The government of Saskatchewan has made changes to the province’s insurance regulations that will help protect three life insurers facing potentially large legal claims over decades-old insurance contracts.
The rules, announced Monday, create new hurdles for the institutional investors pursuing a trio of lawsuits against Canadian life insurers. They also deal a blow to a U.S. short seller’s campaign against one of those firms, Manulife Financial Corporation.
Manulife, Industrial Alliance Insurance and Financial Services Inc. and Bank of Montreal are fighting lawsuits in Saskatchewan over the fine print of decades-old insurance contracts. At issue is whether the terms of universal life contracts allow the insurance products to be used as investment accounts by policyholders.
Universal life contracts were popular in the 1990s and offered policyholders a payout upon death, as well as investment returns throughout the life of the contract. The money managers pursuing the lawsuits argue the insurance products can be used as investment accounts that accept unlimited deposits – something that would allow them to earn attractive returns that are nearly guaranteed. The insurers, meanwhile, argue the contracts were designed solely for insurance purposes and say they cannot be forced to accept unlimited deposits on which they would have to pay fixed interest rates.
By the close of markets on Tuesday, Manulife and Industrial Alliance, the two insurers with the most at risk in the lawsuits, saw their share prices rise 5.8 per cent and 3.6 per cent, respectively, on the Toronto Stock Exchange.
In an amendment to the Saskatchewan Insurance Regulations, the province added language that states “no licensed insurer shall receive or accept for deposit funds or payments in excess of the amount required to pay the life insurance premium for the eligible period.”
The details of the lawsuits are complex, but the new rules appear to dent the money managers’ prospects in court – which would, in turn, hurt a related short-seller campaign.
Muddy Waters Research LLC, a well-known U.S. short-seller run by Carson Block, went public recently with a bet against Manulife, arguing that the lawsuits could put the insurer at risk of significant financial damage.
The lawsuit against Manulife pertains to a 1997 universal life insurance contract that was originally held by a doctor but was purchased by hedge fund Mosten Investment LP in 2010. The contract originated in Saskatchewan. Mosten argues the terms of the contract allow it to deposit an unlimited amount of money with Manulife and receive an annualized guaranteed return of at least 4 per cent.
If Mosten wins, Manulife could be on the hook for the gap between its own investment returns and the return it is legally required to pay the hedge fund. Insurers typically hold a large portion of their money in government and other safe fixed-income investments, which currently pay yields under 4 per cent. This means the hedge fund has the potential to earn significant returns at Manulife’s expense.
Manulife has argued the contract at hand was never marketed for use as an investment account. It has also argued that any investment returns could only be used to help offset premiums the contract holder would pay.
“Given the new Saskatchewan regulations,” the insurer wrote in a statement Tuesday, “Manulife and the other life insurers involved in similar matters plan to make submissions to the court, asking it to dismiss the claims that life insurers can be compelled to accept unlimited premium payments. Manulife believes these regulations should accelerate the resolution, in its favour, of the principal matters in the Mosten litigation in Saskatchewan.”
In a research note, National Bank Financial analyst Gabriel Dechaine wrote on Tuesday that Saskatchewan’s changes “strengthen Manulife’s defence.”
In its own statement Tuesday, Industrial Alliance noted the “new regulations are consistent with the position taken by iA Financial Group," adding that the insurer “has always maintained that this litigation was unfounded and that life insurance contracts were never intended to be used as deposit accounts or for purposes that are unrelated to life insurance.”
It is too early to tell what the Court of Queen’s Bench for Saskatchewan will do in the wake of the new rules. Before the Saskatchewan rule changes, decisions in the cases were expected in the coming months, but there is now a chance the lawsuits will be dismissed. Even if they are, it is possible insurers could face additional lawsuits if hedge funds purchase universal life insurance contracts in other provinces that allow these legacy policies to be bought and sold.
On this front, the Canadian Life and Health Insurance Association (CLHIA), which intervened in the Saskatchewan litigation, said in a statement Tuesday that it intends to advocate for changes across Canada. “Because the public-policy concern addressed by the Government of Saskatchewan is equally relevant across Canada, the CLHIA plans to request other provincial and territorial governments to take comparable regulatory steps to avoid any public uncertainty in other jurisdictions,” the association wrote.
Tim Kiladze