Office of the Superintendent of Financial Institutions
The Insurance Companies Act (ICA) contemplates the conversion of a mutual federal insurance company into a company with share capital, a process referred to in this Guide as demutualization or conversion.
The Mutual Property and Casualty Insurance Company with Non-mutual Policyholders Conversion Regulations (the Regulations), which came into force on July 1, 2015, set out the framework governing the demutualization of federally regulated mutual property and casualty insurance companies that have both mutual and non-mutual policyholders (MPCC).Footnote 1 The demutualization process involves three approvals by the Superintendent of Financial Institutions (the Superintendent), and culminates with the issuance of letters patent of conversion by the Minister of Finance (the Minister).
The primary purpose of this Guide is to promote awareness and enhance the transparency of the process and assessment criteria relative to the demutualization of an MPCC. The Guide describes the regulatory requirements relating to the demutualization of an MPCC and sets out the information that must be provided to OSFI at each phase of the demutualization process.
This Guide is divided into four Parts:
OSFI’s primary responsibility throughout the demutualization process is to review and assess applications for regulatory approval and ultimately make recommendations to the Minister with respect to the approval of the conversion proposal and the issuance of letters patent of conversion.
OSFI will generally evaluate the applications for approval against the criteria in this Guide; however, as the particular circumstances and facts of each demutualization are different, this Guide should not be viewed as an exhaustive set of criteria and information requirements.Footnote 2 OSFI officers from the Regulatory Affairs Division, Insurance Supervision Sector and the Actuarial Division jointly review and assess each application for the demutualization of an MPCC.
To enable OSFI to fulfill this role, it is important that it be kept informed of key developments throughout the process, including during steps that do not require a regulatory approval.
The demutualization process is initiated by a resolution of the MPCC’s board of directors. Among other things, the resolution recommends the conversion and establishes the eligibility date.Footnote 3 MPCCs should provide OSFI with a reasonable opportunity to review the draft board resolution before sending the meeting materials to directors.
Eligible mutual policyholdersFootnote 4 must then vote on whether to negotiate, with the eligible non-mutual policyholdersFootnote 5, the method to allocate the value of the MPCC and whether persons, other than eligible mutual and non-mutual policyholders, should also receive benefits.Footnote 6
Within 30 days of an affirmative vote at the First Special Meeting, the MPCC must request the Superintendent’s authorization to send to all eligible policyholders a notice of intent to negotiate.Footnote 7 This notice must, among other items, set out the criteria for determining who qualifies as an eligible policyholder and include a summary of the conversion process. It must also indicate when and how additional information on this process will be made available.
Within 30 to 45 days after the day on which the notice of intent to negotiate is sent, the MPCC must file an application to the court for an initial order. Among other things, the initial order sets out the parameters of the negotiation process.Footnote 8 As a part of this process, the court appoints counselFootnote 9 to represent each class of eligible policyholders (i.e., mutual and non-mutual), and oversees the establishment of a policyholder committee for each class.
Any eligible policyholder may apply to become a member of the policyholder committee for the class of policyholders to which they belong, subject to meeting certain criteria.Footnote 10 This application must be submitted to counsel appointed for the class in question.
The policyholder committees, with the assistance of their respective counsel, negotiate to establish the method of allocating the value of the MPCC and to determine whether any benefits will be provided to any persons or classes of persons other than eligible policyholders.Footnote 11
The MPCC must provide to counsel for each class of policyholders any information or documents that they reasonably require to facilitate the negotiations.Footnote 12
The proposed method and, if applicable, list of persons or classes of persons – other than eligible policyholders – that will be entitled to benefits must be approved by at least two thirds of the members of each committee.Footnote 13
Before the policyholder committees vote on these matters, the MPCC is expected to provide OSFI with a reasonable opportunity to review the proposed allocation method and opinions of the appointed actuary and of an independent actuary stating that it is fair and equitable.
Once the proposed method and list have been approved by the policyholder committees, the MPCC must apply for the Superintendent’s authorization to send to the eligible mutual policyholders a notice of the Second Special Meeting.Footnote 14 The MPCC must, among other things, submit the conversion proposalFootnote 15 to OSFI for review, as part of this application.
At the Second Special Meeting, eligible mutual policyholders vote on whether to amend the by-laws to permit eligible non-mutual policyholders to vote on the conversion proposal and on the authorization to apply for letters patent of conversion (Letters Patent) from the Minister.Footnote 16
Following an affirmative vote at the Second Special Meeting, the MPCC must obtain the Superintendent’s authorizationFootnote 17 to send a notice of the Third Special Meeting to all eligible policyholders. The purpose of the Third Special Meeting is to vote on the conversion proposal, to confirm any by-law amendments that are necessary to implement the conversion proposal and to authorize the making of an application to the Minister for Letters Patent.
Within 30 days of an affirmative vote at the Third Special Meeting, the MPCC must notify all its policyholders of its intention to apply for Letters Patent.Footnote 18 An application for Letters Patent is then submitted to OSFI, within three months of the date of the Third Special Meeting.Footnote 19
The regulatory demutualization process is complete when the Minister issues the Letters Patent.
The demutualization process contemplated in the ICA and the Regulations, and described in this Guide, involves four regulatory approvals and the issuance of Letters Patent:
The information that MPCCs are expected to provide in respect of each of the above is set out in Part II of this Guide.
Prior to seeking board approval to initiate the process, MPCCs are advised to contact OSFI’s Regulatory Affairs Division to schedule an initial discussion regarding their demutualization plans and OSFI’s expectations with respect to each of the approvals. This discussion also provides OSFI with an opportunity to identify apparent or potential regulatory, prudential or public policy issues.
OSFI expects the MPCC to ensure, at each step of the process, that a demutualization remains in the best interest of the MPCC and that the requirements and timelines outlined in the Regulations and this Guide are met.
Pursuant to section 6 of the Regulations, within 30 days of an affirmative vote at the First Special Meeting, the MPCC must apply for the Superintendent’s authorization to send the notice of intent to negotiate to all eligible policyholders.
In support of this application, the MPCC is expected to provide OSFI with:
Once the conversion proposal is completedFootnote 22, the MPCC must, in accordance with section 14 of the Regulations, apply for the Superintendent’s authorization to send to the eligible mutual policyholders the notice of the Second Special Meeting to vote on whether to amend the by-laws to permit all eligible non-mutual policyholders to vote on the conversion proposal and on the making of an application to the Minister for Letters Patent.
In considering whether to grant its authorization, the Superintendent will review the conversion proposal and all other information provided by the MPCC, from a prudential perspective and to ensure that they meet all legislative and regulatory requirements.
After an affirmative vote at the Second Special Meeting, the MPCC must obtain the Superintendent’s authorization, in accordance with section 16 of the Regulations, to send the notice of the Third Special Meeting to all eligible policyholders
An application pursuant to subsection 237(1) of the ICA for the Minister’s approval of the conversion proposal and the issuance of Letters Patent must be made by the MPCC within three months after the proposal was approved by a special resolution of the eligible policyholders.Footnote 28 This application is submitted to OSFI, and the Superintendent will make a recommendation to the Minister regarding the approval of the conversion proposal and the issuance of the Letters Patent.
In support of this application, the MPCC is, in accordance with section 20 of the Regulations, expected to provide OSFI with:
This Part provides additional guidance to MPCCs in respect of the demutualization process and related approvals.
The Regulations define the concepts of “eligible mutual policyholder” and “eligible non-mutual policyholder”. Please refer to OSFI Ruling 2015-01 for OSFI’s interpretation of certain elements of these definitions. OSFI expects MPCCs to determine eligibility in accordance with this Ruling.
The MPCC’s board may, by resolution, qualify as “eligible non-mutual policyholders” certain holders of non-mutual policies issued by the MPCC, other than those referred to in paragraph (a) of the definition of “eligible non-mutual policyholder”. OSFI is of the view that such persons must, at a minimum, hold their non-mutual policies on the day of the First Special Meeting.
Persons that, on the date of the board resolution, had applied for, but had not yet been issued, a mutual policy, may be eligible mutual policyholders so long as the policy is issued before the date of the First Special Meeting. In this regard, the board resolution that initiates the demutualization process must also set out the date by which any application for a mutual policy must have been submitted to the MPCC.
As described in this Guide, the demutualization process involves three special meetings. Subject to what is specified in the Regulations, the relevant provisions of Division I of Part VI of the ICA and of the Meeting and Proposals (Insurance Companies and Insurance Holding Companies) Regulations apply in respect of the First Special Meeting and the Second Special Meeting. In this regard, the Regulations specify that all eligible mutual policyholders are entitled to vote at these meetings.
Subject to what is specified in section 237 of the ICA and the Regulations, the relevant provisions of Division I of Part VI of the ICA and of the Meeting and Proposals (Insurance Companies and Insurance Holding Companies) Regulations apply in respect of the Third Special Meeting. In this regard, section 237 of the ICA specifies that all eligible policyholders are entitled to vote at this meeting and sets out the notice requirements in respect of the meeting.
The directors of an MPCC may, by resolution, terminate the demutualization process at any time before the issuance of Letters Patent.Footnote 29
The RegulationsFootnote 30 generally provide that the demutualization process is terminated if:
If the demutualization process is terminated at any point and the MPCC subsequently decides to resume the process, each of the steps described in this Guide would need to be repeated, including establishing a new eligibility date.
Subject to the exceptions set out in section 25 of the Regulations, the converted company must remain widely-heldFootnote 31 for two years following the date of issuance of the Letters Patent.
As a condition of any of the approvals referred to in sections 1.2 and 1.3 of this Guide, the Superintendent may require that the MPCC provide additional information to eligible policyholders or take certain measures to assist them in forming a reasoned judgment on any resolution submitted to them as part of the demutualization process.
Subsection 12(2) of the Regulations contemplates, as part of the method of allocating the value of the MPCC, that fixed and/or variable amounts of benefits may be provided.
Subsection 12(3) of the Regulations requires that the amount of variable benefits in respect of each eligible policyholder be calculated having regard to at least the following factors:
OSFI recognizes that the application of these factors could vary based on the circumstances of the MPCCFootnote 32, including on the basis of the availability, quality and accuracy of data, as well as the cost of its retrieval and validation.
Consideration should be given to any inter-relationship among the factors to avoid the risk of unintended overlaps in their application.
The description of the method of allocating the value of the MPCC should include a detailed explanation of how these factors were considered and applied as well as how suitable data will be used to calculate the benefits of each policyholder.
This part provides additional guidance in respect of the role of the IA retained for the purpose of demutualization, as well as the AA of the MPCC.
Subject to what is specified in the Regulations and in this Guide, OSFI Guideline E-14 – Role of the Independent Actuary provides guidance in respect of the role of the IA in the context of the demutualization process, with appropriate modifications that the circumstances may require.
Pursuant to the definition of “independent” in section 1 of the Regulations, the IA retained for the purpose of demutualization must be someone who:
OSFI also expects the IA to be someone who:
With respect to item (a), OSFI would consider the IA as having a conflict of interest if, among other things, the person:
Pursuant to paragraph 14(2)(b) of the Regulations, the IA’s and AA’s opinions must confirm that:
The IA and AA are expected to review and consider all relevant documents and information as necessary to provide an opinion on these points.
When considering the fairness of the proposed method of allocating the value of the MPCC, the IA and AA are expected to take into account, among other things:
OSFI expects the IA’s and AA’s opinions to:
Unless the IA has also been retained to provide an opinion confirming that benefits to be provided in non-share form are appropriate substitutes for the sharesFootnote 34, the IA’s opinion should reference the independent valuation expert who will provide a separate opinion on this point.
Any summary of the IA’s or the AA’s opinion that may be prepared should include a reference to the complete opinion.
All enquiries regarding the demutualization of an MPCC should be directed to:
Office of the Superintendent of Financial Institutions
Regulatory Affairs Division
15th Floor, 255 Albert Street
Ottawa, Ontario, Canada, K1A 0H2
The Mutual Property and Casualty Insurance Company Having Only Mutual Policyholders Conversion Regulations set out the framework governing the demutualization of federally regulated mutual property and casualty insurance companies that only have mutual policyholders.
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The ICA and the Regulations provide broad authority to the Minister and Superintendent to take into account all matters that they consider relevant in the circumstances related to the granting of any approval (e.g., s. 1016.1 of the ICA).
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Please see section 3 of the Regulations.
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Please see section 1 of the Regulations for the definition of “eligible mutual policyholder”.
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Please see section 1 of the Regulations for the definition of “eligible non-mutual policyholder”.
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Please see section 5 of the Regulations and section 2.1 of this Guide.
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Please see section 6 of the Regulations.
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Please see section 7 of the Regulations.
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Section 8 of the Regulations sets out the eligibility criteria and process with respect to the appointment of counsel.
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Section 9 of the Regulations sets out the eligibility criteria and process with respect to membership on a policyholder committee.
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Please see section 12 of the Regulations.
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Please see section 10 of the Regulations.
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Please see subsection 12(5) of the Regulations.
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Please see section 14 of the Regulations.
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Section 13 specifies the elements that must be included in the conversion proposal. The matters voted on by the policyholder committees form part of the conversion proposal, as well as a number of other elements that are provided by the MPCC (e.g., report on the value of the MPCC, description of the benefits to be provided, description of the initial share issuance).
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Please see section 16 of the Regulations.
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Please see section 18 of the Regulations.
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Please see section 19 of the Regulations.
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Section 3 of the Regulations specifies the elements that must be included in the board resolution.
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Please see section 2.1 of this Guide.
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Pursuant to subsection 14(5) of the Regulations, the conversion proposal and actuarial opinions must generally be submitted to OSFI no later than one year after the date on which the court appointed the member of the policyholder committees.
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Please see section 15 of the Regulations.
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Please see section 2.6 of this Guide.
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The financial statements must be prepared in accordance with generally accepted accounting principles and must be accompanied by a report of the MPCC’s chief financial officer stating that they have not been audited but have been prepared in accordance with generally accepted accounting principles.
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Please see footnote 25.
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Please see section 19 of the Regulations.
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Please see subsection 21(1) of the Regulations.
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Please see subsection 21(2) of the Regulations.
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Please see subsection 2(4) of the ICA for the definition of the concept of widely-held.
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For example, the second factor could include premium rebates in some cases, but not in others.
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In this regard, confidential information should not be withheld if this might impair the ability of policyholders to make an informed decision.
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Please see paragraph 14(2)(d) of the Regulations.
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