Saturday, February 15, 2014

No. 31: Phoenix Life's Legal Expenses

Over the past few years, I have written several articles about the extensive litigation involving the cost-of-insurance increases imposed by the operating subsidiaries of The Phoenix Companies, Inc. (NYSE:PNX) on the owners of universal life policies of the type used in stranger-originated life insurance (STOLI) transactions, as well as about Phoenix's many lawsuits seeking rescission of STOLI policies. Recently I began to wonder about how much the company pays to outside legal firms.

A source of such information is Schedule J in the New York Supplement to the statutory annual statement blank promulgated by the National Association of Insurance Commissioners (NAIC). The schedule is described as follows:
Showing all legal expenses paid during the year, other than the salaries of officers or employees. List individually all items of $500 or more.
For many years, Schedule J was in the NAIC's uniform annual statement blank, but it is one of several schedules the NAIC eliminated from the blank in recent years. Another schedule removed from the blank was Schedule K, which disclosed lobbying expenses.

Still another schedule removed from the NAIC blank, and from which for many years I obtained executive compensation data for my annual tabulations, was Schedule G. It was removed from the blank in 1986. NAIC officials with whom I discussed the matter at the time acknowledged the extensive public interest in the data, but said the data did not serve any useful regulatory purpose. (See "More Secrecy from the NAIC" in the January 1987 issue of The Insurance Forum.)

The New York State Department of Financial Services still believes that such information should be available to the public. For that reason, many of the schedules remain part of the New York Supplement.

Phoenix Life
The 2013 Schedule J will be available after March 1, 2014, when the 2013 statements are filed. Meanwhile, I obtained the 2012 Schedule J for Phoenix Life Insurance Company. The payments shown in the schedule totaled $20.3 million, of which $16.5 million, or 81 percent, went to five prominent law firms:

Edison McDowell & Hetherington
DeBevoise & Plimpton
Day Pitney
Dorsey & Whitney

There is no Schedule J for PHL Variable Insurance Company, an affiliate of Phoenix Life, because PHL is not licensed in New York. Since PHL is domiciled in Connecticut, I asked the Connecticut Insurance Department whether it has any breakdown of legal expenses incurred by PHL along the lines of the old Schedule J. A spokesperson said the department did not have such information. Based on other information in PHL's 2012 annual statement, I think it is likely the amounts paid by PHL to outside law firms are smaller than the amounts paid by Phoenix Life.