LS Mutual wants to issue shares

By Alain Thériault | April 17 2012 06:52PM

LS Mutual is asking its 75,000 mutual owners to allow it to change its structure, splitting into a mutually managed company alongside a share capital insurance company. By doing so, the company hopes to give itself more resources to grow and acquire competitors. In an interview with The Insurance and Investment Journal LS Mutual CEO Richard Gagnon said that he has his eye on a block of disability insurance.
Mr. Gagnon announced his plans at the annual general meeting at St. Hyacinthe, Quebec on March 29. At the same time he called a special meeting for May 10 to allow the mutual owners to vote on the proposal, which had been the subject of an internal ruling on Feb. 23. The proposal will pass provided it gains the support of two thirds of the mutual owners. Each member has one vote regardless of the number of contracts he has with the mutual insurer.

LS Mutual will then ask the National Assembly of Quebec to pass a private bill to authorize what the insurer refers to as the “transformation”. Other mutual insurers in Quebec have already gone through this process, including SSQ Financial Group and La Capitale. Mr. Gagnon said he was confident that he would get the law passed in the next parliamentary session to end on June 8.
Speaking to an audience made up of several hundred people, Mr. Gagnon reassured the mutual owners. Founded in 1874, LS Mutual will maintain its mutual status through a two part structure.

Mutual members of LS Mutual will be gathered underneath a mutual management company, while the share capital company will carry out its insurance activities. The mutual members will be majority shareholders of the company and retain their rights in the mutual insurer. As for the outside investors, they will never be majority shareholders, said Mr. Gagnon.

Present at the event, The Insurance and Investment Journal asked the CEO about the nature of these investors he refers to as co-shareholders. Mr. Gagnon replied that they will be institutional investors. He also revealed that the amount of the initial public offering for LS Mutual’s capital company is expected to be about $10 million.

Mr. Gagnon explained why he waited until now to suggest this transformation. “We have experienced strong organic growth in recent years. However, the challenges the industry is facing demonstrate to us the importance of attracting partners to assist in our development through the financing of major projects,” he said.

LS Mutual has several projects underway. Mr. Gagnon pointed out that resources are being tied up by increasingly stringent compliance standards and capital requirements. Its compliance program is also in the deployment phase. Historically low interest rates and volatile markets are putting more pressure on profit margins. Skilled labor is scarce and LS Mutual is investing in the development of internal skills.

All these factors amount to significant expenses.

Mr. Gagnon asked those present at the meeting for permission to raise the maximum annual aggregate remuneration for board members from $175,000 to $400,000. “Board members are constantly sought after and are exposed to greater risks,” he reasoned. The meeting agreed to the proposal.

More than anything, LS Mutual does not want to miss out on opportunities due to lack of capital. Without the new proposed structure, LS Mutual cannot hope to acquire a life insurance company, the way SSQ did with AXA last summer.

During his speech, Mr. Gagnon revealed that he is poised to acquire a large block of disability insurance. He did not want to reveal the origin of this block of business to The Insurance and Investment Journal, but he did say that this acquisition will be concluded shortly, and without the aid of outside capital.

When asked if the portfolio of the bankrupt insurer Union of Canada might be of interest to the newly structured company, Mr. Gagnon said he had not yet analyzed this possibility. However, he suggested that other opportunities were in the works.

The transformation project is taking place while LS Mutual is on a roll. Over the past five years, the company’s sales have grown by 136%, while it’s assets have increased by 70%. Its net profit increased from $ 3.2 million to $3.7 million between 2010 and 2011. Mutual members’ equity appreciated 8.7% during this period. The mutual insurer also had a solvency ratio of 203% compared to 202% in 2010.