Friday, October 8, 2010

(No.118) Great-West '0', par policyholders '1'

It was at a Queen's Park hearing of the Ontario Select Committee on Company Law that I first met Bill Rudd. The legislative committee was looking into the life insurance business -- and quite a serious effort it was. For example: I recall that one of the invited witnesses was Professor Joseph Belth (one of the best informed industry critics in the U.S.) who gave them a slant on policy disclosure that they did not expect. The Committee's Report on Life Insurance was published in June of 1980.

At this time Rudd was a senior executive of London Life, then still controlled by the Jeffery family. Indeed I recall that there was industry talk that he would be a future London CEO. Control of London Life subsequently passed to a Toronto (non-insurance) company and Rudd left London Life in the early 1980s.

In October 1997 Great-West Lifeco, one of the Desmarais family's financial vehicles, beat out the Royal Bank in a $2.9 billion competition for ownership of London Life. As part of the financial arrangements $180 million from the funds belonging to London Life's participating policyholders (for a stock company, London Life traditionally sold an abnormally high proportion of participating life insurance) and $20 million from a Great-West par fund were used by Great-West to help pay for its takeover of London.

When Bill Rudd received his London Life 1997 annual report in March of 1998 he learned that the par policyholders of London and Great-West were contributing $220 million to the takeover. At the subsequent London Life annual meeting Rudd rose and pointed out that what was being done was illegal under Section 462 of the federal Insurance Companies Act which prohibits such transfers out of par funds ( footnote -- these 'borrowed' funds were not repaid to the par accounts).

At the time Rudd questioned the legality of the transfer the response to his objection was to refer to the opinions of several actuaries who had been commissioned to provide justification for the arrangement. I have long regarded as a disgrace the fact that the Office of the Superintendent of Financial Institutions (OSFI), Canada's federal insurance regulator, turned an accommodating eye to what was being done with and to the financial interests of the par policyholders of a federally incorporated life insurance company. It remains to this day a blot on OSFI's record.

During the remainder of 1998 Rudd tried to persuade various involved parties that this action was a great mistake. He prepared to launch a class action but was pre-empted by another action by a different party which started first. It stumbled along for several years without result.

By 2005 Bill Rudd was able to launch his own class action lawsuit working with James Jeffery, a member of the Jeffery family who was also formerly an actuary with London Life, and a third London policyholder, John McKittrick. The action was on behalf of 1.8 million policyholders. It finally came to trial (judge only) in Ontario Superior Court in London Ontario on Sept. 28, 2009. The trial took 45 days and concluded on Jan. 15, 2010.

On Oct. 4, 2010 Judge Johanne Morissette released her decision. The decision awarded $455.7 million in compensation to the par policyholders. As one of the largest Canadian awards for a contested class action in our history it -- and the reasoning on which it was based -- is very significant, far more so than the financial media's longstanding lack of attention to the class action and the trial itself would indicate. Even when the significance of the decision was clear, the case apparently still could not compete for appropriate editorial attention with the financial ephemera and corporate cheerleading that fills so much of the financial media these days.

Of course Great-West will appeal the decision, not just because of the award's size but also because of the implications in terms of setting a precedent with -- it is to be hoped -- positive implications for the rights of par policyholders of stock life insurance companies. This should have been a much greater concern long since.

I once asked a former federal Supt. of Insurance whether a par policyholders' director in a stock life insurance company (who is supposedly on the board to represent a company's par policyholders) had ever approached the regulator about the way the company's par policyholders were treated? His answer: "never". I suspect, based on my involvement in the industry, that nothing has changed since. This makes it all the more important for OSFI to regard the Great-West decision as a prompt not to fall asleep at the switch.

Bill Rudd had argued from the beginning that what had been done with par policyholder funds was illegal. Finally, 13 years later, Judge Morissette concluded that " there was no legally justifiable method to deprive the participating policy accounts of the merger synergies, except by changing the allocation methods in a lawful and proper manner, which was not done in this case."

Rudd, an actuary and former London Life executive, took the lead in this affair. He was the person who objected to an illegal action by a large conglomerate, an action which federal insurance regulators should have reversed but did not. Bill Rudd refused to be quiet about this case although most of the corporate media were content to be so most of the time (with a few notable exceptions like Toronto Star financial columnist James Daw and Bloomberg News), right the way through the 13 years and the 45 day trial.

Bill Rudd, now age 80, rose to object 13 years ago and he never backed down from the challenge of taking on one of Canada's largest corporate interests. Not only par policyholders of these companies but Canadian life insurance consumers generally are in his debt -- although few will ever realize it. I salute his courage, dedication and perseverance. I thank him for the light he has caused to be directed at the important subject of policyholders' rights.

Quite apart from 'takeovers' of the sort involving London Life and Great-West, it is time for federal insurance regulators to pay far closer attention to what stock life insurance company managements and boards of directors are allowed to do (and not do) vis-a-vis their policyholders (especially par).

The expenses stock life insurance companies charge against the company's par funds (to the profits of which shareholders by statute have restricted access) need more careful monitoring so that par policyholders do not -- in effect -- end up paying for costs which should be charged to non-par business and therefore against shareholder profits. A company's setting of dividends for shareholders versus those on the policies of par policyholders is another subject worthy of scrutiny -- in demutualized companies in particular.

Finally, a prediction: Great-West may well drag out this decision on appeal for as long as it can. But if the case should happen to reach the Supreme Court of Canada, its decision will favour the par policyholders whose interests Bill Rudd represented so doggedly for so long.


Alastair Rickard