John Hancock Settles ‘Leaseback’ Dispute

A federal court in Indiana has approved a settlement of litigation between John Hancock Life Insurance Co. and Hoosier Energy Rural Electric Cooperative involving a "leaseback" transaction. Terms of the settlement are confidential, John Hancock and Hoosier Energy said in a joint statement.

A leaseback, also known as a sale and leaseback, generally refers to the sale of an asset to a new party, and the leasing of that asset from the new owner by the previous owner.

For example, if an insurer owns its headquarters facility, it could sell it to a real estate firm and then lease it back. The real estate firm gets its return through the lease, while the insurer receives money for its headquarters, said Steven Schwartz, an equity analyst with Raymond James in Chicago. An insurer "might do this to raise capital."

Leaseback transactions are prevalent in the United States, Schwartz said. He couldn't say if they are more or less prevalent in the insurance industry than in the general economy.

Attempts to speak with the Boston-based John Hancock, a unit of Canada's Manulife Financial, were not successful.

According to court documents, Hoosier Energy sued John Hancock Life, OP Merom Generation I, Merom Generation I, Ambac Credit Products, Ambac Assurance Corp. and others in Indiana state court in October 2008. It sought a temporary restraining order against them and the suit was subsequently transferred to the U.S. District Court for the Southern District of Indiana in November 2008.

Hoosier Energy operates coal, natural gas and renewable energy power plants and delivers electricity to 18 member distribution cooperatives that serve 300,000 consumers in central and southern Indiana and southeastern Illinois.

According to court documents, Hoosier and John Hancock, acting in part through its affiliates, OP Merom Generation I and Merom Generation I, along with several other entities, were parties to a 2002 transaction involving a power station in Indiana -- the Merom Generating Station -- which Hoosier operated.

Under a "head lease agreement," Hoosier leased the Merom Generating Station to John Hancock from Dec. 19, 2002 to May 13, 2065 in return for a one-time rent payment of $300 million payable on the commencement date, according to Hoosier's suit. Under a "facility lease agreement," Hancock immediately leased the Merom Generating Station back to Hoosier for a shorter time than the one in the head lease agreement.

In its complaint, Hoosier said it owed rental payments under the facility lease agreement in amounts totaling $431.8 million. However, it said it doesn't make those payments directly but instead, the payments are made on its behalf by other entities in a structure known as a SILO -- or sale in, lease out.

"As a result of the current credit crisis ... and completely unrelated to any conduct by Hoosier, one of the parties to the transaction -- defendant Ambac Assurance, had its rating downgraded by certain credit agencies," Hoosier said in the lawsuit. "The downgrade has resulted in no harm to Hancock, all of the parties continue to perform their obligations under the contract, and Hoosier is close to securing a replacement for Ambac Assurance.

"Nevertheless, Hancock has wrongly exploited the credit crisis to attempt to recover the value of the tax benefits to which it no longer has any claim by asserting the completely unrelated alleged default related to Ambac Assurance's rating," Hoosier alleged, noting that more than $100 million was at stake.

Hoosier, in its original suit, wanted the court to issue the temporary restraining order to stop any party to the agreements from making any demand or any payment under Hancock's assertion that an "event of default" occurred.

All parties to the litigation are covered by the settlement, John Hancock and Hoosier Energy said.

"We welcome the conclusion to these negotiations," said Jonathan Chiel, general counsel for John Hancock, in a statement. "We are now able to move forward with a resolution that is fair to both sides and protects the interests of our company and its policyholders."

"This is an equitable agreement, and our focus now is on moving forward to further strengthen our cooperative and continuing to meet the power supply needs of members," said Chris Tryba, Hoosier Energy's communications manager, in a statement.

John Hancock Life Insurance Co. currently has a Best's Financial Strength Rating of A+ (Superior).

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)