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Table of Contents
Put your financial adviser on a leash
February 11, 2000
100% Foreign content for your RSP
December 22, 1999
Tax Loss Selling or Dealing With Your Mistakes
November 26, 1999
Life Stages of your RRSPs
November 12, 1999
Just give me boring (but great) rates of return
November 3, 1999
De-mystifying Demutualization - part Two
October 25, 1999
De-mystifying Demutualization - part One
October 19, 1999
Seg funds for the simple minded
September 14, 1999
The interest rate game Part 2
August 12, 1999
The interest rate game Part 1
July 30, 1999
Choosing funds: Five for the long run
July 14, 1999
New Funds: To buy or not to buy
July 2, 1999
Making sense of momentum investing
June 18, 1999
Rating the fund managers
June 4, 1999
Resource recovery hinges on supply and demand
April 30, 1999
Tech funds draw strength from favourable trends
March 24, 1999
Withdrawing from your RRSP
March 9, 1999
The economic implications of the euro - An interview with Ranga Chand
February 12, 1999
Underperforming small-cap funds have strong upside potential
January 29, 1999
How to pick a winning equity fund portfolio
January 15, 1999
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De-mystifying Demutualization - Part One

Anjali Kapoor,  Freelance Journalist,
Elliott & Page
Tuesday, October 19, 1999

It may well be the biggest financial news of 1999 - and it has nothing to do with Eaton's, bank mergers, or gold in Indonesia. The demutualization of the life insurance industry in Canada has been hinted at for several years. But now, Canada's four largest mutual life insurance companies - Manulife, Sun Life and Canada Life, and Mutual Life - are in various stages of demutualization. Manulife and Mutual Life (now known as Clarica) have completed the demutualization process and Canada Life has received policyholder approval to demutualize later this year.

These changes may have a significant impact not only for eligible policyholders, but also on the Canadian economy.

Demutualization involves converting a mutual life insurance company owned by policyholders into a life insurance company owned by shareholders. Only the policyholders' ownership rights in the company change - not the contractual obligations between company and policyholder. Essentially, eligible policyholders receive either cash or shares in exchange for changes to their ownership rights in the company.

The Canadian Life and Health Insurance Association (CLHIA) estimates 83% of Canadian households own either individual or group life insurance1. With that in mind, it is not hard to envision the demutualization process of the four mutual life insurance companies distributing an estimated $10 to $12 billion among two million Canadians. The impact of this sudden influx of wealth to eligible policyholders has the chance to reverberate through the Canadian economy and the investment industry in particular.

Most eligible policyholders would be able to choose to receive their demutualization benefits in the form of shares or cash. Some policyholders (estimated at 25 to 30%) may elect to cash in their allocations in lieu of receiving shares. And it is estimated a further 30 to 40% of eligible policyholders will sell the shares they receive within three to six months following demutualization2. Therefore, the Canadian economy will not only be looking at an initial injection of wealth from those who choose to sell right away, but also a steady capital inflow over the course of the year.

The spillover effects of this process all point to enhanced economic activity within Canada - for example a significant impact on GDP, a boost to tax revenues and the suggestion that it could lead to the creation of over 10,000 jobs3. From a financial standpoint, four new large-cap, blue-chip stocks, similar to the banks, could be created on the Toronto Stock Exchange. Economists estimate the aggregate market capitalization of the four life insurance companies could comprise approximately 5% of the TSE 300, 9% of TSE 35 and over 15% of the Financial Services Index4. This also implies the Financial Services Index weighting could rise from 22% to over 25% of the TSE 300.

The process of demutualization, as it unfolds, may become one of the largest events for the life insurance industry, the financial services industry, and the Canadian economy as all three attempt to capture and harness the wealth that will be generated.

Part 2 of this article (to be published October 26, 1999) discusses the tax consequences to Canadian policyholders, and the impact demutualization has had in other countries.

1 As of 1997. TD Financial Services, "Demutualization of the Life Insurance Industry", May 1999.
2 Scotia Capital Markets.
3 ibid.
4 ibid.

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