Union of Canada Life Insurance, 2012 ONSC 957

Court File and Parties

COURT FILE NO.: CV-12-9584-00CL
DATE: 20120214
SUPERIOR COURT OF JUSTICE – ONTARIO
(COMMERCIAL LIST)

IN THE MATTER OF INSURANCE COMPANIES ACT ,
S.C. 1991, C. 47 , AS AMENDED

AND IN THE MATTER OF THE WINDING-UP AND RESTRUCTURING ACT,
R.S.C. 1985, c. W-11 , AS AMENDED

RE: UNION OF CANADA LIFE INSURANCE, Applicant

BEFORE: MORAWETZ J.

COUNSEL:
G. R. Hall and M. Brady, for the Applicant
G. Rubenstein and C. Costa, for Grant Thornton Limited, Proposed Liquidator
D. Bish, for Canadian Life and Health Insurance Compensation Corporation (“Assuris”)
Mark Bailey, for the Superintendent of Financial Services

HEARD & ENDORSED: FEBRUARY 2, 2012
REASONS RELEASED: FEBRUARY 14, 2012

Endorsement

[1]

Introduction

On February 2, 2012, I endorsed the record as follows:

Application granted. Winding-up ordered. Brief reasons to follow.

2These are the reasons.

[3]

Background

Union of Canada Life Insurance (“Union”) applied for a winding-up order under the Winding-Up and Restructuring Act (the “ WURA ”), along with certain related relief. The application was unopposed.

4Counsel to Union submitted that the only legal issue of significance was how to interpret the concept of “insolvency” for purposes of the WURA in the unique circumstances of a life insurance company. Counsel submitted that it was appropriate to interpret the concept purposively and in a manner consistent with prior case law. Taking these factors into account, counsel submitted that Union was “insolvent” for the purposes of the WURA and, therefore, entitled to bring the application.

5A comprehensive factum was filed which provides a factual summary of the financial situation facing Union.

6The financial viability of a life insurance company is measured by its ability to meet all obligations and liabilities over the entire life of all life insurance contracts in force.

7Life insurance companies are subject to significant regulation. The federal regulator, the Office of the Superintendent of Financial Institutions Canada (“OSFI”), takes the lead on regulatory matters by, among other things, establishing information requirements and forms and publishing guidelines that are followed across the country.

8One of the measures employed by OSFI, the Superintendent of Financial Services of Ontario (the “Superintendent”) and other regulators to measure the financial health of the insurance companies is the financial ratio referred to as the “Minimum Continuing Capital and Surplus Ratio” (“MCCSR”).

9The MCCSR measures the ratio of the capital that a life insurance has available to it against the sum of the capital requirements of five risk components – asset default risk, mortality/morbidity/lapse risks, changes in interest rates, segregated funds risk and foreign exchange risk (the latter two of which do not apply to Union).

10Counsel advises that as a minimum capital adequacy indicator, OSFI guidelines require an insurer’s MCCSR to be at least 120%. In practice, Canadian regulators generally require 150% in order to avoid regulatory intervention.

11Counsel further advises that for many years, Union set its internal MCCSR target at 200%. Union did not meet its target as of the end of 2010 and has faced deterioration in its MCCSR since then, continuing through to the end of 2011. Union’s MCCSR as of August 15, 2011 was estimated to be 146%.

12At a meeting on December 8, 2011, the board of directors of Assuris concluded (employing the terminology of s. 58 of the Insurance Act ) that the assets of Union were insufficient to justify its continuance of business or to provide for its obligations. Counsel to Union submits that in Union’s case, most of its liabilities relate to its outstanding insurance policies and annuities. By their nature, life insurance contracts entail long-term obligations and liabilities. On a solvency basis, a life insurer must have sufficient assets at any point in time to pay policy benefits as they come due.

[13]

The Law

Section 10 of the WURA provides that a court may make a winding-up order in respect of the company if, among other things, the company is insolvent. Section 3 of the WURA sets out the solvency test. Counsel submits that interpreting “insolvency” purposively and in accordance with prior case law, Union is insolvent for the purposes of the WURA . Counsel further submits that since “insolvency” is not well defined in all of Canada’s insolvency statutes, the definition in the Bankruptcy and Insolvency Act (“ BIA ”) is often applied. See Re Stelco Inc ., (2004) 2004 24933 (ON SC) , O.J. No. 1257.

14Counsel further submits that given the infrequency with which applications for winding-up orders are made under the WURA , case law is silent on the application of the “insolvent person” definition to a proceeding under the WURA and, in these circumstances, the same logic applied in Stelco with respect to CCAA proceedings should apply in the context of the WURA , given the court’s general approach of applying Canada’s insolvency regimes in a consistent fashion.

15The three branches of the BIA definition in section 2 are disjunctive. Counsel focussed on subsection (c). In the case of subsection (c), “insolvent person” is one the aggregate of whose property is not sufficient, at a fair valuation, or, if disposed of in a fairly conducted sale under legal process, would not be sufficient to enable payment of all obligations, due and accruing.

16With respect to its obligations, Stelco made it clear that “all obligations, due and accruing” includes contingent and unliquidated liabilities, not just liquidated amounts that are due. Counsel submits that contingent and unliquidated claims would be encompassed by the term “obligations”.

17In this case, counsel contends that by their nature, life insurance contracts entail long-term obligations and liabilities and on a solvency basis, a life insurer must have sufficient assets at any point in time to pay policy benefits as they come due.

18Counsel further submits that, in the context of life insurance companies, the MCCSR is a de facto insolvency test and both Assuris and the Superintendent are of the view that Union appears to be insolvent.

[19]

Analysis

I accept these submissions. It seems to me that, in these circumstances, it is appropriate to accept the definition of “insolvency” as referenced in the BIA and to accept the regulator’s concept of insolvency in the context of a life insurance company. To do otherwise, would, in my view, frustrate the purpose of the WURA .

20I have also taken into account two other factors set forth by counsel to Union, namely, that applying the analysis in Stelco , in the context of a liquidation, Union’s liabilities would exceed its assets. Second, the parties from whom Union received transaction proposals in the fall of 2011 concluded that Union’s assets were insufficient to support a transfer of its policies without a supplemental payment to take on all of the policy liabilities.

[21]

Conclusion

In my opinion, Union is insolvent for the purposes of the WURA and it is appropriate to grant the winding-up order, especially in view of the consensual process that has been reached by the major stakeholders, who are in agreement that the making of this order is the best means to protect policy holders and other stakeholders.

22An order has been signed in the form requested which gives effect to the foregoing.