Great-West Punished for Business Misdemeanour



Posted: Friday, October 29, 2010

by Lorne Marr
LSM Insurance

“C$456m fine;” that was the verdict that Great-West Lifeco Inc. heard from judge Morissette at the beginning of October. But what was the basis for such an unprecedented penalty to one of the leading insurance companies in Canada?

This remarkable success is a product of a long lawsuit that was originally opened by disgruntled policyholders. But let’s start the story properly: Three insurers took part in a planned takeover. London Life Insurance Co. was being bought by Great-West Lifeco Inc. (competing with an offer from Royal Bank of Canada – RBC). The last company involved in the takeover was Great-West Life Assurance Co. Affected were policyholders of Great-West Life Assurance and London Life Insurance – that is to say a specific category of policyholders owning so-called “participating accounts”. Those “participating accounts” are an instrument meant to make it possible for policyholders to take part in the income of an insurer. This is warranted by considerably higher premiums, asclarified by the Financial Post. Such accounts, however, are controlled by regulations and there are clear policies as to how the money stored in those accounts is supposed to be treated, as it is really the capital of the policyholders.

And there is the issue which has been so elusively explained in most other sources: the capital accumulated in the participating accounts was invested in a fashion conflicting with the law and the agreement in effect between policyholders and the insurers. Great-West Lifeco was short of available funds to top their offer for London Life Insurance 13 years ago in order to do better than RBC. Thus, Great-West Lifeco took away the wealth from the participating accounts of London Life Insurance (in an attempt to take over shares from remaining investors) as well as those of Great-West Life Assurance, putting a “prepaid expense” asset item in their place instead. This means that the transaction was in effect classified as an outlay paid for by policyholders, which, as ruled by the court, was not appropriate seeing as it was without the policyholders’ assent. Not only did the transaction deprive policyholders of their cash but they also lost any potential interest which would otherwise be earned on the deposited funds.

Great-West Lifeco says that the acquisition transaction, which succeeded thanks to the supplemental funds, was meant to build synergies from which the entire company would benefit. That means that participating accounts would also benefit from the improved performance. Unfortunately, despite the seemingly noble original plan, it was not correct business conduct right from the start. That fact prompted the court to rule in against the insurer.

The awarded punishment includes both the entire value of the “borrowed” funds alongside the calculated missed interest. The exact disbursement conditions (if Great-West Lifeco does not submit an appeal) have not been determined as of yet, but it is anticipated that concerned policyholders are going to obtain a special dividend in an amount derived from the relative worth of their participating account when the takeover came about. According to the sources from the field informing Winnipeg FreePress, the mean payment will add up to about C$300 per policyholder, ranging anywhere from $50 to $6,000.

For investors, it is quite safe to say that the ongoing matters will have only slight impact on the share price of either of the companies. Likewise, any price swing is expected to be temporary, based more on market excitement than rational valuation.

The unique about this entire case in the Canadian life insurance business is its magnitude along with its moral which suggests that Canadian court system is quite willing to get involved with unsuitable corporate behaviour.

Visit these pages to learn more about Great-West Life Assurance Co or London Life Insurance Company.
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