2015 SPECIAL MEETING NOTICE AND POLICYHOLDER INFORMATION CIRCULAR

Transcription

1 2015 SPECIAL MEETING NOTICE AND POLICYHOLDER INFORMATION CIRCULAR

2 WHAT YOU NEED TO DO This notice of a special meeting and policyholder information circular contains information about Economical Mutual Insurance Company and the process for its demutualization (converting from a mutual company to a company with common shares). In the process of converting, eligible policyholders may participate in the demutualization process and receive financial benefits in the form of common shares and/or other benefits. A special meeting of eligible mutual policyholders has been called to consider and vote on a special resolution to authorize the commencement of negotiations of the allocation of demutualization benefits with eligible non-mutual policyholders. We refer to this special resolution as the Negotiation Resolution. The outcome of this vote determines whether Economical will proceed with the demutualization process at this time (but does not determine any of the terms of the demutualization). If eligible mutual policyholders approve the Negotiation Resolution, we will proceed onto the next stage of the demutualization process by applying to the Ontario Superior Court of Justice to commence the process of selecting policyholder committees and representative counsel, as outlined in the DEMUTUALIZATION PROCESS section. If eligible mutual policyholders do not approve this Negotiation Resolution, the demutualization process will end. There can be no assurance that a new demutualization process will be started at any later time. If a new demutualization process does begin, you may not be eligible to participate if you are not an eligible policyholder on the eligibility date that is set for the new demutualization process, or if you do not meet other applicable eligibility requirements. READ You should read this policyholder information circular in full and carefully consider the implications of approving the Negotiation Resolution. We have divided the circular into clearly labelled sections to make it easy for you to find the information you need to make an informed decision. UNDERSTAND The section ECONOMICAL AND DEMUTUALIZATION provides an overview of demutualization and the efforts of Economical to demutualize. Demutualization must follow a process set out under federal law which is summarized in the section DEMUTUALIZATION BACKGROUND, and described in detail in the section DEMUTUALIZATION PROCESS. The glossary section at the end of this policyholder information circular contains a description of terms related to the demutualization. CONSIDER The advantages and disadvantages of demutualization, and the benefits and risks of beginning the negotiation process, are set out in the section WHY DEMUTUALIZE. The Economical Board of Directors considered these factors and the recommendation of its special committee on demutualization in recommending that you VOTE FOR the Negotiation Resolution. The section BOARD AND SPECIAL COMMITTEE RECOMMENDATION provides further details on the recommendations of the board of directors and special committee on demutualization. VOTE After you have read this policyholder information circular and considered the information, the section GENERAL PROXY AND VOTING INFORMATION provides information on how and when to cast your vote on the Negotiation Resolution. If the Negotiation Resolution is not passed by at least two-thirds of the eligible mutual policyholders voting at the special meeting, demutualization will not proceed at this time. The section OTHER INFORMATION lets you know where and how to obtain more information about Economical and demutualization. POLICYHOLDER QUESTIONS Questions and assistance with voting may be directed to the Economical proxy solicitation agent. North American (toll free): Outside North America (collect): assistance@laurelhill.com

3 NOTICE OF SPECIAL MEETING This is the first of three special meetings required to be held in connection with the demutualization of Economical Mutual Insurance Company (referred to in this notice as Economical ). The Board of Directors of Economical has determined that Economical should begin the process to convert from a mutual company to a company with common shares. This conversion process is referred to as demutualization. In the process of converting, eligible policyholders will be eligible to participate in the demutualization process and receive financial benefits in the form of common shares and/or other benefits (collectively referred to as demutualization benefits ). The terms of the demutualization, including how demutualization benefits will be distributed, will be set out in a detailed document referred to as a conversion proposal. While Economical will prepare the conversion proposal, the substance of certain financial terms of the conversion proposal must be negotiated and approved by policyholder committees representing the eligible mutual and eligible non-mutual policyholders of Economical. Notice is hereby given that a special meeting of the eligible mutual policyholders of Economical will be held on December 14, 2015 at 2:00 p.m. to consider and vote on a special resolution to authorize the commencement of negotiations with the eligible non-mutual policyholders of Economical. We refer to this meeting as the Special Meeting, and the special resolution as the Negotiation Resolution. The Special Meeting will be held at Bingemans Ballroom, 425 Bingemans Centre Drive, Kitchener, Ontario, Canada. If the Negotiation Resolution is approved, the policyholder committees representing the eligible mutual policyholders and eligible non-mutual policyholders will be formed and must negotiate and agree on the substance of the following terms to be set out in the conversion proposal: the method of allocating the demutualization benefits; and whether any demutualization benefits will be allocated to any recipients other than eligible mutual policyholders and eligible non-mutual policyholders. A policyholder is entitled to notice of the Special Meeting if they held a mutual policy on the record date of November 3, 2015, which is also the date that the board decided to proceed with demutualization (we refer to this date as the eligibility date ). Mutual policyholders who receive notice are entitled to vote at this Special Meeting. Each eligible mutual policyholder holding one or more individual mutual insurance policies is entitled to cast one (1) vote on the Negotiation Resolution. If one or more mutual policies is issued in the joint names of two or more eligible mutual policyholders, one (and only one) of the joint holders may cast one (1) vote on the Negotiation Resolution in respect of the joint policy or policies held between them. Please see the section of the policyholder information circular GENERAL PROXY AND VOTING INFORMATION for more details. In general, a policyholder s eligibility to participate in the demutualization process beyond this Special Meeting depends at a minimum on holding a policy on the eligibility date (non-mutual policyholders would also had to have done so for the 12-month period ending on the eligibility date). However, an eligible policyholder might lose their eligibility if their policy is cancelled or lapses after the eligibility date. If you would like to ensure that you will be eligible for demutualization benefits, we recommend you maintain your policy beyond the eligibility date. We have requested guidance from our primary regulator, the Office of the Superintendent of Financial Institutions ( OSFI ), on whether policies must be held past the eligibility date in order for policyholders to remain eligible. Once we have this guidance, you will receive more information from us about eligibility. i

4 At the Special Meeting, eligible mutual policyholders are NOT voting on whether to approve the conversion proposal for the demutualization of Economical, or determine any demutualization terms or conditions they are voting only on whether to negotiate the allocation of demutualization benefits with eligible non-mutual policyholders. In order to begin the process to demutualize Economical, two-thirds of eligible mutual policyholders voting in person or by proxy at the Special Meeting must approve the Negotiation Resolution. If the Negotiation Resolution is not passed, demutualization will not proceed at this time. There can be no assurance that the Economical Board of Directors will recommend commencing a new demutualization process in the near future or at all. If a new demutualization process does begin, you may not be eligible to participate if you are not an eligible policyholder on the eligibility date that is set for the new demutualization process, or if you do not meet other applicable eligibility requirements. The text of the Negotiation Resolution is attached as Appendix A to the policyholder information circular included with this notice. The policyholder information circular provides additional information about the process that Economical must follow to demutualize and the advantages and disadvantages of demutualization. Eligible mutual policyholders are encouraged to read the policyholder information circular in its entirety, which is incorporated into and forms part of this notice. By order of the Board of Directors, KAREN L. GAVAN President and CEO Waterloo, Ontario November 10, 2015 ii

5 VOTING INSTRUCTIONS Eligible mutual policyholders of Economical, whether or not you will attend the Special Meeting, are encouraged to vote. You can vote in one of the following ways: by attending the Special Meeting in person; or by completing, signing and dating the enclosed BLUE proxy form and returning it: by mail in the postage-paid envelope provided, or by mailing it to Computershare Investor Services Inc., 100 University Avenue, 8th Floor, Toronto, Ontario, Canada M5J 2Y1; or in person to: Computershare Investor Services Inc., 100 University Avenue, 8th Floor, Toronto, Ontario, Canada M5J 2Y1; or Economical Insurance (head office), 111 Westmount Road South, Waterloo, Ontario, Canada N2J 4S4, Attention: Corporate Secretary; or by fax at (toll-free in North America) or (international); or by internet (at or by phone (toll-free in North America at ). In order to be counted, your proxy must reach Computershare Investor Services Inc. or Economical, in the manner noted above, or you must have registered your vote online or by phone, by no later than 2:00 p.m. (EST) on December 4, 2015 or, if the Special Meeting is adjourned or postponed, no later than 10 days before the new date set for the Special Meeting. You may also call our proxy solicitation agent, Laurel Hill Advisory Group, who will arrange to have your completed BLUE proxy form picked up by courier. For any questions you may have regarding the policyholder information circular or the BLUE proxy form, or if you require assistance with voting, please contact Laurel Hill Advisory Group toll-free at ( collect), or by at iii

6 TABLE OF CONTENTS NOTICE OF SPECIAL MEETING i VOTING INSTRUCTIONS iii POLICYHOLDER INFORMATION CIRCULAR 1 A MESSAGE FROM JOHN BOWEY, VICE-CHAIR OF THE BOARD OF DIRECTORS AND CHAIR OF THE SPECIAL COMMITTEE 1 DEMUTUALIZATION BACKGROUND 2 What is demutualization? 2 How would Economical demutualize? 2 What happens upon demutualization? 3 Who are eligible policyholders? 4 What benefits may policyholders receive from the demutualization? 5 ECONOMICAL AND DEMUTUALIZATION 6 History of Economical 6 History of demutualization in Canada 6 History of the decision to demutualize Economical 6 WHY DEMUTUALIZE 7 Advantages of demutualization 7 Disadvantages to demutualization 9 Benefits of beginning the negotiation process 10 Risks arising from negotiation process 10 Alternatives considered 11 What happens if Economical does not demutualize? 13 BOARD AND SPECIAL COMMITTEE RECOMMENDATION 13 Description of Special Committee 13 Recommendation of the Special Committee 13 Recommendation of the Board 14 DEMUTUALIZATION PROCESS 14 Summary of process 14 Timing 15 GENERAL PROXY AND VOTING INFORMATION 15 Solicitation of proxies 15 Who is soliciting the proxies 15 Who may vote 15 How to vote 15 Voting in person 16 Voting by proxy 16 OTHER INFORMATION 17 Policyholder communications 17 Contacting us 17 Website 17 Printed material 17 APPROVAL OF THE BOARD 17 APPENDIX A 18 Special resolution authorizing the negotiation of allocation of demutualization benefits with eligible non-mutual policyholders 18 APPENDIX B 19 Overview of demutualization 19 iv

7 POLICYHOLDER INFORMATION CIRCULAR We refer to this policyholder information circular as the Circular. In the Circular when we refer to Economical, the Company, we, us, and our, we mean Economical Mutual Insurance Company. This Circular has been prepared in connection with the special meeting (the Special Meeting ) of the eligible mutual policyholders of Economical scheduled to be held on December 14, 2015 at 2:00 p.m. at Bingemans Ballroom, 425 Bingemans Centre Drive, Kitchener, Ontario, Canada. The information contained in this Circular is current as of November 10, 2015, except where otherwise noted. Information posted on our website may be found at or Information on or otherwise accessible through a website mentioned in this Circular does not form a part of this document. This Circular contains forward-looking statements, as indicated by words such as believe, anticipate, intend, estimate, expect, may, project, will, would, and similar expressions. Those statements are based on our current expectations and are naturally subject to uncertainty and changes in circumstances that may cause actual results or events to differ materially from those expressed or implied by such forward-looking statements. Factors that may cause such differences include but are not limited to economic, business, technological, competitive, governmental, legislative and regulatory factors, including those affecting our proposed demutualization. We are under no obligation to update or alter any of our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. A MESSAGE FROM JOHN BOWEY, VICE-CHAIR OF THE BOARD OF DIRECTORS AND CHAIR OF THE SPECIAL COMMITTEE Dear Eligible Mutual Policyholders: On December 14, 2015, you will have an extremely rare opportunity to determine the future of a large and successful Canadian company Economical Insurance and to shape the future of the property and casualty insurance industry in this country. Through your vote at the Special Meeting to be held that day, you can advance the demutualization of Economical, which will allow the Company to compete on an equal footing and provide it with access to capital, which is vital to achieve its goals. That vote will indicate whether Economical eligible mutual policyholders are prepared to engage in negotiations with eligible nonmutual policyholders on the allocation of financial benefits from demutualization. This Negotiation Resolution must gain the approval of two-thirds of the eligible mutual policyholders voting at the meeting, or the demutualization process ends. We cannot assure you that a new demutualization process would begin at a later date, or ever. Three special meetings are required to complete the process, and the process will stop immediately if any of the three planned policyholder votes is not passed. Your Board of Directors recommends you support demutualization and vote FOR the Negotiation Resolution After careful review, the Special Committee and the Board of Directors of Economical have determined that demutualization is in the best interests of Economical and unanimously recommend that eligible policyholders vote in favour of completing the process we began almost five years ago. That phase starts with eligible mutual policyholders approving the Negotiation Resolution. The new regulatory framework is more complex and requires more steps than we initially expected. Achieving demutualization will depend to a great extent on good-faith negotiation and compromise. We remain confident that it can be completed, as everyone understands that failure to reach an agreement means that Economical will continue to be challenged to reach its full potential. It is our hope that you will support this first resolution and the demutualization of Economical, because we believe it best serves the Company s interests. I encourage you to review the materials in this document to ensure that, when the time comes, you are making a fully informed decision. Along with the rest of the Board, I believe the facts will lead you to vote yes for the Negotiation Resolution that will authorize the demutualization process to continue. Sincerely, John Bowey Vice-Chair of the Board of Directors and Chair of the Special Committee 1

8 DEMUTUALIZATION BACKGROUND WHAT IS DEMUTUALIZATION? Canadian property and casualty insurance companies generally have one of two forms of corporate organization. One form is the traditional corporation with common shares (a share company ). The other form is a mutual company. Mutual companies provide governance rights to mutual policyholders, whereas share companies provide governance and other rights to shareholders. Here is an overview of other key differences between mutual and share companies: Mutual company Evidence of rights Mutual insurance policy Share Transferability Voting Dividends/Distributions Rights on liquidation Mutual polices may not be transferable (in the case of Economical, they are not) Mutual policyholders vote to elect directors and on other matters Mutual policyholders may participate in a distribution of profits, by way of dividend, bonus or other benefit, but only if such a distribution is declared by the board of directors in the ordinary course of business (under the Insurance Companies Act, the board is not permitted to distribute profits other than in the ordinary course of business, or pursuant to a demutualization) In the event of a mutual company s insolvency, mutual policyholders may participate in the distribution of any remaining surplus after satisfaction of all obligations Share company Shares are usually transferable Common shareholders vote to elect directors and other matters Shareholders are entitled to receive dividends on common shares if declared by the board of directors Shareholders are entitled to participate in the distribution of any remaining surplus on a liquidation or winding-up, after satisfaction of all obligations A demutualization is a regulated process in which a mutual insurance company converts from a company with mutual policyholders as its voting members, to a share company with share capital and voting shareholders. HOW WOULD ECONOMICAL DEMUTUALIZE? In order to demutualize, Economical must comply with the process set out in our governing statute, the Insurance Companies Act, and in regulations made under that Act called the Mutual Property and Casualty Insurance Company with Non-Mutual Policyholders Conversion Regulations (we refer to these as the Demutualization Regulations ). The demutualization process is complex. It was designed to, in the government s view, strike a fair and equitable balance among the varied interests of policyholders (both mutual and non-mutual) and other stakeholders in the property and casualty industry. In the process of demutualizing, Economical will distribute financial benefits in the form of common shares and/or other benefits (referred to as demutualization benefits ) to eligible recipients. Two policyholder committees representing the eligible mutual policyholders and the eligible non-mutual policyholders must negotiate to determine whether any recipients, other than eligible policyholders, may be eligible to receive demutualization benefits, and the method of allocating demutualization benefits to all eligible recipients. The terms of the demutualization, including the allocation of demutualization benefits agreed to by the committees, will be set out in a conversion proposal that will be prepared by Economical. 2

9 The following is a brief outline of the steps in the demutualization process (assuming success at each step): Vote 1 (Eligible mutual policyholders) Authorize negotiations with eligible non-mutual policyholders Committee appointment date Court-appointed committees (Following appointment of counsel for each committee) Non-mutual policyholder committee Mutual policyholder committee Policyholder committees negotiate and approve method for allocating demutualization benefits Deadline (Economical must submit to OSFI within 12 months of Committee appointment date) Final conversion proposal (Requires OSFI approval) Vote 2 (Eligible mutual policyholders) Amend voting bylaws Vote 3 (Eligible mutual policyholders and eligible non-mutual policyholders) Approve conversion proposal and authorize demutualization application Ministerial approval Complete demutualization The demutualization process also includes regular involvement by our primary regulator, the Office of the Superintendent of Financial Institutions ( OSFI ). Economical must send the conversion proposal and supporting materials (such as financial information about the Company and opinions and valuations of actuarial and financial experts) to OSFI at different times throughout the process. Economical must submit the conversion proposal to OSFI within one year from the date that the policyholder committees are appointed by the Court. Therefore the policyholder committees must reach an agreement on the allocation terms to provide the Company with sufficient time to complete the conversion proposal and meet that deadline. If this deadline is not met, the demutualization process will end, unless OSFI agrees to an extension (which is not certain). Economical must also send the notice of the second and third special meetings and certain supporting documents to OSFI and will not be able to send the notices to eligible policyholders unless it is authorized to do so by OSFI. The process may be terminated in a number of other ways, including by the Board of Directors of Economical (the Board ) at any time. See The demutualization process may be terminated below in the section RISKS ARISING FROM NEGOTIATION PROCESS. For a more detailed description of the process for demutualization, please see the section DEMUTUALIZATION PROCESS. WHAT HAPPENS UPON DEMUTUALIZATION? All persons who held insurance policies with Economical prior to demutualization will continue to hold their policies following demutualization. Insurance coverage and policy terms will not be affected by demutualization, except that holders of mutual policies will receive non-mutual insurance policies (with a one-year term) in replacement for their mutual policies (with a threeyear term). 3

10 The eligible recipients who receive and retain common shares will become common shareholders of Economical. Depending on the results of the allocation negotiation between the policyholder committees, this will include eligible mutual policyholders as well as eligible non-mutual policyholders who did not previously have any governance rights in Economical. It would also include any other eligible recipients who are not eligible policyholders but who are allocated demutualization benefits by the policyholder committees. Common shareholders are entitled, among other things, to vote at meetings of shareholders and to receive dividends on their shares if declared by the Board. It is intended that the shares distributed in a demutualization of Economical will be listed on a stock exchange (subject to, among other things, stock exchange approval), which would provide an eligible recipient who receives Economical shares with a public market through which they may buy and sell shares. The listing may also be part of an offering of new shares to investors (subject to, among other things, the issuance of a receipt for a prospectus by the relevant securities regulators). This is called an initial public offering. Economical is still determining its most appropriate corporate structure post-demutualization. The reorganization of our corporate structure could involve the creation of a holding company, which will own all the shares of our insurance companies. If a holding company is created, the holding company will issue common shares to eligible recipients of demutualization benefits. The detailed terms of any demutualization will be described in the conversion proposal which all eligible policyholders will receive in later stages of the demutualization process. WHO ARE ELIGIBLE POLICYHOLDERS? ELIGIBLE POLICYHOLDERS In general, a policyholder s eligibility to participate in the demutualization process beyond this Special Meeting depends at a minimum on holding a policy on the eligibility date (non-mutual policyholders would also had to have done so for the 12-month period ending on the eligibility date). However, an eligible policyholder might lose their eligibility if their policy is cancelled or lapses after the eligibility date. If you would like to ensure that you will be eligible for demutualization benefits, we recommend you maintain your policy beyond the eligibility date. We have requested guidance from OSFI on whether policies must be held past the eligibility date in order for policyholders to remain eligible. In order to begin the demutualization process without delay, the Board has determined that it will proceed with the Negotiation Resolution while pursuing the guidance from OSFI. Once Economical has this guidance, you will receive more information from us about eligibility. The Demutualization Regulations specify that only persons holding policies issued by Economical Mutual Insurance Company are eligible to participate in demutualization. These policies include Economical policies sold under Family Insurance Solutions, and Western General brands, but exclude policies issued by our subsidiaries. The Demutualization Regulations permit the Board to identify additional Economical non-mutual policyholders who will qualify as eligible to participate in the demutualization. In its resolution recommending demutualization on November 3, 2015 (we will refer to that date as the eligibility date ), the Board exercised this authority and specified that the following policyholders, who may not otherwise be eligible, will qualify as eligible non-mutual policyholders: any policyholder whose policy was at least 12 months old on the eligibility date even if they themselves did not hold the policy for those 12 months (e.g., a joint policyholder added to an existing policy) this is consistent with the Economical practice of treating joint policyholders equally; any policyholder who, for whatever reason, did not have any one policy that was 12 months old on the eligibility date, but had held two or more similar policies issued by Economical during the 12-month period which added up to 12 months of coverage (two policies are similar if they are both personal property policies, both are auto policies or both are commercial policies) this may address certain circumstances when there are technical changes that result in a policy change, but which are not generally in the policyholder s control; any policyholders who would have been eligible (including in the above circumstances) but for gaps in coverage each up to 30 days; and a non-mutual policyholder who has a combination of the above circumstances. If it is determined that a non-mutual policyholder must hold a policy past the eligibility date in order to remain eligible, then the resolution referred to above also requires those policyholders to hold their policy (or one or more similar policies) throughout the entire period from and including the eligibility date until and including any later date that is required for eligibility, but for gaps in coverage each up to 30 days. 4

11 The Board considers it fair and equitable to treat these categories of non-mutual policyholders as eligible non-mutual policyholders for the purposes of the demutualization. A detailed description of each additional category of eligible non-mutual policyholders identified by the Board is set out in Appendix B OVERVIEW OF DEMUTUALIZATION. WHAT BENEFITS MAY POLICYHOLDERS RECEIVE FROM THE DEMUTUALIZATION? The Demutualization Regulations provide that two court-appointed policyholder committees one representing the eligible mutual policyholders and one representing the eligible non-mutual policyholders must negotiate to determine how demutualization benefits are allocated. This includes: whether any recipients, other than eligible mutual and eligible non-mutual policyholders, will be entitled to demutualization benefits; and the method of allocation of demutualization benefits. The Demutualization Regulations provide direction as to how demutualization benefits may be allocated. The regulations specify that the method of allocating the value of Economical among eligible recipients must set out: a. the basis on which any variable amount of benefits will be calculated, which in respect of each eligible policyholder must be calculated having regard to at least the following factors: i. their obligations, rights, and benefits; ii. the premiums paid by them; iii. the length of time they have held a policy with the Company; and iv. the historical growth of the Company s surplus account; b. any fixed, minimum, or maximum amount of benefits to be provided to each of them; c. the rationale for choosing the method of determining and allocating the benefits; and d. the aggregate value of the benefits. At this point, we do not know what any eligible recipient might receive from demutualization. No eligible recipient is guaranteed any particular or minimum amount of demutualization benefits. The benefits that may be received by any eligible recipient will depend on the allocation methodology negotiated by the committees as well as the total value of demutualization benefits to be distributed, and the total number of eligible recipients who may become entitled to benefits. ILLUSTRATIVE FINANCIAL BENEFITS In the process of demutualizing, demutualization benefits will be distributed to eligible recipients. Assuming that: (i) the demutualization benefits consist of common shares of Economical; and (ii) Economical conducts an initial public offering and lists its common shares on a stock exchange concurrently with the completion of the demutualization, the total value of demutualization benefits would be the market value of all Economical common shares. The total market value of all Economical common shares upon the completion of an initial public offering can be illustrated simply by multiplying the total equity of Economical by a multiplier based on the market value and book value of publicly traded companies that are similar to Economical. Total value of the demutualization benefits could be estimated as: Total equity x market price/book value multiplier = total demutualization benefits As at September 31, 2015, the total equity of Economical was $1.72 billion. The average market price/book value multiplier of publicly traded North American property and casualty insurance companies that are similar to Economical is greater than 1.0x. The Company s performance and its financial condition, including its total equity, could change significantly prior to the completion of the demutualization process. The actual market value of Economical shares after demutualization and a successful public offering is subject to the market conditions at the time and may not reflect any estimated value. Policyholders who receive common shares may not be able to sell their common shares at the market price, which will fluctuate after completion of any stock exchange listing. There can be no assurance that the demutualization benefits will take the form of common shares or that Economical shares will be successfully listed on a stock exchange post-demutualization. THE INFORMATION ABOVE IS PROVIDED FOR ILLUSTRATIVE PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS AN ESTIMATE OR FORECAST OF THE AMOUNT TO BE DISTRIBUTED TO ELIGIBLE MUTUAL POLICYHOLDERS AS A RESULT OF DEMUTUALIZATION, AS A GROUP OR INDIVIDUALLY. THERE IS NO GUARANTEE OF THE AMOUNT OR VALUE OF DEMUTUALIZATION BENEFITS. SEE RISKS ARISING FROM NEGOTIATION PROCESS THERE IS NO GUARANTEE OF THE AMOUNT OR VALUE OF DEMUTUALIZATION BENEFITS. 5

12 The illustration above does not purport to represent every possible scenario that may arise as a result of demutualization. By necessity, the illustration above assumes that the demutualization is successfully completed, including the receipt of the necessary approvals of eligible mutual and eligible non-mutual policyholders, OSFI, and the Minister of Finance, together with any associated stock exchange listing. ECONOMICAL AND DEMUTUALIZATION HISTORY OF ECONOMICAL Many mutual property and casualty insurance companies such as Economical were formed in the mid to late 1800s, often on a township-by-township basis in predominantly rural areas. Mutual insurance companies, or mutuals, arose as a means of providing fire insurance protection in those communities, as associations of people with common interests came together to pool their resources as a means of obtaining property insurance not otherwise available to them. Economical was founded in 1871 and has been a success over its 144-year history. Economical has, over the decades, provided quality insurance products at reasonable cost to millions of policyholders. It has been an important contributor to the Kitchener- Waterloo community, where it maintains its head office. Economical is governed by the federal Insurance Companies Act. HISTORY OF DEMUTUALIZATION IN CANADA In the mid-1990s, the Insurance Companies Act was amended to allow federally-incorporated mutual life insurance and property and casualty insurance companies to demutualize, subject to regulations that would set out the specific process for demutualization. In the late 1990s, regulations were established to set out the process by which federally-incorporated mutual life insurance companies could demutualize. At that time, no regulations were established to provide a framework for demutualizing federallyincorporated mutual property and casualty insurers, leaving them unable to demutualize. Several of the key milestones in the development of demutualization regulations for mutual property and casualty insurance companies are highlighted below: The federal government committed in the 2011 federal budget to develop a demutualization framework, as well as an amendment to the Insurance Companies Act prohibiting a mutual company from attempting an indirect demutualization outside of the demutualization framework. In other words, the government intended to prevent a mutual company from distributing significant value to its policyholders except by way of demutualization. In the summer of 2011, the federal Department of Finance requested comments from interested stakeholders. A large number of submissions were made in response to the federal Department of Finance s consultation request. The federal government renewed its commitment to establish a framework to govern property and casualty insurance company demutualization in its 2014 federal budget. Bill C-31 was tabled by the federal Minister of Finance in March 2014, and included technical amendments to the Insurance Companies Act that were required to broaden the authority to make regulatory changes. The bill received royal assent in June 2014, supporting the eventual release and implementation of the Demutualization Regulations. On February 28, 2015, the federal Department of Finance published demutualization regulations for mutual property and casualty insurance companies in draft form and asked for comments from interested stakeholders. In March 2015, Economical submitted a letter to the federal Department of Finance with comments on the proposed demutualization framework reflected in the draft demutualization regulations. In the July 1, 2015 Canada Gazette, the federal Department of Finance published the Mutual Property and Casualty Insurance Company with Non-Mutual Policyholders Conversion Regulations, which provide a framework for the demutualization of mutual property and casualty insurance companies with both mutual and non-mutual policyholders, such as Economical. We will refer to these regulations as the Demutualization Regulations. Since the Demutualization Regulations were published, Economical has been proactively working with OSFI to make sure we understand the full range of regulatory considerations as the Board considered whether to proceed with the demutualization. In September 2015, Economical filed a request for guidance from OSFI, on whether policies must be held past the eligibility date in order for policyholders to remain eligible. HISTORY OF THE DECISION TO DEMUTUALIZE ECONOMICAL Since its founding, Economical has been a mutual insurance company. While this structure has served us well up to now, demutualization provides an opportunity to reach our full potential and to continue to be competitive. The advantages of demutualization are discussed below under the heading ADVANTAGES OF DEMUTUALIZATION. 6

13 In December 2010, the Board announced its intention to pursue the demutualization of Economical. The Board tasked the Special Committee with bringing forward a proposal for the demutualization of Economical. The Special Committee is currently composed exclusively of directors who are independent (as defined in the Glossary of Terms section) to avoid any conflict or appearance of conflict in recommendations to the Board on whether and how to proceed with demutualization. Since the 2010 decision by the Board to pursue demutualization, the Special Committee, together with senior management and outside advisors, have had extensive ongoing discussions with government representatives and OSFI about the development and implementation of a framework for demutualization. On October 30, 2015, the Special Committee determined that demutualization is in the best interests of Economical and recommended that the Board proceed with demutualization. The Board followed that recommendation in deciding to commence the demutualization process on November 3, 2015, and subsequently called the Special Meeting. The Board can terminate the demutualization process at any time before it is complete. For more information regarding the reasons for this recommendation, please see BOARD AND SPECIAL COMMITTEE RECOMMENDATION. WHY DEMUTUALIZE In making their recommendations and decision, the Special Committee and the Board considered whether demutualization was in the best interests of the Company by examining: (1) the opportunities and risks associated with remaining a mutual company; (2) the possible advantages and disadvantages of any resulting demutualization and conducting business as a public company; and (3) the benefits and risks of beginning the negotiation process to effect the demutualization of Economical. The Special Committee and the Board also considered alternatives to the demutualization of Economical. A summary of key considerations is provided below. ADVANTAGES OF DEMUTUALIZATION POSITIONS THE COMPANY FOR INDUSTRY CONSOLIDATION The Canadian property and casualty insurance industry continues to consolidate. Recent transactions underscore the trend of large companies becoming larger and more powerful, while mid-sized and smaller companies are at risk of becoming marginalized, confined to market niches or face being taken over. Demutualization would provide the opportunity for Economical to participate meaningfully in industry consolidation as an acquirer, by having the ability to issue shares to raise funding for acquisitions or to deploy as acquisition currency. BENEFITS OF COMMON SHARE OWNERSHIP FOR POLICYHOLDERS As a mutual policyholder, you currently have governance and other rights in Economical, beyond the insurance coverage in your policy. The most important of these are the right: to vote on matters submitted to mutual policyholders, such as to elect members of the Board; to participate in the distribution of profits of Economical from all its businesses as determined by the Board (historically in the form of premium refunds); to participate in demutualization (together with eligible non-mutual policyholders) as provided under the Demutualization Regulations governing the demutualization process if you are a mutual policyholder; and in the unlikely event of the insolvency of Economical, to participate in the distribution of any remaining surplus on a liquidation of Economical after the satisfaction of all obligations. However, your current rights are subject to four important limitations under the existing structure of Economical: you cannot sell or otherwise transfer your rights; the Insurance Companies Act currently prohibits Economical from making any distributions to mutual policyholders other than those made in the ordinary course of business; in the absence of demutualization under the regulatory framework, there is no value to your mutual policy beyond the insurance coverage it provides; and your rights generally exist for only as long as your insurance policy remains in force. Owning common shares in a share company has many advantages. As a shareholder you will be entitled to: vote on matters submitted to shareholders, such as electing the members of the board of directors; receive dividends on common shares if dividends are declared by the board of directors; and participate in the distribution of any remaining surplus on a liquidation or winding-up, after satisfaction of all obligations. 7

14 In addition, share ownership has three important advantages over your current rights as a mutual policyholder: you can sell, transfer, or pledge your shares; if the shares are listed on a public market, the market price of the shares will establish a clear value for your shares, which you can realize for cash when you sell them or can use for security for loans; and your rights as a shareholder will continue for as long as you hold shares, regardless of whether your insurance policy is in force. ACCESS TO CAPITAL AND IMPROVED STABILITY FOR THE COMPANY Although Economical has considerable financial strength, it would likely require significantly more capital to finance its growth aspirations, particularly through acquisitions in the rapidly consolidating property and casualty insurance industry. As a mutual company, the ability of Economical to raise capital is extremely limited. As a company with common shares, Economical will have significantly improved access to capital. The ability to issue shares for cash to fund acquisitions or other business growth areas such as product development, technology, distribution, and marketing would allow Economical to preserve capital to serve its customers. The vision of Economical is to be one of Canada s top five property and casualty insurers, recognized for its business innovation and how well it takes care of its customers. Economical believes it cannot achieve this vision without access to the capital markets. Greater access to capital will also improve stability. Mutual companies cannot issue shares in the capital markets in order to raise funds to repair damage done by a significant insurance loss event or adverse market events such as a major financial crisis. Instead, mutual companies must rely on retained profits from their underlying businesses, which slows down their recovery and prolongs the vulnerability created by the initial adverse event. Demutualization would open up other avenues to access funds in such cases. In addition, Canadian businesses are increasingly relying on rating agencies to assess an insurer s ability to pay insurance claims and to guide their insurance purchasing decisions. In order to receive ratings comparable to share companies, mutual insurers are generally required to maintain higher levels of capital (in excess of regulatory capital requirements) because they cannot access capital markets to replenish capital quickly after an extreme impairment event, such as a significant insurance loss event. FLEXIBILITY TO DEVELOP AND GROW THE COMPANY After demutualization, Economical would have the flexibility to utilize a holding company structure, which could facilitate the growth of new lines of business for Economical in the future. As a mutual company without shares, Economical cannot currently be owned by a holding company. Therefore, any other company held within the Economical group must be owned by Economical (as a subsidiary) as opposed to being owned by a holding company (as an affiliate of Economical). As a result, the types of businesses that Economical can acquire are limited to the types of businesses that an insurance company can own, which is limited by investment restrictions set out in the Insurance Companies Act. The Demutualization Regulations require that any holding company of Economical must also be an insurance company governed by the Insurance Companies Act. However, following the two-year period after demutualization, the holding company might, with regulatory approval, be able to convert from an insurance company to a non-insurance company. A non-insurance company is not limited by the same investment restrictions as an insurance company. Therefore, if Economical is, like many of its competitors, ultimately held by a non-insurance holding company, the Economical group would gain significantly more flexibility in the types of acquisitions and investments it will be able to make to facilitate the growth of new lines of business. GREATER MANAGEMENT ACCOUNTABILITY After demutualization, Economical will be required to make regular, comprehensive public disclosure of its operations and financial results, continuing the path to greater disclosure and transparency begun by Economical in the last several years. Shareholders will have a direct financial interest in the performance of Economical through dividend payments (if declared by the Board) and share price. This increased level of transparency and interest from new stakeholders will increase management accountability for financial performance. EMPLOYEE ATTRACTION AND RETENTION Economical believes that becoming a share company, particularly one with shares listed on a recognized stock exchange, would help to attract, maintain and motivate key employees. As a public company, Economical may gain greater exposure and recognition in its industry which would help to attract and motivate employees. The improved ability of Economical to participate in industry consolidation and access capital to better facilitate organic growth would help ensure that Economical remains successful and relevant within the industry. This is expected to assist Economical in attracting and motivating key personnel by giving employees the opportunity to share in achieving our vision to be one of Canada s top five property and casualty insurers. 8

15 After the limitation period under the Insurance Companies Act (one year after Economical shares are listed on a stock exchange) expires, Economical could establish compensation plans tied to its equity performance or share price, such as a stock option plan, an employee share purchase plan, a restricted share unit plan and/or a performance share unit plan. Such equity compensation plans can be used to motivate, retain, and attract directors, officers, and employees by providing Economical with greater flexibility to pay compensation based on medium and long term performance. Economical believes that such compensation arrangements help align director, officers, and employees interests with Economical shareholders by linking compensation to share price performance and encouraging ownership of the Company through a proprietary interest. DISADVANTAGES TO DEMUTUALIZATION LOSS OF VOTING CONTROL FOR MUTUAL POLICYHOLDERS Currently, mutual policyholders have the exclusive right to elect the members of the Board and to vote on other matters submitted to them at policyholder meetings. As a result of demutualization, the mutual policyholders will no longer hold exclusive voting control. However, as shareholders, eligible mutual policyholders will still have voting rights in Economical, though it will be shared with other shareholders, including eligible non-mutual policyholders and other eligible recipients who were issued and hold shares from the demutualization, and future investors in the Company. As a result, there will be a dilution in the mutual policyholders voting control based on the negotiated allocation of demutualization benefits and any new common shares that Economical may issue to investors. INCREASED EXPOSURE TO TAKEOVER FOR THE COMPANY It would be very difficult for another company to acquire control of Economical while it is a mutual company. Control of a mutual company like Economical could only be acquired through assumption reinsurance of all Economical policies and the purchase of the shares of its subsidiaries, or in an amalgamation. After demutualization, because Economical common shares will be freely transferrable, and likely listed on a stock exchange, a buyer could attempt to acquire enough common shares of Economical to gain control of the Company. However, there is takeover protection built into the Demutualization Regulations. Under the Insurance Companies Act, the Minister of Finance must approve any acquisition, directly or indirectly (e.g., through an amalgamation), by any person of more than 10% of an insurance company s shares. The Demutualization Regulations specify that for a period of two years following a demutualization, the Minister of Finance will not approve an acquisition by any person of more than 20% of any class of voting shares of a demutualized company (unless the demutualized company is in financial difficulty and the Minister believes the acquisition will improve the company s financial position). This ensures that a demutualized company will remain widely-held for at least two years, providing time for the demutualized company to make the transition from a mutual company to a public company with common shares. Following the two-year period, any takeover of Economical will still be subject to the approval of the Minister of Finance. COSTS TO BE INCURRED The costs of the demutualization negotiations and any resulting demutualization and restructuring, or other strategic options (such as an initial public offering), are expected to be substantial. The principal costs are professional advisors fees for advising Economical on the demutualization process, any conversion proposal, and the approval of any conversion proposal. In addition, the Demutualization Regulations require that Economical must pay the costs incurred by the policyholder committees in the course of their negotiations, including the cost of counsel and any experts consulted by the committees (these costs will be determined by the court). Significant advisory and financing fees are also expected to be incurred as a result of any restructuring or other matters related to the demutualization, such as an initial public offering and related stock exchange listing. Following a successful demutualization there will be ongoing costs associated with maintaining shareholder services and complying with public company disclosure requirements. The Board believes that these costs are not significant in comparison to the advantages of demutualization to Economical. POTENTIAL TAX AND SOCIAL ASSISTANCE BENEFITS CONSEQUENCES FOR POLICYHOLDERS The receipt of certain demutualization benefits (such as cash or other non-share consideration, if any) may result in an income inclusion for tax purposes, and therefore give rise to tax liabilities. Ownership of shares of a demutualized company which are received on demutualization may also give rise to tax considerations, including when gains are realized on the disposition of such shares or dividends (if declared by the Board) are received on such shares. The receipt of demutualization benefits may also affect a policyholder s entitlement to certain social assistance benefits. Economical recommends that any policyholders receiving social assistance benefits consider the potential effect of any demutualization benefits on these social assistance benefits and seek any personal financial, tax, and legal advice that might be appropriate for them in the circumstances. It is expected that any conversion proposal will provide that, in the very exceptional case where receiving demutualization benefits may ultimately be disadvantageous, an eligible policyholder may elect to not receive demutualization benefits. 9