Life Insurance Premiums Mishandled in a Merger Bid: Great-West Lifeco
Great West life insurance company was sentenced to pay record settlement by Canadian court.
$456 million to go
At the beginning of October 2010, Great-West Lifeco Inc. was penalized for corporate transgression. Judge Morissette ordered that the insurer repay $456 million to some of its policyholders. But what was the reason?
This remarkable success is the conclusion of a long lawsuit initiated by aggravated policyholders. But let’s start with the basic information. Three insurance companies took part in a takeover transaction. London Life Insurance Co. was being fought for by Great-West Lifeco Inc. (competing with bids from RBC). The last company involved in the transaction was Great-West Life Assurance Co. Policyholders of London Life Insurance and Great-West Life Assurance were affected the most – that is to say one category of policyholders with so-called participating accounts. These participating accounts are special accounts through which policyholders can share in the profits of their insurance company. This is, however, for the price of noticeably larger monthly premiums, as explained by the Financial Post. Accounts of this nature, however, are protected by law and there are well-defined requirements regulating how the capital accumulated within those accounts is to be made use of, this being in fact the money of the policyholders.
And here comes the problem which has been so nebulously explained in other news sources: the cash held in the participating accounts was devoted to a goal which was conflicting with both the law and the agreement signed between policyholders and the insurers. Great-West Lifeco was short of available cash to better their bid for London Life Insurance 13 years ago in 1997 to outplay RBC. Therefore, Great-West Lifeco removed the money from the participating accounts of London Life Insurance and those of Great-West Life Assurance, exchanging it with a “prepaid expense” as the compensation. Thanks to that, the transaction was principally marked as an unrecognized outlay funded by policyholders, which, as the court found, wasn’t entirely suitable as it was without the policyholders’ okay. The transaction deprived policyholders of their money and of any potential interest from the funds in question.
Great-West Lifeco claims that the transaction, which succeeded only thanks to the supplemental funds, was going to establish synergies helping the whole company. That implies that participating accounts would also get a slice of the cake in turn. In spite of the original plan, it wasn’t good business conduct from the very beginning.
The awarded fine consists of the face worth of the “borrowed” moneys including the estimated forgone interest. The literal disbursement provisions (if Great-West Lifeco doesn’t submit an appeal) have not been resolved as of yet, but it seems like involved policyholders are going to receive an extraordinary dividend in an amount dependent on the worth of their participating account at the time of the acquisition. According to the experts advising Winnipeg FreePress, the standard payment is estimated at about $300 per account. The limits will be roughly between fifty and six thousand dollars.
For investors, it looks that the news will harm the market worth of either London Life Insurance, Great-West Life Assurance or Great-West Lifeco negligibly. Likewise, any price change is expected to be temporary, arising more from sentiments in the market than prudent valuation.
The special about this entire case in the Canadian life insurance business is its magnitude and its message which shows that Canadian court system is openly set to get engaged with protests against wrong business conduct.