Life insurance giants fight investor suit

At least three limited partnerships purchased such policies several years ago in Saskatchewan, one of only four Canadian provinces that permit the purchase of insurance policies from their original holders. These investors are in court in Saskatoon to force the insurers to accept their money.

If the court decides in favour of the investors, two major Canadian insurance companies could incur significant costs and even face “liquidation” in a worst-case scenario, according to one expert witness.

The universal life policies in question were written in 1997 by Aetna Life Insurance Co. (subsequently acquired by Maritime Life Assurance Co., which, in turn, was acquired by Manulife in 2004) and 1999 by Tational Life Assurance Co. of Canada (acquired by Industrial Alliance in 2005).

Universal life policies provide the twin advantages of a death benefit and a means to earn investment income on a tax-exempt basis within the policy, thereby building a cash value that can be accessed prior to death, though Canada Revenue Agency imposes a limit on the policy value to maintain this taxexempt status.

As the investment options available to customers expanded to include equity market-related index returns, the volatility of the policy values increased. This sometimes required insurers to return funds to customers to stay within CRA limits, only to turn around and request the annual premium payment shortly thereafter.

The side account was introduced as a solution to this customer annoyance, according to company representatives in their affidavits. Rather than sending cheques back and forth, the side account acted as a receptacle for the insurer to deposit excess funds beyond the CRA limit and for policyholders to prepay future premiums.

Most side accounts offered more limited investment options — frequently, for example, just a daily interest account — than those offered in the main policy account.

However, older policies issued by a few insurers offered very attractive investment options in the side account, including a renewable 10-year guaranteed investment account with a fixed, unalterable rate significantly above current market rates.

That option caught the attention of Michael Hawkins, a self-described businessman, farmer and actuary with more than 24 years of experience in the life insurance industry, and an officer of the general partner of Ituna Investment LP and Mosten Investment LP, the plaintiffs in the case before the court.

In 2007, he began to look for policies, underwritten by creditworthy insurers, that offered attractive guaranteed interest rates, no ability for the insurers to reduce them, and no caps on the size of permitted investment.

In 2009 and 2010, according to his affidavit, Hawkins and his partners found what they were looking for and Ituna and Mosten purchased the IA and Manulife policies.

Focusing their efforts on the more lucrative IA policy, they gradually invested more than $4 million (net of withdrawals) over three years, at close to five per cent (including bonus interest), before IA shut them down in early 2016 after an internal audit of the policy.

They were less successful with Manulife, which accepted only $10,000 into the side account in 2015 before returning their funds in 2016. After unsuccessful attempts to negotiate an “acceptable” level of investment in the policies with the insurers, Ituna and Mosten filed court applications last December to compel the insurers to accept their investments.

But company executives argue in affidavits that the side account cannot be used to hold funds that aren’t reasonably required for future life insurance premium payments, pointing to contract language that refers to balances as “premiums on deposit.”

Furthermore, they note, it was never industry practice for the side account to be used for large investments, pointing out that commissions were not paid to brokers on balances in the side account.

The investors counter that prior to purchasing a policy of the same type in 2009, Ituna requested and received a schedule from IA illustrating a hypothetical $1 million investment in the side account.

The insurers’ counsel has also called on Ticholas Le Pan, a former head of the Office of the Superintendent of Financial Institutions. In written testimony, he noted that if insurers were forced by the court’s decision to accept large deposits into the side account, they would contravene the Insurance Companies Act, which prohibits deposit taking.