Wednesday, January 29, 2014

No. 26: The Unsealing of Court Documents Relating to Phoenix's Cost-of-Insurance Increases

A federal judge recently ordered the unsealing of many court documents in several lawsuits over cost-of-insurance (COI) increases imposed on certain policyholders by Phoenix Life Insurance Company and its affiliate, PHL Variable Insurance Company (collectively, "Phoenix"). I have been trying for a long time, with little success, to obtain various documents under state open records laws. Now, at last, many of the documents are in the public domain.

In 2010, Phoenix significantly increased COI charges on universal life policies of the type used in stranger-originated life insurance (STOLI) arrangements. To accomplish the increase, Phoenix created a separate class consisting of policies with face amounts of $1 million and up issued to insureds aged 68 and up. STOLI investors invariably pay as little premium as possible. Consequently, the policies do not develop any accumulation value. In 2011, after an investigation that arose from complaints by STOLI investors, what is now the New York Department of Financial Services directed Phoenix to rescind the 2010 increases on policies issued in New York, credit the refunds to the policies with interest, and refrain in the future from basing COI charges on the ratio of accumulation value to face amount (the "funding ratio"). Phoenix did as directed, and then instituted fresh increases (the "2011 increases") on New York policies using a different methodology. Phoenix maintained the 2010 increases on policies issued in other states.

STOLI investors filed several lawsuits in federal courts. Also, in addition to the New York investigation, regulators in Wisconsin and California initiated investigations after receiving complaints from STOLI investors. I obtained some documents from Wisconsin pursuant to its open records law. However, I was frustrated by sealed documents in the lawsuits, a denial of my open records request to California, and what is now a 17-month delay on my August 2012 open records request to New York. I wrote about Phoenix's COI increases in the October 2012, December 2012, and November 2013 issues of The Insurance Forum, and in blog post No. 9.

The Unsealing Order
U.S. District Judge Colleen McMahon of the Southern District of New York is handling four of the lawsuits. Until recently, the parties filed many documents under seal pursuant to protective orders. The cases are Fleisher v. Phoenix Life (11-cv-8405), Tiger Capital v. PHL (12-cv-2939), and two U.S. Bank N.A. v. PHL cases (12-cv-6811 and 13-cv-1580).

On January 15, 2014, Judge McMahon ordered that one category of material and one exhibit should remain under seal. She also said:
All other material filed in support of or in opposition to the pending motions for summary judgment must be publicly filed. Defendant's [Phoenix's] argument for why these materials—which consist almost entirely of outdated business information from more than five years ago—should be filed under seal is utterly unpersuasive.
Appropriate filings shall be made within three business days. The Clerk of the Court shall remove ALL pending motions (whether noticed motions or letter motions) seeking permission to file materials under seal from the court's list of outstanding motions. This constitutes the decision and order of the court.
The Unsealed Documents
A few of the newly unsealed documents are discussed here. They are listed chronologically. I edited some direct quotes for spelling, grammar, consistency, and readability. Brackets denote my comments.

New York Letter to Phoenix
On September 6, 2011, Michael Maffei, chief of the life bureau in the New York department, wrote a three-page letter to Kathleen A. McGah, vice president and counsel at Phoenix. He directed the company to rescind the 2010 increases, credit the refunds to the policies with interest, and refrain in the future from basing COI charges on the funding ratio. I obtained this letter earlier, and discussed it in blog post No. 9.

Phoenix Letter to New York
On November 15, 2011, McGah wrote an 11-page "inadmissible, confidential settlement communication" to Maffei in response to his September 6 letter. She explained why Phoenix believes that the 2010 increases did not violate New York law and were permitted by the policies. "However, to avoid the costs and uncertainty of administrative or adjudicatory action," Phoenix offered to "undo" the 2010 increases, credit the refunds to the policies with interest, and implement the 2011 increases as described in an October 21, 2011 letter. I have not seen the October 21 letter, but I saw an earlier letter saying the 2011 increases would be "applied as a level percentage to the current COI rate."

Another New York Letter to Phoenix
On November 16, 2011, Maffei wrote a one-page letter to McGah. He acknowledged that Phoenix does not agree with the department's September 6 determination. "Without prejudice to the Department's position," he said the department accepts the plan described in McGah's November 15 letter, and "we are closing our file."

Phoenix "Talking Points"
Phoenix prepared a five-page "Talking Points and Q&A" dated November 18, 2011 and effective January 1, 2012. Here are some of the talking points:
  • Phoenix resolved the 2010 increases on a small number of policies and is moving forward with a different methodology that the New York Department finds acceptable. 
  • Phoenix is reversing the 2010 increases for certain New York policies and applying different increases beginning January 1, 2012. [I call the "different increases" the "2011 increases" because Phoenix sent notification letters to policyholders in September 2011.] 
  • Phoenix continues to believe that the original methodology for the 2010 increases is consistent with the policy provisions, actuarially sound, fair and equitable, and in compliance with state laws and regulations. [Phoenix's position differs totally from that of insurance regulators in New York, Wisconsin, and California.] 
  • The change applies only to policies issued by Phoenix Life (sold in New York). It does not apply to policies issued by PHL (sold in other states). 
  • The 2011 increases will not vary based on the ratio of accumulation value to face amount but rather will apply as a level percentage to all policies subject to increases. [Prior to the recent unsealing of documents, I had not seen any reference to the methodology for the 2011 increases.]
Phoenix Letter to Wisconsin
On August 1, 2012, McGah wrote an eight-page letter to Janelle V. Dvorak, an insurance examiner in the Wisconsin Office of the Commissioner of Insurance. The letter was in response to a July 9, 2012 letter from Dvorak to Robert P. Mallick, second vice president and counsel at Phoenix.

I have not seen the Dvorak letter. However, the McGah letter describes the Dvorak letter, provides background and analysis, lists six questions Dvorak asked, and answers the questions. I think this sentence in the McGah letter warrants close attention:
PHL's use of the relationship between accumulation value and face amount (i.e., the net amount at risk) under a policy was in accordance with policy terms, as policy form 05PAUL identified "Net Amount at Risk" as a factor in determining the COI rates. ["05PAUL" is the "Phoenix Accumulator Universal Life" policy form that was introduced in 2005.]
The net amount at risk is the face amount minus the accumulation value, and the COI charge is the net amount at risk multiplied by the COI rate. However, that "relationship" is not the one Phoenix used in the 2010 increases. Rather, Phoenix based the 2010 increases on the ratio of the accumulation value to the face amount.

Wisconsin Letter to Phoenix
On December 4, 2012, Robin Jacobs, an attorney in the Wisconsin commissioner's office, wrote a three-page letter to McGah explaining why the 2010 increases are "inconsistent with Wisconsin insurance statutes and regulations, as both the policy and the advertising materials fail to sufficiently inform the consumer that actual premiums paid will impact PHL's charge for COI." Jacobs "requests" that Phoenix rescind the COI increase, credit the refunds to the policies, and refrain from imposing future increases that are inconsistent with Wisconsin insurance laws. Jacobs does not use the word "demands," and the word "requests" in the letter is underlined by hand, presumably by someone at Phoenix. As I reported in the November 2013 issue of The Insurance Forum, Phoenix denied the allegations and did not rescind the increases on Wisconsin policies. Wisconsin began an administrative proceeding. The administrative law judge ordered all pleadings to be filed by November 11, 2013, and scheduled a two-day hearing for March 24-25, 2014.

California Letter to Phoenix
On June 21, 2013, Fernando De La Merced, a senior insurance compliance officer in the California Department of Insurance, wrote a two-page letter to Mallick. De La Merced said a complaint the department had received "is justified because the COI rate increase is unfairly discriminatory in violation of California Insurance Code section 790.03f" and "the rate increase violates the express terms of the 05PAUL policy." De La Merced said Phoenix should rescind the increases and refrain from using the funding ratio in determining COI charges. Phoenix disagreed with the findings and did not rescind the increases on California policies. The department took no further action.

The Stern Report
On September 16, 2013, Larry N. Stern, FSA, MAAA, who was retained by the plaintiffs, submitted an 82-page "Expert Report." Here are two excerpts from the "Conclusions" section:
The methods used to determine the group of policies subjected to the COI rate increases, the basis for the need for the COI rate increases, and the methodology for imposing those COI rate increases were not "actuarially sound and fair"--words often used by Phoenix in communications internally and externally to regulators and policyholders. Since the entire block of PAUL policies exhibited different premium patterns from what Phoenix claimed was anticipated in original pricing, Phoenix should not have singled out the policies it subjected to the COI rate increases....
The COI rate increases were discriminatory and not applied uniformly for all insureds in the same class. The definition of "class" was not dependent on factors at issue but rather based on funding characteristics of policyholder behavior after issue. For the 2010 COI rate increases an individual policyholder could avoid being subjected to the COI rate increase by paying more premium. Thus at one point the individual was a member of the "class" and the next moment was not a member of the "class." The 2011 COI rate increases were targeted at those policyholders that were minimally funding, even though the policies had been designed for, and designed to be profitable in, the minimally-funding market and all policyholders had been granted the freedom under the policy to fund minimally. The use of the threshold method to determine which policy would experience a COI rate increase was discriminatory because the COI rate increase was not applied in a uniform manner to all insureds in the same class....
The Stern Rebuttal Report
On October 23, 2013, Stern submitted an eight-page "Rebuttal Expert Report" in response to an expert report by Douglas A. French, FSA, MAAA. I have not seen the report by French, who presumably was retained by the defendants.

Recently unsealed documents show that, for several years prior to the 2010 increases, Phoenix became increasingly concerned about the lack of profitability on universal life policies of $1 million and up issued to insureds aged 68 and up. STOLI investors invariably pay the minimum premiums necessary to cover mortality and expense charges. The policies therefore develop no accumulation value and have a zero funding ratio. That approach is called "ART funding" because universal life policies are thereby transformed into annual renewable term policies.

In 2010, Phoenix split the class of universal life policies, created a separate class of large policies issued on elderly insureds, and increased the COI charges substantially on the policies in the separate class. In 2011, in response to a demand by the New York department, Phoenix rescinded the increases for policies issued in New York, obtained the department's approval of 2011 increases using a different methodology, and maintained the 2010 increases on policies in other states despite findings by California and Wisconsin regulators that the 2010 increases were improper.

I am not surprised that regulators in New York, Wisconsin, and California found the 2010 increases improper. However, I am surprised that the New York department approved the 2011 increases. In my opinion, the 2010 increases and the 2011 increases are improper, because a company should not be allowed to split a class for pricing purposes years after the class is established.

It remains to be seen how Judge McMahon will rule on the parties' motions for summary judgment and what appeals arise from her rulings. I think the cases are far from resolution.