Great-West Lifeco Must Pay $456 Million in Class Action Over 1997 London Life Acquisition

Canada's Great-West Lifeco must pay $456 million to more than a million policyholders as a result of a ruling by the Ontario Superior Court of Justice in a class-action lawsuit over the financing of the acquisition of London Insurance Group nearly 13 years ago.

The decision pertains to the involvement of the participating accounts of its subsidiaries -- London Life Insurance Co. and Great-West Life Assurance Co. -- in the financing of the acquisition of London Insurance Group in 1997, Great-West Lifeco said in a statement.

The court ruled that Great-West breached sections of the Insurance Companies Act by transferring money from the accounts of London Life Insurance and Great-West Life Assurance to pay for the acquisition of London Insurance, parent of London Life.

A spokesperson for Great-West Lifeco declined to comment beyond the company's statement. The companies plan to appeal the decision. "Although the decision confirms in many respects the companies' position, there are significant aspects of the decision that the companies believe are in error," Lifeco (TSX: GWO) said.

The ruling is significant because the court is delving into the way the defendant company functions and into investment decisions, said Tony Merchant, a class-action attorney in Canada who was not involved in this case. This has "far-reaching impact" for all investment banks, stock brokerage firms, investment holding companies and perhaps even mutual funds because the court is examining the propriety of an investment, he said.

The decision, if upheld, would require that the companies pay the $456 million to the participating accounts, which include interest. London Life would be required to pay $372 million and Great-West Life would be required to pay $84 million. "The decision, if sustained on appeal, is not expected to have a material impact on the capital positions of the companies," Lifeco said.

In November 1997, Great-West Lifeco and Great-West Life Assurance of Winnipeg, Manitoba, said they would pay C$2.95 billion (US$2.89 billion) in cash and securities to close on their purchase of London Insurance. At that time, London Insurance was a leading Canadian writer of individual life insurance (BestWire, Nov. 13, 1997).

The tender offer included C$1.8 billion in cash plus a maximum of almost 40 million shares of common and preferred stock. London shareholders, the largest at that time being Trilon Financial of Toronto, with 56% of the stock, was to receive C$33.50 a share. In a private placement, Power Financial Corp., Great-West's Montreal-based parent, and Investors Group Inc., a Power Financial subsidiary, were to infuse C$400 million to finance the deal (BestWire, Nov. 13, 1997).

"The management and boards of directors believe they have at all times acted in the best interests of their respective companies, taking into account the interests of all stakeholders, including the policyholders," Lifeco said.

In June, A.M. Best Co. noted that in recent years, global economic conditions have pressured Great-West's operating results. Despite those pressures, Great-West's leading market position in Canada, conservative pricing discipline and low expense structure enabled it to generate favorable operating results on a quarterly basis, Best said (BestWire, June 22, 2010).

Great-West Life Assurance Co. and London Life Insurance Co. each currently have Best's Financial Strength Ratings of A+ (Superior).

(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])