Canada Gazette, Part I, Volume 149, Number 9: Mutual Property and Casualty Insurance Company Having Only Mutual Policyholders Conversion Regulations

February 28 , 2015

Statutory authority

Insurance Companies Act

Sponsoring department

Department of Finance

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the regulations.)

Issues

The Insurance Companies Act contemplates the demutualization of mutual life and property and casualty (P&C) insurance companies. Demutualization is the process by which a company governed by its mutual policyholders converts into a share-based company. The legislation requires that the details of a demutualization framework be set out in regulations. While demutualization regulations for life insurance companies have been in place since 1999 (Mutual Company (Life Insurance) Conversion Regulations), there are currently no regulations for P&C insurance companies.

Some federally regulated mutual P&C insurance companies have recently expressed an interest in demutualizing. Without P&C demutualization regulations, federally regulated mutual P&C insurance companies cannot demutualize.

Background

Mutual P&C companies engage in a number of business segments, including automobile, home, and commercial insurance. The broader P&C insurance sector consists of hundreds of companies and may offer insurance to Canadians nationwide; the federally regulated mutual P&C sector is narrow and consists of seven companies, most of which operate rurally and regionally. They are Wawanesa Mutual, Economical Insurance, Gore Mutual, Portage La Prairie Mutual, North Waterloo Farmers Mutual, Saskatchewan Mutual, and The Kings Mutual. In general, these companies are relatively small, ranging from approximately $20 million to $200 million in equity, although Wawanesa Mutual and Economical Insurance rank among the top 10 largest P&C insurers in Canada, each having over $1 billion in equity as of June 2014.

In December 2010, Economical Insurance (then Economical Mutual) announced that it was pursuing a process to convert from its existing mutual structure. The company indicated that it saw demutualization as a way to enable it to compete more effectively with the large number of share-owned P&C companies that operate in Canada. Economical Insurance subsequently requested that the Department of Finance Canada develop regulations to facilitate demutualization.

In its Budget 2011 response to industry, the federal government proposed to develop a demutualization framework that would provide federally regulated mutual P&C companies choosing to demutualize with an orderly and transparent process — one that would ensure the fair and equitable treatment of all policyholders.

In June 2011, the Government launched public consultations and received more than 80 submissions from a broad range of stakeholders, including the federally regulated mutual P&C companies and the Canadian Association of Mutual Insurance Companies, a voluntary national trade association. Respondents expressed views that were generally in favour of the Government's intent to develop a process, although views differed extensively on how the framework should be designed. At issue was who would be entitled to vote on, and receive benefits from, a demutualization process. Some respondents stated a preference that only current mutual policyholders receive benefits, while other respondents favoured approaches that would consider non-mutual policyholders and past policyholders as well. Some stakeholders went further, recommending that benefits be distributed to other mutual insurance companies or to charity.

The results of the consultations held in 2011 have been published on the Department of Finance Canada's Web site at http://www.fin.gc.ca/activty/consult/dffpcic-cdsamf-eng.asp and are further discussed in the “Consultation” section of this document. Since 2011, the Government has continued to conduct targeted consultations with stakeholders.

In Budget 2014, the Government re-announced that it would develop and consult on a proposed P&C demutualization framework that would ensure the fair and equitable treatment of policyholders and establish an orderly and transparent process for demutualizing. In Division 14 of the Economic Action Plan 2014 Act, No. 1, legislative amendments were adopted to adjust the regulation-making authority of the Government to better achieve its objectives. The amendments included provisions for a court role in a negotiated process and temporary restrictions on the ownership of the converted company following demutualization in order to give converting companies time to adjust to their new structure.

Objectives

The proposed amendments aim to provide federally regulated mutual P&C companies with the option to demutualize within a framework that

• ensures fair and equitable treatment of policyholders; and
• establishes an orderly and transparent process for demutualizing.

Description

In terms of governance structure, federally regulated mutual P&C companies fall into two categories. Some companies have only mutual policyholders, who are entitled to vote on decisions of the company under the terms of the company by-laws. These companies have a 100% mutual policyholder structure. Other companies have both mutual and non-mutual policyholders. The latter are not entitled to vote on decisions of the company. These companies have a dual policyholder structure.

Given the two types of governance structures, two separate sets of regulations are proposed for federally regulated mutual P&C companies in order to provide demutualizing processes tailored to each type of company. The Mutual Property and Casualty Insurance Company Having Only Mutual Policyholders Conversion Regulations and the Mutual Property and Casualty Insurance Company With Non-Mutual Policyholders Conversion Regulations together set out the terms and conditions of demutualization.

Demutualization process: Aspects common to both sets of proposed regulations

Respecting corporate governance rights

In both types of governance structures, the board of directors must first decide that demutualization is in the best interest of its company. Once the process is underway, the board may terminate the conversion process at any time prior to the issuance of letters patent if it determines that demutualizing is not favourable. The regulations promote the autonomy of the board and existing governance rights throughout the demutualization process.

Valuing the company and apportioning benefits

Both sets of proposed regulations require that companies obtain a company valuation, established by an independent valuation expert, and the opinion of an independent actuary that the estimated and proposed apportionment of benefits is fair and equitable for the eligible policyholders. The benefits to be provided to eligible policyholders are to be calculated with regard to at least the following key factors:

• Obligations, rights and benefits of each policyholder;
• Premiums paid by each eligible policyholder;
• Length of time each eligible policyholder has held a policy with the company; and
• Historical growth of the company's surplus account.

Disclosure requirements

Both sets of proposed regulations prescribe the information that must be provided to eligible policyholders to ensure that eligible mutual policyholders and eligible non-mutual policyholders are well informed and receive important information relevant to potential votes on demutualization. These regulations also set out information that must be provided in the conversion proposal and to the Superintendent of Financial Institutions (the Superintendent) to obtain authorization to hold those votes, for the purpose of ensuring that sound corporate governance practices are met, that legislative and regulatory requirements are followed, and that full and meaningful notices to eligible policyholders are provided.

Information that must be contained within the conversion proposal includes

• Information concerning the value of the converting company, and a description of the method used and any assumptions made in estimating the value;
• Information identifying any other persons who are to receive benefits (e.g. past policyholders, other mutual insurance companies, charities); and
• Information concerning the form, amount and aggregate value of the benefits to be provided to eligible policyholders and other persons, and a description of the method to be used to apportion the value of the converting company among them.

Transition to a new corporate structure

To give companies time to adjust to their new corporate structure and to limit the risk of takeover of recently demutualized companies, both sets of proposed regulations require demutualized companies, subject to certain exceptions (e.g. if the converted company is in financial difficulty), to be widely held for two years following demutualization

Demutualization process: Aspects specific to each set of proposed regulations

This section describes aspects of the demutualization process specific to each set of proposed regulations.

Mutual Property and Casualty Insurance Company Having Only Mutual Policyholders Conversion Regulations

For companies that have a 100% mutual policyholder structure, all mutual policyholders of the company, on the day on which the directors recommend conversion, are eligible policyholders, as well as certain other mutual policyholders who obtained or reinstated their policies within the time frames set out in the definition of “eligible mutual policyholder,” are considered to be eligible policyholders (policyholders entitled to vote on, and receive benefits from, demutualization). The proposed Regulations require that, to proceed with demutualization, the board of directors present the eligible policyholders with a conversion proposal that identifies how the benefits of demutualization would be distributed.

This proposal needs to be accompanied by a valuation of the company by an independent valuation expert and an opinion from an independent actuary that the proposed distribution of benefits is fair and equitable to eligible policyholders. The eligible policyholders subsequently vote on whether the company should demutualize, based on the terms of the conversion proposal. If a special resolution of eligible policyholders approves the option to demutualize, the company must seek the Minister of Finance's approval to convert within three months.

Mutual Property and Casualty Insurance Company With Non-mutual Policyholders Conversion Regulations

For companies that have a dual policyholder structure, the proposed Regulations require a negotiated process that enables all eligible mutual policyholders and eligible non-mutual policyholders in the company to participate in the demutualization of the company, thereby promoting a fair and equitable process.

The proposed Regulations require a four-step negotiated process, as follows:

• (1) The board decides to pursue demutualization by adopting a resolution recommending conversion and determines who the eligible policyholders are (those mutual policyholders and non-mutual policyholders who would vote on the conversion proposal);
• (2) Eligible mutual policyholders vote to negotiate a conversion proposal with eligible non-mutual policyholders;
• (3) The representative committees for each category of policyholders (eligible mutual and eligible non-mutual), with the assistance of their counsel, negotiate the conversion proposal; and
• (4) Eligible mutual policyholders vote to amend the by-laws to allow eligible non-mutual policyholders to vote on the conversion proposal. Subsequently, all eligible policyholders vote on the conversion proposal. If the vote passes, the board of directors makes an application to the Minister of Finance to demutualize.

Each step is set out in more detail below.

Step 1: Board decides to pursue demutualization

The proposed Regulations require the board of directors to pass a resolution recommending demutualization and identifying which mutual and non-mutual policyholders, in addition to those who otherwise qualify pursuant to the proposed Regulations, might also be eligible to participate in the negotiation of a conversion proposal and vote on, and receive benefits from, demutualization.

Step 2: Eligible mutual policyholders vote to negotiate a conversion proposal with eligible non-mutual policyholders

The proposed Regulations set out a minimum requirement that non-mutual policyholders who have held an insurance policy for at least 12 months from the date of the board's decision to recommend demutualization be considered as eligible non-mutual policyholders. The time requirement discourages speculative policy purchases and ensures that policyholders have a reasonable commitment to the company; however, the board of directors may extend eligibility to other non-mutual policyholders (see section 1 of the proposed Regulations).

The proposed Regulations specify that, in order for the demutualization process to proceed, eligible mutual policyholders must vote by special resolution to negotiate a conversion proposal with the eligible non-mutual policyholders. If the special resolution passes, the company sends a notice to eligible mutual policyholders and eligible non-mutual policyholders to inform them of the eligible mutual policyholders' decision. The notice is also to indicate when and how the company will make information related to the demutualization process available on its Web site, and to include a summary of the conversion proposal (see sections 5 and 6 of the proposed Regulations).

Step 3: Counsel and representative committees for each category of policyholder (eligible mutual and eligible non-mutual) negotiate conversion proposal

To begin the negotiation process, the company files an application with the relevant court of the province in which the company's headquarters are located for an initial order setting out how, among other things, policyholders can participate in the demutualization process. The court then receives applications from interested counsel to represent the two prospective categories of policyholders — one counsel to represent the eligible mutual policyholders and the other to represent the eligible non-mutual policyholders. The company is required to publish the names of all candidates seeking to represent the policyholders on its Web site. The court determines how and when policyholders can object to a candidate. Once policyholders have had an opportunity to object, the court appoints the two counsel, and the company publishes their names and contact information on its Web site (see section 8 of the proposed Regulations).

Interested policyholders are invited to submit to the relevant appointed counsel their applications to sit on one of the two policyholder committees. The company is required to publish the names of all candidates on its Web site. The appointed counsel file all applications received with the court. The court determines how and when individuals may object to a candidate. Once individuals have had the opportunity to object, the court appoints between three and nine members, in an odd number, for each committee. The company publishes the names of the members of each policyholder committee on its Web site (see section 9 of the proposed Regulations).

The two committees then negotiate a conversion proposal that identifies who is to benefit from the demutualization and how the benefits of demutualization would be distributed. To assist with negotiations, the policyholder committees may hire outside experts. The court requires the company to pay the reasonable expenses associated with each committee's appointed counsel and outside experts, as determined by the court. The two committees have one year from their appointment to submit a mutually agreeable conversion proposal and the opinions of the independent actuary and the company's actuary to the Superintendent for review (see sections 11, 12 and 13 of the proposed Regulations).

Step 4: Eligible mutual policyholders vote to amend by-laws and all eligible policyholders vote on the conversion proposal and make an application to the Minister of Finance to convert

Once the Superintendent is satisfied that the conversion proposal does not pose undue operational or prudential risk and that it meets all legislative and regulatory requirements, the eligible mutual policyholders are sent a notice of a special meeting on whether to amend the company's by-laws to extend the right to vote on demutualization to the eligible non-mutual policyholders (see sections 13 and 14 of the proposed Regulations).

If the eligible mutual policyholders vote by special resolution to extend the right to vote on the conversion proposal to eligible non-mutual policyholders, the company must then obtain the Superintendent's authorization to send notice of a special meeting, during which the eligible policyholders will have the opportunity to approve the conversion proposal, confirm any related amendments to the by-laws, and authorize the making of the application to the Minister of Finance. Under the process set out in the Insurance Companies Act, if a special resolution of eligible mutual and non-mutual policyholders is passed in favour of conversion, the company may apply to the Minister of Finance to demutualize. The process is completed once letters patent of conversion are issued (see sections 15, 16, 18 and 19 of the proposed Regulations).

However, the board of directors of the converting company is able to pass a resolution terminating the conversion process at any time before the letters patent for conversion are issued. In addition, the conversion process is terminated if the two committees have not submitted the conversion proposal and the actuaries' opinions for review within one year following the appointment of the committee members to the Superintendent or if the notice of special meeting for the eligible policyholders to vote on the conversion proposal is not sent within a year of the Superintendent's authorization. The Superintendent may exempt the converting company from certain provisions in the proposed Regulations, on such terms and conditions as the Superintendent considers appropriate. This will provide for greater flexibility for those companies that are close to completing the demutualization process (see sections 20 and 21 of the proposed Regulations).

“One-for-One” Rule

The demutualization process and the application of both sets of proposed regulations are voluntary. Any associated costs are considered to be part of the company's decision to choose to engage in this process. As a result, the “One-for-One” Rule does not apply.

Small business lens

The small business lens does not apply to this proposal because opting in to the framework is voluntary for P&C companies and any P&C company choosing to opt in would not be a small business. Thus, there is no impact on small businesses.

Summary of consultations on the P&C demutualization framework

On June 30, 2011, the Government launched a 30-day public consultation process to give all interested parties an opportunity to provide input on this important issue. More than 80 submissions were received from a wide range of stakeholders (federally regulated mutual P&C companies, policyholders and employees, industry associations, insurance brokers, accountants, actuaries, the cooperative sector, and many other interested individuals).

Summary of responses to consultation questions

Policy objectives

The consultation paper sought views on the appropriateness of the policy objectives for the demutualization of P&C companies, referencing the four objectives that support the life insurance company demutualization framework: (a) providing fair and equitable treatment to policyholders; (b) maintaining safety and soundness; (c) fostering a competitive and efficient sector; and (d) establishing an orderly and transparent process. Stakeholders generally recommended the same objectives for a P&C framework, although differences arose in how the objectives should be reflected in the process for P&C demutualization.

Process for demutualization

Views were sought on the appropriateness of the process for demutualizing in the P&C context. Regulations are required under the Insurance Companies Act to set the terms and conditions of demutualization, including establishing which policyholders are eligible to vote on demutualization and receive benefits and how to apportion benefits.

Regarding the right to vote, each of the four dual policyholder companies (where some policyholders are mutual policyholders, i.e. have insurance policies with voting rights attached, and others are not) recommended that only mutual policyholders be given the right to vote on demutualization. This view was generally shared by responding mutual policyholders from these companies. Other respondents recommended that the right to vote on demutualization be extended to all policyholders.

On the right to receive benefits, views were also divided, with two of the four dual policyholder companies and responding mutual policyholders in general recommending that benefits be distributed only to mutual policyholders. The other mutual companies and other stakeholders generally held the opposite view and recommended that all policyholders share the benefits. Some stakeholders went further, recommending that benefits be distributed to other mutual insurance corporations or to charity.

Regarding the apportionment of benefits, some stakeholders recommended that the framework allow for discretion in apportioning benefits to reflect the unique circumstances of each case, allowing companies to take into account factors such as premiums paid, contributions to surplus, and the type of insurance policy. Others were concerned that stakeholders could challenge a company's method of allocation and recommended that the framework provide less flexibility and prescribe the manner of apportionment.

Impacts of demutualization

The consultation paper sought views on the potential impacts of demutualization on the P&C sector, and whether these impacts needed to be addressed and how. Some stakeholders felt that demutualization would increase competitiveness, for example by providing companies with access to equity to grow their businesses. Others considered demutualization to be driven by the prospect of windfall gains rather than by the company's or mutual sector's long-term interests. Concerns were expressed that demutualization could lead to consolidation, reduce competition and access to services, and weaken ties to the rural communities in which most mutual companies are based.

Number of mutual policyholders in some mutual companies

Independent from the demutualization issue, views were sought on how companies with a dual policyholder structure can ensure that they continue to have an effective governance structure, and whether measures need to be taken to increase the number of mutual policyholders. This question solicited a range of views, principally from the mutual companies.

Some companies were of the view that a small mutual policyholder base did not impact the effective governance of their company. Other companies indicated that relatively few policyholders participate at annual meetings, and recommended that steps be taken to increase awareness of governance rights. Others recommended that dual policyholder companies be required to extend voting rights to policyholders who have been with the company for a five-year period or who have a minimum percentage of mutual policyholders.

Rationale

Both sets of proposed regulations respond to the industry's request that the Government develop a framework that would give federally regulated mutual P&C insurance companies the option to demutualize. These regulations are in keeping with the results obtained during the 2011 consultations. The Government has since continued to engage stakeholders and subsequently announced in Budget 2014 that it would develop a framework. The recently adopted legislative amendments in Division 14 of the Economic Action Plan 2014 Act, No. 1 enable the development of these regulations, which address concerns raised by stakeholders and allow the Government to move forward with this priority.

The regulatory framework, as proposed here, is designed to ensure that policyholders, including both mutual and eligible non-mutual policyholders, are treated fairly and equitably. This objective is achieved through a negotiation process whereby the board of directors retains autonomy to determine whether the process is beneficial to the company. Once the board has adopted a resolution to demutualize, the proposal requires agreement from both categories of policyholders. The board may elect to terminate the process at any time prior to the issuance of letters patent.

The proposed framework for companies that have both mutual and non-mutual policyholders further seeks to ensure that the process for demutualization is orderly and transparent. The proposed Regulations for dual policyholder structure companies stipulate that demutualization must be facilitated by the courts and that actuaries and valuation experts must be independent. Furthermore, the proposed regulations specify factors to facilitate the determination of the company's value and provide for restrictions on share ownership to give the converted company time to adjust to its new corporate structure following the demutualization. The proposed regulations are not expected to unduly impact other sectors.

Implementation, enforcement and service standards

The publication of these proposed regulations in the Canada Gazette, Part I, begins a 30-day comment period. For any enquiries or comments on this notice, please contact Glenn Campbell, Director, Financial Institutions Division, Department of Finance Canada at the address provided below, or by email at finlegis@fin.gc.ca.

The proposed regulations would come into force on the day they are published in the Canada Gazette, Part II.

The Office of the Superintendent of Financial Institutions would ensure that mutual P&C insurance companies that pursue demutualization adhere to sound corporate governance practices, satisfy all legislative and regulatory requirements and provide appropriate disclosure materials.

Contact

Glenn Campbell
Director
Financial Institutions Division
Department of Finance Canada
90 Elgin Street, 13th Floor
Ottawa, Ontario
K1A 0G5
Telephone: 613-369-3945
Fax: 613-369-3894
Email: finlegis@fin.gc.ca

PROPOSED REGULATORY TEXT

Notice is given that the Governor in Council, pursuant to subsections 237(2) (see footnote a) and (3) (see footnote b) and section 1021 (see footnote c) of the Insurance Companies Act (see footnote d), proposes to make the annexed Mutual Property and Casualty Insurance Company Having Only Mutual Policyholders Conversion Regulations.

Interested persons may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Glenn Campbell, Director, Financial Institutions Division, Department of Finance, 90 Elgin Street, 13th Floor, Ottawa, Ontario K1A 0G5 (tel.: 613-369-3945; fax: 613-369-3894; email: finlegis@fin.gc.ca)

Ottawa, February 19, 2015

JURICA ČAPKUN
Assistant Clerk of the Privy Council

MUTUAL PROPERTY AND CASUALTY INSURANCE COMPANY HAVING ONLY MUTUAL POLICYHOLDERS CONVERSION REGULATIONS

INTERPRETATION

Definitions

1. The following definitions apply in these Regulations.

“Act”
« Loi »

“Act” means the Insurance Companies Act.

“conversion”
« transformation »

“conversion” means the conversion of a mutual property and casualty insurance company into a company with common shares.

“converted company”
« société transformée »

“converted company” means a property and casualty company that was a mutual company and has been converted into a company with common shares and, except for the purpose of paragraphs 4(1)(g) and 5(2)(m), includes a holding corporation of that company.

“converting company”
« société en transformation »

“converting company” means a mutual property and casualty insurance company whose directors have passed a resolution under section 3 recommending conversion of the company.

“eligibility date”
« date d'admissibilité »

“eligibility date” means the date on which the directors of a mutual property and casualty insurance company pass a resolution under section 3 recommending conversion of the company.

“eligible policyholder”
« souscripteur admissible »

“eligible policyholder” means a person who holds a mutual policy if

• (a) they held it on the eligibility date;
• (b) they applied for it on or before the eligibility date and it was issued within the period specified by the converting company in its conversion proposal; or
• (c) they held it before the eligibility date but it lapsed before that date and was reinstated during the period beginning on the eligibility date and ending 90 days before the date of the special meeting.

“holding corporation”
« société mère »

“holding corporation” means a body corporate that is incorporated as a company under the Act and that holds all of the voting shares of the converted company.

“independent”
« indépendant »

“independent” means, in respect of an actuary, financial market expert or valuation expert, that the actuary, financial market expert or valuation expert

• (a) does not have a conflict of interest with the converting company, any of its eligible policyholders or any other person who is to be provided with benefits in respect of the conversion; and
• (b) is not a related party of the converting company.

“mutual policy”
« police mutuelle »

“mutual policy” means a policy the holding of which entitles its holder to vote at all policyholder meetings of a converting company, but does not include a policy issued or assumed by a company with common shares that amalgamated with a mutual company after the eligibility date.

“mutual property and casualty insurance company”
« société mutuelle d'assurances multirisques »

“mutual property and casualty insurance company” means a mutual company that is also a property and casualty company.

“related party”
« personne apparentée »

“related party” has the meaning assigned by section 518 of the Act.

“special meeting”
« assemblée extraordinaire »

“special meeting” means the meeting of eligible policyholders referred to in subsection 237(1.1) of the Act.

“value of the converting company”
« valeur de la société en transformation »

“value of the converting company” means the estimated market value or range of market values of the converting company, excluding

• (a) the value of capital contributions made at the time of incorporation as a mutual property and casualty insurance company;
• (b) amounts recorded in any account maintained under section 70 or 83.04 of the Act; and
• (c) any expenses expected to be incurred to effect the conversion.
  

APPLICATION

Company having only mutual policyholders

2. These Regulations apply to mutual property and casualty insurance companies in which all of the policyholders hold mutual policies.

INITIATION OF CONVERSION PROCESS

Resolution of directors

3. If the directors of a mutual property and casualty insurance company wish to pursue its conversion, they must pass a resolution recommending conversion.

CONVERSION PROPOSAL

Contents of conversion proposal

4. (1) The converting company must develop a conversion proposal that includes

• (a) a report setting out the value of the converting company as estimated by that company and a description of the method used and any assumptions made in estimating that value;
• (b) a statement indicating the eligibility date;
• (c) the period after the eligibility date within which a mutual policy must be issued for the purposes of paragraph (b) of the definition “eligible policyholder”;
• (d) a statement identifying any persons other than eligible policyholders who are to be provided with benefits in respect of the conversion;
• (e) a detailed description of the benefits to be provided to eligible policyholders and the other persons referred to in paragraph (d), and of the method to be used to apportion the value of the converting company among them, indicating
  • (i) the basis on which any variable amount of benefits will be calculated,
  • (ii) any fixed, minimum or maximum amount of benefits to be provided to each,
  • (iii) the rationale for choosing the method for determining and allocating the benefits, and
  • (iv) the aggregate value of the benefits;
• (f) a description of the mechanisms proposed to effect an initial issuance of common shares or any other class of shares, including a copy of the proposed by-law authorizing the issuance of those shares;
• (g) if shares in the converted company are to be issued to a holding corporation, a description of the proposed activities of the holding corporation;
• (h) if shares have been issued and remain outstanding immediately prior to the effective date of the conversion, a statement describing how those shares will be converted into common shares following conversion;
• (i) if the benefits referred to in paragraph (e) include shares, a description of the measures to be taken by the converted company, in the two years following the effective date of the conversion, to ensure that the eligible policyholders and the other persons referred to in paragraph (d) who receive the shares will be able to sell those shares on a public market and that any potential imbalances that may arise between the volume of shares offered for sale by them and the volume of shares sought for purchase by public market participants will be addressed;
• (j) a description of how the measures referred to in paragraph (i) would be affected if the converted company were to issue additional shares in the two years following the effective date of the conversion; and
• (k) a statement that the directors of the converting company may terminate the conversion process at any time before letters patent of conversion are issued.
  

Valuation day

(2) The Superintendent is authorized to specify the day at which the value of a converting company must be estimated by the converting company.

Calculation of variable amount

(3) The variable amount of benefits referred to in subparagraph (1)(e)(i) must, in respect of each eligible policyholder, be calculated having regard to at least the following factors:

• (a) their obligations, rights and benefits;
• (b) the premiums paid by them;
• (c) the length of time they have held a policy with the company; and
• (d) the historical growth of the company's surplus account.

SPECIAL MEETING

Superintendent's authorization

5. (1) The converting company must obtain the Superintendent's authorization to send the notice referred to in paragraph 237(1.2)(a) of the Act.

Information and documents to Superintendent

(2) To obtain the Superintendent's authorization, the converting company must submit to the Superintendent

• (a) the conversion proposal, as well as the description of the conversion proposal that is to be included in the notice sent to eligible policyholders under paragraph 237(1.2)(a) of the Act;
• (b) an opinion prepared by the actuary of the converting company and an opinion prepared by an independent actuary stating
  • (i) that the benefits and method referred to in paragraph 4(1)(e) are fair and equitable to the eligible policyholders, and
  • (ii) that the financial strength and vitality of the converting company and the security of its policyholders with respect to the continuation of their policies will not be materially adversely affected by the conversion;
• (c) an opinion prepared by an independent valuation expert stating that the method and assumptions referred to in paragraph 4(1)(a) that were employed to estimate the value of the converting company are appropriate and that the estimated value reasonably reflects prevailing market conditions as of the day the value was estimated;
• (d) if other benefits are to be provided in lieu of shares, an opinion prepared by an independent actuary or an independent valuation expert stating that the alternative benefits are appropriate substitutes for the shares as of the day the value of the converting company was estimated;
• (e) an opinion prepared by an independent financial market expert stating that the measures referred to in paragraph 4(1)(i) are likely to ensure that, in the two years following the effective date of the conversion, the eligible policyholders and the other persons referred to in paragraph 4(1)(d) who receive shares will be able to sell those shares on a public market and that any potential imbalances that may arise between the volume of shares offered for sale by them and the volume of shares sought for purchase by public market participants will be appropriately addressed;
• (f) the annual statement for the most recently completed financial year of the converting company, in addition to the reports required by the Act for that year, prepared by the converting company's auditor and actuary;
• (g) if the notice is to be sent to eligible policyholders more than 120 days after the end of the most recently completed financial year of the converting company, financial statements for the portion of the current financial year ending prior to a day that is not more than 120 days before the day on which the notice is sent, and the converting company's auditor's comfort letter in respect of those statements;
• (h) pro forma financial statements of the future converted company showing the effect of the conversion and any other significant transactions contemplated in connection with the conversion, including any proposed initial public offering of common shares, based on
  • (i) the annual statement for the most recently completed financial year, or
  • (ii) in the circumstances referred to in paragraph (g), the financial statements for the portion of the current financial year referred to in that paragraph;
• (i) the compilation report of the converting company's auditor, and a statement of reconciliation, in respect of the financial statements referred to in paragraph (h);
• (j) a detailed description of any significant transaction contemplated in connection with the conversion;
• (k) if the converted company is required under the laws of any jurisdiction in which it carries on business to file a prospectus in respect of its issuance of shares to eligible policyholders or the other persons referred to in paragraph 4(1)(d), a copy of that prospectus;
• (l) the proposed special resolutions referred to in subsection 237(1.5) of the Act;
• (m) if shares in the converted company are to be issued to a holding corporation, a copy of the holding corporation's existing or proposed incorporating instrument and by-laws;
• (n) the summaries referred to in paragraph 6(h); and
• (o) the notice of the special meeting, as well as the information and documents referred to in section 6 and the form of proxy and any management proxy circular to be sent with the notice.

Financial statement requirements

(3) The financial statements referred to in paragraphs (2)(g) and (h) must be

• (a) prepared in accordance with the accounting principles referred to in subsection 331(4) of the Act; and
• (b) accompanied by a report of the chief financial officer of the converting company stating that the financial statements have not been audited but have been prepared in accordance with the accounting principles referred to in subsection 331(4) of the Act.

Decision to authorize

(4) In deciding whether to authorize the sending of the notice, the Superintendent must consider the information and documents submitted under subsection (2) and may consider any additional information or documents relating to the converting company or any aspect of the conversion proposal.

Deadline

(5) The conversion proposal and the opinions referred to in paragraph (2)(b) must be submitted no later than one year after the eligibility date.

Conditions of authorization

(6) As a condition of authorizing the sending of the notice, the Superintendent may require

• (a) that any information that the Superintendent considers appropriate, in addition to that required under section 6, be sent with the notice; and
• (b) that the converting company
  • (i) hold one or more information sessions for eligible policyholders prior to the holding of the special meeting, for which the rules may be set by the Superintendent, and
  • (ii) take any other measures that the Superintendent considers appropriate to assist eligible policyholders in forming a reasoned judgment on the conversion proposal.

Information and documents to eligible policyholders

6. The notice of the special meeting must be sent with

• (a) a description of the steps that have been taken in the conversion process and the steps that are to be taken;
• (b) the conversion proposal;
• (c) a description of the advantages and disadvantages of the proposed conversion to the converting company and its policyholders;
• (d) a description of the alternatives to conversion that the directors of the converting company have considered, and the reasons why, in their opinion, the conversion is in the best interests of the company and its policyholders;
• (e) a description of the form, amount and estimated market value or range of market values of the benefits to be provided as a result of the conversion to the eligible policyholder to whom the notice is sent;
• (f) a description of any right of policyholders to vote after the conversion, as policyholders or shareholders of the converted company;
• (g) for each jurisdiction in which at least one per cent of all eligible policyholders reside, a description of the income tax treatment accorded the benefits referred to in paragraph (e) in that jurisdiction;
• (h) summaries of
  • (i) the opinions referred to in paragraphs 5(2)(b) to (e), other than those that are subject to an exemption under section 12, and
  • (ii) the documents referred to in paragraph 5(2)(m);
• (i) the financial statements referred to in paragraphs 5(2)(f) to (h), other than those that are subject to an exemption under section 12;
• (j) the documents referred to in paragraphs 5(2)(i) and (j), other than those that are subject to an exemption under section 12;
• (k) a brief description of the business carried on by the converting company and its subsidiaries, and the general development of that business, during the three years preceding a day that is not more than 120 days before the day on which the notice is sent to the eligible policyholders, and any future business foreseen as of that day;
• (l) a brief description of any substantial variations in the operating results of the converting company during the three most recently completed financial years preceding the notice and, if the notice is sent to the eligible policyholders more than 120 days after the end of the most recently completed financial year of the converting company, during the portion of the current financial year ending on a day that is not more than 120 days before the day on which the notice is sent;
• (m) the names of all persons who, on the day on which the notice is sent to the eligible policyholders, have a significant interest in the converting company or who, as a result of the conversion, will have a significant interest in the converted company, and a description of the type and number of shares held or to be held by those persons;
• (n) the name and address of the converted company's auditor;
• (o) the names and addresses of the proposed transfer agents and registrars;
• (p) the proposed location for the securities registers for the initial issuance of common shares;
• (q) a description of any sales by the converting company, within the 12 months preceding a day that is not more than 120 days before the day on which the notice is sent to the eligible policyholders, of securities of the same type as those to be provided as benefits to eligible policyholders under the conversion proposal;
• (r) a copy of any prospectus referred to in paragraph 5(2)(k);
• (s) a description of the restrictions set out in sections 13 and 14 and of any plans that the converting company has for the establishment of stock option or stock incentive plans for the persons referred to in those sections after the period referred to in section 14;
• (t) a description of any measures, including the establishment of toll-free lines and websites, the holding of information sessions, and the placement of advertisements in widely circulated publications, that the converting company has taken or will take before holding the special meeting to provide eligible policyholders with information about the proposed conversion and an opportunity to raise questions or concerns about the proposed conversion;
• (u) a description of the measures that the converting company has taken or will take to encourage eligible policyholders to vote on the conversion proposal, in person or by proxy, at the special meeting;
• (v) an indication of the eligible policyholders' right under section 164.01 of the Act to appoint a proxyholder to attend and act at the special meeting on their behalf; and
• (w) any other information that the Superintendent has required under paragraph 5(6)(a).
  

Notice to policyholders

7. Within 30 days after the approval of a conversion proposal by the eligible policyholders, the directors of a converting company must send a notice to all of its policyholders informing them of the approval and indicating the company's intention to make an application under section 8.

MINISTERIAL APPROVAL

Application to Minister

8. Within three months after the approval of a conversion proposal by the eligible policyholders, the directors of a converting company must make an application referred to in subsection 237(1) of the Act.

Contents of application

9. (1) An application referred to in subsection 237(1) of the Act must be submitted to the Superintendent and must include

• (a) the conversion proposal;
• (b) the documents referred to in paragraphs 5(2)(b) to (j), (m) and (n), other than those that are subject to an exemption under section 12;
• (c) the notice referred to in paragraph 237(1.2)(a) of the Act and the documents sent with that notice;
• (d) the proposed letters patent of conversion and any by-laws, amendments to by-laws or repeals of by-laws that are necessary to implement the conversion proposal; and
• (e) the special resolutions of the eligible policyholders referred to in subsection 237(1.5) of the Act, accompanied by a certificate issued by the converting company indicating the results of the votes held in respect of those resolutions.

Information and documents already submitted

(2) The converting company is not required to resubmit to the Superintendent any information or document referred to in subsection (1) that is unchanged from that submitted to the Superintendent under subsection 5(2).

Additional information

(3) The Superintendent may request any additional information that he or she considers necessary to make a recommendation to the Minister for the purpose of subsection 237(1) of the Act.

AMENDMENT OF CONVERSION PROPOSAL OR TERMINATION OF CONVERSION PROCESS

Amendment

10. The directors of a converting company may amend a conversion proposal at any time before the vote of eligible policyholders is held at the special meeting, if measures approved by the Superintendent are taken by the converting company in respect of the amendment.

Termination by resolution

11. (1) The directors of a converting company may pass a resolution terminating the conversion process at any time before the letters patent of conversion are issued.

Termination for failure to meet deadlines

(2) The conversion process is terminated if the required documents are not submitted to the Superintendent within the time limit set out in subsection 5(5) or if no notice referred to in paragraph 237(1.2)(a) of the Act is sent within one year after the day on which the Superintendent authorizes its sending.

EXEMPTION BY SUPERINTENDENT

Exemption

12. The Superintendent may exempt a converting company from any of the requirements of paragraphs 5(2)(c) to (h), subsection 5(5) and paragraphs 6(g), (l) and (r), on such terms and conditions as he or she considers appropriate.

RESTRICTIONS

Consideration to officers, employees and related parties

13. (1) Subject to subsection (2), a converting company or converted company must not pay to any officer, employee or related party of the company any fee, compensation or other consideration in relation to the conversion of the company, other than

• (a) the regular compensation provided to the person in that person's capacity as an officer, employee or related party of the company; and
• (b) any benefits provided to the person as an eligible policyholder.
  

Contracts for services

(2) A converting company or converted company may pay fees, compensation or other consideration to an entity with which an officer, employee or related party of the company is associated under a contract for services in relation to the conversion that is entered into by the company with the entity on terms and conditions that are at least as favourable to the converting company as market terms and conditions, as defined in subsection 534(2) of the Act.

Issuance of shares

14. A converted company must not, prior to the listing of its shares on a recognized stock exchange in Canada and for a period of one year after that listing, issue or provide shares, share options or rights to acquire shares to the following persons, other than shares issued to them as a result of being an eligible policyholder:

• (a) any officer, employee or related party of the company; or
• (b) any person who was an officer, employee or related party of the company during the year preceding the day on which the conversion takes effect.
  

Acquisition

15. During a company's first two years as a converted company, the Minister may only give an approval under subsection 407(1) of the Act in respect of the company if

• (a) the proposed acquisition would not result in the converted company having a major shareholder; or
• (b) the Minister is of the opinion that the converted company is, or is about to be, in financial difficulty and that the proposed acquisition would facilitate an improvement in its financial condition.

COMING INTO FORCE

Publication

16. These Regulations come into force on the day on which they are published in the Canada Gazette, Part II.

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