Saskatchewan Government Squashes Investors Hope For Unlimited Returns Using Life Insurance

On October 29th the government of the Canadian province of Saskatchewan amended regulations dealing with premium deposits into a specially designed universal life policy.  The new rule limits deposits into “side accounts in life insurance policies to an amount equal to premiums required under contract.” (1)

The new regulation comes as a court battle rages between Canadian life insurance carriers and investors who purchased the policies hoping for guaranteed investment returns up to 5%.

The contracts in question were universal life policies issued in the 1990’s when fixed rates were much higher. The policies provide for a death benefit and an investment account – similar to the cash value in a traditional universal life policy.  According to a white paper put out by Muddy Waters Capital, a Canadian investment firm that has shorted Canadian carrier stock (2), one policy issued by Manulife, that is part of the court case, has a tax-exempt account and a separate taxable account. Cash goes into the tax-exempt account to pay the policy premium, and additional funds can be added.  On the policy anniversary date, a test is run, and any cash over a specific amount is moved from the tax-exempt account to the taxable account to preserve the tax status of the policy.  Both accounts have investment options, including an account that guarantees 4%. The tax-exempt account pays an annual bonus of .85 percent on the policy anniversary date. Cash can be contributed at any time.

Universal life policies issued in the United States have contribution limits based on the death benefit provided, but this Canadian policy and others like it can accept unlimited contributions, generating guaranteed returns for investors that are well above market rates.

A Wall Street Journal article recently featured Michael Hawkins, an Ontario businessman who purchased eight life insurance policies and contributed $11 million to them as a method to generate “extra income.” (3)  Hedge funds, investment houses and wealth management firms have purchased policies seeking a limitless cash cow.  Mr. Hawkins is now locked in the court battle that according to the Journal, is being funded in large part by investors, “in exchange for the potential opportunity to earn above-market rates in the side accounts.”

For every winner, there is a loser and if Mr. Hawkins were to win the carriers would be the big losers. The Muddy Waters white paper points out a Manulife expert testified in June of 2017 that a $100 million deposit would cause “an immediate reported loss to the insurer in excess of $45 million.”  However, it appears that the new regulation drastically cut the chances Mr. Hawkins will prevail.  Although some question the governments moves to amend “its insurance regulations in the middle of a judicial process,” the Wall Street Journal article points to one analyst who says the move “should substantially remove” any risk of litigation risk for the insurers in question.

Manulife, who had seen its stock drop 14% as a direct result of the case, saw shares rebound after the new regulation was announced.

(1)   Canadian Province Changes Rules, Benefiting Insurers in Dispute, Jacquie McNish,  Wall Street Journal, October 30, 2018

(2)  Manulife: An Insurance Company on Trial for its Life,  Muddy Waters Capital

(3)  Canadian Insurers Fight Cattle Farmer’s Investment Strategy, Fearing Stampede, Wall Street Journal, October 4, 2018