Definity Financial Corporation

November 4, 2021

Order

Headnote

Section 6.1 of NI 62-104 -- Exemption from issuer bid requirements in part 2 of NI 62-104 in connection with a demutualization of insurance company and IPO of holdco -- issuer bid requirements not applicable to purchase for cancellation by holdco of holdco common share held by insurance company in connection with demutualization of insurance company.

Applicable Legislative Provisions

National Instrument 62-104 Take-Over Bids and Issuer Bids, Part 2 and s. 6.1.

IN THE MATTER OF THE SECURITIES ACT, R.S.O. 1990, c.S.5, AS AMENDED AND IN THE MATTER OF DEFINITY FINANCIAL CORPORATION

ORDER (Section 6.1 of National Instrument 62-104)

UPON the application (the "Application") of Definity Financial Corporation (the "Filer") to the Ontario Securities Commission (the "Commission") for an order pursuant to section 6.1 of National Instrument 62-104 Take-over Bids and Issuer Bids ("NI 62-104") exempting the Filer from the requirements applicable to issuer bids in Part 2 of NI 62-104 (the "Issuer Bid Requirements") in respect of the Purchase for Cancellation (as defined in paragraph 15 below) by the Filer of the Initial Definity Share (as defined in paragraph 9 below) owned by Economical Mutual Insurance Company ("Economical Insurance") upon completion of the Demutualization (as defined in paragraph 1 below);

AND UPON considering the Application and the recommendation of staff of the Commission;

AND UPON the Filer having represented to the Commission that:

1. Prior to completion of the proposed demutualization of Economical Insurance (the "Demutualization") from a mutual property and casualty insurance company with mutual policyholders into a company with common shares, to be wholly-owned by the Filer following Demutualization, Economical Insurance is a mutual property and casualty insurance company. Economical Insurance is governed by the Insurance Companies Act (Canada) (the "ICA").

2. Economical Insurance is not a reporting issuer in any province or territory in Canada and is not in default of any requirements under applicable securities legislation or the rules and regulations made pursuant thereto.

3. The registered and head office of Economical Insurance is located at 111 Westmount Road South, Waterloo, Ontario, N2J 4S4.

4. While it is a mutual property and casualty insurance company, Economical Insurance has no common shareholders and its board of directors is elected by its mutual policyholders in accordance with the ICA.

5. While it is a mutual property and casualty insurance company, Economical Insurance has two types of policyholders -- mutual policyholders and non-mutual policyholders. Mutual policyholders of a mutual insurance company have certain governance rights in the company, such as electing the board of directors, appointing auditors, and approving certain special matters. Non-mutual policyholders of Economical Insurance do not currently have any governance or voting rights.

6. Upon the Demutualization, the authorized share capital of Economical Insurance will consist of an unlimited number of common shares (the "Economical Common Shares") and an unlimited number of preferred shares.

7. Upon the Demutualization, Economical Insurance will no longer be a mutual property and casualty insurance company and will become a wholly-owned subsidiary of the Filer.

8. Economical Insurance has incorporated the Filer under the ICA. The Filer is not a reporting issuer in any province or territory in Canada and is not in default of any requirements under applicable securities legislation or the rules and regulations made pursuant thereto. The Filer will not be a reporting issuer in any province or territory of Canada prior to the filing of, and obtaining a receipt for, a final prospectus for the IPO (as defined in paragraph 22 below).

9. The authorized share capital of the Filer currently consists of an unlimited number of common shares ("Definity Shares"), of which one Definity Share is issued and outstanding and is held by Economical Insurance (the "Initial Definity Share"), which will be the case until immediately prior to the Demutualization. Upon the completion of the Demutualization, the authorized share capital of the Filer will consist of an unlimited number of Definity Shares and an unlimited number of preferred shares.

10. Prior to the Demutualization, the Filer will have no assets other than $5 million of share capital invested by Economical Insurance.

11. Demutualization is a regulated legal process by which a mutual insurance company converts from a company with mutual policyholders as its voting members and no shareholders, to a share company with voting shareholders. The Demutualization will be implemented pursuant to the ICA and the Mutual Property and Casualty Insurance Company with Non-Mutual Policyholders Conversion Regulations under the ICA (the "Demutualization Regulations"), and a conversion plan (the "Conversion Plan") approved pursuant thereto.

12. On November 3, 2015 (the "Eligibility Date"), the board of directors of Economical Insurance passed a resolution recommending that Economical Insurance demutualize. The Eligibility Date is the date for determining which mutual and non-mutual policyholders would be eligible to participate in the distribution of benefits (in the form of cash, Definity Shares or a combination of cash and Definity Shares) ("Demutualization Benefits") in accordance with the Demutualization Regulations and the Conversion Plan. Such policyholders are referred to as "Eligible Policyholders". Most of the Eligible Policyholders (approximately 630,000) are non-mutual policyholders. There are approximately 878 mutual policyholders that are Eligible Policyholders.

13. The Demutualization has been or is expected to be approved through a number of steps as contemplated by the Demutualization Regulations. In summary, pursuant to the Demutualization Regulations and under the supervision of the Office of the Superintendent of Financial Institutions of Canada ("OSFI"):

(a) In December 2015, eligible mutual policyholders of Economical Insurance approved a special resolution to negotiate the method of allocating the Demutualization Benefits with eligible non-mutual policyholders of Economical Insurance;

(b) The method of allocating Demutualization Benefits, and whether any persons or classes of persons other than Eligible Policyholders would be entitled to Demutualization Benefits, were negotiated by policyholder committees representing the eligible mutual policyholders and eligible non-mutual policyholders (each having independent legal counsel appointed by the Ontario Superior Court of Justice). In June 2018, each policyholder committee unanimously approved a method of allocating Demutualization Benefits and the allocation of $100 million of cash Demutualization Benefits to a new charitable foundation, now known as the Definity Insurance Foundation (the "Foundation"). These terms formed part of the Conversion Plan, which was submitted to OSFI on June 26, 2018, along with other required materials;

(c) In March 2019, eligible mutual policyholders approved a special resolution to amend the by-laws of Economical Insurance to extend the right to vote on certain matters relating to the Demutualization (described in the next paragraph) to eligible non-mutual policyholders;

(d) At a special meeting on May 20, 2021 (the "Special Meeting"), Eligible Policyholders (mutual and non-mutual) voted by special resolution to: (i) approve the Conversion Plan, (ii) confirm the form of amended and restated by-laws of Economical Insurance that will become effective at the time of Demutualization, and (iii) authorize Economical Insurance to apply to the Minister of Finance for approval of the Conversion Plan and issuance of Letters Patent of Conversion (collectively, the "Conversion Approval Resolution"). The Conversion Approval Resolution was passed by more than two-thirds of the Eligible Policyholders voting at the Special Meeting; and

(e) The final step in the Demutualization process is the approval by the Minister of Finance of the Conversion Plan and the issuance of Letters Patent of Conversion, which is expected to take effect immediately prior to the completion of the IPO.

14. Distribution of Demutualization Benefits to Eligible Policyholders and the Foundation will be made pursuant to allocation rules set out in the Conversion Plan.

15. At the effective time of the Demutualization, the following steps will occur simultaneously:

(a) Economical Insurance will cease to be a mutual property and casualty insurance company and will become a property and casualty insurance company with common shares;

(b) All of Economical Insurance's policyholders will cease to have any rights with respect to, or any interest in, Economical Insurance as a mutual company;

(c) Amended and restated by-laws of Economical Insurance will come into force, including a by-law authorizing the issuance of Economical Common Shares;

(d) Economical Insurance will issue Economical Common Shares to the Filer in consideration for the Filer issuing Definity Shares to Eligible Policyholders;

(e) The Filer will issue Definity Shares to Eligible Policyholders in accordance with the Conversion Plan; and

(f) The Filer will repurchase and cancel the Initial Definity Share (the "Purchase for Cancellation").

16. The Purchase for Cancellation is, in the context of the Demutualization, a share repurchase within the Filer/Economical Insurance corporate structure whereby the initial $5 million of share capital of the Filer will be returned to Economical Insurance. The Purchase for Cancellation is necessary to ensure that the Filer and Economical Insurance comply with the ICA, which does not permit a subsidiary to own shares in its parent company or a company to own shares issued by itself (in each case, other than in limited circumstances which are not relevant in these circumstances).

17. The Purchase for Cancellation may constitute an "issuer bid" as defined in NI 62-104. The Purchase for Cancellation involves the acquisition of the Initial Definity Share as a technical step in the Demutualization. If the Filer were to complete the Purchase for Cancellation prior to becoming a reporting issuer, and prior to completion of the Demutualization, the Purchase for Cancellation would be exempt from the Issuer Bid Requirements under section 4.9 of NI 62-104.

18. In addition, the definition of "issuer bid" in NI 62-104 excludes an acquisition or redemption that is a step in an amalgamation, merger, reorganization or arrangement that requires approval in a vote of security holders. In this case, as a mutual insurance company, Economical Insurance does not have security holders; instead, the Demutualization and the Conversion Plan (including the Purchase for Cancellation provided for therein) have been approved by Eligible Policyholders.

19. Holders of Definity Shares are not prejudiced by the Purchase for Cancellation.

20. Prior to the Special Meeting, Eligible Policyholders were provided with an information circular which disclosed, among other things, that the Initial Definity Share would be repurchased by the Filer as part of the Conversion Plan. The Eligible Policyholders were made aware that in approving the Conversion Plan, they were also approving the Purchase for Cancellation as a step in the Conversion Plan. There is no material information regarding the Demutualization which has not been generally disclosed.

21. The Demutualization will become effective at the effective time stated in the Letters Patent of Conversion, as issued by the Minister of Finance (Canada), which is expected to be 12:01 a.m. Eastern time on the date of the completion of the IPO (which will be after the date of the receipt for the final prospectus for the IPO).

22. Before the effective date of the Demutualization, it is intended that a preliminary prospectus and final prospectus of the Filer will be filed qualifying the public distribution of Definity Shares in an initial public offering (the "IPO") in all of the provinces and territories of Canada. As part of the IPO, Definity Shares will be issued and sold by the Filer (through an underwriting syndicate) to investors to generate cash proceeds (not including proceeds from exercise of any over-allotment option) in order to fund expenses of the Offering and the distribution of cash Demutualization Benefits to the Foundation and Eligible Policyholders. The Filer and Economical Insurance have also agreed to sell additional Definity Shares to two investors in a concurrent private placement (the "Cornerstone Private Placements"). Proceeds from the Cornerstone Private Placements (excluding proceeds from any over-allotment related additional subscription) will also fund expenses of the Offering and the distribution of cash Demutualization Benefits to eligible recipients. The "Offering" refers to both the IPO and the Cornerstone Private Placements (excluding any over-allotment option or additional subscription).

23. The IPO (and the Cornerstone Private Placements) are expected to close as soon as reasonably practicable after the Demutualization.

24. Upon the issuance of a receipt for the final prospectus for the IPO, the Filer will be a reporting issuer (or equivalent) in all of the provinces and territories of Canada.

25. The Filer expects that, upon completion of the IPO, the Definity Shares will be listed on the Toronto Stock Exchange, subject to the approval of the Toronto Stock Exchange in accordance with its listing requirements.

26. Under the Conversion Plan, as soon as reasonably practicable after completion of the Offering, the proceeds to the Filer from the sale of Definity Shares:

(a) First, will be used by the Filer to pay certain expenses of the Offering;

(b) Second, will be used by the Filer to subscribe for additional Economical Common Shares in order to fund cash distributions by Economical Insurance in accordance with the Conversion Plan; and

(c) Otherwise may be retained by the Filer for general corporate purposes.

AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;

IT IS ORDERED pursuant to section 6.1 of NI 62-104 that the Filer be exempt from the Issuer Bid Requirements in connection with the Purchase for Cancellation.

DATED at Toronto, Ontario this 4th day of November, 2021.

"David Mendicino"
Manager, Office of Mergers & Acquisitions
Ontario Securities Commission