PrefBlog

Details are pretty skimpy, but I’ll do what I can …

In their 2009 Annual Report, GWO disclosed:

The trial of the class proceedings in Ontario regarding the participation of the London Life and Great-West Life participating accounts in the financing of the acquisition of London Insurance Group Inc. (LIG) in 1997 by Great-West Life concluded on January 15, 2010. The Court reserved and a decision is expected later in 2010. Based on information presently known, these proceedings are not expected to have a material adverse effect on the consolidated financial position of the Company.

Now, however, is reported:

A group of disgruntled life insurance policyholders has won a class-action lawsuit against Great-West Life Assurance Co. and London Life Insurance Co., with an Ontario court ruling Friday the companies must pay $455.7 million in one of the largest contested class-action payouts to date in Canada.

The suit originates from parent Great-West Lifeco Inc.’s 1997 takeover of London Insurance Group Inc. for $2.9 billion, outbidding Royal Bank of Canada at the time.

The plaintiffs had claimed in the 45-day trial in London, Ont. that the two insurance companies transferred $220 million from participating accounts with London Life and Great-West Life to help finance about 7.5 per cent of the takeover. The cash was replaced by an accounting instrument called a “prepaid expense asset” (PPEA) — but the cash was never repaid.
…
In her ruling dated Oct. 1, Ontario Superior Court Justice Johanne Morissette declared the actions of Great-West and London Life as unlawful and in violation of the Insurance Companies Act.

“By creating the (participating account transactions) the defendants have done indirectly what was prohibited from being done directly,” the ruling said. “The PPEA could be characterized as ‘creative accounting,’ however they are not assets recognized by GAAP (Generally Accepted Accounting Principles).”

As a result, Morissette has ordered the two companies repay the par accounts the $220 million taken, plus $172.7 million in foregone investment income and $63 million of gross-up for taxes. This works out to $372.2 million to the London Life account and $83.5 million to the Great-West Life account.

The company states:

Although the decision confirms in many respects the Companies’ position, there are significant aspects of the decision which the Companies believe are in error. Accordingly, the Companies intend to appeal the decision.

The decision, if sustained on appeal, would require that the Companies pay an amount of $456 million to the participating accounts for distribution ($372 million in respect of London Life and $84 million in respect of Great-West Life). These amounts include both capital and interest items.

Regardless of the ultimate outcome of this case, all of the participating policy contract terms and conditions will continue to be honoured. As well, the decision, if sustained on appeal, is not expected to have a material impact on the capital position of the Companies.

Class action opportunists legal counsel crowed:

The court held that the defendant companies breached s. 462, and other sections of the Insurance Companies Act (“ICA”) which prohibits transfers from the participating accounts of federally incorporated life insurers. The court conducted an analysis of the facts underlying the transaction and concluded at paragraph 105 of the judgment:

“This Court, therefore finds that the $220 million payment involved a transfer of cash in contravention of s. 462 of the ICA”.

The court reviewed the conduct of the companies, their auditors and external advisors and concluded that the accounting for the par account transactions failed to comply with Generally Accepted Accounting Principles (GAAP) contrary to s. 331(4) of the Insurance Companies Act.

It’s rather difficult to tell what the implications might be for the books …. the GWO press release refers to capital and interest portions, which implies that some of the amount is on the books already and therefore won’t be a hit to profit. Additionally, GWO claims that “the decision, if sustained on appeal, is not expected to have a material impact on the capital position of the Companies.”, but, naturally enough, do not specify what the benchmark for materiality might be.

Stay tuned!

The last mention of GWO in the “Issue Comments” category was GWO Warns of Higher Seg-Fund Capital Requirements.

This entry was posted on Sunday, October 3rd, 2010 at 10:42 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.