Policyholders’ Money Mistreated For An Acquisition Bid: The Story Of Great-West
On October 1st, 2010, Great-West Lifeco Inc. was punished for corporate misbehaviour. Judge Morissette ruled that one of the largest insurance companies must repay $456m to some of its policyholders. But do you know why? This large success is a product of a 13-year-long lawsuit that was set off by unhappy policyholders. But first things first. Three insurance companies took part in a takeover transaction. London Life Insurance Co. was on the verge of being acquired by Great-West Lifeco Inc. (trying to outbid RBC).
The third 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. Participating accounts are special accounts through which policyholders can partake in the earnings of their insurer. This is, however, warranted by substantially higher monthly premiums. This concept was nicely described by the Financial Post. Accounts of this nature, however, are directed by regulations and there are well-defined guidelines defining how the funds accumulated in those accounts should be made use of, this being effectively the property of the policyholders. And here is the main issue which has been so vaguely explained everywhere else: the cash stored in the participating accounts was invested in a manner conflicting with both the law and the contract between policyholders and respective insurers. Great-West Lifeco had to build up more funds to crown their offer for London Life Insurance in order to do better than RBC.
Therefore, Great-West Lifeco drew the money from London life insurance participating accounts as well as those of Great-West Life Assurance, putting a prepaid expensein their place instead. With this, the transaction was tagged as an outlay paid for by policyholders, which wasn’t entirely correct since it happened neither in the best interest of policyholders, nor with their permission. The transaction deprived policyholders of their money and any interest which would otherwise be earned on the funds in question. Great-West Lifeco claims that the acquisition, which succeeded thanks to the added funds, was designed to give rise to synergies from which the entire company would profit. That means that participating accounts, due to their nature, would also share in the cost savings. In spite of the good original intent, it wasn’t correct business conduct from the very beginning. That finding prodded the court to decide in against the insurance company.
The awarded fine covers both the entire worth of the “borrowed” assets with the calculated lost interest. The literal payment conditions (if Great West life insurance doesn’t appeal) are yet to be settled, but it seems like affected policyholders will collect an extraordinary dividend at a sum conditional upon the relative size of their participating account at the time of the transaction. According to the expert sources of Winnipeg FreePress, the mean compensation is estimated at about C$300 per policyholder. The limits may be generally between $50 and $6,000. For investors, it looks that the matters will harm the market worth of either of the companies negligibly. Likewise, any value slump is going to be temporary, sourced more from emotions in the market than prudent valuation. What makes the case unusual and remarkable in the Canadian life insurance companies is its size and its moral which indicates that the Canadian court system is quite ready to get engaged with inappropriate business behaviour.