Managed Money Reporter Newsletter — Issue 150, August 1999
Editors: Carl Spiess & Allan McGlade
The demutualization of Canada Life, Industrial-Alliance, Manulife, Mutual Life and Sun Life is expected to represent the largest distribution of capital in Canada's history, with over three mil-lion insurance policyholders set to receive either cash or shares. In the coming months, demutualization - the process by which a mutual life insurance company owned by policy-holders is converted to a publicly traded company - will impact Canada's equity markets and the insurance industry. However, this process directly impacts the Canadian policyholders of these five companies. The following addresses the specific implications of demutualization.
What exactly happens to the ownership structure of the company through demutualization?
Currently, these mutual insurance companies operate for the benefit of their participating or "par" policyholders who exercise voting control over the company. A par policyholder will typically have a whole life policy with voting rights and is entitled to receive policy dividends from the profits and surplus of the insurance company. The rights are referred to as ownership rights. Under demutualization, the ownership rights of par policyholders are separated from their policies and surrendered in exchange for cash or shares of the new public company.
What is the impact on policy benefits and dividends?
There will be no changes to any contractual benefits of policyholders as a result of demutualization. Premiums, policy benefits, annuity payments and the right to policy dividends will all remain unchanged.
Are voting rights retained?
Par policyholders will retain the right to vote as part of a shareholder-owned life insurance company but they will no longer exercise voting control over the company. Proposed insurance industry regulations stipulate that a third of the life insurance company Board of Directors must be elected by policyholders, thereby ensuring representation of the policyholder interest.
How are the number of shares a policyholder is entitled to determined?
Each demutualizing company establishes a formula, developed by actuaries with input and approval by management and regulators, to determine how the value of the mutual insurance company will be allocated to participating policy-holders. The formula will take into account the value of policyholders' right to vote and the contributions that policyholders have made to the value of the demutualizing company through the payments of premiums. Approximately 20% to 30% of the shares allocated to policyholders will be in exchange for their vote (i.e. each policyholder receives the same number of shares).
The balance will be allocated based on relative contributions of each policy to the value of the company considering factors that include: size of death benefit, age of policy, cumulative premiums paid and current cash surrender value.
What are the tax implications that a policyholder should be aware of?
Policyholders who elect to receive cash will have the cash payment taxed as a dividend in the year it is received.
Those policyholders who receive shares will not be taxed when the shares are received. However, selling the shares will result in a capital gain being realized on the difference between the sale proceeds and the adjusted cost base of the shares. The adjusted cost base (ACB), the price at which policyholders are deemed to have acquired the shares on conversion, is zero.
Policyholders should consult with their tax advisor to determine specific tax consequences.
What are the key considerations a policyholder should keep in mind in deciding whether to take either cash or shares?
There are no changes to the contractual benefits of policyholders regardless of whether they choose cash or shares. However, there are some differences individuals should be aware of prior to making a decision on how they will exchange their ownership rights.
As noted above, there are different tax implications for policyholders who elect to take cash and for those who choose shares. Policyholders who elect to take stock will also be eligible for share dividends that are paid out.
Most importantly, a policyholder should consider his or her specific tax situation, financial circumstances and investment objectives. By taking shares of the company, an individual should be prepared to accept the level of risk that comes with investing in the stock market.
Each demutualizing company provides a demutualization guide for policyholders and this should be read carefully before any decision is made. Policyholders should consult with their tax advisor in order to understand fully the specific implications before they elect to take either cash or shares.
Our on-site insurance specialist, Allan McGlade is available at (416) 862-3066 to answer any questions or address any concerns.
If you look at the example above, remember that you are happy if you achieve 8% because it allows you to live the lifestyle that you want.
Use that 8% as a guide-if you get more than 8% in a particular year, that helps you in a year where you may not achieve the 8%. Remember you are in this for the long haul if you are going to achieve all your goals and objectives.
Human nature makes it difficult, but don't get caught up in the quagmire of daily monitoring. Measurement is important but you want long term performance - unless of course, you have a crystal ball and can time the market.
ScotiaMcLeod is a division of Scotia Capital Inc., member of CIPF.
® Registered trademark of The Bank of Nova Scotia, used under licence. ™ Trademark of The Bank of Nova Scotia, used under licence. Scotia Wealth Management™ consists of a range of financial services provided by The Bank of Nova Scotia (Scotiabank®); The Bank of Nova Scotia Trust Company (Scotiatrust®); Private Investment Counsel, a service of 1832 Asset Management L.P.; 1832 Asset Management U.S. Inc.; Scotia Wealth Insurance Services Inc.; and ScotiaMcLeod®, a division of Scotia Capital Inc. ("SCI"). Wealth advisory and brokerage services are provided by ScotiaMcLeod, a division of SCI. Insurance services are provided by Scotia Wealth Insurance Services Inc., the insurance subsidiary of SCI. When discussing life insurance products, ScotiaMcLeod advisors are acting as Life Underwriters (Financial Security Advisors in Québec) representing Scotia Wealth Insurance Services Inc. SCI is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
The Spiess McGlade Team is a personal trade name of Carl Spiess and Allan McGlade.