Two Canadian life settlements companies that buy and sell foreign life insurance policies have landed in the Ontario courts.

Universal Settlements Inter-national Inc. , which received bankruptcy protection from the Ontario Superior Court of Justice at the beginning of December 2008, has now asked the court to set a new deadline of April 30 for developing a proposal for creditors.

Court documents show that earlier this year, the Mississauga, Ont.-based company agreed to sell a part of its assets — a portfolio of 567 life insurance policies with a face value of $36 million previously owned by persons infected by the HIV virus, TPI AIDs — to SDM Holdings LLC for $2.5 million. USI is also trying to arrange longer-term financing.

Separately, but also in De-cember, the Ontario Securities Commission asked the same court to appoint KPMG LLP as the receiver for New Life Capital Corp. and a handful of related entities.

New Life didn’t oppose the application. In August 2008, the OSC issued a cease trade order against New Life and its principals, Jeffrey Pogachar, Paola Lombardi and Alan S. Price.

KPMG was expecting to make a report to the court about New Life at the end of February but as of Investment Executive’s press date, it had not.

So-called life settlements occur when the owner of a policy sells the contract to a third party at a discount to its benefit face value. The buyer maintains the premium payments and receives the proceeds of the benefit when the insured person dies. In effect, the seller gains access to most of the value of the policy in a secondary market while he or she is still alive.

In most provinces in Canada (with the exceptions of Quebec, Saskatchewan and Nova Scotia), the sale of Canadian life insurance policies by any entities other than life insurance companies is illegal. However, Ontario regulators have ruled that anyone can technically buy or sell internationally sold policies.

Both New Life and USI had bought portfolios of U.S. life settlement insurance policies to sell to Canadians and other international clients; they can be sold legally as securities. The policies are marketed as investments in an asset class unrelated to fixed income or equities. But as it turns out, they can be just as unpredictable.

Court documents indicate that, for USI, original policyholders didn’t die according to projected mortality tables. As no benefits were paid out to USI, it was left short of cash. USI started running out of money and its financial troubles were compounded when the Italian bond agency, San Remo SpA, which it had paid to reinsure its premium payments, went out of business.

“USI faces a severe liquidity crisis and will have completely depleted its readily available operating funds by Jan. 15, 2009,” says USI’s December 2008 application to the court. As with any insurance policies, if USI can’t pay the premiums for the policies that it owns, the policies lapse, the benefits disappear and, with it, all of USI’s income.

Mills Potoczak & Co. , a privately owned Ohio-based accounting firm and a founding member of the Viatical & Life Settlement Association of America, was hired to administer USI’s policies. Under the circumstances, it has recommended USI draw on the cash value of some of the life insurance policies in order to continue paying premiums on the other ones.

In addition to the viaticals that it has sold, USI also owns 134 policies with a notional benefit value of $187 million.

In its latest report to the court, the receiver for USI stated that this was a reasonable step to take considering that it is an option that maintains income and does not harm creditors, who are mostly investors in USI’s products. USI’s more than 3,500 creditors include investors from Latin America, Europe and Asia.

USI has a long history in the province. In 2001, the Ontario superintendent of financial services issued a “notice of proposed cease and desist order” against USI, alleging the company was in contravention of section 115 of the Insurance Act, which essentially makes it illegal to sell life policies unless the seller is licensed as an insurance agent. But a Financial Services Commission of Ontario tribunal found that USI’s viatical settlement purchase program did not constitute “insurance undertaken in Ontario” because the policies were foreign.

@page_break@Proceedings haven’t advanced as far in the case of New Life. In August 2008, the OSC charged the company’s principals, Pogachar, Price and Lombardi with several offences; none have yet been proven.

The OSC alleges that the executives sold securities to unqualified investors without proper registration to sell the securities, and without a preliminary prospectus to properly describe the investments. The OSC also alleges that New Life spent about $1.1 million of investors’ money on unsecured loans to executives and that it paid monthly dividends, before there was any income to distribute. It accomplished this simply by refunding investors’ own money.

The life settlement industry is growing in the U.S. but is stagnant in Canada. Connecticut-based Conning Research and Consulting Inc. estimates that policies worth about US$12 billion were sold in 2007 in the U.S., up from US$6.1 billion in 2006. By 2012, that figure will approach US$21 billion, it says.

Legislation in Canada makes the sale of Canadian-domiciled policies difficult. But even ventures that package together U.S. policies seem to stagger for differing reasons, and the industry seems to be experiencing a long stretch of hard luck.

To add to the pile, last year, Hamilton, Ont.-based Wickham Investment Counsel Inc. aimed to launch a closed-end fund of U.S. life settlements with distribution through a major dealer. The deal never closed according to Wickham, which chose not to comment any further. IE