Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 44 - Evidence, February 9, 1999
OTTAWA, Tuesday, February 9, 1999
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-59, to amend the Insurance Companies Act, met this day at 9:30 a.m. to give consideration to the bill.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, our first witness today is the Honourable Jim Peterson, Secretary of State for International Financial Institutions. Following the appearance of the minister and his officials, we will hear from representatives of the CEOs of the four companies that are helping to demutualization.
Mr. Minister, thank you very much for coming. Proceed, please.
Mr. Jim Peterson, Secretary of State (International Financial Institutions): Honourable senators, I am most pleased to be here today.
The proposed legislation deals with demutualization which would allow all federally regulated Canadian mutual life insurance companies to convert to stock companies.
[Translation]
The main reason for developing an application framework is to give mutual insurance companies greater leeway in accessing capital. These companies are owned by the policyholder and therefore cannot issue common shares, which limits their capacity to raise capital in comparison with joint stock companies. Furthermore, demutualization would make the converted companies subject to stricter market discipline and would allow them to benefit from a better-known government regime. We are proposing to lower this obstacle to growth because access to capital is becoming increasingly important given the international trend toward consolidation in the financial sector. The converted companies would have access to a greater number of capital sources to finance their expansion, either in Canada or abroad, and to invest in developing new technologies and new products. We want to ensure that, in the future, Canadian life insurance companies will have the flexibility they need to take advantage of opportunities for growth and improve their competitiveness in a rapidly changing market.
[English]
At the same time as allowing the companies to increase their competitiveness and efficiency, demutualization would allow for the separation of policyholders' rights as owners from their rights as customers.
A company's current owners, its voting policyholders, would remain the owners of the company after demutualization by becoming shareholders with one vote per share. They would then have the option of trading their ownership rights and interests in the company by selling their shares in exchange for significant financial benefits.
If all four of Canada's large mutual life insurance companies proceed to demutualize, their 2 million Canadian policyholders would receive the equivalent of approximately $10 billion, mainly in the form of shares. Regardless of whether or not they keep their shares, voting policyholders would retain the right to elect at least one-third of the company's directors.
It is important to note that the policyholders' contractual rights as customers, such as their insurance coverage premiums and right to receive policyholder dividends, would in no way be altered by demutualization.
Furthermore, policyholders should benefit from doing business with a company that is well placed to enhance its efficiency, make strategic investments and compete in the increasingly globalized financial services market.
The government's role in demutualization is to put in place rules under which mutual life companies will be able, should they wish, to convert to stock companies. The proposed regime is the result of extensive consultations with policyholder groups, industry participants and other interested parties and stakeholders. It is based on these three key principles: ensuring fairness and fair treatment for policyholders; enhancing the efficiency and competitiveness of the converting companies; and, throughout, maintaining the safety and soundness of the converted companies.
Our overriding objective in the development of the regime has always been the protection of policyholders. Fundamental to the proposed regime is that policyholders must be well-informed about their company's demutualization proposal before they vote on the proposed conversion. In order to ensure that policyholders receive complete, accurate, unbiased information on demutualization, all information destined for policyholders must first be approved by the regulator, the Office of the Superintendent of Financial Institutions. Furthermore, the regulations set out very clearly what information must be provided to those policyholders who will be called to vote on the demutualization.
Those requirements include, among many others, descriptions of the advantages and disadvantages of the proposed conversion both to the company and to its policyholders and the alternatives to demutualization that were considered by the directors of the company and why, in their opinion, demutualization is in the best interests of both the company and its policyholders. The estimated market value of the benefits that would be received by the policyholders as well as information on the policyholders' voting rights after demutualization will be included.
The information will have to outline the income tax treatment of the demutualization benefits in the policyholders' jurisdiction. It will outline the measures that the company has taken or will take to encourage policyholders to vote on the proposal. It will also include measures that the company has taken or will take to provide policyholders with information about the proposed conversion and an opportunity to raise questions or concerns about the proposal.
That information package would have to include financial information about the company and a summary of expert opinions that the company must submit to OSFI. Those expert opinions are another very important element of the proposed regime. Their purpose is to ensure the appropriateness and accuracy of the figures that form the basis of the conversion proposal. Let me take just a moment to describe these requirements.
Under the proposed regime, the company must provide OSFI with opinions prepared by the company's actuary, as well as by an independent actuary, stating that the allocation of the company's value among policyholders is fair and equitable. The same actuaries must also provide opinions that there would be sufficient assets remaining in the participating accounts to support current and future participating policies and to meet policyholders' reasonable expectations in terms of dividends.
In addition, they must provide opinions that the future financial strength of the company and the security of policyholders' policy benefits would not be adversely affected by demutualization. A valuation expert must also provide an opinion on the appropriateness of the estimated market value of the company, the value that is used to estimate the benefits to be allocated to individual policyholders.
Apart from governing how a demutualization would unfold, the proposed framework also sets standards for the actual conversion proposal. For example, demutualization benefits may be allocated only to the company's voting policyholders who are, in fact, the true owners of the company. It therefore follows that management should not receive benefits from demutualization, except those to which they may be entitled as policyholders.
At the same time, we recognize that the entire value of the company must be allocated to policyholders. However, we recognize that stock options can be a useful tool in aligning management's interests with those of its shareholders. Therefore, as a result of the draft regulations, there will be a one-year prohibition on management having stock options.
An equally important part of the framework includes its provisions for enforcement. Under the proposed regime, the Superintendent of Financial Institutions would be vested with appropriate powers to ensure that the converting companies comply with the regulations and the legislation.
OSFI will obtain its own expert opinions where it deems necessary and could order companies to include any additional information deemed appropriate in their policyholder information packages. Moreover, if the superintendent were concerned that policyholders required additional information before the vote is taken, he could order the company to take such additional measures as he might consider appropriate, including information sessions. He could prescribe the rules for holding those policyholder information sessions, and at the end of the day, if the superintendent felt that a company had not respected the rules, he could simply remind the Minister of Finance, whose final approval is critical and necessary to this, that the application for demutualization should be denied.
I will now give a brief history of the proposed regime, to offer some perspective on the extent of the consultations that went into its development.
As you know, the initiative to develop a demutualization regime began in 1992 under the previous government when the Insurance Companies Act was amended to allow demutualization with the terms and conditions to be set out in the regulations. However, the regulations passed pursuant to that legislation in 1993 applied only to small life insurance companies, those with Canadian assets of less than $7.5 billion.
Following on those first steps that were taken, and within their spirit, the government announced in June of 1996 that we would extend that regime to the large companies. We began an extensive round of consultations with stakeholders. In September of 1997, the government consulted on the key principles to be followed in the development of the new regime, and in August of last year, following further consultations, we put out a consultation paper that included the entire proposed regime and the draft regulations.
In response to our August consultation paper, we received 20 submissions from a wide variety of stakeholders. Those submissions were largely positive. Most were of a technical nature. We were able to make changes as a result of that input. Revised draft regulations were publicly released upon introduction of Bill C-59 on November 30, 1998.
Throughout the course of developing the proposed regime, it became apparent that a limited number of legislative amendments would be required, in addition to the regulations, in order to implement a new regime for all life insurance companies, not just the large ones.
[Translation]
These amendments are contained in the bill in the main provisions that have to do with the holding of a special meeting of policyholders to study the proposal: requiring a relatively longer notice so that policyholders will be well informed before voting on the proposal; ensuring that only eligible policyholders vote on the proposal; allowing the transfer of surplus assets from participating accounts in order to increase the value of the company that will be distributed to policyholders at the time of demutualization; giving the Superintendent adequate authority to monitor the demutualization process; ensuring that the directors, officers and employees cannot draw any benefits from demutualization other than those to which they are entitled as eligible policyholders.
[English]
I should also like to take a few moments to talk about the implications for policyholders in terms of taxation of benefits, which is an issue that I know is of concern not only to the government but to honourable senators. The general principle underlying the tax treatment of demutualization is that it will be consistent with the existing rules relating to the distribution of benefits by corporations with share capital. That is, there will be no special tax or no tax concessions as part of demutualization. That is appropriate because policyholders receiving income from a demutualization will have greater resources at their disposal.
The same principle applies for income-tested benefits. Because income from demutualization will increase one's ability to pay in the same way as would other sources of income, it will affect income-tested benefits in the same manner. However, demutualization has highlighted an existing problem with the tax treatment of dividend income under the GIS program. We have introduced legislation to correct this problem.
Policyholders who receive provincial benefits may also see those benefits affected by demutualization. While those benefits are not within federal jurisdiction, we are concerned about them. Provinces have been informed about the upcoming demutualization process so that they can assess the potential implications for their own programs.
There is clearly a need to ensure that policyholders are educated about the implications of tax and benefits so that they can plan their affairs accordingly. We are, therefore, taking measures to ensure that they have access to adequate information in this regard. As I said earlier, our overriding objective in demutualization is the protection of policyholders. That applies to the question of taxes and benefits as well. We want to do everything possible to empower the policyholders themselves to make the appropriate decisions.
Before closing, I should like to explain the importance of ensuring timely implementation of this legislation. Many policyholders are aware of demutualization as a result of the companies' education efforts and of the media reports. The four companies with us today announced about a year ago their intent to demutualize. However, until the regime is actually finalized, the companies are limited to basing their communication with policyholders on the government's draft regulations and legislation. They are therefore unable to provide precise information as to the proposals in place and that could lead to shareholder confusion.
In addition, significant delays could reduce the flexibility of the companies with respect to the timing of their initial public offerings. As honourable senators know, the late summer months are not generally ideal for new equity issues. As well, we are expecting a large number of converting U.S. mutuals early in the next year.
Let me emphasize that demutualization is not a quick process given the many safeguards that we are attempting to put into this law to ensure an orderly conversion and the protection of policyholders. A company hoping to demutualize before the summer would have to send its information package to policyholders in the early spring, not to mention the fact that OSFI is going to need a lot of time to review every single word in the information that goes out.
It is then all the more important that we, as custodians of the public good and commensurate with our responsibilities as legislators, move as expeditiously as possible to put this regime in place.
[Translation]
Adopting Bill C-59 and the related draft regulations would allow us to eliminate an unnecessary regulatory barrier, and at the same time enable mutual life insurance companies to remain competitive and seize opportunities for growth, while protecting policyholder interests throughout the demutualization process.
[English]
Honourable senators, before going to questions, I would thank you for the speedy way in which you have addressed this issue immediately upon return from the long break over the Christmas season. I thank you for the opportunity of being with you.
Senator Lynch-Staunton: Thank you, Minister Peterson, for that complete presentation. I am glad that the sense of urgency that you expressed today is not as great as the one that was expressed before Christmas, though I will not go into any more detail there.
The exercise through which we are going this week and perhaps next week is valuable for all policyholders. Certainly on this side there is no objection to demutualization. We have supported it every time it has come up. We do, however, have questions regarding the implementation and, in particular, the impacts on policyholders, both favourable and unfavourable.
Regulations have now been issued. Is that the end of the regulations or are there more regulations to follow?
Mr. Peterson: We issued all of the regulations with the legislation when we brought it down.
Senator Lynch-Staunton: Does that mean that there will not be any more and that those are the ones with which we can work?
Mr. Peterson: That is correct.
Senator Lynch-Staunton: Would you have an objection to asking that the superintendent report annually on how this bill is being implemented, until such time as the process is completed? In that way, Parliament can be informed on a regular basis.
Mr. Peterson: No. That is an excellent suggestion. The superintendent files his annual report with the Minister of Finance who then tables it in the House of Commons every year. It would be very appropriate, pursuant to your suggestion, that the superintendent include the material to which you have referred. Then it would be available for members of Parliament. Certainly it would be appropriate for honourable senators to call the superintendent before them at any particular point if they have concerns.
We are in an evolving process here. We do not pretend that we will always have all the answers. We welcome suggestions as to how we can improve on the process in order to protect policyholders and to ensure that this process works to the advantage of all.
The Chairman: I might just say that the superintendent appears before the committee two or three times a year. The committee can hold a special session to follow up or we can cover these issues during his regular appearances over the year.
Senator Lynch-Staunton: I would be happy if the superintendent follows up on the minister's suggestion and includes in his annual report activities surrounding Bill C-59.
Is there or is there not a concern in the United States regarding the attitude of the Michigan authorities with respect to this process?
Mr. Peterson: Yes, senator, we did encounter certain concerns of the previous Michigan administrator. That administrator is no longer in place. Michigan will be the port of entry for the Canadian companies into the United States market, so that state is very important to us.
The superintendent has had discussions with the new Michigan administrator. While Michigan is now looking in detail at our proposals, we have received no adverse comments. I believe senators have been provided today with a letter from the New York regulator showing that they have looked at our regime and that they realize that we have taken into consideration many of the problems which New York experienced with their demutualization regime.
Senator Oliver: What letter is it that you say we received?
Mr. Peterson: Perhaps it has not yet been distributed. I will ensure that you get it.
We do not anticipate problems. We will work with the Americans in a constructive way. I am prepared to meet directly with the administrator from Michigan should there be any questions of substance.
Senator Lynch-Staunton: There may be questions from Michigan or from other authorities anywhere in the world because we are talking about policyholders who are scattered everywhere. Can we be assured, however, that the conditions of demutualization will be the same for everyone and that no compromise will be made for Michigan or some other authority to allow for stricter or more generous processes? Can we have an assurance that every policyholder will be treated the same?
Mr. Peterson: Senator, it would be totally unacceptable to treat policyholders differently in different jurisdictions. That is why we will have one regime which will apply to all. That is a good suggestion.
Regarding any concerns of the new administrator in Michigan, we have been very fortunate as we developed our regime to have the ability to examine demutualization regimes in Australia, the United States and the United Kingdom. We have been able to learn from their experiences about some of the pitfalls and hopefully we can avoid them.
Senator Lynch-Staunton: On another matter, you did say in your presentation that employees of insurance companies would not be eligible to become stockholders until, I believe, one year after the stock has been exchanged but, as policyholders, they will be entitled to convert. Is that correct?
Mr. Peterson: Yes.
Senator Lynch-Staunton: They can become shareholders via the fact that they hold policies but not as senior management entitled to stock options or to purchase shares.
Mr. Peterson: No. We have said that options should not be available.
Senator Lynch-Staunton: If I am on the wrong track, please clarify.
Mr. Peterson: First, if I were a director and I had a policy, I would receive my shares. I would become a shareholder that way. I would also have a right to subscribe for shares at the IPO or on the market. I would not have the option. Thus, if I were prepared to put my own money with the future of the company, and not just have an option that has only an upside to it, then that would be acceptable.
We agonized over this issue. For example, New York precluded insiders from having an option for five years and even from acquiring stock with their own money for two years.
These are never easy decisions. Perhaps there is no one right rule. We tried to weigh the interests on both sides -- having an alignment of interests between shareholders and management at a certain point and ensuring that the fundamental principle of demutualization would be that the value of the company would go only to policyholders who are the real owners.
Senator Lynch-Staunton: I will not belabour the issue. It seems that an exception is being made here. When we had privatization bills for CN and Air Canada, I do not recall that one-year freeze being imposed on management. Why was it felt necessary in this case?
Mr. Peterson: The 1992 bill regarding the demutualization of the smaller insurance companies had a three-year prohibition on options. We also considered that in this case. We considered many of the representations made to us.
I am not saying that we have got this 100 per cent right or that it was an easy decision. We weighed the interests of the policyholders and wanted to ensure that all the benefits went to them. Various companies said, "We want to have our status under the 10 per cent rule. We do not want to be subject to take-overs of a hostile nature for anywhere from two to five years, in order to give us time to adjust to the new regime." Those were factors that we took into consideration when looking at this matter. I am not saying that we have it absolutely right.
We looked at all the other regimes as well as at the previous regime that was in place. As a result, we said that one year would be enough to allow the new companies to find their feet under a new way of operating and to allow the stock markets to take into consideration the true value of those companies. By that time we would have probably two, if not three, quarterly reports that would be in the public domain. Thus, the markets could assess the efficacy and the effectiveness of the new directors in the new company at meeting their financial goals.
Senator Lynch-Staunton: As I recall, what is required is a two-third vote of those voting. You could have two-thirds of 10 per cent or two-thirds of 100 per cent. Did you consider having a minimum number voting, such as one-half? For whatever reason, only 10 per cent of Prudential's policyholders in the United States turned out to vote. I do not know if it was because of a lack of interest or if they could not be bothered. Did you think of a minimum number for the two-thirds to click in?
Mr. Peterson: That was a difficult problem for us. Prudential had imposed on it the requirement that at least 10 per cent of its shareholders would vote. When we looked at other demutualizations around the world, the vote was between 10 per cent and 15 per cent.
Corporate governance is a very familiar issue to honourable senators. When you are dealing with a public company, how do you ensure that a certain percentage of policyholders or shareholders will exercise their right to vote? We were not sure that if there were a very high requirement we could ever have an effective corporate governance regime, not only for demutualizing insurance companies but for any other companies. That is the nature of the beast. You can lead a horse to water but you cannot make it drink.
Therefore, as opposed to setting some artificial minimum that may or may not be met, we went the other way. We said, "Let us go beyond what happens with other public companies. Let us require that in the information to shareholders and to OSFI the companies outline the specific steps they have taken to try to get greater shareholder participation in person or by proxy through that special meeting which will be called and which requires a two-thirds vote."
I wish that more policyholders and shareholders would take their obligations and rights more seriously. The fact is that we will err in this case by trying to bend over backward to ensure that they have the information and that they are made aware of their responsibilities and rights.
Senator Lynch-Staunton: I know that Senator Oliver will raise questions on tax consequences. My question in that regard is this: Major tax consequences will flow from this measure and that will come as a nasty surprise to many people regardless of the information sent out. Is one way of addressing that to distribute the surplus through either reduced premiums or increased benefits?
Mr. Peterson: Yes.
Senator Lynch-Staunton: Is it being considered as such for individuals?
Mr. Peterson: The legislation and regulations would leave the possibility of other than share contributions being made to the policyholders, such as the enhancement of benefits, the reduction of premiums, or other such measures. The companies will have to respond to that. My understanding is that the companies will distribute shares as the preferred means of doing it.
Senator Lynch-Staunton: The legislation allows that third option if companies are interested in pursuing it; is that right?
Mr. Peterson: Yes.
Senator, you raised a point earlier to which I did not respond. You asked about options and you mentioned that when we privatized federal companies we allowed options to directors. We feel that this is slightly different from that type of privatization. When a company that the government owns is privatized, we have the right to accept or reject the price given to us. Here it is not the shareholders or the policyholders who have that right, but rather the management who is sitting down with the best experts they can muster to set that share price. That is why we want to ensure that every consideration is given to maximizing the benefits for policyholders.
Senator Angus: At the outset, our leader indicated that we are in favour of the principle of demutualization and have been for some time. In fact, we have deplored the time it has taken to get to this stage.
Having said that, it is interesting to note that the big insurance companies that are in question here, those with over $7.5 billion in assets, were previously stock companies before they were mutualized. I would be interested in having your comments on why they were originally mutualized and are now being demutualized, inasmuch as this exercise is being scrutinized not only by active players in the financial services industry at present but also by students and other analysts of this subject. It is complicated and I am aware of how difficult it was to arrive at a set of rules that would enable this process to take place effectively.
Could you outline for the record why there has been this change over history?
Mr. Peterson: I would defer to the representatives from the companies themselves, but my understanding is that it was really part of the sense of so-called economic nationalism; we were concerned about some of our major institutions being taken over by foreigners so we allowed this mutualization to take place as protection against hostile takeovers. It was important to us that our major financial institutions be based in Canada, be controlled here and have their head offices here.
Circumstances have changed. Globally, we have seen the breaking down of barriers to investment and to transfers of capital. Meanwhile, we have an industry of which I could not be more proud. These four insurance companies have, by all measures, been very successful. A number of them have a strong presence in foreign markets, attesting to their competitiveness. This has been part of the history of our entire financial services sector, which I would dare say is probably the best industry that we have in this country. I would be happy to wax eloquent about that for as long as you have time.
Having said that, times have changed. The companies want access to this capital, and at present they are precluded from growing internationally and domestically through the favourite way of most people who want to do acquisitions, which is the using of shares in order to make acquisitions. We want them to have that capacity. At the same time, there is probably a windfall benefit, which policyholders never expected they would get, whereby some $10 billion will be distributed to policyholders. It is one of those rather felicitous situations where it seems to me there is a benefit on both sides.
Senator Angus: That is interesting, Mr. Minister. I like the way you are waxing. Parenthetically, we followed much of your waxings when you were chairman of the Finance Committee in the other place, particularly those in which you were urging the rapid opening of the doors to foreign banks here in Canada. Now that you are the minister, we are waiting to see how you will follow your own advice. Do you have any eloquent words for us on that subject?
Mr. Peterson: On Thursday, we will be tabling a bill for foreign bank entry into Canada, including the branching regime. I know that your committee has fought long and hard on this subject and has also suggested some very concrete and worthwhile ways to deal with the foreign banking regime. Your efforts go back right to the white paper of just over two years ago. I am very appreciative of those efforts, which have led to much of the legislation being brought forward.
As we go forward, we as a government must adopt the position that we may not have all of the answers and we can benefit from consultation and openness on the process. Things are not written in stone. We will welcome your ongoing participation in improving this, as we work through the steps that will be taken.
Senator Angus: In regard to the demutualization process, I note that it is planned that there will be a series of initial public offerings of the four large companies. The order has even been hinted at. I would like to understand why these IPOs are to be staggered. Since we have reached such maturity and strength in the global marketplace, do we need to resort to that kind of process? The second part of my question is: Who has established the order for the IPOs?
Mr. Peterson: I can assure you that the government has not suggested any particular order. I think it has been driven more by the companies themselves, although I would hesitate to put words in their mouths. I think some companies are more advanced than others in the demutualization process. That is as it should be. We are not trying to dictate that they demutualize. We are just putting legislation in place that will enable them, should they, or two-thirds of their shareholders voting in person or by proxy, determine that it is in their best interest to demutualize.
Senator Angus: Is that as far as you are willing to go to answer both parts of that question?
Mr. Peterson: We have not dictated to them that they should demutualize nor have we dictated the order in which they should, if they choose to do so. They are much more aware of the problems of doing this. After all, it is a brand new regime. We are working closely with them and other stakeholders to get that regime right.
We have seen cases where IPOs just do not float. We know for a fact that there will be a great deal of interest in the United States in these things. Because our companies are smaller, they may want to get to market sooner. We want to give them that flexibility. That is their decision.
Senator Angus: I should just like to follow up on Senator Lynch-Staunton's questions about the pricing, because I am not clear. As I understood your answer on the issue of executive options and your decision to have a one-year moratorium, you appeared to draw a distinction between those IPOs and others in terms of the pricing process. I have always understood -- and I believe the case will be similar here -- that when these offerings come to market, they are done through a syndicate of financial advisers of substantial experience and that when they do the pricing exercise, they will probably be backed up by fairness opinions.
It seems to me that the restrictions that you are contemplating show a lack of confidence in that process, in that they might price the issues too low and that there might be a windfall. I found it a dangerous precedent, frankly, from a corporate governance point of view. I know how hard management works to do a good job and to bring those issues to market in an appropriate and fair way for the shareholders. You seem almost to be showing a lack of confidence and faith in the integrity of our very capable managers.
Mr. Peterson: Senator Angus, I can see why you may say that. However, there could be nothing further from the truth, from our viewpoint, regarding our confidence in the competence or the integrity of the individuals and of the companies.
We are breaking new ground. It is new ground for the companies as they go from a fairly closed system of governance without the discipline of the stock market which affected many other countries and companies.
From the government's point of view, we are breaking new ground with you in looking at how we do this. We are moving to a regime of ownership where the companies themselves realize that there will be periods of adjustment in terms of the ownership requirements and the 10 per cent rule. It has been suggested to us that we will want to have a period of at least two years, maybe up to five years, to ensure that we have adapted to the new modality of governance that a stock company brings.
We looked at what happened in other jurisdictions. Some had no prohibitions. Others had five years. The previous regime, in place since 1992, had a three-year hold on it. We debated and we agonized. There is absolutely nothing to the charge that we do not trust them. They are an honourable people. We have had a wonderful give-and-take relationship working together to produce this regime.
Senator Angus: I appreciate your saying that on the record, Minister Peterson. One of the rumours in corporate Canada's boardrooms is that you suddenly introduced that restriction because some ill-informed media types wrote up speculations about how this could be abused.
One of the most difficult exercises in corporate governance these days is the establishing of fair remuneration packages for senior management. It is all transparent now and there are very strict rules in place. One can probably live with a one-year restriction. I think those very fine people to whom you referred will understand that. However, I submit that we have not seen any good reasons and I find it a rather weak-kneed reaction to misguided media reports.
Mr. Peterson: These are difficult judgment calls. They are certainly not based on any concept that there would be skulduggery.
We looked at demutualizations elsewhere and found that there was often a very big run-up in the press in the first year. That factor led many other jurisdictions to consider some type of ban. Certainly some shareholder-rights groups came before us proposing outright bans or longer bans.
I do not pretend that this decision was an easy one. I will not even say that it was necessarily the right one. It is the decision that we have taken based on attempting to balance those types of things and attempting to avoid a number of the problems that we have seen arise in the United States where legal actions have delayed demutualizations.
We have consulted thoroughly on those particular issues in an attempt to pre-empt some of the issues that might be perceived as arising and we sidelined a lot of other issues in the United States.
Senator Kroft: I have no real problems with the specific aspects of the proposals, at least none that I would raise here. I should, however, like to probe your vision of the next steps. We all look forward to discussing that with the companies' representatives, too.
In this committee's review of the financial institutions, which was filed before Christmas, we took a good deal of interest, as did the MacKay report, in the increase of competition and options and in an enriched, more mature and broader financial services industry where the insurance companies potentially play a major role. We recommended three years without any possible mergers. On a broader policy basis, we suggested a prohibition on cross-pillar purchases between large insurance companies and large banks.
Obviously, we felt strongly and optimistically that the large insurance companies could play an important role in a broader financial industry in our country. I am interested in looking at how today's issues fit into that pattern. I should like to probe your view a little more on that question.
I am not clear on the derivation of the time limits on prohibitions. I do not believe the regulations are clear about that. Is that a policy view at this point?
Mr. Peterson: This is, again, one of those judgment calls. Perhaps we did not get it right. You are quite right that your committee and the MacKay report both said that there should be a three-year hoist of mergers of those demutualized companies. We said that there will be an absolute hoist for two years, after which we will study the issue.
My own particular view on this is that the ownership provisions for our entire financial services sector are probably among the most important matters which we as parliamentarians will deal with over the next few years. I do not believe that we should necessarily wait a full two years before we start to look into it. What we do in terms of ownership and who can buy whom will determine the architecture of our entire financial services sector for a long time to come.
Our stand is fairly consistent. There is a one-year difference but we undertook to study it at the end of two years. I hope that we can begin to look at it sooner.
Senator Kroft: Also in the ownership area, we have moved the broadly-held number from 10 to 20 with an option to go to 30 with equity-type, non-voting shares. I would think that that move is of enormous significance to the companies that are part of the process being addressed here today.
I want to be clear. Are you signalling with this two-year review that these issues of ownership and permissible and non-permissible inter-corporate activity are indeed on the table? I think you said it should be sooner rather than later.
If the message from this committee is to be consistent with our previous pronouncements or suggestions, then all those things must be in the mix and this period must be constructively used in the whole broad range of questions.
Mr. Peterson: Your point, senator, is well taken. As a government, we must respond to the MacKay report. Using the work of your committee and that of the other House, we will address the ownership issue. It is a very important, ongoing issue and probably the most difficult issue to address.
That is why your ongoing advice in these areas will be of importance to us.
We have noted with a great deal of interest your suggestion that the 10 per cent rule could be relaxed in certain cases, particularly with respect to the need for our companies and our institutions to be able to use their paper to acquire other companies, perhaps doing international joint ventures. This is under active consideration now, and I am sure that we will not have the last word on it.
Senator Meighen: Senator Kroft appropriated the question I wanted to ask about the 20 per cent rule; however, Mr. Minister, I simply add my unqualified support to that proposal. I hope that you will consider carefully, in due course, the idea of moving to 20 per cent, and possibly 30 per cent for non-voting stock. It seems to us that that has innumerable advantages. It may not be a solution to all our ills, but I think it offers an avenue into new and different areas that could be very promising. I am glad to hear you say that it will be under active consideration.
My question now may be appropriate for Mr. Thompson or someone else from OSFI. Do you see a different regulatory environment once demutualization has taken place? Will the beast, from a regulatory point of view, be a very different beast or will it be generally the same beast? Shareholders, after all, want their stock to do well; policyholders are primarily concerned that their policy is doing well.
In your view as a regulator is there any conflict there, or would it dictate a different approach from OSFI in its regulatory practices?
Mr. John R. Thompson, Deputy Superintendent, Regulation, Office of the Superintendent of Financial Institutions Canada: If I may answer your question, senator, our primary role under our mandate is to focus on the rights and benefits for policyholders in the case of life insurance companies. We have been exercising our responsibilities for both mutual companies and stock companies and, to date, we have not had a meaningful conflict between the rights of shareholders and policyholders. We see them as quite different. For both mutual companies and stock companies we are able to focus on the rights of policyholders as we carry out our work.
The short answer to your question is that I do not see a material difference in the way we would supervise these companies after demutualization as compared with the process we would have used while they were mutual companies.
Senator Meighen: You have no doubt conferred with your colleagues in other countries to seek out their experience of demutualization and so on. What, in your view, are the areas that will need to be most carefully supervised when going through the demutualization process? I will put it another way: What went wrong, if anything, in other countries?
Mr. Thompson: I cannot answer the question as to what went wrong in other countries. However, I can say that our concern is to ensure that, during the demutualization process itself, the policyholders who will be voting on the demutualization itself are given as much information as possible, and as clearly enunciated as we can possibly get it, so that they can make an educated and informed decision as to whether demutualization is in their interests. We also want to ensure that the information encourages them to participate in that process as much as possible.
Much of our effort in reviewing materials is focused both on the scope of the information that is made available and on the clarity of the language that is used to describe the transactions.
Mr. Peterson: Senator, I should like to add to that, if I am permitted. One of the big problems we saw in foreign demutualizations was that they were using mutual holding companies. Another was that, instead of giving actual stock to their policyholders, they just gave them subscription rights; so the policyholders, whom we consider to be the true owners of the mutual companies, were not the ones who were getting the benefits. That led to a number of lawsuits and it was one of the great lessons we were able to learn. That is why we are allowing holding companies in, but only ones that are incorporated as insurance companies and regulated as such, in order to protect the safety and soundness of the institution.
Senator Meighen: For clarity, Mr. Thompson, your role is to suggest, encourage, and aid and abet the exercise of clarity and full disclosure by the companies as they go through demutualization; is that correct?
Mr. Thompson: Yes, and actually to approve the documents that are released to policyholders.
Senator Meighen: You will not be issuing any statements or documents yourself, will you?
Mr. Thompson: No.
Senator Callbeck: Mr. Peterson, are you receiving any letters from policyholders expressing major concerns about this legislation?
Mr. Peterson: Since we tabled this on November 30, I believe we have received four or five letters. I have seen letters from policyholders who have raised issues which we have dealt with in the legislation. I have also seen letters that have complained about certain past practices of insurance companies, some of which are the subject of litigation right now.
Doubtless, there are policyholders who will object outright to demutualization, because, even though we believe demutualization means that good things could ensue for policyholders and for the companies themselves, the votes taken elsewhere were never unanimous; they were 90 to 95 per cent in favour. However, because of the openness of this process, which started in June of 1996, in which we laid our cards on the public table for response, I think we have benefited a great deal from this type of input and have been able to respond to the concerns that we have received.
Senator Kenny: I hate to think I account for 25 per cent of the minister's mail.
Mr. Peterson: It was 49 per cent. The rest of it dealt with cigarette taxes.
Senator Callbeck: Did the four letters you received express the same concern?
Mr. Charles Seeto, Director, Financial Sector Division, Department of Finance: One of the companies indicated to their policyholders that, if they had a problem, they should write to the government. Some of the letters were saying, "We just want to make sure that you have the right framework in place in terms of protecting the policyholder." We think we have done that in the proposals we have put in place. Policyholder protection was what they were raising concerns about, and I think we have addressed that through the regime that we are proposing.
Senator Oliver: There are only five or six major legal questions that arise from this legislation. Most of the topics have already been addressed by various senators. I want to follow up on some of the questions you answered, to see if I can get more meat put on the bones.
I had five questions in mind, but I will ask only two, and they concern two areas that were canvassed by my leader, Senator John Lynch-Staunton, but I did not find the response that you gave to be much of an answer.
The first question deals with the clawback provisions with regard to GIS, OAS, child tax credits, and other income-tested programs, and the effect they will have on policyholders. The one thing you said, Mr. Minister, in your main presentation to us was that you want to ensure that you protect the policyholders.
What about these poor policyholders who are in income-tested programs in the provinces, and who, once they get these shares, are put into another tax bracket? How will you protect them from very severe financial consequences? What will you do about that?
Mr. Peterson: You raise a very important issue that has been of great concern to us. Policyholders will receive an average of $5,000, but we know that actual receipts could range from a very small amount to a substantial amount. With respect to their being pushed into another bracket, we have, as you know, three brackets in the federal income tax. For an income of close to $30,000, the tax rate is set at 17 per cent. For incomes up to $60,000, the tax rate is set at 26 per cent. For incomes over $60,000, the tax rate is 29 per cent. One can argue as to whether these are confiscatory rates. We could certainly get into a whole debate as to whether our tax rates are too high.
Let us take an example of a taxpayer being pushed into the higher, over-$60,000 bracket by receipt of a $5,000 benefit. Only the incremental income would be taxed at that higher rate. All income under the $60,000 would be taxed at the lower rate federally. So we are not creating any special regime for a demutualization benefit or a capital gain that might arise from it.
Senator Oliver: It does not seem very fair to me. You spoke about protection of shareholders and ensuring that they are treated fairly. That is not fair treatment.
Mr. Peterson: Reasonable people may wish to differ on this. If I were at $60,000 and I received a $5,000 bonus from my employer, it would be taxed at a higher rate than the income which was under $60,000. That is a phenomenon that applies to a progressive income tax system.
I ask honourable senators this question: If one receives this type of benefit from demutualization, be it in the form of cash or a policy benefit or a capital gain, should one have special treatment?
Senator Oliver: What did other jurisdictions, such as Australia, do?
Mr. Peterson: Australia gave a cost basis in terms of capital gains. The United States did not. The U.K. did not. We are adopting the U.K.-U.S. approach, saying that the shares acquired by a policyholder on demutualization will have no cost basis.
When we look back at what has happened in demutualization, we see mutual companies that have been in existence for up to 100 years. Who has contributed that surplus? Is it the current policyholders or the entire gamut of policyholders from day one?
When does my benefit as a mutual policyholder crystallize? It is when there is a death. We have created one new phenomenon: I cannot trade that today, if I do not demutualize; I cannot realize the value for it. I contributed my premiums to that company based on the protection I was getting in the debit industry, and the income stream that was anticipated. Therefore, I find it very difficult to suggest that there was a cost contributed by the policyholder that should reduce any capital gain that may occur, but that gain will occur only when that policyholder sells that share that is given to him or her.
You are quite right: jurisdictions have differed on this. Australia took one approach and we have taken another.
Senator Oliver: My second question deals with the voting requirements of demutualization -- and I spoke about this in the chamber. It seems to me that, for example, if only 30,000 policyholders vote, then by absolutely no standard is that a fair representation.
I heard the answer that you gave to my leader on that question. On the one hand, you spoke of wanting to ensure that the policyholders are fully protected, but, on the other hand, you will not do anything about how many people must vote before gaining approval. It seems to me that, as the minister, you should be doing more to ensure that the vote is more representative.
Mr. Peterson: Ideally, I would like 100 per cent of the policyholders to vote. Honourable senators around this table have had a great deal more experience than I with the issue of overall corporate governance and whether or not we should require that for all corporations, not just demutualizers, a certain percentage of shareholders must vote in order for a particular action to be taken.
Perhaps this is an issue that should apply not only to demutualizing companies but to all corporations under our jurisdiction. Should we make a special exception here to the general rules of corporate governance, when we do not actually know how many people will vote? We know from past experience in other jurisdictions that turn-out has been between 10 and 15 per cent. I think that is very low, and we are concerned about that.
Senator Oliver: What will you do about it?
Mr. Peterson: We will require in the circular reports that go to shareholders that the company outline the approaches being taken to encourage more shareholders not only to be knowledgeable but to actually exercise their votes.
We have made it easier to vote because we have changed how the proxies will be handled. We have made it more user-friendly in that regard. You do not just have to appoint management; you can indicate in your proxy whether you are in favour of or against the question.
Barring some future determination on overall corporate governance, perhaps by this Senate committee, we feel that the best way to deal with this issue is to empower policyholders through knowledge. That means carefully scrutinizing the information that goes out, ensuring that the companies do have adequate communication with their policyholders and that policyholders are made aware of issues. I am encouraged that many of the companies have taken steps already to try to inform their policyholders.
Senator Oliver: Do you refer to Web pages?
Mr. Peterson: The web pages will not be terribly effective except for those who have access to the web. I refer to policyholder meetings throughout the country. Two companies have held a total of 18 meetings with approximately 200 people showing up at each meeting. That may be only 3,600 out of 2 million Canadian policyholders.
Senator Oliver: A lobby firm report done for one of the companies stated in November that 45 per cent of the policyholder respondents had still not heard anything about the process.
Mr. Peterson: How do we do this? If you polled the constituents whom I have represented for some 14 or 15 years, probably 45 per cent would not know my name. How do we overcome this type of difficulty, except by bending over backwards to make information available to them? If they will not read what goes into their house, how do we deal with them? Perhaps we should send the chief executives around knocking on the doors of every one of these people. It is a problem.
Perhaps you have suggestions for the companies to help publicize this. I look forward to hearing from them.
Senator Oliver: How about a quorum?
Mr. Peterson: What would you suggest as a quorum, senator? Fifty per cent?
Senator Stewart: In the Senate, it is 15 per cent.
Senator Oliver: I am just a lawyer. I just ask questions.
Mr. Peterson: We are all legislators here. We are all working together in a cooperative fashion to try to achieve what you would like to achieve.
Senator Oliver: Fairness for the policyholders is all I want.
Mr. Peterson: We want fairness. Is it the suggestion of this honourable committee that we should impose a quorum of, say, 50 per cent?
Senator Stewart: Take the Senate quorum, 15 out of 100. We make decisions on all sorts of subjects.
The Chairman: On that note, Mr. Minister, I thank you and your officials for joining us this morning. I am sorry we went so long, but you were very helpful.
Senators, our next and final set of witnesses this morning is a panel of the four CEOs of the four largest mutual life insurance companies in Canada, all of whom have already indicated publicly their interest in proceeding fairly rapidly with demutualization.
Appearing next will be Mr. Astley, the CEO of the Mutual Group; Mr. D'Alessandro, the CEO of Manulife; Mr. Nield, the CEO of Canada Life; and Mr. Don Stewart, the CEO of Sun Life.
Please proceed.
Mr. Robert Astley, Chief Executive Officer, Mutual Group: Honourable senators, by way of introduction, the four of us have brief opening statements, and we will proceed in alphabetical order. We appreciate very much the opportunity to address the Senate Banking Committee on this important subject.
Speaking on behalf of the Mutual Group, may I say that I have had the pleasure of addressing this committee in the past, most recently in Toronto in November, when the Banking Committee was reviewing the McKay task force report. At that time I referred to the task force's endorsement of the demutualization process and the specific benefits for my company and, more important, for its 900,000 Canadian policyholders.
There have been significant developments on the demutualization front since my last appearance. As you know, prior to Christmas the final regulations were released and Bill C-59 was introduced and passed in the House of Commons. The bill and the accompanying regulations are a culmination of many months of consultation between the government, the industry and policyholders.
This is a very good piece of legislation. The regulatory framework that will be coming into place is a model for the rest of the world in terms of policyholder protection. Indeed, the letter that was tabled by the minister this morning from an official in New York attests to that. It is a model in terms of policyholder protection and providing enhanced flexibility and greater access to capital for the companies. I believe Canadian legislators can and should take great pride in this accomplishment.
The Senate Banking Committee has demonstrated a great deal of leadership and vision with regard to its long-standing support of demutualization dating back to 1992. You eloquently articulated that support in your December report in response to the McKay task force.
Your committee suggested that demutualization was in the best interests of the approximately 2 million policyholders, from all four companies, who were entitled to shares in the newly demutualized companies. I certainly agree with your assessment.
Last November, I urged the government to move forward with passage of the enabling legislation and proclamation of the final regulations as soon as possible. Today I wish to emphasize and re-emphasize that point.
We are eager to distribute the full value of the company to our current owners, our 900,000 eligible policyholders in Canada. As well, the four companies would benefit from an orderly entry into the marketplace that could be crowded in the not-too-distant future, particularly with large American companies coming into the market.
Mr. Chairman, I know that there was a question in the previous testimony about who decided on the order. I want to assure honourable senators that no order has been decided. This is very much a commercial proposition. The companies may be in differing stages of preparation; however, I can say without hesitation that there has been no collusion or agreement on who will go first, second, third or fourth. That will be a commercial choice and a commercial outcome.
In summary, I urge honourable senators to support timely passage of Bill C-59.
Mr. Chairman, those are all of my opening remarks and I will turn the floor over to my colleague.
Mr. Dominic D'Alessandro, President and Chief Executive Officer, Manulife: Honourable senators, I thank you all for inviting us to appear before your committee. I have had the chance to speak to you before about demutualization and I am pleased to have the opportunity to do so again as part of this important consultative process.
We should be proud that our Canadian financial system is sound and competitive and delivers good value to customers. We have a strong and effective financial regulatory structure that has played a critical role in the development of the financial system that we have in Canada. It is in the spirit of this tradition that the demutualization package is before you.
As you heard from my colleague, we believe that the proposed demutualization legislation is comprehensive and balanced and meets the needs of all parties. It provides strong protection for policyholders while giving the demutualizing companies the ability to modernize their ownership structures consistent with a rapidly changing and more competitive environment.
Policyholders stand to benefit substantially from demutualization. They will receive equity shares or cash representing 100 per cent of the value of the companies. It is estimated that the Canadian portion of that distribution will amount to $10 billion and will be received by 2 million Canadians.
We are committed to ensuring that our policyholders will be able to maximize the value of the shares received on demutualization. Policyholder protections built into the legislative package will contribute to this end. However, timing is the critical element.
It would be a shame if the buoyant and receptive capital markets that are currently prevailing were missed. In addition, the four companies are on separate time lines that will allow them to make share distributions in an orderly and sequenced manner. Delay could create a situation in which all four companies would be going to market at or near the same time. That would create an oversupply of insurance company stock and depress the initial market value of the policyholder shares.
This crowding could be further compounded by a company like Manulife, which has huge non-Canadian policyholders, if the Canadian demutualizations were delayed until next year when a number of very large, well-known U.S. companies will also be going public.
From a company perspective, demutualization will improve our competitive position by placing us on an equal footing with other domestic and international financial institutions. We are currently restricted by our outdated capital structure from taking advantage of growth opportunities. It is imperative that we are given the full range of options available to many of our competitors.
Demutualization will help to ensure that we will have the opportunity to emerge as a Canadian-based, world-class financial service enterprise. That is my goal for Manulife. I hope that you will agree with me that that is a goal worth striving for.
Mr. Chairman, over the years, the Senate Banking Committee has made fundamental contributions to the development of public policy in Canada. I am pleased to have the opportunity to be part of these deliberations on a matter of such critical importance to our industry, and I look forward to answering any questions you may have.
Mr. David A. Nield, Chairman, President and Chief Executive Officer, The Canada Life Assurance Company: Honourable senators, I would like to thank the committee for providing this important opportunity to participate in your examination of Bill C-59, to amend the Insurance Companies Act.
I had the opportunity in November of last year to report to the committee on the McKay task force report. Some of my remarks dealt with demutualization. However, this morning's meeting provides an opportunity to elaborate my views on that perspective.
I should like to refer to two subjects this morning: first, the proposed legislation and draft regulations that you are considering, and, second, the importance of demutualization to all stakeholders, policyholders, the company and the Canadian economy.
As you know, the legislation and regulations before are the result or culmination of a significant effort by many people led by the federal Department of Finance.
The four large Canadian mutual companies worked very closely with the department in helping to come up with a framework for demutualization that, above all, would protect policyholder interests. Our input was received with courtesy and careful deliberation at all times, and I am sure similar thought was given to the input from all other constituents, including a number of policyholders.
The end result is a legislative framework for demutualization that is likely unique in the world. It provides significant assurance that eligible policyholders will benefit fully from the demutualization by realizing the entire value of the company on distribution and ensures that all benefits and dividend expectations are protected. We strongly support the thrust of the legislation and its regulations, and urge its swift passage.
Demutualization is a rare event, in that everyone impacted will benefit, including voting policyholders, the company itself, and the Canadian economy. Voting policyholder benefits, premiums and dividend expectations do not change as a result of demutualization. Yet, they benefit, by receiving in the form of shares in the company, a one-time distribution of the entire surplus of the company. In Canada Life's case, that amounts to an average of over $7,000 per policyholder if our stock ultimately trades at book value. Stock prices are unpredictable but we are hoping, if market conditions do not substantially change, that the price will exceed book value. The shares will be listed on the Toronto and Montreal exchanges and the value will be fully cashable at issue. Canada Life's distribution alone will put well over $1 billion into the hands of Canadians. Coupled with the distribution of our competitors, that is a distribution of unheard proportions in Canada. It will be a positive benefit to the economy.
Australia has recently completed similar demutualizations of its large mutual insurers, and a government-commissioned study there indicated that the economic benefits of demutualization were far more than first anticipated.
Canada Life, of course, benefits as well. The change in ownership allows us access to capital markets in a way we have not had to date. It allows us to grow, diversify, and acquire so that we can build to the size and franchise strength that is so valued today.
Without being a public company, I do not believe we would have the ability to fully implement our strategic plan and would not realize full value for our policyholders. Canada Life hopes to complete its demutualization in 1999. To do that, swift passage of this legislation is critical. Both the regulators and the capital markets need some staging of implementation of all the companies for an orderly process to occur.
Once again, I thank you for your interest and for the opportunity to be with you today.
The Chairman: Thank you, Mr. Nield. Mr. Stewart, you have the floor.
Mr. Don Stewart, President and Chief Executive Officer, Sun Life Assurance Company Canada: Honourable senators, speaking last in this morning's order, I thought it particularly appropriate that I be brief. However, I would not want that to be construed as anything other than committed support to Bill C-59.
I am pleased to have a second opportunity to appear before you on behalf of Sun Life Assurance Company of Canada. Sun Life supports Bill C-59 as providing an appropriate, reasoned and workable framework for the conversion of large Canadian mutual companies into stock companies.
Along with my colleagues, I would be delighted to respond to any questions you may have this morning.
The Chairman: Thank you, Mr. Stewart. We will hear first from Senator Lynch-Staunton.
Senator Lynch-Staunton: Mr. Chairman, thank you. Gentlemen, welcome. Perhaps I should reveal that I am a former employee of Sun Life. I left in 1970, and I think the statute of limitations has long since expired.
Senator Angus: You are still open to options.
Senator Lynch-Staunton: But I am not a policyholder. I enjoyed my stay there. I was in the investment department, and had it not been for the openness of the management at the time, when it was rather unusual for someone belonging to a small "C" conservative company to go into politics, I would not have gone into municipal politics, which means that I might not have been here today to enjoy your company. It is a very personal pleasure to me to be associated again, however briefly, with those who gave me my first real job.
I would like to know how many eligible policyholders there are outside Canada and in how many jurisdictions.
Mr. Stewart: We have just over 1 million eligible policyholders in total at Sun Life. The distribution is as follows: 400,000 in Canada; 230,000 in the United Kingdom; 210,000 in the Philippines; 160,000 in the United States; 50,000 in Hong Kong; and a miscellaneous collection of 20,000, primarily distributed in Ireland, Bermuda and Malta.
Mr. Nield: At Canada Life, we are still doing some of the counting, because there is a difference between policyholders and policies. I do not have precise figures, but 55 per cent of the policyholders that we have would be Canadian, 18 per cent are from the United States, 18 per cent are from the United Kingdom, and 9 per cent are from the Republic of Ireland.
Senator Lynch-Staunton: The other two need not answer. I just wanted to establish that there are policyholders all over the world who will become eligible for this offer.
That leads up to the question I asked the minister: Can you guarantee that whatever offer is finally agreed to will be applicable to all policyholders no matter where they reside, even if you do find one jurisdiction that wants to have a little sweetener added or something removed, without whose approval the whole deal cannot go through, or can you make an offer only to certain select policyholders, or the majority of your policyholders, if there are certain jurisdictions that would not accept the conditions and terms that you have agreed to? In other words, once the offer is made, does it apply to all policyholders no matter where they live, and on terms and conditions that are the same for everyone?
Mr. D'Alessandro: Certainly, that is the intent. To date, it is the intent that the same principles that gave rise to the determination of values be allocated to individual policyholders, and that the same formulas be used universally around the world. In Manulife's case, we have no indication that that ambition will be frustrated. It seems that the rules that are being laid down will be opined upon by experts. Each of these jurisdictions will be retaining its own advisers to tell them whether or not the piece of the pie that is being distributed to their particular jurisdiction is fair and reasonable and has been determined in an appropriate manner.
Thus far, we have no reason to believe that there will be any need to do any fine-tuning along the lines that you are suggesting, senator.
Senator Lynch-Staunton: You say that is the intent, but is that the commitment?
Mr. D'Alessandro: Let us take a scenario in which, for example, Hong Kong legislators decide, "No, we do not believe that you should be using a four-factor formula for allocating value to the residents of my jurisdiction. We think you should use a three-factor formula." What would that mean? It would mean that the piece of the pie going to them would not change, but the distribution of that pie within that jurisdiction might have to be cut up in different pieces to suit the law of that jurisdiction.
It is very hypothetical. If that were to come to pass, would we have violated the principle that we have computed everybody's entitlement in exactly the same manner? Slightly, yes. We would have computed every geographic jurisdiction's entitlement in exactly the same manner, and then, within each of those jurisdictions, we would have to live with the law of the land.
Senator Lynch-Staunton: Let us say one of those jurisdictions is unhappy with your solicitation material.
Mr. D'Alessandro: They all approve it beforehand.
Senator Lynch-Staunton: Let us say they do not. The reason I am asking is that it seems to me to be an extraordinarily complex exercise that you are facing, and you hope to get it over with as soon as possible. As a matter of fact, we were urged to pass this bill in December without even looking at it; so the urgency must still be there. The minister said that the fall is not a good time to do new issues, so I assume you want to go this summer.
Does that mean that all these jurisdictions have seen, and accepted and approved, the material which, as far as I know, is not available here?
Mr. D'Alessandro: No, there have been discussions in the process of preparing for this demutualization.
By the way, colleagues, any time you want to jump in, please do.
In the process of demutualization, we did not stand still, because the legislation was working its way through Parliament here in Canada. We have had discussions, for example, to clarify the types of accounting practices that would be acceptable and the kinds of listing requirements that would be applicable in different jurisdictions.
There has been a lot of dialogue. Our companies are well known and highly regarded in each of the jurisdictions where we will be distributing shares. In Manulife's case, we are getting a very warm reception. People are welcoming the event. They see this as a tremendously positive thing for their citizens.
Senator Lynch-Staunton: When the companies do their initial public offerings, will it be only to policyholders or will they take advantage of the first offering to offer shares no non-eligible policyholders?
Mr. Astley: Senator, the expectation is that each of the companies would make an offering to institutional shareholders at around the same time in order to help create a vibrant and orderly market that is to everyone's benefit.
Speaking for my own company, when the policyholders are asked to vote on whether they would approve the demutualization, they will also be asked to indicate whether or not they wish to receive shares or the equivalent value in cash. Those who receive the equivalent value in cash will, in effect, receive that money from outside shareholders, not directly but through the company as a conduit.
In that process, the policyholder base will be the predominant shareholder base after demutualization, being probably something in the order of 75 to 85 per cent of total shares. The balance will be taken up by new institutional shareholders who have come along to facilitate those policyholders who want to take cash. This will also help create an orderly market. That is the process that would be visualized for my company.
Senator Lynch-Staunton: Would the policyholders be eligible to buy additional shares at the time of public offering, along with institutional investors, or would they be limited only to the shares or the cash for which they are eligible?
Mr. Astley: Each company may take a somewhat different approach on that, depending on whether the company has a desire to raise additional capital. That would be a company-specific decision.
Senator Lynch-Staunton: It could happen, though?
Mr. Astley: Yes, it could happen.
Senator Lynch-Staunton: Senator Oliver has discussed the tax implications that have to be clarified. One way of avoiding taxation, I assume, is to offer, instead of shares or cash, an equivalent amount in reduced premiums or benefits or a combination of both. The minister suggested that that could be done or that there is nothing to prevent it from being done. Is that being considered by any of the companies?
Mr. Astley: We considered different alternatives. My company, the Mutual Group, concluded that the best choice was to offer policyholders the choice of shares or cash. We are not pursuing the possibility of enhanced benefits as part of the proposal that we will put forward to policyholders. It is a valid option, but our board of directors chose not to make that a part of the proposal.
Mr. D'Alessandro: In our case, we also looked at that. We concluded that it would be best to offer the choice of shares or cash. If my memory is correct, very few of the demutualizations that have occurred have offered that third option because of its complexity, especially when you have a multi-jurisdictional demutualization like ours. What is the value of a premium rebate or a policy enhancement in Jurisdiction "A" as opposed to Jurisdiction "B"? Cash and market value and securities are much easier to quantify, thus you avoid that additional complexity.
Senator Lynch-Staunton: Mr. D'Alessandro, your company ran an ad just before Christmas inviting lapsed policyholders to reinstate their policies and to take advantage of what will eventually come as an offer for shares. What is the advantage to the company in doing that?
Mr. D'Alessandro: We did not run the ad because of any advantage to the company. We felt there was a responsibility to advise lapsed policyholders that there was a potential benefit of some size here which it might be in their interest to investigate. In fact, it is a big headache for us, but we are acting on lawyers' advice. For example, if someone's policy lapses three months before the demutualization becomes effective or three months before we announce our demutualization date, that person may forego a substantial benefit in exchange for a modest amount of premium dollars. We wanted to ensure that policyholders understood that. We wanted to take action to advise the policyholder base of that situation, but it was not done for company benefit.
Senator Lynch-Staunton: Have any of the other three companies taken that step?
Mr. Stewart: Everyone has done it.
Senator Lynch-Staunton: What has been the response?
Mr. Astley: My company did not place ads in newspapers, but we did write to every policyholder who might have fallen into that category of having lapsed but being eligible for reinstatement. We have had quite a modest number of responses to that. The number of policyholders who have indicated a desire to reinstate is about 200.
Senator Lynch-Staunton: It was really a question of trying to avoid liability later on, in case someone claimed they should have been advised.
Mr. Astley: It was also done to be fair.
Senator Meighen: Gentlemen, I realize that you represent four different companies, albeit in the same industry. In what areas could these proposals be different, other than in price? Do you expect that the proposals to the policyholders will be substantially different?
In answer to Senator Lynch-Staunton, you all said that you have already been in touch with policyholders. I do not condemn you -- on the contrary -- for getting together to talk about how best to treat policyholders on an equitable basis. To what extent have you pursued that, without falling afoul of any criticism of collusion?
Mr. Stewart: The fact that all four of us are here today in support of Bill C-59 obviously says a great deal about cooperation in Canada.
We are distributing, as far as our policyholders are concerned, in different jurisdictions. That leads to some differences in the technicalities of the demutualization process. A couple of our companies are quite substantial presences in the United Kingdom, where demutualization has a long and detailed history. We tend to fall into the industry pattern there, rather than into any particular Canadian dimension.
A couple of us have substantial business in various parts of Asia. We have found it helpful to work together at a high level in dealing with the authorities there. However, we have all cooperated in a general way in retaining company-specific outcomes at the more detailed level.
Senator Meighen: Let us look specifically at enhanced policy benefits as an option, instead of cash or stock. Mr. Astley and Mr. D'Alessandro said they have considered it.
Senator Oliver: It was considered but turned down.
Senator Meighen: Have the other two companies considered it? Have you talked as an industry about this question?
Mr. Stewart: When this question has come in front of us, the management view has been company-specific.
As a matter of fact, we have considered this and we will be doing it in a small number of situations where it is impossible for the voting policyholder to receive shares. Typically, these are situations where the voting policyholder is a corporation and the arrangement is registered or qualified in some fashion. There is a small minor exception, however. We arrived at the conclusion that we could not apply this across the board for a whole bunch of reasons, including looking at what had happened in other jurisdictions.
Senator Meighen: For the record, am I correct, gentlemen, that even if you were to decide that policy enhancement was an alternative, such enhancements are taxable, are they not? It is not a tax free alternative?
Mr. Nield: It may involve a deferral of tax, because you are only taxed when where you are exceeds what you put in.
Senator Meighen: Mr. Nield, is there a difficulty in finding policyholders?
Mr. Nield: Yes.
Senator Meighen: Given that, what sort of announcement or publicity campaign do you anticipate and for how long would you think the offer would be open?
Mr. Nield: All the companies have a very similar problem in that their address lists and record lists may be acceptable for their ongoing business, but when they come to a share distribution those lists suddenly become inadequate. It is a fairly expensive and complex process of going through and ensuring your records are where they must be so you can reach everyone. We are going through it right now and others are in various stages, I am sure, of having what they consider to be an adequate, up-to-date mailing list.
Senator Meighen: In terms of the deployment of the funds raised, will we need to wait until the policy offers are mailed to find out what the intention is, or have statements been made by any of you in this connection that are more than just general statements?
Mr. Nield: I have not heard anyone announce whether they would raise extra money or not. That will depend on the timing and what is happening in the marketplace. Robert Astley stated it pretty much the way it is; certainly, for my own company, we are asking policyholders whether they want cash or shares. We will look at those who want cash and we will go out and raise that, ideally establishing a marketplace. At the time we come to the market, we will look at the market and decide whether we wish to raise additional funds or not. At this point, my company has not made a decision.
Senator Meighen: Have any of you formed an opinion on the suggestion made by this committee in its report in response to the MacKay commission, which Senator Kroft alluded to earlier, with respect to the possibility of raising the 10 per cent level to 20 per cent for voting stock and raising it to 30 per cent for non-voting?
Mr. Astley: Senator, if I may respond to that first. Those are important issues and, indeed, all of us at the table, I believe, would want to be involved in ongoing debates about those. However, it is my view at least that this is not central to the passage of Bill C-59. The government has indicated that it intends to review all of those in two years. We heard the minister this morning indicate that he thought earlier review would be appropriate. I would certainly support that.
Senator Stewart: I wish to go back to the basis of the mutual model. When your companies adopted that model, what benefits were anticipated from having that particular model? For example, was it thought that potential policyholders might be more attracted by a mutual company than by one that was not? If so, why? What are we forgoing, assuming that the circumstances are the same now as they were when you became mutual companies?
Mr. Stewart: In our case, we completed our mutualization in December of 1962, having begun it four years earlier. At the end of 1962, approximately 50 per cent of the company's business was individual, participating, life insurance. Policyholders were a very large proportion of the business transacted by the corporation, therefore. Today, as I said earlier, we have approximately 1 million voting policyholders and the total number of customers of the corporation is well above 12 million. There is a much smaller proportion of the corporation devoted to this particular class of customer, which leads you to some divergence of corporate governance with customers. That is an important issue for us going forward. Moreover, quite clearly, although I will not repeat all the economic differences between today and the early 1960s, globalization, information technology and all the rest of it make today's environment very different from that.
Senator Stewart: Does anyone else wish to make a different point?
Mr. D'Alessandro: I would make the point that remaining as mutual companies, given the environment in which we are operating, would essentially doom us to becoming marginal institutions over time. We are being competed with not just by other insurance companies, as may have been the case some years ago, but in fact by other financial institutions, whether banks or mutual funds, et cetera.
I believe that this is not a Canadian phenomenon. It is really a worldwide phenomenon, and it is why all jurisdictions where mutuals exist are choosing to enact legislation to allow their mutuals to change their form. It was very interesting to hear this morning about the South Africans, the Australians, the British and the Americans, and to hear that, just within the last few weeks, two of the large Japanese insurance companies and their government have announced their intent to begin the process, a process that is well underway here.
Senator Stewart: I am not asking these witnesses to deal with this point, but what are the implications for credit unions? I will not ask the present witnesses to deal with that question.
My next question is very different from the first. It is a program question. I should like to understand the process. First, you will, with the best advice available, decide the value of the shares to be distributed to those policyholders who do not opt to take cash. Is that correct?
Mr. Astley: No, that is not quite correct, because the actual final pricing of the share issue will not take place until the final day of the offering to institutional shareholders, the so-called road show. What the regulations require is that a range of value that would be illustrative of current market conditions will be presented to the policyholders. The actual conversion will then take place some several months later. That is when the final price is struck.
Senator Stewart: When they are choosing between cash and shares, they do not really know what the value of the shares will be?
Mr. Astley: Not with precision.
Mr. D'Alessandro: Just to clarify, they do not know the value of the cash either at that point. The cash is a substitute for the shares.
Senator Stewart: I see.
Mr. D'Alessandro: I can try to explain it in a different way. What we do is we spend a great deal of time dividing the pie up into different pieces. That is a very complex calculation. The value of those pieces will be determined when the issue is priced at some other time with the best inputs, et cetera. Once that value is known, the choice will then be presented to the policyholder of either receiving his value in cash or receiving his value in shares.
Senator Stewart: Am I correct in thinking that the real value will be ascertained when you go to the market?
Mr. D'Alessandro: Exactly. The marketplace will ultimately value these shares.
Senator Oliver: In one of the newspaper reports that quoted some of your companies, there was an indication that demutualization is particularly good for Canadians because it will create tens of thousands of new jobs. Can you give me some help in determining where all these new jobs will come from as a result of demutualization?
Mr. Nield: The starting point would be the money that is distributed into the economy.
Senator Oliver: Have you done some calculations in that regard?
Mr. D'Alessandro: Calculations done in other jurisdictions that have already experienced demutualization indicate that their GDP has gone up noticeably. In the United Kingdom, they attribute one quarter of 1 per cent growth to demutualization. If you use those same types of parameters in Canada, a GDP growth does imply employment: people spend money, goods are consumed and those goods must be manufactured. I cannot tell you that we will create three jobs in Ottawa and six in Toronto. However, I think that if you increase the amount of purchasing power, it will lead to economic activity.
Senator Oliver: I should like to return to the question that I put to the minister about voting requirements. Can you tell me what views each of you may have in that regard?
In educating the policyholder about demutualization, their rights, liabilities, et cetera, will you go so far as to actually hire and pay for tax planning and financial planning experts for some of the policyholders? How far will you go?
Mr. Astley: Perhaps I could start and speak about my own company's plans and then the others can describe theirs.
In the case of the Mutual Group, we announced our intention to seek policyholder approval in December 1997. We included a considerable discussion of it in the next year's annual report, and that went to all eligible policyholders. We continue to use electronic media for communicating with policyholders. Last fall, we sent to every policyholder a small booklet outlining quick facts about demutualization. We also held policyholder meetings across the country.
When we come to the actual proposal, it is our intention to send a post card in advance of the full set of materials alerting policyholders that that set is coming and that it is important to look for it. They will then receive the full proposal and we are intending also to send them a reminder post card as a follow up, saying, "Please remember that you received this booklet. Please exercise your right to vote and indicate your preference for cash or shares."
That is the kind of program that we have put in place. We believe that is the most we can do to reach what is close to 1 million Canadians. We are expecting that we will get a reasonable proportion of policyholder votes. However, we really do not know, because this has never been done in Canada before. I would not favour a legislated minimum turn-out vote, simply because we do not have the experience upon which to base such a regulation.
Mr. Stewart: If I might speak to our situation, we are pursuing similar measures to those described by Mr. Astley, although we are a little later in the cycle. We are just beginning to deliver cross-Canada presentations where policyholders are invited to come and assemble to hear the plans firsthand. Two of the companies have already done that, and we are beginning later this month.
Generally, we are following the same track in Canada. In other jurisdictions, demutualization has achieved a track record and a higher profile. The population at large, particularly in the United Kingdom, is quite knowledgeable about the benefits of demutualization. Therefore, we are not planning quite the same degree of general education and information there, although we will have a similar level of material. However, we are planning similar sessions in the Philippines because we perceive that the situation there is similar to that in Canada.
Mr. Nield: We will likely be the fourth of the four in demutualizing. One of the benefits of being fourth out of the four is that we will learn from the mistakes of my colleagues. I am listening with interest to some of their plans. We are planning to do many of the same things.
I might elaborate on the United Kingdom and Ireland. Not only have there been a number of demutualizations there, but if I can pick up on the question of the credit unions, the building societies there have also demutualized. There may be only one mutual building society of any size left in the United Kingdom. It created a great deal of excitement with people opening accounts. The public there are familiar with the benefits of demutualization. They know they will get some extra money either in the form of cash or stock.
The problems with communication in both Ireland and the United Kingdom are different from the problems in Canada, and the United States is somewhere in between.
Senator Oliver: In Canada, would you go so far as to make available legal advice and financial planning advice to some of the policyholders?
Mr. Nield: No. We will communicate to the best of our ability. I have learned over the years that on financial aspects of life insurance, if you attempt to offer legal advice at the same time you will never fully understand individual circumstances. We advise people to get their own private advice.
Policyholders will be receiving a fairly full package of information that will, if they are prepared to read it themselves, answer practically all their questions. There will always be some unique situations in which people need their own personal, legal or financial advice. We would not want to get into that.
Senator Angus: The regulations have been available to you. They have been discussed and even negotiated throughout the consultation process. You are now asking that the bill be enacted with all possible dispatch and that the regulations be proclaimed in force at the same time as the bill. Am I right in that regard?
Mr. D'Alessandro: Yes.
Senator Angus: Are you comfortable with the regulations as they are?
Mr. Nield: Yes.
Senator Angus: There has been sufficient input, and so on?
Mr. Nield: Yes.
Mr. Astley: Yes.
Senator Di Nino: I have one question that is still not clear to me. We have heard expressions such as "current owners," "voting policyholders," "policyholders," and so on and so forth. Who will be the recipient of the distribution of the shares or cash, considering that all of you offer a variety of different services, some of which are called policies, some of which are not? Perhaps you can address that issue.
Mr. Nield: The distribution will go to what we call our participating policyholders. It is a particular category of policies that are issued. There are people who have voting rights, people who have the right to participate in a distribution of surplus.
Mr. Stewart mentioned the trend over the past 35 years, from its being a large percentage of our new business sales to a relatively smaller percentage. In all companies, there is a sizeable number of people who have ownership and voting rights in the company. It is unlike any other organization in respect of trying to deal with shareholders, where, if you have 15,000 or 20,000 different people, you consider that a large number with whom to communicate. All of us have hundreds of thousands of people with whom we must communicate. However, it is not the full policyholder base of any of the companies.
Senator Di Nino: Those individuals and corporations that deal with your companies and group plans and other services that you offer would not be participating in distribution; it would be only those individuals whose policies have a dividend attached to them.
Mr. Nield: Individuals or companies would be affected; however, it varies by company. Anyone with a participating policy has voting and ownership responsibility.
Mr. Astley: I need to add one supplementary piece, Mr. Chairman. There are some variations by company. In the case of my company, there are some classes of non-participating life insurance and annuity policyholders who, have, historically, had the right to vote. Those policyholders with the right to vote would also be eligible to participate. There are many other classes of customers who have never had the right to vote in determining the affairs of the company. As indicated by Mr. Nield, they do not benefit.
Senator Di Nino: If they had the right to vote, then they could participate; is that right?
Mr. Astley: That is correct.
Senator Callbeck: Can you give me some examples of people who have policies but who do not have the right to vote?
Mr. Astley: An example might be an individual who had a fixed annuity where the amount of the monthly income was fixed and predetermined; there was no discretion on the part of the company to vary the dividends or any other financial return. In most companies, those policyholders would not have the right to vote because it was strictly a contractual relationship. There was not any discretionary relationship or any ownership interest.
Senator Callbeck: Anyone who has a life insurance policy would have voting privileges; is that not right?
Mr. Astley: We could not say that categorically, because there would be some non-participating life insurance policyholders who did not have the right to vote. The fundamental criterion relates to the right to vote and to control the affairs of the company through the collective vote.
Senator Callbeck: When this happens, will there be some people who do not have the right to vote who will come in looking for their cheques?
Mr. Astley: There may be. However, the eligibility rules are very clear at law and in the regulations.
Senator Callbeck: You do not see that as a problem.
Mr. Astley: No.
Senator Callbeck: You talked about having meetings across the country. What did you mean by that? Were there meetings in every province?
Mr. D'Alessandro: Our company has completed its round of meetings. We held meetings in all the major centres in Canada. I presided at four or five of them and other company officers did the balance. With regard to the meetings, we took ads in newspapers. We would encourage our agents in the different districts to invite policyholders to come to the meetings to hear the story of demutualization directly from the company officers. There was a presentation and a question and answer period. We did not have huge turnouts, but the turnouts were vigorous. The people who came tended to be a little elderly. They were curious about what demutualization means for them.
Why did we do it? Essentially, to raise some enthusiasm and knowledge out there in the local press. In that way, people would be able to read about the event and start the process. Once this legislation is passed and we are closer to the date of actually listing, there will be much more media attention paid to the issue of demutualization than we have had to date. That is what we did. That was the purpose of it.
Senator Callbeck: That was the reason for my question. I am sure as this gets closer there will be many questions. I am interested in knowing how policyholders, besides getting information in the mail, will receive the information. Do you have a 1-800 number?
Mr. D'Alessandro: Yes, along with a Website and a series of mailings. They will be receiving a comprehensive number of documents equivalent to what any company issues when it goes to public market.
Mr. Astley: It is a few hundred pages.
Mr. Nield: It is not a small document.
Senator Callbeck: They will not read that.
Mr. D'Alessandro: As was expressed earlier, what can you do about that?
The Chairman: Gentlemen, thank you very much for your appearance before the committee today.
The committee adjourned.