No. 219: Cost-of-Insurance Increases, Aetna, Lincoln, Voya, and the New York State Department of Financial Services—An Update

In No. 214 (posted April 20, 2017), I reported that, in August 2016, Lincoln Life & Annuity Company of New York (Lincoln) sent letters to agents informing them of a "temporary postponement" of previously announced cost-of-insurance (COI) increases that were to have been imposed on owners of policies issued in New York State. I also said that, on April 10, I filed with the New York State Department of Financial Services (DFS) a request pursuant to the New York State Freedom of Information Law (FOIL). In the request, I mentioned the postponement, said I assume DFS conducted an investigation, and asked for the file on the investigation. On May 10, DFS sent me a package of letters relating to the investigation. In this update, I describe the letters, show some excerpts I edited lightly to improve readability, and offer readers the full package.

DFS's May 13, 2016 Letter
Aetna Life Insurance and Annuity Company (Aetna) issued the affected policies between 1983 and 2000. Aetna is now Voya Retirement Insurance and Annuity Company (Voya). Lincoln administers the policies through a reinsurance arrangement under which Lincoln acts as both reinsurer and administrative agent for the Aetna block on behalf of Voya.

On May 13, 2016, after learning of the upcoming COI increase, DFS sent Voya a two-page letter. Aside from introductory material and contact information, the letter reads:

DFS is investigating whether these increases comply with all applicable New York State laws and regulations. Voya is hereby requested pursuant to Insurance Law §308 to provide the following information to DFS by no later than May 20, 2016.

1. A side-by-side comparison of new and old COI rates by duration. Please also indicate if there are any no-lapse premium guarantees involved.
2. A copy of the contract language for each policy form for which the COI rate will increase.
3. A detailed explanation of the increase in reinsurance costs.
4. The original profit margins projected from the time of the proposed COI increase forward, assuming no COI increase was made compared to the new profit margins reflecting the effect of the proposed changes. This projection should not factor in reinsurance costs.
5. Confirmation that no other nonguaranteed elements are changing, such as expense loads, other than changes in any fixed account interest rates merely to reflect changes in expected investment returns.
6. An explanation of why the change is being made and the derivation of the previous and current pricing assumptions.
7. A description of the affected market, including whether any of this business is owned by life settlement providers or secondary market life settlement investors.

Voya's September 23 Letter
Emails followed DFS's May 13 letter. They mentioned meetings of Voya and DFS officials on June 30 and July 30. On September 23, Voya sent DFS a five-page letter. Here is the two-paragraph conclusion:

In reviewing the policy language and its reference to class, neither the policy nor the submissions to DFS provide any guidance on how class is to be defined. Accordingly, applying a COI increase uniformly to the entire cohort of policies is consistent with the policy language and thus is the approach underlying Voya's June 14, 2016 submission. [Blogger's note: I do not have Voya's June 14 submission.] While we do not believe using two classes (smoker/nonsmoker) is required under the policy language, we agree that doing so would be consistent with Actuarial Standards of Practice (ASOP) and the policy.

While we submit that the COI rate determination submitted by Voya appropriately applies uniformly across the entire cohort of policies, and neither the policy language nor ASOP requires otherwise, if DFS insists that the redetermination must vary depending upon the premium class of the insureds in the Aetna block, we will submit new calculations for COI redetermination on that basis.

DFS's October 14 Letter
On October 14, DFS sent Voya a three-page letter explaining why DFS disagrees with Voya's analysis and conclusions. Here is the final paragraph:

If Voya intends to pursue the COI increase in question, it should provide a response using the appropriate classes in a manner that is consistent with the §308 letter for DFS's consideration. If Voya implements the increase without providing any additional information and on the basis you suggest, DFS reserves all of its rights with respect to what it believes is a violation of §§4232(b) and 4224(a)(1).

Voya's November 18 Letter
On November 18, Voya sent DFS a three-page letter saying that "we must respectfully disagree with many of the propositions underlying the October 14 letter as well as its overall findings." Here is the final paragraph:

It is Voya's great desire to reach an agreement with DFS as to an acceptable methodology for adjusting COI rates, consistent with policy language, to reflect the increases in costs and loss of profitability that Voya is experiencing. In that regard, as you know, Voya and DFS have had continuing dialogue in the form of face-to-face meetings, calls, letters and emails. Throughout this process, Voya has been concerned by what we view as the apparently changing standards DFS is seeking to apply to these requested increases. Accordingly, so that we may have a clear understanding of the standards and methodology that, in DFS's opinion, are to be applied, we request a letter addressing in detail the information DFS requests to not object to the changes, including DFS's definition of class and acceptable profit metric.

DFS's December 5 Letter
On December 5, DFS sent Voya a two-page letter. Following an introductory paragraph, here is the remainder of the letter:

While your letter references "changing standards DFS is seeking to apply to these requested increases," DFS has been consistent in its application of the law throughout the many iterations of proposed COI increases with multiple insurers. DFS has made clear from the beginning that, in order to demonstrate compliance with standards set forth in the Insurance Law, Voya should provide:

1. a comparison of the original COI and the proposed COI, with a clear illustration of the credible experience from Voya that justifies the proposed increase [italics in original];
2. confirmation that the proposed increase is purely prospective and that Voya will not attempt to recoup past losses;
3. confirmation that only eligible criteria under §4232(b) are used as experience factors to determine the credible experience, not including reinsurance (that is, investment experience, mortality, persistency and expenses);
4. confirmation that the classes of policyholders upon which the proposed increased COIs are to be assessed comport, to the extent practicable (such as 5-year age bands), with the original classes established by the original pricing at the time the policies were issued, which for the Aetna block appear to be "the insured's sex, attained age and premium class";
5. confirmation that the proposed COI increase is compliant with all the approved policy provisions; and
6. confirmation that no increase in profit will be obtained through the proposed COI increase.

We understand that Voya believes it has appropriately "considered [the ASOP 2] factors and determined that the policy class ... can be entire cohorts of policies by policy form." We note that Section 3.4 of ASOP 2 provides for factors to be considered in establishing classes "if the policy classes have not been defined in the determination policy." Based upon our discussions and information provided, we cannot conclude that in this case policy classes were not established. Nor can we conclude that a single cohort is appropriate; a single cohort was clearly not the class determined at the time the policies were originally sold and would not be the reasonable expectation for the consumer based on the policy language. Establishing a single cohort as the class would be inconsistent with §§4232 and 4224 and may, if acted upon, constitute an unfair and deceptive trade practice under Article 24.

As stated previously, if Voya intends to pursue the COI increase in question, it should provide a response using the appropriate classes in a manner that is consistent with the foregoing criteria and the §308 letter for DFS's consideration. If Voya implements the COI increase without providing any additional information and on the basis you suggest, DFS continues to reserve all of its rights with respect to what it believes are violations of law.

Voya's February 23, 2017 Email
On February 23, 2017, Voya sent DFS an email ending the correspondence. Voya's attorney said:

I spoke with the client and they do not intend to have any further communication unless they decide to revisit raising the rates, something on which they have not come to a final position. They believe that the prior communication is still accurate and alerted the policyholders that if there was a change, then they would receive further notification.

More on my FOIL Request
I received two responses to my April 10 FOIL request—one from DFS's New York City office and one from the Albany office. Each said I would be hearing from the other. The New York City office sent the material discussed in this post. The Albany office said that Voya had requested confidential treatment when it submitted material, and that DFS must therefore inform the company of my request and ask whether the company has any objection to release of the material. If the company approves release, the material would be sent to me. If the company objects to release, DFS would make a determination. If DFS rules against the company, DFS would have to inform the company so that it could seek court review of DFS's determination. Thus I anticipate a long delay and may or may not receive any material from the Albany office.

General Observations
I lean toward DFS's position in this dispute. I say "lean toward" because I am uncomfortable taking a firm stand without seeing the material filed with DFS's Albany office.

As I have said in articles in The Insurance Forum and posts on this blog, disputes about COI increases often focus on what constitutes a "class." For example, the "class" question was at the heart of numerous lawsuits against the Phoenix Companies, who created—after sale—a separate class for stranger-originated life insurance policies that were funded by minimum premium outlay and maximum borrowing. I usually oppose "post-sale classification" because I think the practice generally is contrary to the interests of policyholders.

I wrote in detail about "post-sale classification" almost 40 years ago in a major article about the calculation of life insurance policy dividends. The article, in the March 1978 issue of The Journal of Risk and Insurance, included a section about post-sale classification. I am including that section in the package mentioned below.

Available Material
I am offering a complimentary 31-page PDF containing the material I received from DFS's New York City office (23 pages) and my 1978 discussion of post-sale classification (8 pages). Email jmbelth@gmail.com and ask for the May 2017 package relating to the DFS/Voya COI dispute.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 218: Massachusetts Mutual's Dividends and the Proposed Settlement of a Class Action Lawsuit

On July 12, 2012, Karen Bacchi, a Massachusetts resident, filed a class action lawsuit in federal court against Massachusetts Mutual Life Insurance Company (Springfield, MA). The plaintiff alleges that the company violated a Massachusetts law by paying insufficient dividends to owners of participating life insurance policies. The filing of the lawsuit preceded by a few months the filing of a similar lawsuit in Pennsylvania against Penn Mutual, as discussed in No. 217 (posted May 11, 2017). Both lawsuits involve the same plaintiff attorneys.

The Bacchi case is in the hands of U.S. District Judge Denise J. Casper. The case was assigned initially to U.S. District Judge Joseph L. Tauro. When he took senior status, the case was reassigned on October 17, 2013 to U.S. District Judge George A. O'Toole, Jr. On March 11, 2015, the case was reassigned (I do not know the reason) to Judge Casper. President Obama nominated her in April 2010, and the Senate confirmed her in December 2010. (See Bacchi v. Massachusetts Mutual, U.S. District Court, District of Massachusetts, Case No. 1:12-cv-11280.)

The Parties
Bacchi, the plaintiff, purchased a participating whole life policy issued in 1975 by Connecticut Mutual Life Insurance Company. In 1996, Connecticut Mutual merged into Massachusetts Mutual, which is the defendant in this case.

The Allegation
Section 141 of Chapter 175 of the Massachusetts General Laws allows a Massachusetts-domiciled mutual life insurance company to hold a "safety fund" not to exceed 12 percent of the company's reserve liabilities, and requires the company to distribute amounts in excess of the safety fund to its participating policyholders. The law gives the Massachusetts insurance commissioner the authority to allow a company to hold a safety fund larger than 12 percent "for cause shown."

The gist of the case is a disagreement concerning the calculation of the excess funds Massachusetts Mutual held over the years. The plaintiff alleges that the company significantly understated the amount of excess funds it held by overstating its reserve liabilities and thereby understating its surplus. In 2010, for example, the company says it held excess funds equal to 4.65 percent of reserves, a figure well below the safety fund limit of 12 percent. The plaintiff, on the other hand, alleges that in 2010 the company held excess funds equal to 15.87 percent of reserves, a figure well above the safety fund limit of 12 percent.

Subsequent Developments
On October 15, 2012, Massachusetts Mutual filed a motion to dismiss the complaint. On August 27, 2013, after extensive briefing, Judge Tauro denied the motion in an order and a memorandum. The judge said the company's arguments for dismissal involve matters that have to be determined by a trier of fact. On September 10, 2013, the company filed its answer to the complaint.

For more than two years thereafter, the parties wrangled over many issues. For example, there was a blizzard of disputes over the confidentiality of documents filed in the case. On February 12, 2016, Judge Casper established a timetable and scheduled a jury trial to begin February 6, 2017.

On May 6, 2016, Massachusetts Mutual filed a motion for summary judgment. On July 27, 2016, after briefing, and at a hearing on the motion, Judge Casper took the motion under advisement.

The Proposed Settlement
On January 6, 2017, the parties filed a joint status report. They said they anticipated filing a stipulation of settlement within 45 days. Judge Casper thereupon canceled the trial, stayed the case, and ordered the parties to file the settlement papers by March 13.

On that day, the parties filed the proposed settlement agreement. It provides for payment of a total of $37.5 million to persons who are or were owners of Massachusetts Mutual participating policies at any time between January 1, 2001 and December 31, 2016. The payments for the most part are to be in the form of paid-up additions. The parties estimate that the average amount paid to class members receiving benefits will be $22.02. The total payment includes plaintiff attorney fees (not to exceed 25 percent of the $37.5 million), plaintiff attorney expenses, and a service award to the named plaintiff, all to be approved by Judge Casper.

The parties also filed a motion for preliminary approval of the proposed settlement, certification of the proposed class for the purposes of the proposed settlement, approval of the class notice, and appointment of the class representative and class counsel. On March 29, Judge Casper preliminarily approved the proposed settlement and scheduled the final approval hearing for July 27, 2017.

General Observations
This is another interesting case based on an old surplus limitation law. As I said in No. 217, I am not able to express an opinion about the fairness of the settlements in such cases because the precise methods by which companies calculate dividends on their participating policies invariably are shrouded in secrecy. Judge Casper has preliminarily determined that the settlement is fair, and will make a final determination after the July hearing. As I also mentioned, New York in 1906 became the first state to enact such a law, which was later enacted in a few other states, including Massachusetts and Pennsylvania.

Available Material
I am offering a complimentary 64-page PDF consisting of a table of contents (1 page), the complaint (18 pages), Judge Tauro's order (2 pages), Judge Tauro's memorandum (7 pages), the answer to the complaint (17 pages), the joint status report (3 pages), the proposed class notice (9 pages), and Judge Casper's order preliminarily approving the proposed settlement (7 pages). Email jmbelth@gmail.com and ask for the May 2017 package relating to the Bacchi/Massachusetts Mutual dividends case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 217: Penn Mutual's Policy Dividends and the Proposed Settlement of a Class Action Lawsuit

On November 1, 2012, Pennsylvania residents Daniel and Edith Harshbarger filed a class action lawsuit in federal court against Penn Mutual Life Insurance Company, which is domiciled in Pennsylvania. The plaintiffs allege that the company violated a Pennsylvania law by paying insufficient dividends to owners of participating life insurance policies. The case involves not only the court but also the Pennsylvania Insurance Department.

On July 19, 2013, the case was reassigned (initially it was assigned to another judge) to U.S. District Judge Nitza I. Quiñones Alejandro. President Obama nominated her in November 2012, and the Senate confirmed her in June 2013. (See Harshbarger v. Penn Mutual, U.S. District Court, Eastern District of Pennsylvania, Case No. 2:12-cv-6172.)

The Parties
The plaintiffs own Penn Mutual participating whole life policies. Daniel owns three policies issued in 1973, 1974, and 1977. Edith owns two policies issued in 1993. The defendant is Penn Mutual.

The Allegation
Section 614 of the Pennsylvania statutes allows a Pennsylvania-domiciled mutual life insurance company to hold a "safety fund" not to exceed 10 percent of the company's reserve liabilities, and requires the company to distribute to its participating policyholders amounts in excess of the safety fund. The plaintiffs allege that the company held funds in excess of the allowable amounts in many recent years.

The complaint shows safety fund amounts each year as a percentage of the reserves. It also shows excess amounts each year as a percentage of the reserves. For example, the safety fund at the end of 2011 was 25.7 percent of the reserves, so the excess was 15.7 percent (25.7 percent minus 10 percent) of the reserves. The safety fund law gives the Pennsylvania insurance commissioner the authority to allow a company to hold a safety fund larger than 10 percent "for cause shown," but Penn Mutual never sought or obtained such permission.

Subsequent Developments
On December 28, 2012, Penn Mutual filed a motion to dismiss the complaint. On April 11, 2014, after extensive briefing, Judge Alejandro granted the motion to dismiss. She said the court will abstain from exercising its jurisdiction in deference to the Pennsylvania Insurance Department. She placed the case in "civil suspense" pending resolution of the plaintiffs' claims before the Department.

On February 20, 2015, the plaintiffs filed an administrative complaint with the Pennsylvania Department. Thereafter the parties engaged in extensive briefing and discovery. The officer presiding over the administrative proceeding before the Department scheduled a hearing for October 26, 2016. However, the hearing was not held because the parties were engaged in efforts to settle the court case.

The Proposed Settlement
On April 15, 2017, with the help of a mediator, the parties reached a proposed settlement. The same day, the plaintiffs filed an unopposed motion for preliminary approval of the proposed settlement, and one of the plaintiffs' attorneys filed an unopposed declaration in support of the motion.

The policies affected are all Penn Mutual participating policies that were in effect at any time from the beginning of 2006 to the end of 2015. The policy types are whole life, term, indexed universal life, universal life, variable universal life (fixed), and variable universal life (variable). Almost 300,000 policyholders are affected.

The financial component of the settlement requires Penn Mutual to pay one-time "terminal dividends" to owners of affected policies. Specifically, the company will pay $97,073,303 to the owners of in-force policies, $13 million to the owners or beneficiaries of terminated policies, $10 million of fees to the attorneys for the class, $700,000 of expenses incurred by the attorneys for the class, and a service award of $3,750 to each of the two named representatives of the class. The total of those figures is $120,780,803.

Penn Mutual is allowed to defer payments to the policyholders should the payments cause the company's risk-based capital (RBC) ratio to fall below 250 percent, where the denominator of the ratio is company action level RBC. See No. 122 (posted October 22, 2015) for a detailed discussion of RBC ratios.

Although surplus notes are debt instruments, state surplus note laws and statutory accounting principles allow companies to include surplus notes in surplus rather than in liabilities. However, in the proposed settlement, Penn Mutual is allowed to exclude its surplus notes from the excess funds in the calculation of amounts to be paid to the policyholders. See No. 183 (posted October 19, 2016) for a detailed discussion of surplus notes.

Completion of the settlement requires a hearing on the parties' motion for preliminary approval of the proposed settlement, the mailing of notices of the proposed settlement to the class members, and a hearing on final approval of the proposed settlement. Judge Alejandro has not yet established a timetable for the approval process.

General Observations
I am not able to express an opinion about the fairness of the proposed settlement because I do not know how Penn Mutual calculates its dividends. As I have written over the years, the precise manner in which companies calculate dividends on participating life insurance policies is invariably a closely guarded secret. The companies justify the secrecy by insisting that the details are proprietary information that would place them at a competitive disadvantage if the details were disclosed. I have always argued that the details should be in the public domain, but my argument has never gained traction.

The Harshbarger case involves an old surplus limitation law. New York was the first state to enact such a law. It was among the reforms enacted in New York in 1906 after the Hughes-Armstrong investigation of 1905. A few other states, such as Pennsylvania, enacted similar laws. The current law in New York is Section 4219(a)(1). In general terms, that section allows a domestic mutual life insurance company to maintain a surplus not exceeding the largest of four figures: (1) $850,000, (2) 10 percent of the reserve liabilities, (3) 10 percent of the reserve liabilities plus (a) 150 percent of the company action level risk-based capital minus (b) the asset valuation reserve, and (4) the minimum capital and surplus required by any state where the company is licensed.

Available Material
I am offering a complimentary 64-page PDF consisting of a table of contents (1 page), the complaint (15 pages), the introduction to the stipulation of settlement (5 pages), the proposed notice to be sent to class members describing the proposed settlement (13 pages), the proposed consent order to be issued by the Pennsylvania Insurance Department (17 pages), and the unopposed declaration by one of the plaintiffs' attorneys supporting the motion for preliminary approval of the proposed settlement (13 pages). Email jmbelth@gmail.com and ask for the May 2017 package relating to the Harshbarger/Penn Mutual dividends case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 216: Donald Trump and the Two Emoluments Clauses of the U.S. Constitution—An Update

In No. 213 (posted April 14, 2017), I wrote about a complaint that Citizens for Responsibility and Ethics in Washington (CREW) filed on January 23 against President Donald J. Trump. CREW alleged that Trump had committed numerous violations of the two emoluments clauses of the U.S. Constitution. The case was assigned to U.S. District Judge Ronnie Abrams. The parties agreed, and the judge ordered, that dispositive motions were due by April 21, that responses were due by June 2, and that replies to the responses were due by June 30. (See CREW v. Trump, U.S. District Court, Southern District of New York, Case No. 1:17-cv-458.)

The Amended Complaint
On April 18, three days before the anticipated filing of Trump's motion to dismiss the complaint, CREW filed a significantly amended complaint. It added two new plaintiffs and many new allegations.

On April 19, the parties, in a joint letter to Judge Abrams, said the Federal Rules of Civil Procedure require a response from the defendant by May 2. However, the parties briefly described the significantly amended complaint and asked for a longer briefing schedule. They requested that the defendant's dispositive motion be due by June 2, that the plaintiffs' response to any dispositive motion be due by July 14, and that the defendant's reply be due by August 11. The judge immediately granted the parties' joint request.

The New Plaintiffs
One new plaintiff is Restaurant Opportunities Centers United, Inc. (ROC United), a nonprofit, nonpartisan organization founded in 2008. It has over 200 restaurant members, nearly 25,000 restaurant-employee members, and about 3,000 diner members. It engages employers, workers, and consumers "to improve wage and working conditions in the restaurant industry, including by providing job training, placement, leadership development, civil engagement, legal support, and policy advocacy." It also owns and operates a restaurant in New York City, and will soon open another restaurant in Washington, D.C.

The other new plaintiff is Jill Phaneuf, a resident of Washington, D.C. She works with a hospitality company to book events for two hotels in Washington, D.C. She seeks to book embassy functions, political functions involving foreign governments, and other events in the Washington, D.C. area. Her compensation is tied directly to a percentage of the gross receipts of the events she books for the hotels.

The Plaintiffs' Injuries
In No. 213, I did not discuss the comments in the original complaint about the injuries CREW suffers as a result of Trump's alleged violations of the two emoluments clauses. The amended complaint provides a similar list of injuries, which includes diversion of communications resources, diversion of legal resources, diversion of research resources, and impairment of programmatic functions and fundamental services.

The amended complaint discusses the injuries to ROC United. They include injuries to ROC United's restaurant members, worker members, and restaurants as a result of Trump's alleged violations of the two emoluments clauses. The amended complaint also alleges that ROC United's restaurants have been and will be injured by competition with Trump's restaurants.

The amended complaint discusses the injuries to Phaneuf as a result of Trump's alleged violations of the two emoluments clauses. It alleges that she has been and will be injured due to a loss of commission-based income.

The Presidential Emoluments Clause
The original complaint focused primarily on alleged violations of the Foreign Emoluments Clause of the Constitution. The amended complaint expands on alleged violations of the Domestic Emoluments Clause, which is also referred to as the "Presidential Emoluments Clause." It is Article II, Section 1, Clause 6 of the Constitution, which reads:

The President shall, at stated Times, receive for his Services, a Compensation, which shall neither be increased nor diminished during the Period for which he shall have been elected, and he shall not receive within that Period any other Emolument from the United States, or any of them.

The amended complaint discusses Trump's alleged violations of the Presidential Emoluments Clause, especially his personal financial interest in the "Old Post Office" building in Washington, D.C. That building is now the Trump International Hotel. It operates under a 60-year lease executed in 2013 with the General Services Administration, a U.S. agency. The amended complaint alleges that Trump has been in breach of the lease since the moment he was inaugurated on January 20.

The amended complaint also discusses Trump's alleged violations of the Presidential Emoluments Clause through the "premium" he receives for goods and services sold by his various businesses. For example, the starting rate for guest rooms at the Trump International Hotel increased to $500 on most nights, up hundreds of dollars from when the hotel opened shortly before the election. As another example, the annual rate for membership in Trump's Mar-a-Lago resort doubled from $100,000 to $200,000 shortly after the election.

General Observations
I think the amended complaint is significantly stronger than the original complaint. I have nothing to add to my general observations in No. 213. I plan to report further on the case after Judge Abrams issues a ruling on Trump's anticipated motion to dismiss the amended complaint.

Available Material
I am offering a complimentary 68-page PDF consisting of the amended complaint (66 pages) and the parties' April 19 joint letter request granted by Judge Abrams (2 pages). Send an email to jmbelth@gmail.com and ask for the May 2017 package relating to the CREW/Trump emoluments case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com