Monday, October 19, 2015

No. 121: Cost-of-Insurance Increases in the News

In 2003 I wrote extensively in The Insurance Forum about cost-of-insurance (COI) increases imposed by an operating subsidiary of Conseco, Inc. on owners of certain policies Conseco had acquired from other companies. Later I wrote extensively in the Forum and on my blog about COI increases imposed by operating subsidiaries of The Phoenix Companies, Inc. on owners of certain policies involved in stranger-originated life insurance (STOLI) transactions. Recently COI increases appear to be spreading among other companies.

Conseco's COI Increases
The Conseco story began in 1992, when Massachusetts General Life Insurance Company and Philadelphia Life Insurance Company imposed COI increases on certain universal life policies. A policyholder sued the companies alleging they had breached their contracts. A federal judge ruled the companies had breached their contracts, the case was converted to a class action, the class was certified, the case was settled, and the companies rolled back the COI increases. Conseco acquired Massachusetts General and Philadelphia Life in the late 1990s. The unanswered question is whether Conseco officials were aware that the policies they acquired had been significantly underpriced for sales purposes and were a disaster waiting to happen.

In 2003 Conseco launched an assault on its policyholders by imposing sharp COI increases. One example: the COI on a $1,000,000 policy issued in 1988 to a man aged 52 increased from $373.78 per month to $1,484.05 per month. Another example: the COI on a $250,000 policy issued in 1987 to a man aged 56 increased from $26.65 per month to $349.81 per month. Litigation ensued. Eventually the cases were settled, and the policyholders were awarded substantial benefits.

My most extensive material on Conseco's COI increases appeared in the 16-page December 2003 issue of the Forum. The issue was devoted in its entirety to the Conseco story.

Phoenix's COI Increases
In 2010 Phoenix imposed substantial COI increases on the owners of policies of the type used in STOLI transactions. The New York Department of Insurance received complaints and, after an investigation, ordered Phoenix to rescind the COI increases—but only for New York policyholders. Phoenix complied.

In 2011 Phoenix imposed new increases on New York policyholders, and the Department did not object. Meanwhile, insurance regulators in California and Wisconsin ordered Phoenix to rescind the 2010 increases, but Phoenix refused to comply. California dropped the matter, but Wisconsin began legal proceedings that are yet to be finally resolved.

Phoenix was also the target of several lawsuits relating to the COI increases. In May 2015 Phoenix moved to settle two long-standing class action lawsuits just before the trial. The settlement was later approved by the court, and has been completed. Also, Phoenix is in the process of settling some of the other cases.

My major articles in the Forum about Phoenix's COI increases are in the October 2012, December 2012, and November 2013 issues. My three blog posts about Phoenix's COI increases are No. 9 (November 21, 2013), No. 26 (January 29, 2014), and No. 103 (June 15, 2015).

COI Increases at Other Companies
Recently I have learned of announcements by several other companies who are imposing COI increases. The announcements are vague about the magnitude of the increases, and about the reasons for the increases. However, it appears at least some increases will be substantial, and at least some increases are caused by increased prices of reinsurance or low market interest rates. Furthermore, it appears at least some increases apply to policies of $1 million or more issued at ages 70 and above. Among the companies imposing COI increases are AXA Equitable Life, Banner Life, Security Life of Denver, Transamerica Life, and William Penn Life.

Nassau's Acquisition of Phoenix
On September 29, 2015, Phoenix announced it was being acquired by Nassau Reinsurance Group Holdings L.P. for $37.50 per share, or an aggregate of $217.2 million. The purchase price represents a 188 percent premium over Phoenix's closing stock price of $13.03 on September 28. Nassau is backed by Golden Gate Capital, a private investment firm. After completion of the acquisition—expected by early 2016—Nassau will contribute $100 million of new capital into Phoenix, which will be a privately held, wholly owned subsidiary of Nassau.

General Observations
I mention Nassau's acquisition of Phoenix here because I think there is a connection between that development and the settlements of the lawsuits against Phoenix relating to the COI increases. The most important settlement, which I discussed in No. 103, occurred almost literally on the courthouse steps just before the trial was to begin. Phoenix had been fighting those lawsuits for years, and also had been fighting to keep confidential many of the documents filed in court in those cases. A few of those documents, however, have been unsealed, as discussed in No. 26. I think Nassau probably had no interest in acquiring a company bogged down in litigation over COI increases.

Available Material
I am offering a complimentary five-page PDF containing the Phoenix press release. E-mail and ask for the Phoenix press release dated September 29, 2015. Ordering information for back issues of the Forum is available at