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Union of Canada Life sells life and accident insurance, mortgage and investment products and operates in Ontario, Quebec, New Brunswick and Prince Edward Island.

Getty Images/iStockphoto

Union of Canada Life Insurance is folding after 148 years, marking the first failure of a Canadian life insurer since 1994.

The Ottawa-based mutual insurer, whose customers are largely in Quebec, received court approval Thursday to begin winding up.

It's a small outfit, with only about 22,000 policies outstanding, but some senior players in the industry are concerned it may not be the last to go under amid low interest rates and poor investment returns.

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"This could be the canary in the coal mine," said one senior industry executive who spoke on condition of anonymity.

The fear is that low interest rates and bad investment returns will have a serious impact on the weakest companies. Those same factors are also hurting the industry giants, with analysts expecting both Manulife Financial and Sun Life Financial to lose money in their latest quarters.

Regulators and the life insurance industry association, however, said Union of Canada is a one-off situation.

"The industry remains strong, our capital levels remain well over 200 per cent, well over the minimum requirements, and so we don't believe that this is reflective of the industry," said Frank Swedlove, president of the Canadian Life and Health Insurance Association. "This was a very small regional company that had some particular issues."

"The life insurance industry in Ontario and Canada is strong," said the Financial Services Commission of Ontario, the industry's regulator.

It is only the fourth time a life insurer has gone under in Canada in recent memory. The other three – Les Coopérants, Sovereign Life, and Confederation Life, all took place in the early 1990s.

Documents filed with the Ontario Superior Court of Justice indicate that Union of Canada Life Insurance had been struggling for a number of years, but that it was low interest rates and poor investment returns during the past two years that pushed it to the brink.

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"For the past two years, Union of Canada has experienced deterioration in its capital base and its general financial condition, primarily because of low interest rates (which, in effect, increase the present value of its estimated liabilities) and low investment returns," the insurer said in a factum filed in court.

In an illustration of the impact that interest rates are having, the company said that its capital base, or surplus, would more than double if interest rates rose to the level they were at two years ago.

Union of Canada was first incorporated by the former Province of Canada in 1864. It sells individual annuities, and life and accident insurance in five provinces, but the vast majority of its customers are in Quebec. As a provincial insurer, its primary regulator is FSCO, not the federal Office of the Superintendent of Financial Institutions. It is also accountable to Assuris, a not-for-profit organization that protects policy holders if their life insurer fails.

As the regulators stepped up pressure on Union of Canada to fix its problems, the company unsuccessfully tried to raise capital and to sell itself. In fact, the only potential "buyers" it could find said that it would have to pay them in order for them to take on its policy liabilities.

The company did manage to bolster its revenues by increasing the volume of new business it sells. But that wasn't enough, and regulators signalled that it needed to wind up after its capital levels continued to fall.

The key measure of its capital levels or financial cushion, called the Minimum Continuing Capital and Surplus Ratio (MSSCR), fell from 178 per cent at the end of June 2011, to 158.1 per cent at the end of September, to 121.8 per cent at the end of the year. Life insurers must maintain a bare minimum MCCSR of 120 per cent, but, depending on the individual company, regulators become concerned at anywhere between 150 and 200 per cent.

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"We will be focused on arranging the transfer of the policies to another life insurance company expeditiously in order to ensure the policy holders continue to be served seamlessly," said Michael Creber, the partner at Grant Thornton who is in charge of the liquidation. "In the interim, operations of Union of Canada Life will continue from its head office in Ottawa."

The benefits offered by Assuris will kick in if policy holders do not receive all their benefits through the court process.

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