Holders of $2.4 billion of Confederation Life Insurance Co. GICs have a good chance of recovering their full investments, sources say.
Indeed, they could even see modest gains on their guaranteed investment contracts if they are willing to hold out for the long-term rehabilitation of the U.S. portion of the 132-year-old Toronto-based insurer. Confederation Life was seized by Canadian authorities Aug. 11 to prevent a "run on the bank."
Confederation GICs are widely held and appear in the portfolios of most large diversified GIC funds. "Virtually all" GIC managers have at least a small percentage of assets invested with Confederation Life, said Larry Mylnechuk, executive director of the GIC Association, Lake Oswego, Ore.
Major positions of Confederation Life contracts reportedly are held by big GIC managers such as Fidelity Investments, Boston; Bankers Trust Co., New York; T. Rowe Price, Baltimore; and Vanguard Co., Valley Forge, Pa.
Most outstanding Confederation Life GICs were issued prior to 1992. The company has not appeared on most GIC manager or consultant buy lists in the past 12 months.
Keli Hueler, president of Hueler Analytics, Minneapolis, a GIC consulting firm that tracks more than 80% of pooled GIC funds, said pooled funds have been lowering their exposure to Confederation Life for the past three years. She said pooled funds now have less than 0.5% of their holdings in Confederation Life contracts, down from 2% in 1992 and 0.9% in 1993.
Based on early indications, the disposition of Confederation Life closely resembles the workout of Mutual Benefit Life Insurance Co., which was taken over by New Jersey regulators in 1991.
Both Mutual Benefit and Confederation Life were brought down by problems in their commercial mortgage portfolios, lack of adequate capitalization and fears of a run-on-the-bank scenario that actually materialized at Mutual Benefit.
Mutual Benefit contract holders are expected to receive 100% of their principal after state guaranty associations and the life insurance industry agreed to cover account values with input from a contract holder organization.
Confederation Life contract holders began forming a similar group only days after the company's seizure to represent their interests in rehabilitating the U.S. portion of the firm. The group, which has yet to select a name, is headed by Victor Gallo, principal at PRIMCO Capital Management, Louisville, Ky., and a former executive at Prudential Life Insurance Co.
The major uncertainty surrounding the Confederation Life workout is the cross-border relationship between U.S. contract holders and the Canadian ownership and regulation of the company. Canadian regulators have indicated they plan to liquidate the company while officials in Michigan, which have frozen the company's more than $8 billion in U.S. assets, are more inclined to rehabilitate the firm.
Mr. Mylnechuk said most U.S. contract holders and GIC managers still do not have enough information on the financial and investment standing of Confederation Life to make any decisions. One insurance industry source said Michigan's freezing of Confederation's U.S. assets of about $8.2 billion could help facilitate the payment of U.S. contract holders, barring interference from Canadian officials.
The source said the $8.2 billion is sufficient to cover claims by GIC and other insurance liabilities by Confederation's U.S. policy and contract holders. He said if Michigan officials can maintain possession of the assets, there would be no need for state guaranty associations or other domestic insurers to become involved in covering account values as with Mutual Benefit.
"It could be simpler than expected from one perspective, but from the Canadian standpoint, there could be some repercussions," he said.
Among GIC holders, a Fidelity spokeswoman declined to comment on its Confederation Life holdings.
A spokesman for Morley Capital Management, Lake Oswego, Ore., said less than 1% of the firm's $5.5 billion in assets under management are invested with Confederation Life.
Murray Becker, president of Becker & Rooney, Teaneck, N.J., said he has placed no Confederation Life contracts since 1992 and still has a "modest amount" in force.
Mr. Becker said he expects GIC holders to emerge without loss of principal in much the same fashion as Mutual Benefit investors. "There are still a lot of unknowns here ... but the precedent has been established with Mutual Benefit. All funds make some investments they later regret. It is still early in the game, but my expectation is that the worst case is that we will have a Mutual Benefit situation and the worst case for most plans means it will have only minor impact," said Mr. Becker.
Contract holders unwilling to wait out the estimated seven- to 10-year contract restructuring may have an alternative.
Scott Sokol, principal at Chambers, Dunhill & Rubin, Beverly Hills, Calif., said his investment banking firm has clients willing to purchase Confederation Life contracts for "55 to 60 cents on the dollar." He said the firm will help contract holders structure an equalizer contract that would allow them to amortize the loss over an extended period of time.
"Clients need to evaluate whether it makes sense for them to wait and receive a low crediting rate over an extended period of time or to cash out now," said Mr. Sokol.
Mr. Gallo, who organized the Confederation Life GIC holders, said the organization has hired legal counsel in Michigan to assist in monitoring regulatory oversight of the state's plans for rehabilitating or liquidating Confederation's assets.
The organization hopes to bring in all, or most, Confederation contract holders and to present a unified front before the courts and regulatory agencies.
"One of the main purposes is to have a strong standing in the courts and regulatory proceedings and to have recognition and to work with them in reaching a solution acceptable to all," said Mr. Gallo.
"It is certainly our expectation and goal for there to be no loss of principal," he added.
David Van Benschoten, director-investment management at General Mills Inc., Minneapolis, and who headed the Mutual Benefit group, said he is willing to help the Confederation Life organization, even though General Mills does not hold any Confederation Life contracts.
"From a general sense, the experience we gained at Mutual Benefit could be helpful and I am willing to share than experience," said Mr. Van Benschoten. "We learned a lot and it was successful. Now, hopefully, we learned from our prior experience; life goes on and we can recover from these situations. There was a reasonable outcome and now, hopefully, at Confederation Life the situation should lead to less panic."
The advantage of forming such an organization is it carries "a little more weight as an inclusive coalition rather than each group representing separate interests," he said.
Mr. Mylnechuk said he and most GIC Association members he has been in contact with were surprised Confederation Life failed. "It was certainly unexpected and caught most of us off guard," he said.
Nearly half of Confederation Life's assets are invested in mortgages and real estate, compared with an industry average among U.S. carriers of 18%, down from 27% in 1991.