A number of prospective suitors are circling the Economical Insurance Group, which is moving closer to being the first Canadian customer-owned property and casualty insurer to adopt wider ownership.
The insurer is still weighing whether to accept a takeover offer or significant investment from another firm, or whether to go the alternative route of an initial public offering, which analysts estimate would raise in the neighbourhood of $1.5-billion.
Either way - and amid a nasty proxy battle - Economical's new chief executive officer Katherine Mabe intends to carry out the demutualization later this year. And the drama swirling around the Waterloo-based insurer promises to alter the face of the property and casualty (P&C) insurance sector.
Officials with the company say that players in Canada, as well as foreign insurers looking for a beachhead here, have expressed interest.
Meanwhile, the Department of Finance is coming up with regulations to govern just how a mutual property and casualty firm can demutualize. Once that's done, it's likely that more customer-owned P&C insurers will consider doing the same.
Some Canadian mutual life insurance companies have already demutualized, including Manulife Financial and Sun Life Financial.
The P&C sector, with more than 200 competitors, is highly fragmented and many of its players have been badly bruised by unprofitable auto insurance policies in Ontario, storm and weather damage to homes and properties, and low interest rates. Participants such as Rowan Saunders, the CEO of Royal & Sun Alliance Insurance Co. of Canada, are predicting a high level of merger-and-acquisition activity in the near future.
While a number of analysts expect Intact Financial Corp. to make a bid for Economical, Toronto-based Westaim Corp. is rumoured to have made an informal offer late last year. Westaim is a publicly traded holding company that owns JEVCO Insurance Co., which specializes in insuring recreational vehicles such as motorcycles and snowmobiles but has been working to widen its suite of products. Economical, which has about 2,500 employees, offers a wide range of home, auto and commercial insurance products.
Westaim officials could not be reached for comment.
Economical's leadership team says that after a period in which it underperformed its peers, the insurer did well in 2010, and that made it a good time to consider demutualizing.
"And to continue to grow access to capital, for a whole range of reasons, is important," said Karen Gavan, who is chairing a special committee of Economical's board that is exploring its strategic options. Those reasons include acquiring competitors or new broker distribution, as well as the need to secure good ratings from rating agencies, which would be key to expanding Economical's commercial business, she said.
Ms. Gavan suggested that Economical will have no trouble attracting bids. "There is a lot of interest, and it's from three sources," she said. "There are out-of-market buyers who are looking to enter Canada … there are a number of financial buyers, as well as the in-market buyers."
If the company chooses to have an initial public offering, it will ask regulators and the government to place a moratorium on takeovers for a period of time.
Once a route has been decided upon, mutual policy holders will vote on it.
The backdrop to this process is a fight that's taking place between Economical and Toronto-based VC & Co. Advisory Ltd., which often advises activist investors.
Last month VC & Co., which has attacked Economical's board for not doing enough to realize the company's value and says it should have considered demutualization long ago, submitted proposals to the company calling for the board of directors to be replaced. Economical, whose annual meeting is scheduled for late May, has asked the Ontario Court of Justice to determine the legality of those proposals.
"By commencing these legal proceedings, the incumbent board is attempting to prevent mutual policy holders from having the opportunity to vote on the proposals at the next policy holder meeting," Mr. Woollcombe said in an e-mailed statement.