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Restructuring and Insolvency

Insolvency Watch: Union of Canada Life to Be Wound Up Due to Inadequate Capital and Deteriorating Finances

Published: 02/06/2012

By Joseph J. Bellissimo, Larry Ellis, Deborah S. Grieve, Bruce Leonard, Eleonore Morris, David Ward

A liquidator has been appointed to supervise the winding up and sale of the assets of Union of Canada Life, one of Canada's oldest life insurance companies, by order of the Ontario Superior Court of Justice.

Union of Canada applied under the Winding Up and Restructuring Act (WURA) for a Winding Up Order and the appointment of Grant Thornton as liquidator to take possession and control of the company and conduct the sale under the protection of a stay of proceedings.

In seeking the order, Jean Cloutier, Union’s president and chief executive officer, said in an affidavit that the Ottawa-based company had experienced deterioration in its capital base and overall financial condition primarily as a result of falling interest rates, which have increased the present value of its estimated liabilities and lowered the company’s investment returns.

He said that the company had made extensive efforts to reduce costs, improve efficiencies, better match asset and liability terms, and undertake a capital raising or strategic transaction.

Nevertheless, Cloutier said, the company had not been able to improve its long-term sustainability to the satisfaction of the Superintendent of Financial Services, who is the Chief Executive Officer of the Financial Services Commission of Ontario (FSCO), and the Canadian Life and Health Insurance Compensation Corporation (Assuris), a not-for-profit organization funded by the life insurance industry that protects policy holders if their life insurance company fails.

Cloutier said that over the past several weeks Union has had discussions with the FSCO and Assuris during which both made it clear that the only consensual process they would support in dealing with the company's problems was the winding up of the enterprise under the WURA.

Cloutier noted that one of the most important measures employed by regulators to monitor the financial health insurance companies is a financial ratio referred to as the "Minimum Continuing Capital and Surplus Ratio" or MCCSR, which is also recognized by the insurance industry as a de facto solvency test.

As a minimum capital adequacy indicator, the guidelines of the Office of the Superintendent of Financial Institutions Canada state the minimum MCCSR ratio for life insurers is 120% but that it expects each institution to set a minimum “supervisory target ratio of not less than 150%.”

Union’s MCCSR ratio has fallen from 178.0% in June 30, 2011 to 121.8% by December 31, 2011.

Over that same period, Union's ROE declined from -13.8% to -61%.

As of December 31, 2011, the company's assets were $110.6 million with liabilities of $104.0 million, for surplus of $6.6 million, down 34.7% on an annualized basis.

Cloutier noted that the company remains financially vulnerable to current low rates of interest because of a mismatch between the duration of its assets and liabilities. Life insurance liabilities are long-term, he explained, while it is difficult to find assets with similar terms in the current low interest rate environment.

Grant Thornton said it will endeavor to transfer Union’s policies to another life insurance company expeditiously in order to ensure the policyholders continue to be served "seamlessly." The liquidator said it expects policyholders will not suffer losses from the liquidation process, but, if they do, these losses will be covered by Assuris.

"If full recovery of policyholders' benefits is not achieved in the transfer process, Assuris is committed to providing its protection to all policyholders" said Gordon Dunning, president and CEO of the insurance compensation organization.