A year after Confederation Life Insurance Co. was seized by regulators, plan sponsors are getting some bad news.
Contrary to early reports, holders of Confederation Life GICs now seem less likely to get 100% of their investments back.
Confederation Life was required to deposit and maintain in trust cash and securities an amount sufficient to satisfy its liabilities in the United States. A suit by Michigan regulators alleges Confed officials "looted" the trust of the $600 million established for U.S. policyholders, and used the "misappropriated" funds to support the company's Canadian operations shortly before it collapsed.
U.S. officials claim that $600 million would allow the full reimbursement of U.S. policy holders.
The suit was filed June 28 by the Michigan Insurance Commissioner against 27 former Confederation Life officers and directors. The suit also names the accounting firm of Ernst & Young, Confed's auditors, and Harris Trust and Savings Bank, Chicago, which managed the U.S. trust accounts.
Harris Bank and Ernst & Young officials declined comment on the suit but said the claims are without merit and will be defended in court.
Meanwhile, an industry executive connected with trying to clean up the Confed mess has become more pessimistic about whether GIC holders will get their money back.
"I don't know if contract holders will emerge whole, but I am confident there won't be any big losses," said Victor Gallo, head of the Association of Confederation Life Contract Holders, the industry group formed following the failure. Last October, Mr. Gallo said he expected Confed's GIC investors to emerge without losses.
He said the organization supports the Michigan suit.
Rich Cowen, principal at Brentwood Asset Advisors, Santa Monica, Calif., also sounded a note of caution. He said the allegations in the suit complicate an already complex problem of rehabilitating a Canadian company with a substantial amount of business in the United States, including $2.4 billion of outstanding GICs.
"A few months ago they were talking about getting 90% to 100% back on the contracts," he said. "But since early this year things have slowed down and the tone is now more pessimistic," said Mr. Cowen.
In a report issued late last year Moody's Investors Service, New York, said institutional policy holders, "particularly those with unallocated GICs in the United States, are at greatest risk of substantial loss" following Confederation Life's failure.
Francis de Regnaucourt, senior analyst at Moody's and author of the report, said if the assets are not recovered through the Michigan suit, there probably will be a shortfall in reimbursing Confed's U.S. policyholders.
Contract holders then would be subject to the insurance guaranty associations in each state. In that case, he said, guaranty associations are inclined to be more sympathetic to "widows and orphans" than to institutional investors such as GIC holders.
Confederation contracts were not widely held by individual plan sponsors; most were held by GIC managers, mutual funds and bank pooled funds that managed funds for 401(k) plans.
Mr. Gallo said the 134 members of the ACLCH include plan sponsors, money managers, banks, insurance company representatives and consultants.
Sources say plan sponsors that have participated in group meetings include Shell Oil Co., SmithKline Beecham Corp., Annuity Board of the Southern Baptist Convention, GenCorp, IBM Corp., Aluminum Co. of America, Coors Brewing Co., International Paper Co., Northern Telecom Inc. and ARA Services Inc.
Coors has filed a lawsuit against Fidelity Management and Trust Co., Boston, which reportedly was one of the largest holders of Confed contracts, seeking compensation for any losses caused by the failure of Confederation Life.
The suit accuses Fidelity of mismanagement by placing approximately $10 million, or about 5%, of the fund's 401(k) assets in Confederation contracts. A Fidelity spokeswoman declined to comment.
Industry sources say Confed contracts were widely held by most large diversified GIC funds and virtually all GIC managers had some exposure to Confed, including Fidelity Institutional Retirement Services Co., Boston; Bankers Trust Co., New York; Vanguard Group of Cos., Valley Forge, Pa; and T. Rowe Price Stable Asset Management Inc., Richmond, Va.
Despite the legal wrangling, Mr. Gallo said he expects the Confederation Life rehabilitation to move forward quickly once Confed's creditor group reaches a settlement or the company moves into a liquidation phase.
He said the assets and liabilities structure of Confederation Life is clearer than with Mutual Benefit Life Insurance Co., another failed insurer.
"The assets are in better shape (with Confed) than with Mutual Benefit, and it should turn around quicker," said Mr. Gallo.