No. 103: Phoenix Moves to Settle Two Cost-of-Insurance Lawsuits

On May 1, 2015, Phoenix Companies, Inc. filed an 8-K (material event) report with the Securities and Exchange Commission disclosing that the company is moving to settle two of several long-standing class action lawsuits. The complaints were filed because of cost-of-insurance (COI) increases on variable universal life policies of the type used in stranger-originated life insurance (STOLI). Phoenix made the move when the cases were about to go to trial. (See Fleisher v. Phoenix Life Ins. Co. and SPRR v. PHL Variable Ins. Co., U.S. District Court, Southern District of New York, Case Nos. 11-cv-8405 and 14-cv-8714.)

The description of the settlement in the 8-K filed May 1 was very brief.  For that reason, I postponed writing about the settlement until I could see it.  Phoenix filed it in court on May 29, and as an exhibit to another 8-K on June 3.

Background of the Dispute
Phoenix first imposed COI increases on the STOLI policies in 2010. The company rescinded the 2010 increases, but only for New York policyholders, when the New York Department of Insurance ordered the company to do so. The company then imposed COI increases in 2011 on New York policyholders without objection from the Department.

California and Wisconsin regulators ordered Phoenix to rescind the 2010 increases, but the company refused. California did not pursue the matter. Wisconsin began administrative proceedings and prevailed, but Phoenix appealed and the matter is in litigation.

Several class action lawsuits were filed against Phoenix by angry policyholders. I wrote about some of the cases in the October 2012, December 2012, and November 2013 issues of The Insurance Forum, and in blog post No. 9 (November 13, 2013).

Purposes of the Agreement
U.S. District Court Judge Colleen McMahon has been handling the two cases. In the recent filing, the parties sought her preliminary approval of the settlement, certification of a class solely for the purposes of the settlement, approval of the notice to class members giving them an opportunity to object to or opt out of the settlement, and approval of the plan for a fairness hearing. Judge McMahon promptly issued an order preliminarily approving the above items and appointing an administrator.

Thrust of the Dispute
The agreement, reached with the help of a mediator, includes brief descriptions of the parties' views. Here is the language:

The [Plaintiffs] alleged, in part, that Defendants' decision to raise cost of insurance rates on certain policies in April 2010 and on other policies beginning in November 2011 was unlawful and in violation of the terms of the Policies. These complaints further alleged that Defendants' rate increases did not apply uniformly to a class of insureds, discriminated unfairly between insureds of the same class, and were designed to recoup past losses.

Defendants deny any and all allegations of wrongdoing and do not admit or concede any actual or potential fault, wrongdoing, liability, or damage of any kind to Named Plaintiffs and the putative settlement class in connection with any facts or claims that have been or could have been alleged against them in the Actions. Defendants deny that they acted improperly or wrongfully in any way, believe that the Actions have no merit and contend that Named Plaintiffs' claims are improper as a matter of law. Defendants further contend that their decisions to implement the cost of insurance increases were, at all times, in accordance with the Policies' terms and accepted actuarial standards.

Structure of the Agreement
The basic document is a stipulation of settlement. Phoenix agrees to create a $42.5 million settlement fund and agrees not to object to a request for plaintiffs' attorney fees of one-third of the settlement fund (about $14.2 million). Phoenix agrees to pay plaintiffs' attorney expenses and the settlement expenses out of the settlement fund, leaving a net settlement fund of around $27 million. Phoenix agrees to pay an additional $6 million in plaintiffs' attorney fees outside the settlement fund, so that the total plaintiffs' attorney fees are about $20.2 million. No funds will revert to Phoenix, and the settlement includes broad releases. The parties entered into a separate, confidential agreement allowing Phoenix to terminate the agreement in the event too many class members opt out.

The system for allocating the net settlement fund among the class members is the responsibility of the plaintiffs' attorneys. Phoenix states that it is not insolvent, and that the payments required under the settlement will not render Phoenix insolvent. Phoenix agrees not to impose further COI increases on the class members until after the end of 2020.

There are three exhibits attached to the stipulation of agreement. Exhibit A is the notice to be sent to class members informing them of the settlement, offering them an opportunity to object to or opt out of the settlement, and inviting them to attend the fairness hearing.

Exhibit B is the proposed order for Judge McMahon to issue. She crossed out the word "proposed" and issued the order on June 3. She preliminarily approved the settlement as "fair, reasonable and adequate to the class," conditionally certified the class for purposes of the settlement, appointed Susman Godfrey LLP as class counsel for purposes of the settlement, appointed Rust Consulting as the settlement administrator. and scheduled a hearing for September 9, 2015.

Exhibit C shows proposed letters providing required notices to certain interested parties about the proposed agreement. Among those parties are the U.S. Attorney General, the coordinator of the federal Class Action Fairness Act, and state insurance regulators.

The Brief Initial Description
As mentioned earlier, the description of the settlement in the 8-K filed May 1 was very brief. Phoenix said it "will establish a Settlement fund," "will pay a class counsel fee if the Settlement is approved," "agreed to pay a total of $48.5 million," and "expects to incur a $48.5 million charge in the first quarter of 2015."

The brief description implied that Phoenix is proposing to create a $48.5 settlement fund. As explained above, the gross settlement fund is $42.5 million, and the other $6 million is an extra payment to the plaintiffs' attorneys.

General Observations
I am not sufficiently familiar with the cases to express an opinion about the fairness of the proposed settlement, or about whether the $20.2 million in fees for the plaintiffs' attorneys are reasonable. I also do not know whether the system the plaintiffs' attorneys will use to allocate the net settlement fund of around $27 million will be fair.

I am puzzled about the provision under which Phoenix promises not to impose further COI increases until after 2020. All the insureds were at least 68 years old when the policies were issued about a decade ago, and by 2021 the surviving insureds will be in their 80s and 90s.

It is impossible to know what will happen in the other COI lawsuits in which Phoenix is involved. However, the proposed settlement provides a template for settlements of those cases.

Available Material
I am offering, as a complimentary 77-page PDF, the version of the settlement filed in court on May 29. E-mail jmbelth@gmail.com and ask for the Phoenix COI settlement.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 102: Life Partners—The Chapter 11 Trustee Lowers the Boom

On May 20, 2015, H. Thomas Moran II, the Chapter 11 Trustee in the bankruptcy case of Life Partners Holdings, Inc. and its subsidiaries (collectively, "Life Partners"), filed numerous documents. The key document is the "Declaration of H. Thomas Moran II in Support of Voluntary Petitions, First Day Motions and Designation as Complex Chapter 11 Case." The 39-page sworn declaration describes the background of the case and reports the results to date of the Trustee's investigation into the activities of Life Partners.

The Finding of Fraud

A major section of the declaration is the "Initial Findings of Trustee's Investigation." The Trustee said: "As a result of my investigation to date, I have concluded that Life Partners devised and executed a wide-ranging scheme to defraud its Investors." The Trustee also said the fraud "took place over the course of a number of years" and "occurred in a number of ways, including, but not limited to" these fourteen activities:

• Use of artificially shortened life expectancies in the sale of its so-called "fractional investments";
• Material misrepresentation of the returns Investors could expect;
• Misrepresentations regarding whether policies had lapsed and resale of lapsed interests;
• Use of so-called "escrow companies," including one with the word "trust" in its name, as instrumentalities of, and cover for, the fraudulent scheme;
• Charging massive, undisclosed fees and commissions, the total of which, in many cases, exceeded the purchase price of the policies themselves;
• Repeated misrepresentation of Life Partners' business practices in order to maneuver around securities regulatory regimes;
• Egregious and continuous self dealing by insiders;
• Failure to disclose CSV [cash surrender values];
• Forcing Investors to abandon Contract Provisions, many of which were then resold for personal gain;
• Systematic financial mismanagement, including improper payment of dividends;
• Faulty and inconsistent record keeping, including with respect to the purported "escrow" companies and "trusts";
• Commingling and unauthorized use of investor monies;
• The offer and sale of unregistered securities; and
• Implying the investment structure was a permissible investment for an IRA [individual retirement account], and failing to disclose the risks if it was not.

A major portion of the Trustee's declaration is devoted to detailed descriptions of the above elements of the "wide-ranging" fraud. The findings go far beyond the allegations by the Securities and Exchange Commission that led to what I referred to in No. 75 (posted December 10, 2014) as the "death sentence" imposed on Life Partners by Senior U.S. District Court Judge James R. Nowlin. The findings make clear why Life Partners and its senior officers fought so hard to continue operating the company during the bankruptcy proceedings and to oppose the appointment of an independent trustee who would have total access to the company's records of its activities.

The Trustee's Plans

At the same time, the Trustee filed eleven emergency motions. They include such items as joint administration of the Life Partners companies, payment of employee wages, payment of property and liability insurance premiums, payment for utilities, and payment of taxes. There is also a motion for authority to change the beneficiary designations on the policies that make up the fractional interests in the life settlements sold by Life Partners so as to eliminate the escrow companies and the expenses associated with the escrow companies. There is also a motion to approve a plan for paying premiums on those policies so as to make sure that those policies remain in force.

My Question

In earlier postings I expressed the opinion that the Trustee and the bankruptcy court judge would do everything possible to protect the owners of fractional interests in the life settlements sold by Life Partners. I am asking the Trustee a question about his plans for those policies, and I will report his answer.

Availability of the Declaration

Meanwhile, I am offering a complimentary 39-page PDF containing the Trustee's declaration. E-mail jmbelth@gmail.com and ask for the Trustee's May 20 declaration in the Life Partners bankruptcy case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 101: Life Partners and the Texas Supreme Court

On May 8, 2015, in a landmark opinion delivered by Justice Jeffrey S. Boyd, the Texas Supreme Court ruled that the life settlement agreements sold by Life Partners, Inc. (Waco, TX), an operating subsidiary of Life Partners Holdings, Inc. (LPHI), "are investment contracts, and thus securities, under the Texas Securities Act." No dissent was filed.

The opinion is the culmination of a 20-year struggle by the now bankrupt company and Brian D. Pardo, former chief executive officer and majority shareholder of LPHI, to avoid having to comply with securities laws. The impact of the opinion on the bankruptcy case is not known, but the ruling clears the air on the status of life settlement agreements.

The Opinion
The Texas Supreme Court opinion grew out of rulings by two Texas appellate courts. The trial courts had found in favor of Life Partners, and both appellate courts had reversed the trial court decisions. The Texas Supreme Court affirmed the rulings of the two appellate courts. (See Life Partners v. Arnold, Court of Appeals for the Fifth District of Texas, No. 14-0122, and LPHI v. State of Texas, Court of Appeals for the Third District of Texas, No. 14-0226.)

The elaborate 40-page opinion not only says Life Partners' life settlement agreements are securities under the Texas Securities Act, but also declines to give the ruling only prospective application. Life Partners had requested only prospective application in the event of an adverse decision on the underlying issue. This is important because it means that the ruling applies retroactively to all of Life Partners' past activities. Here is the first paragraph of the opinion:

The primary issue in these two separate cases is whether a "life settlement agreement" or "viatical settlement agreement" is an "investment contract" under the Texas Securities Act. We hold that the agreements at issue are investment contracts because they constitute transactions through which a person pays money to participate in a common enterprise with the expectation of receiving profits, under circumstances in which the failure or success of the enterprise and the person's realization of the expected profits is at least predominately due to the entrepreneurial or managerial efforts of others. We decline to give today's holding only prospective application, and we decline to consider the merits of the "relief defendants'" evidentiary arguments. In short, we affirm the courts of appeals' judgments in both cases.

The Trustee's Reaction
I contacted H. Thomas Moran II, the Chapter 11 Trustee in the Life Partners bankruptcy case. In response to my invitation to comment on the opinion, he said:

I respect the ruling by the Texas Supreme Court. The ruling brings clarity to the bankruptcy and ultimately will benefit those affected most by the Life Partners business model.

The 1996 Federal Appellate Ruling
I wrote many articles in The Insurance Forum over the years and posted many blog items about Life Partners. My first mention of the company was in the March 1999 issue of the Forum, which was devoted in its entirety to a 12-page article entitled "Viatical Transactions and the Growth of the Frightening Secondary Market for Life Insurance Policies." The article included a section subtitled "The Life Partners Case." Here is a shortened version of that section:

In 1995 the Securities and Exchange Commission (SEC) alleged that Life Partners had violated federal securities laws by selling unregistered securities. A federal district court ruled in favor of the SEC. Life Partners appealed. On July 5, 1996, a panel of the U.S. Court of Appeals for the District of Columbia Circuit reversed the decision in a 2 to 1 ruling. The majority said a viatical transaction satisfied two of the three necessary elements in the definition of a security, but did not satisfy the third element. The dissenting judge said a viatical transaction satisfied all three elements. The SEC petitioned for a rehearing; the panel denied the petition in a 2 to 1 ruling.

The 1996 Dissent
The 1996 dissent was written by Patricia M. Wald, a distinguished jurist. She served on the D.C. Circuit from 1979 to 1999, and was its chief judge from 1986 to 1991. She also has had an outstanding career before and after her tenure on the D.C. Circuit. She served as an assistant attorney general in the administration of President Jimmy Carter before he appointed her to the D.C. Circuit. Later she served as a judge on the International Criminal Tribunal for the Former Yugoslavia and currently serves as a member of the Privacy and Civil Liberties Oversight Board.

Many who cite the 1996 appellate ruling, including Life Partners, rarely if ever mention that it was a split opinion. Judge Boyd, in the ruling last week, included an exhaustive discussion of the judicial history of the issue and quoted extensively from Judge Wald's superb dissenting opinion. It is a classic example of a dissenting opinion that was later adopted by a majority of the judges who have studied the issue.

LPHI's Pre-Bankruptcy Views
Prior to its January 2015 bankruptcy filing, LPHI, in filings with the SEC, often discussed the litigation that led to the Texas Supreme Court opinion. For example, the appellate court handed down its decision in the Arnold case on August 13, 2013. LPHI disclosed it in an 8-K (material event) report filed a full month later, despite the fact that an 8-K is supposed to be filed within four business days after the event. LPHI disagreed with the ruling and cited, among other things, the 1996 D.C. Circuit opinion without mentioning that it was a split opinion. LPHI said:

Should the decision ever become final, it would result in a material adverse effect on our operations and require substantial changes in our business model.

Availability of the Opinion
I am offering a complimentary 40-page PDF containing the recent opinion by the Texas Supreme Court. E-mail jmbelth@gmail.com and ask for the May 8 Texas Supreme Court opinion in the Life Partners cases.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 100: Shadow Insurance—A Chronology of What May Become the Worst Financial Scandal in the History of the Life Insurance Business

"Shadow insurance" usually refers to reinsurance used to weaken (reduce) life insurance reserves, which are liabilities that measure a company's obligations to policyholders. Shadow insurance also involves questionable financial instruments such as parental guarantees, letters of credit, and contingent notes. The details of such instruments are shrouded in secrecy, and the reasons for the secrecy have not been explained.

Shadow insurance may become the worst financial scandal in the history of the life insurance business. The chronology presented here may be useful for those interested in the welfare of the life insurance business, including those who depend on life insurance protection.

1858

Elizur Wright, later called "The Father of Life Insurance," is appointed insurance commissioner of Massachusetts, thereby becoming the first insurance regulator in the U.S., and begins his campaign to require life insurance companies to establish adequate reserves.

1863

August Zillmer, a German actuary, publishes article explaining a method (used in the U.S. beginning about 40 years later) by which to weaken life insurance reserves.

1932

State insurance regulators allow life insurance companies to use, in financial statements for the end of 1932, asset values as of June 30, 1931.

1979

Universal life insurance is introduced.

April 1993

Prudential Insurance Company of America, to save $100 million in federal income taxes, issues $300 million of surplus notes through a confidential private offering to qualified investors.

1994

National Association of Insurance Commissioners (NAIC) begins to require "Triple-X" reserves designed to offset efforts by companies to weaken reserves through clever policy designs.

February 1994

Article entitled "The Recent Flurry of Controversial Surplus Notes" appears in The Insurance Forum.

March 2004

Article entitled "Secondary Guarantees, Marketers, Actuaries, Regulators, and a Potential Financial Disaster for the Life Insurance Business" appears in The Insurance Forum.

2009

NAIC adopts model law that includes reference to so-called principles based reserves designed to allow actuaries to use judgment in establishing reserves rather than using formulas in insurance statutes.

February 2009

Article entitled "Capital Infusions into Life Insurance Companies by Weakening Statutory Accounting Rules" appears in The Insurance Forum.

March 2011

Frederick Andersen, a New York Department of Financial Services (NYDFS) actuary, sends a letter to NAIC concerning what NYDFS perceives as inadequate reserves for universal life policies with secondary guarantees.

February 2012

Article entitled "The Controversy over Reserves for Universal Life Policies with Secondary Guarantees" appears in The Insurance Forum.

July 2012

NYDFS begins investigation of shadow insurance.

March 2013

Article entitled "A Review of More Than a Century of Efforts to Weaken Life Insurance Reserves" appears in The Insurance Forum.

April 18, 2013

NYDFS Superintendent Benjamin Lawsky, in a speech, discloses the existence of NYDFS investigation of shadow insurance.

June 11, 2013

Article by Mary Williams Walsh entitled "Insurers Inflating Books, New York Regulator Says" appears in The New York Times.

June 12, 2013

NYDFS issues report entitled "Shining a Light on Shadow Insurance: A Little Known Loophole That Puts Insurance Policyholders and Taxpayers at Greater Risk."

August 2013

Moody's Investors Service issues report entitled "The Captive Triangle: Where Life Insurers' Reserves and Capital Requirements Disappear."

September 30, 2013

Article by Alistair Gray entitled "Shadow Insurance Schemes Multiply to $360 Billion" appears in Financial Times.

February 2014

Rector & Associates, consulting firm retained by NAIC, submits report to NAIC concerning shadow insurance.

April 1, 2014

Paper by Ralph Koijen and Motohiro Yogo entitled "Shadow Insurance" is published by Federal Reserve Bank of Minneapolis.

April 22, 2014

Joseph M. Belth blog post No. 44 discusses certain notes to 2013 statutory financial statement filed by Iowa-domiciled Transamerica Life Insurance Company concerning a massive increase in surplus resulting from use of accounting practices permitted in Iowa.

April 23, 2014

Class action lawsuit is filed against AXA Equitable Life Insurance Company following NYDFS report on shadow insurance. (See Yale v. AXA Equitable, U.S. District Court, Southern District of New York, No. 1:14-cv-2904.)

June 2014

Rector submits to NAIC a modified report which, according to Superintendent Lawsky, "essentially defanged" the February 2014 report.

August 12, 2014

Superintendent Lawsky sends letter to his fellow insurance commissioners deploring weak response of NAIC to problems of shadow insurance and improper use of captive reinsurance companies.

August 17, 2014

NAIC Executive Committee issues recommendations based on modified report submitted by Rector.

November 6, 12, 19, 2014

Belth blog post Nos. 71, 72, and 73 discuss frightening accounting rules promulgated in Iowa.

December 18, 2014

Article by Mary Williams Walsh entitled "Regulators Deem MetLife 'Too Big to Fail' Institution" appears in The New York Times and discusses MetLife's designation as "systemically important financial institution" by Financial Stability Oversight Council.

April 12, 2015
Article by Mary Williams Walsh entitled "Risky Moves in the Game of Life Insurance" appears in The New York Times.

May 6, 2015

Belth blog post No. 99 discusses report released by American Academy of Actuaries on April 27, 2015 entitled "Key Ethical Concerns Facing the Actuarial Profession," in which by far the most serious ethical concern expressed by Academy members in 2012 survey was "responding to pressure from principals and/or management to select inappropriate assumptions used in pricing or reserving."

Available Material

Complimentary packages offered in Belth blog posts remain available. E-mail jmbelth@gmail.com and specify package(s) desired. All issues of The Insurance Forum are available in hard copy. E-mail belth@theinsuranceforum.com for ordering information.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 99: Actuarial Ethics—The American Academy of Actuaries Releases a Significant and Timely Report

On April 27, 2015, the American Academy of Actuaries announced release of a 31-page report entitled "Key Ethical Concerns Facing the Actuarial Profession" and subtitled "Perceptions of Members of the American Academy of Actuaries." The report is based on a 2012 survey of Academy members by the Academy's Council on Professionalism (COP). Among the 18 potential ethical issues identified in the report, by far the most significant issue perceived by Academy members is "responding to pressure from principals and/or management to select inappropriate assumptions used in pricing or reserving."

The 2012 Survey
The 2012 survey was prepared by members of the COP, Professors Rahul Parsa and Garry L. Frank of Drake University, and the Academy. The cover letter on the survey was from Karen Fulton Terry, MAAA, FCAS, who at the time of the survey was vice president of the Academy and chairperson of the COP. She is listed in the current directory of the Society of Actuaries as assistant vice president and actuary in the home office of State Farm Mutual Automobile Insurance Company.

The key finding about pressure from principals and/or management with regard to assumptions used in pricing or reserving is timely in view of the ongoing controversy over reserve adequacy, shadow insurance, accounting practices permitted by individual states, and so-called principles based reserves. The other four of the top five ethical concerns are: (2) "false or misleading representation of products or services in marketing, advertising, or sales efforts," (3) "failure to take appropriate action when another actuary misrepresents information," (4) "conflicts of interest between opportunities for personal financial gain (or other personal benefits) and proper performance of one's responsibilities," and (5) "misrepresenting or concealing limitations in one's abilities to provide services."

More than 3,300 Academy members responded to the survey. The members were asked to rate each of 18 potential ethical concerns on a scale of 1 to 5, where 1 means it is not an ethical concern and 5 means it is a major ethical concern.

Availability of the Report
The Academy announced release of the report in a news item dated April 27, 2015, and provided a link to a PDF containing the full report. The following notice is at the bottom of every page except the cover page: "©2015 American Academy of Actuaries. All rights reserved. May not be reproduced without express permission."

I immediately sent an e-mail request to the Academy for permission to offer a complimentary PDF of the full report to my readers. In my request, I mentioned the need for an immediate response.

Mary E. Downs, executive director of the Academy, responded promptly. She denied my request, but she also said:

We have, as you know, made the full report freely available on the Academy website, and you can refer your readers to our website for the complete report. We will also be having a webinar on the topic, and will be discussing it thoroughly in that venue on May 22. We will be continuing to have discussions about the report in Academy meetings and events.

A link to the report is on the home page of the Academy's website at www.actuary.org. I urge interested readers to read the report, and would welcome comments from those who read it.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 98: Life Partners and the Improvement of the Bankruptcy Trustee's Website

In No. 95 posted April 27, I discussed the inadequacy of the website established by H. Thomas Moran II, the Chapter 11 Trustee in the bankruptcy case of Life Partners Holdings, Inc. (LPHI) to keep affected parties informed about the case. Three developments occurred the next day: (1) the Trustee sent a letter to those with interests in the life settlements sold by Life Partners, Inc. (LPI), the primary operating subsidiary of LPHI; (2) the Trustee significantly improved his website; and (3) LPHI filed an 8-K (material event) report with the Securities and Exchange Commission (SEC).

The Trustee's April 28 Letter
The April 28 letter was addressed to "LPI position holders," provided background, said there are well over 20,000 "parties in interest" in the bankruptcy proceeding, expressed the Trustee's understanding of how distressing the situation is for interested parties, and described the Trustee's undertakings since his appointment. The letter stated in part:

It is my goal to preserve your interests, reduce financial obligations and to provide you with information on an ongoing basis. However, please remember, this will not be a simple process and will take some time.

The Trustee said in the letter that he has reduced the ministerial service fees. He described the reduction and enclosed a bill covering the six-month period from September 2014 through February 2015.

The Improved Trustee's Website
The Trustee's significantly improved website (www.lphitrustee.com) includes extensive background on the bankruptcy proceedings and provides links to all recent LPHI filings with the SEC. The website also provides links to all major filings in the bankruptcy court case.

The April 28 8-K Report
On April 28 LPHI filed an 8-K report with the SEC. Attached to the report was an exhibit showing 19 frequently asked questions and the answers to them, as well as an exhibit showing the April 28 Trustee's letter to LPI position holders.

General Observations
The Trustee is to be commended in general for improving his communication with parties affected by the LPHI bankruptcy, and in particular for the improvement in his website. I think his actions are good news for the holders of fractional interests in LPI's life settlements.

I am offering a complimentary 11-page PDF containing the April 28 8-K report, which includes an exhibit showing the frequently asked questions and the answers to them, and an exhibit showing the Trustee's April 28 letter to LPI position holders. Send an e-mail to jmbelth@gmail.com and ask for LPHI's April 28 8-K report.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 97: Senator Elizabeth Warren Investigates Annuity Sales Incentives

On April 28, 2015, U.S. Senator Elizabeth Warren (D-MA) sent a five-page letter to the chief executive officer of each of 15 major issuers of annuities seeking "information on rewards and incentives offered by your company to brokers and dealers who sell annuities to families and small investors." The response date is May 11. Senator Warren identifies herself in the letter as the Ranking Member of the Subcommittee on Economic Policy of the Committee on Banking, Housing, and Urban Affairs. Her office released copies of the 15 letters, a press release, and several examples of the incentives.

The Companies Contacted

Senator Warren sent her letter to the companies referred to in her press release as "15 of the largest annuity providers today." The companies, using the names shown in the letters, are AIG Companies, Allianz Life Insurance Company of North America, American Equity Investment Life, AVIVA, AXA Equitable, Jackson National Life Insurance Company, Lincoln Financial Group, MetLife, Nationwide Financial, New York Life, Pacific Life, Prudential Annuities, RiverSource Life Insurance, TIAA-CREF, and Transamerica.

The Information Requested

The second paragraph of Senator Warren's letter lays the foundation for her request. The paragraph reads:

A preliminary review by my staff reveals that annuity providers offer a vast range of perks—from cruises to international travel to iPads to diamond-encrusted "NFL Super Bowl Style" rings to cash and stock options—to entice sales of their products. I am concerned that these incentives present a conflict of interest for agents and financial advisers that could result in these agents providing inadequate advice about annuities to investors and selling products that may not meet the retirement investment needs of their buyers.

Senator Warren's specific request for information is near the end of her letter. The four components of her request are:

1. A list of all incentives—including cash awards, cruises or other vacations, electronics, jewelry, and any other items of value—that are awarded by your company to agents, brokers, FMOs [field marketing organizations], or other sellers or middlemen involved in sales of your annuity products.
2. Documents and information provided to agents, brokers, FMOs, or other sellers or middlemen involved in sales of your annuity products describing the incentives and the qualifications for earning those incentives.
3. Information on the number of each of these incentives awarded to agents, brokers, FMOs, or other sellers or middlemen involved in sales of your annuity products, and the total value of each of those incentives.
4. A copy of your company policies for disclosing and describing sales incentives and conflicts of interests to annuity purchasers. 

The ACLI Comment

Senator Warren's letter prompted the American Council of Life Insurers (ACLI) to issue a comment entitled "Comprehensive Regulations Protect Consumers' Interests In Annuity Sales." The ACLI comment describes "Product Content and Marketing Rules," "Sales Practices Requirements" including references to four model regulations promulgated by the National Association of Insurance Commissioners (NAIC), and "Federal Laws and Regulations." The ACLI comment does not mention the incentives that are at the heart of Senator Warren's investigation.

The NAIC Comment

When I saw Senator Warren's material and the ACLI comment on it, I asked the NAIC for a comment. In response, I obtained a short comment from Monica Lindeen. She is the president of the NAIC and the Montana commissioner of securities and insurance. The NAIC comment, like the ACLI comment, mentions various model laws, model regulations, and other materials, but does not mention the incentives that are at the heart of Senator Warren's investigation.

The DOL Proposed Rule

On February 23, 2015, President Barack Obama asked the U.S. Department of Labor (DOL) "to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests." On April 14, DOL issued a press release announcing a request for public comment on "a proposed rule that will protect 401(k) and IRA investors by mitigating the effect of conflicts of interest in the retirement investment marketplace." DOL also issued a "Fact Sheet" and other materials about the proposed rule. On April 20, DOL published the proposed rule in the Federal Register.

General Observations

The investigation launched by Senator Warren is long overdue. I agree with her that the widespread use of sales incentives is a serious problem. It is surprising that the insurance and securities regulators have not explored this area. It is disappointing, but understandable given the circumstances, that the vacuous comments by the ACLI and the NAIC merely call attention to existing rules and regulations without making any direct reference to the subject of Senator Warren's investigation. The comments therefore imply—incorrectly in my view—that there is no cause for concern because annuity sales activities are regulated. 

I am offering a complimentary 19-page PDF consisting of one of the five-page letters, the four pages of examples, the one-page press release, the three-page ACLI comment, the one-page NAIC comment, and the five-page "Fact Sheet" concerning the DOL proposed rule. Send an e-mail to jmbelth@gmail.com and ask for the Warren annuity incentives package.

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Blog: www.josephmbelth.com