It's hard to remain in a mutual form and remain at the forefront of the industry. We don't want to be marginalized as everyone grows around us; we want to keep pace. Being a public company will facilitate that. Demutualization would also provide a considerable benefit to eligible policyholders ……This goes to show that mutuals can access the capital markets without stripping the policyholders of their equity rights as we believe the mutual holding concept being advocated in the United States does."
At the time of the announcement, the company had not drawn any plans for acquisition or growth after conversion. ManuLife appeared to be pre-empting to secure its market position, at a time when several takeovers were taking place in the insurance industry across North America.
Commenting on the prediction by Manulife's Dominic D'Alessandro (that Sun Life and Canada Life would also seek to demutualize) Sun Life spokesman Keith Moore agreed, "Everyone's looking at it, and Sun Life is always looking at what's in the best interests of policyholders. Demutualization is one of those options Sun life converted from a stock company to a mutual in 1959.”
And surely enough, Sun Life’s Board of Directors, on January 27, 1998 requested that Management prepare a plan for Demutualization of the company that claimed a complement of 10,000+ employees and had 65,000 agents and distributors worldwide, total assets under management of $Can 174 billion and a surplus of $Can 5.5 billion, as at September 30, 1997.
Making the announcement, John D. McNeil, Chairman and Chief Executive Officer of the 128 years old Sun Life said, "Becoming a publicly traded company can provide substantial value for our policyholders and unlock our capital base, allowing the Company to compete effectively in the global financial services marketplace. Participating policyholders would receive shares representing ownership of the Company that could be traded on stock exchanges, and they would retain the contractual benefits of their existing policies. Sun Life would gain the flexibility to raise capital to take advantage of domestic and international opportunities for growth."
David Nield, president and chief executive officer of Canada Life, had this to say about D'Alessandro's prediction, "We're on the task force and always reviewing what's going on in the world, but we haven't made a decision."
The decision came just two months after that comment. On April 2, 1998, at its 150th Annual General Meeting, Canada Life announced its intention to demutualize. David Nield said, "Canada Life's strategic direction calls for bold growth and expansion. Demutualization is the best means to give us broader access to capital markets. The new capital we can raise will allow us to grow more rapidly both internally and by continuing our acquisition strategy. We foresee continued consolidation in the life insurance industry in all countries in which we operate, and we intend to use our proven acquisition expertise to undertake more and, perhaps, larger transactions. As well, demutualization provides common shares in the company to our eligible participating policyholders."
Mr. Nield added, "The mutual form of organization has served our policyholders very well over the past many years. But, in today's world of rapid change and globalization, we believe that, as a publicly traded stock company, Canada Life will gain the financial flexibility necessary to compete aggressively. With this structure we also will be subject to greater analysis and scrutiny from financial markets, a challenge to which we look forward."
Reporting on Canada Life’s performance in 1997, the policyholders were informed that net income was at a record level of Cdn$266 million, up 22 per cent over 1996, total premium income, including segregated funds, was more than Cdn$5.2 billion, up 19 per cent and total assets under administration were Cdn$43 billion, up 23 per cent. “Much of this result was driven by a 72 per cent or Cdn$7 billion increase in segregated funds assets, and the acquisition of the unit-linked operations of Met Life (UK), which conducted business as Albany Life” in the United Kingdom.
The obvious flip flop that the mutual companies have undergone over the years, that is converting from stock companies to mutual companies in the sixties and now reverting to stock company status at the turn of the millennium, led me to ask the following question to David Nield at Canada Life’s annual staff meeting held earlier this year (1999):
“We were a stock company before, and then we converted to a mutual company. I understand this was about thirty years ago”. (Interjection by David Nield, “1962”). “As a matter of interest, why did we convert from a stock company to a mutual company …… were we trying to minimize public scrutiny or what, what were the main reasons?”
David Nield’s response was,
“The main drivers at the time were (made public). ……… The four Canadian stock companies, the Sun, the Confed, the Manu(life) and the Canada (Life), at that time were controlled by families that were getting older; they didn’t have a majority block but they had controlling block of shares; Sun Life was under attack by New York investors that (were out to) buyout Sun Life. The government rushed through enabling legislation for companies to mutualize … (that) I think encouraged the four families, in fact, to proceed with this, that was reason number one.
“Reason number two: in the late fifties when this was first (agreed to), stock markets were not nearly as wide as they are today, so (public) shares sold at less than book value and dividends paid were less than you can get on bank deposits, so that this worked the same as having stock ownership. So you are quite right, for hundred and fifteen years we were a stock company, for thirty eight years, I guess, ………we have been a mutual company. But you know, when you are hundred and fifty years old, times change and you change, and does anything change!”
Strategy for growth
In the context of future growth strategy of the company, I asked the following additional question at the same meeting:
“You mentioned access to more capital and acquisitions. Is Canada Life changing its strategy to concentrate more on acquisitions and less on natural growth of business?”
David Nield responded,
“No our strategy has always been organic growth. In the end in the analogy that I used I remarked that Canada being a pool of water that was shrinking with fewer fish in it, you can only make acquisitions when there is anything to acquire. When they are all gone they are gone, whereas natural growth is really the true test of a viable organization and a healthy organization. Our goal has always been for natural growth but at the same time we will develop over a period of six to seven years quite an extensive acquisition capability. We have got a group of people headed by Rob Smith at the Head-office that do the centralized assessments and acquisitions (we have seen) and we have done acquisitions in each of our countries. So we have a team of people everywhere that are experienced in integrating. So we bring to the table quite a depth of expertise and as a stock company we are going for additional currency which we can make use of for (the rightful situation) but natural growth is still our main goal”
Canada Life has an active track record of acquisitions, having made eight acquisitions since 1992 at an investment cost of almost Cdn$875 million, including the Albany Life operations in the United Kingdom in 1997.
I had proceeded to ask,
“So we don’t believe that we have reached a saturation point with regard to natural growth; there is a lot of business still available?”
And Mr. Nield responded,
“There is always business for successful companies and you can see all kinds of examples where people come in a market where everyone else is complacent as being saturated and suddenly do remarkable things. I don’t believe any market is saturated for well strategized operations and I’d like to think we are one of them.”
The company, currently serving more than eight million people under individual and group contracts in Canada, the United
States, the United Kingdom and Ireland, is exploring opportunities of long-term business in Brazil and India. This year Canada Life gained permission to establish a representative office in the People's Republic of China.
Fairness in demutualization
There are two main sectors of beneficiaries from demutualization, policyholders on the one hand and the directors on the other. Depending on the option of asset distribution selected by a demutualizing company, the benefits to the policyholders can be in the form of cash, stock or policy enhancements.
Employees can also benefit from the distribution if the distribution policy provides for that. “At UNUM, reports spokesperson Mike Norton, every employee hired before December 31, 1994 received 300 stock options, an act that by itself created intense interest from employees in the company’s performance and value to investors.”(The Human Side of Demutualization, By Ernest Martin, Ph.D., FLMI - A. M. Best Company).
Legislation (March 1999) in Canada, does not allow distribution to the management nor purchase of stock by the staff for at least 12 months. The biggest benefit to the senior management, however, is accessibility to enormous amounts of capital, to be used for expansion through acquisitions.
While the boards and senior management of insurance companies are excited about having large amounts of capital at their disposal, feelings among policyholders seem to be mixed. From the statements made by Canadian Mutual companies, it seems obvious that participating policyholders will receive unexpected monetary and/or stock gains in one form or another but non-participating policyholders, having also contributed to the growth and profits of the company over a long period of time, are likely to wonder why they should be excluded from benefiting from the demutualization process. This aspect boils down to the question of who has the voting rights. Participating policyholders have voting rights and own the company, while non-participating policyholders don’t have voting rights and do not own the company.
One has yet to hear raving praises of a demutualizing company from participating policyholders, perhaps partly because they have no clue as to what is going on, except that they stand to gain from the process, or partly because they are overjoyed with the prospect of receiving benefits they may have never dreamt of, and they forgot to praise the company.
At the time of Manulife’s announcement to demutualize, Donald Guloien had indicated that the process would help demutualizing companies endow "a great deal of wealth" on the policyholders. Latest information regarding gains of the participating policyholders of Manulife indicates that the “675,000 recipients in Canada, the United States, Hong Kong and Philippines ……… - should they approve the plan at a meeting to be held on July 29 - will get an average of $15,000………the minimum they could get will be $4,000 in stock as part of the switchover, and 1% of the group will actually get more than $100,000.” (The Financial Post, ‘Manulife’s demutualization tome 388 pages long’, May 28, 1999)
In the USA, not all demutualizing companies undertook to distribute cash or stock to the policyholders during the process of demutualization. Instead the approach by some was to invite policyholders to purchase stock. That approach quashed the demutualization process commenced by Mercer Mutual Insurance Co., because the policyholders voted against the process. The fight to vote against demutualization was led by Franklin Mutual Insurance Co. who “launched a proxy fight to defeat the Plan of Conversion of Mercer Mutual Insurance Co. (Pennington, NJ) which Franklin president, George H. Guptill, Jr. labeled as "unfair" to Mercer policyholders.” 
The spat of demutualizations in the past 15 odd years, activated advocacy groups that attempted to help policyholders get a fair deal at the end of the conversion process. An Internet site (email@example.com) explained  what demutualization meant and cast doubts as to how policyholders could fare, insinuating that “directors have their own interests, although they will publicly insist that they always put policyholders' interests first.”
Macdonald Shymko & Company Ltd. informed policy-owners to become more educated about the process. The company made a projection of the average amount of gain per policy-owner, mentioning the voting rights that would come with the distribution of assets and inviting the policy-owners to a seminar on investing wisely. 
And analyst Elena Shlugleyt discussed the question of who controls the demutualized company. Because directors of stock companies would have their goals set on capital appreciation, as they may or may not be policyholders, many policyholders who understood the change that demutualization would bring to their status, were likely to resist the prospect of losing their “right of control” over benefits derived from competitive products sold by mutual insurance companies. The goals of stockholders would more likely lean towards capital appreciation, perhaps even to the extent of giving up the right to competitive products.
However, one can argue that there is nothing to prevent a policyholder-turned-stockholder from having the best of both worlds. On one hand, one can hold the stock of the demutualized company and take advantage of capital appreciation of the stock, while on the other hand, buy insurance products from other remaining mutual companies, to benefit from competitiveness that mutual companies are able to offer. Analyst Elena Shlugleyt, however, has quoted Moody’s senior analyst Arthur Fliegelman as saying “that many stock companies have successfully competed with mutual companies by providing competitive products to policyholders”. For the discerning policyholders the realization of unexpected gains can be summarized in Elena Shlugleyt’s words, “Many individual policyholders who never owned individual securities before will now be able to own a considerable amount of equity.”
And a dramatic statement among several by other analysts included the following:
“Collectively, policyholders of America’s seven biggest mutual insurers stand to lose a whopping $63.6 billion.
“You and all mutual insurance policyholders stand to lose over $110 billion.
“Your mutual insurer may legally rob you of your ownership in the company & its surplus money, but there is a way to stop them --
“Your mutual insurer’s Board of Directors may decide to "convert" your mutual insurance company into a stock company. No longer would your mutual insurance company belong to you, the policyholder. It would be sold in the form of shares of stock and would belong to investors who buy the stock. Money from the sale of stock may not go to you, even though the money came from the sale of your property. The money would stay with the company -- a company you would no longer own. Don’t be surprised if the stock or proceeds are later offered to company executives as bonuses. Out of your pocket and into theirs!” -
Source: Anne Colden, "Some Insurers going public draw fire: Disputed laws allow capital distributions withheld." Wall Street Journal, Apr. 7, 1997 9A.
I mentioned two main sectors that would be affected from demutualization, namely policyholders and directors. However, there is a third sector that always remains behind the scenes, during and after the process, and this third sector comprises the staff. In addition to the complex issue of dealing with insurance regulators and policyholders, top management has to deal with issues affecting the employees. Consolidation of the available human resources causes considerable stress to a large majority of employees which the top management should address.
Stress can arise from a shift in employee attitudes, as the organizational culture changes. Employees who have always served the needs of policyholders alone must, upon demutualization, address the requirements of other stakeholders - investors and the public financial marketplace. Running the company on behalf of the policyholders alone would no longer be sufficient and employees must, in addition, maximize profits and returns on investors’ equity. One of the most difficult tasks that the executives of the company face would be changing the company’s organizational culture.
In a mutual structure, the three factors that keep the business going, the policyholders, the directors and employees are seen to be operating as one large business family, attempting to assist one another overcome any failings by exercising greater tolerance than one would expect to find in stock companies. The stock company structure has the tendency of placing the three factors in highly competitive camps, one against another, with extremely high levels of intolerance and no desire to work together.
Ernest Martin (The Human Side of Demutualization) researched the questions,
“What happens to the people in a company when that company demutualizes? How traumatic is the culture change? What is the process a mutual company typically follows in implementing the internal changes necessary for the company to operate as a publicly held company? Does the associated culture shift more closely resemble efforts to merge two companies with different cultures, or is it a matter of a less daunting task of change management?”
According to Ernest Martin’s findings, John Winterbauer, vice president of human resources and administrative services at Royal & SunAlliance Financial Services, stated that his company experienced a dramatic culture change. Winterbauer said, “The whole culture changes from a more relaxed to a stockholder-oriented mentality……… For those who have worked in other industries, the change is not as dramatic as it is for those who’ve spent their work lives exclusively in a mutual environment."
Winterbauer reported that some employees at his company were unable to deal with the culture change and left. "Over time," said Winterbauer, "the company lost some people, either because they couldn’t handle the magnitude of the change or because they couldn’t function effectively in the new environment. Some people left voluntarily; others needed a little shove."
Ernest Martin found that at UNUM, the culture change was relatively mild, learning from Marie Clements, director of marketing and product development and head of employee benefits at the time of UNUM’s demutualization, that "Demutualization was not as radical a change for UNUM as it might have been for other companies. We were already moving toward a more traditional set of practices. Over time, changes did occur with respect to our policies and practices as a result of demutualization, but the changes were more evolutionary than revolutionary. We were already focused on achievement of goals, results, expense control and excellence. With demutualization, we did get more focused on those aspects, but again the change was evolutionary rather than radical."
The Equitable and UNUM found great benefit in involving their human resource departments in the process of demutualization. At The Equitable the demutualization team was lead by the head of the company’s human resources function, while at “UNUM the head of HR was at the planning table from the very start.”
At UNUM, communication with the employees included training programs for all to enable them “cope with the forthcoming change. Managers and supervisors attended training sessions focused on managing in a changing environment.”
My first hand observation at Canada Life revealed that, in an apparent attempt to minimize speculation, on the issues of both demutualization and Crown Life acquisition, the senior management met the staff face to face. A series of meetings was held in the company’s Corporate Conference Centre, where over a thousand head-office staff would gather (in groups of up to 500 at a time) to hear the senior management unfold the latest developments associated with the acquisition and demutualization processes. In the early stages, extensive use was made of the available hi-tech equipment, including electronic prompt cards, to ‘tele-conference’ the proceedings of the meetings with the company’s regional offices across Canada, from Vancouver on the coast of Pacific Ocean at one end to Nova Scotia on Atlantic Ocean at the other end, reaching hundreds more eager to be kept abreast of developments.
From my cubicle in the system support department, however, I did not experience nor observe any signs of actions that could resemble the organizational culture change approaches adopted by The Equitable and UNUM of the USA. I am unaware of the involvement of the HR department and of any training program that would help the employees acquire a change of attitude required in a stock company.
In an Employee Information Package, circulated by Canada Life, a section reads, “The areas of the company that will be most involved in the project will be actuarial, legal, financial, information services, marketing, policyholder services, and communications”. If I may draw an analogy here: in many major construction projects it is found necessary to involve the fire fighting authorities in the planning stages at the outset in order to ensure that an occurrence of a fire, both during and after completion of the project, can be controlled adequately; such involvement addresses issues like the adequacy of a city’s preparedness in dealing with emergencies - ladders not long enough or insufficient water pressure in the hydrants. I would venture to suggest that, in time, without the involvement of the human resource department in the demutualization process at Canada Life, the company may experience revolutionary rather than evolutionary changes in its organizational culture.
In recent weeks, with the Crown Life acquisition having been finalized, the frequency of mass meetings has diminished and the use of high-tech conferencing has been replaced with personal visits to the regions. There is much that can be said in favour of personal visits, and the most important is that such visits boost the morale of the staff, when they see senior management take the trouble to go to the regions to observe first hand what effect these major changes have on the employees in those areas, although, one wonders at what level of employee seniority does senior management address staff concerns during these visits.
Since the announcement of the Crown Life acquisition, there seems to be bewilderment among the employees, many of whom are concerned about their future at Canada Life. Some fears seem to have softened, on one hand, with the announcement that no dramatic staff adjustments would occur through layoff but the changes would be gradual, through attrition and other means. On the other hand, attrition would be practiced by biased department and section heads, lacking in soft skills and wanting to secure their own positions at the expense of their unsuspecting subordinates, who would be shoved out of the way.
As top management rolled out the plans for relocating the control points for the various departments, following the Crown Life acquisition, many employees were concerned that they would be asked to leave behind the convenience of living in the metropolis of Toronto in Ontario, where Canada Life has its head office, to go to work in a relatively small city of Regina in Saskatchewan, home to Crown Life head-office. Conversely, the prospects must have seemed bright for those who had gone to work in Regina few years back, when Crown Life had relocated to that city as a cost-cutting measure, and were looking forward to returning to Toronto.
A dreaded phenomenon extensively characteristic of North American workplace and gathering momentum in other parts of the world is the unpredictable rearing of the monstrous head of ‘layoff’. That phenomenon, although an accepted way of North American lifestyle, has affected loyalties flowing in both directions, from the employee to the employer and vice versa. Each party looks out for its own interest first. The falling level of loyalty has caused the annual staff turnover in many companies to reach alarming levels, as much as 15% or more. Many companies have lost their experienced and qualified staff to competitors both within Canada and to the south to USA. The staff turnover at Canada Life has reduced in the past couple of years and hovers around 11% at present. In recent weeks, following the completion of the acquisition process, some staff have left Canada Life, either voluntarily or otherwise, and it will be interesting to see how the continuing uneasiness among the staff will transform the turnover figure as the company attains stock-company status.
Burnout and stress levels
One of the concerns of the staff at Canada Life head office was voiced at the company’s annual staff meeting earlier this year (1999) when the following question was put to David Nield:
“You spoke of what our life is becoming a norm at Canada Life. With projects like the Crown integration and demutualization, the reutilizing of key resource (force) and the number of staff and knowledgeable staff, the remaining staff have to take on an increasing cost of their responsibilities. I have noticed an increase in stress levels and burnout levels among all my coworkers. If unusual items like these are becoming more than the norm for the company, what relief do you foresee, if any, for the staff in the short or long term?”
To the amusement of the questioner and some 500 employees packing the company’s Corporate Conference Centre, David Nield quipped, “Well I know my wife is asking the same question” and then went on to give the following reply:
“Well I guess if we can replicate the kind of talent we have, there is no complete freeze on hiring needed people. The problem is that in any of these (one ofs) that we are involved in is of course that it requires pretty intimate knowledge of both, of the company and of the industry and that kind of experience isn’t easily come by. I am certainly sensitive to the stress levels staff are feeling, the potential burn out. I can only encourage all of you to make sure you take your vacations. I think they are very important, I think you have to pace yourself. I believe in the old saying, work smarter not harder. I can’t imagine there are other ways that we can do things but, having said all that, I don’t have a magic wand, and I know the people I can call on each and every time are the talented people, the hard working people; everybody is working hard; but its the same in every other company as well. Every company I have talked to is pretty much the same. Don’t have a good answer for you, have you got a better answer for me?”
The phraseology used by the questioner, on the burnout issue above, told me that she, more than likely, worked in one of several (corporate, group life and health, pensions, individual life, casualty and property, or human resource) technology departments. At one point I had listed the various projects that one of the technology departments was simultaneously working on. These projects were Y2K compliance, conversion of VSAM mainframe system to DB2 platform, desktop rejuvenation to replace about 1,500 computers (286s, 386s, 486s and terminals) with Pentium II, introducing Lotus Notes and Windows NT, developing Intranet sites, the “Xybernet” project, the Rewards project (on client-server platform), Crown Life integration to transfer that company’s operations to Canada Life’s mainframe system and the demutualization process. I wondered if this technology department was not making the company bite more than it could chew. The other technology departments had their own plateful of projects to complete.
A major concern that the technology departments had to address was related to the available space on the system. Space was being used up rapidly mainly by the most recent projects, DB2 conversion and Crown Life Integration. Urgent appeals were issued to programmers to delete software libraries that were not in use, and to refrain from creating new permanent libraries unless absolutely necessary.
The complex nature of integration needed following an acquisition must have compounded the problems faced by the company, with the shortage of mainframe programmers in North American companies during the nineties, just when anxiety was mounting over the Y2K issues. Major corporations scrambled to scoop up anyone and everyone who demonstrated some knowledge of COBOL programming language and mainframe systems, to fill the vacuum in their technology departments. However, with the year 2000 just around the corner, the demand for COBOL programmers seems to have dwindled, as corporations feel satisfied that their mainframe systems have become “Y2K compliant”. With no employer/employee loyalty in the picture, a large number of programmers, employed by the mutual companies, are soon likely to become unemployed as the companies attain stock-company status.
Insurers vs. banks
Canadian insurance industry must be very happy with the Finance Minister, Paul Martin’s latest action of disregarding the “bank demands that they be allowed to expand their business powers to offer auto leasing or insurance through their branches.” (“Martin set to block big banks yet again”, The Toronto Star June 23, 1999). Under pressure from insurance lobbyists, Martin has introduced proposals that do not include allowing banks to market annuities in their branches. Instead the Finance Minister is proposing that there should be more competition in the services that banks offer. The proposals include opening the cheques processing and other financial transactions, such as credit cards and chequing accounts, to other financial institutions including insurance companies.
The lobbying by the insurance industry must have occurred over some period of time and I would not be surprised if the spat of Canadian demutualization actions is somewhat tied to warding off takeover threats from the banking industry that had announced mega-mergers. Those proposed mergers were blocked by Martin just around the time the mutual companies went public with the demutualization phenomenon. The access to capital markets being sought by the demutualizing companies will, with little doubt, give the needed clout to the insurance industry, facilitating the competition that Martin wants to create.
For anyone who is not directly involved in the acquisition, demutualization and lobbying processes, the motives of the insurers undertaking these processes can only be speculative, barring only the official announcements. My speculation is that underwriting companies have suffered considerable setbacks in their organic growth. In consequence, their market positions have become unstable and they have become vulnerable to hostile takeover bids, irrespective of whether any real takeover attempts exist.
Boards of directors and top management are hard pressed to find alternative means to supplement the conventional methods of conducting business. However, in order to embark on any alternative growth project, the insurers have found it necessary to grow bigger first. Bigger they become lesser will be the risk of being taken over. The only means to become bigger quickly seems to be through acquisitions, and acquisitions have become as much a matter of everyday business as attracting large insurance portfolios of multinational corporations.
And for acquiring another entity the insurers need to amass enormous sums of money. The mutual insurers in Canada have found demutualization to be the only means of accessing large amounts of money, which will not only make acquisitions easier to pursue, as long as there is anything to acquire (“when they are all gone they are gone”) but also enable them to trade in new products, such as credit cards and chequing accounts.
Then there is the perpetual tussle between the insurance industry and banks, each wanting to be bigger than the other. Finance Ministers continue to be swayed by intense lobbying in an apparent attempt to maintain a balance, while the bewildered consumers tag along, as do the employees.
 Twenty five years of progressive career in the
insurance industry of Kenya, including nine years in senior management, had to
coupled with computer skills before I would find a job in the insurance industry of Canada. Forced into going back to college, to acquire computer skills, I undertook a two and a half year Computer Information Systems course at DeVry Institute of Technology in Toronto. My first job after graduating in October 1994 was as a Programmer Analyst with Policy Management Systems Canada (PMSC). After just over two years with PMSC I landed a job with Canada Life Assurance Company, again as a Programmer Analyst. Ironically, both jobs were based not on my freshly acquired computer skills but on the strength of my past knowledge of the insurance industry. It has been quite an experience to begin a career in Canada at the bottom rung of the ladder, a far cry from a position of overseeing the functions of talented managers in one country to taking instructions from a generation of supervisors learning management skills in another with a totally different type of business culture.
 “Demutualization is the process of converting
from a mutual life insurance company to a publicly traded stock company. A
company is owned by all its participating policyholders, but the ownership rights are not tradable or exchangeable. Under the process of demutualization, common shares are issued to the eligible participating policyholders who then have the opportunity to retain or sell the shares”
- from information (Q & A) posted on the Internet by Canada Life.
 (Extracts from Supermarket Sweep, The Journal, The Chartered Insurance Institute, November 1997)
“Supermarkets are asking their customers to look beyond the vegetable aisle and the shelves of tinned soup, and to consider buying insurance from them as well.”
“It all comes down to that ubiquitous concept: service. Consumer research still reveals that banks and insurers are not perceived as providing quality levels of service. Although they are quite willing to take the customers’ hard earned cash, the general perception is that the return from these quarters is low.”
“Marks and Spencer media relations manager , Chris Larkin, says that his company has certainly profited from these developments. …… ‘We’ve seen compound growth of 30% each year. Last Year we made (Pounds) 75.3m profit, representing 7% of the total group profit … it’s one of the fastest growth areas of our business’ .”
Franklin Mutual Insurance Co. has launched a proxy fight to defeat the Plan of Conversion of Mercer Mutual Insurance Co. (Pennington, NJ) which Franklin president, George H. Guptill, Jr. has labeled as "unfair" to Mercer policyholders.
In its proxy solicitation, Franklin urges policyholders to vote against the Mercer Plan because it takes away policyholder rights and privileges without payment of cash or stock. Policyholders will have to buy back their interest in the new company with their own money, Franklin contends.
Franklin made a proposal to Mercer's Board of Directors in March 1998 that Franklin purchase all the shares of Mercer by paying in cash at least $23.2 million directly to Mercer policyholders.
"Mercer has twice rejected our proposal which would pay on average more than $500 to each policyholder for each policy owned," Guptill said. "As a policyholder of Mercer, Franklin objects to Mercer's Plan because it would give nothing of value to policyholders while providing free stock and potential stock incentives and bonuses to the management of Mercer. Our proposal compensates policyholders but does not provide these lucrative rewards to Mercer management."
Guptill said that he has received hundreds of comments from Mercer policyholders. Last week he received a letter from Thomas Grillo, former New Jersey Deputy Insurance Commissioner and a Mercer policyholder, opposing Mercer's Plan. Grillo wrote, "Mercer executives have conveniently forgotten (or what they have apparently chosen not to tell the policyholders) is that a mutual insurance company is owned by its policyholders. It is not owned by a small group of company executives whose sole motivation is to enrich themselves by taking the property of the policyholders/owners."
"As a Mercer policyholder, I will vote against the Plan and I encourage all Mercer policyholders to also vote against Mercer's demutualization Plan," he concluded.
Mercer has called a special meeting of policyholders for Mar. 3, 1999 to vote on its Plan.
"We plan to fight this demutualization to the end and will be at that meeting with our proxies to vote against its adoption," Guptill said. "We are hoping that our fellow Mercer policyholders will not let Mercer executives expropriate their interest in the company for their own gain, and that they will send a strong message to Mercer's management to consider Franklin's proposal by defeating the Mercer Plan."
 - DEMUTUALIZATION.Org
A Policyholder Advocate Website
- Helping to Achieve Fairness for Policyholders as Mutual Insurance Companies Reorganize -
If you own a life insurance policy or an annuity contract issued by a mutual company, or are thinking of buying one, this may affect you.
Demutualization is the process of converting a mutual insurance company to a stock company. Mutual insurers are abandoning their mutual status to go public or "demutualize". This requires approval from policyholders. Management and directors say reorganization is necessary to enable the company to grow, gain greater access to capital and to attract the best qualified employees.
The trend toward demutualization is accelerating. "The demutualization process is the largest single event in the U.S. equity markets for the next three to four years," says a Merrill Lynch & C0. investment banker. "The industry will create $100 billion to $200 billion of new stock."
Policyholders can fare poorly or fairly in this process. Insurance company officers and directors have their own interests, although they will publicly insist that they always put policyholders' interests first. Most policyholders don't bother to vote, and those who do may not understand the issues. State regulators have multiple objectives, such as promoting commerce in their state and obtaining future employment in the insurance industry. Most state laws do not require reorganization plans to be in the best interests of policyholders; regulators can approve them if they meet the weaker standard of being "fair and equitable." There is only one person who can reliably put your interests first: you. Especially a well-informed you.
Copyright (c) 1999 DEMUTUALIZATION.Org
Last modified: May 21, 1999
 - September 18, 1998
DEMUTUALIZATION A WINDFALL FOR POLICYHOLDERS
David Christianson, RFP
If you are the owner of a life insurance policy with ManuLife, Mutual Life, Sun Life or Canada Life, you may be receiving a gift of shares averaging $5,000.
However, the windfall will not likely blow your way until next summer at the earliest.
Over the next few months, all of these companies expect to get permission to convert from mutual companies (owned by the policyowners) to publicly traded companies, (owned by shareholders).
Mutual insurance companies are owned by the policyowners, although their ownership rights are not transferable or salable. The main benefits to this ownership include participation in dividends which enhance policy value, and voting rights at the annual meetings. As such, participating policyowners of each company will have to vote in favour of demutualization before the companies can proceed.
With such an attractive payout contemplated, approval is fairly likely. Norwich Union converted to a stock company last year and paid out substantial share value to policyholders who were paying even small premiums.
To benefit from the share distributions, you must have owned a "par" (participating in dividends) policy on the following dates:
Company Effective date
Mutual Group December 8, 1997
Manulife January 20, 1998
Sun Life January 27, 1998
Canada Life April 2, 1998
If you have had a participating policy replaced since those dates, quickly speak to your insurance agent and the insurance company with which you held the policy. You don't want to be left out.
The amount of shares you receive will be determined by a variety of factors, such as the period of time you've owned the policy, the amount of premium and death benefit, and the type of policy. The value of shares will be different than the policy's cash value.
With a publicly traded company you will be able to sell your shares (and cash in your shares) without affecting your values or rights as a policy owner, except for your voting rights regarding the company's affairs.
London Life and its new owner Great West Life have been the only two examples of large, publicly traded insurance companies until quite recently. As their policyowners will attest, there is no appreciable difference in their policy benefits.
The federal government issued draft rules regarding demutualization in August. While most professionals are quite happy with them, two consumer lobby groups say the rules do not go far enough to protect policyowners. Since the rules stipulate that 100% of the company value must be distributed to eligible policyholders and that no free shares or stock options can be distributed to executives, directors or employees until at least a year after the companies are listed means that the policyholders will likely be treated fairly.
As always, the consumer groups will likely be able to make this treatment even more fair. If you have an opinion, October 13 is the deadline for submissions on the rules. Contact the office of the Superintendent of Financial Institutions to put in your two cents worth.
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If you're looking for some new knowledge of the capital markets to help you be a more informed investor, the non-profit Investor Learning Centre is running Intelligent Investor courses this fall. The cost is $165 to $200 and the number is 1-888-452-5566.
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The preceding article is provided as an introduction to this topic and should not in any way be construed as a replacement for proper professional advice.
©1996 Macdonald Shymko & Company Ltd.