Tuesday, June 30, 2015

No. 107: Aviva, Athene, and Apollo Are Defendants in a RICO Lawsuit about Alleged Phony Reinsurance

On June 12, 2015, eight plaintiffs' attorneys filed a federal class action lawsuit on behalf of two individuals who purchased Aviva annuities in 2010. The elaborate 131-page complaint alleges violations of the Racketeer Influenced and Corrupt Organizations Act (RICO). The complaint further alleges that the defendant companies—Aviva, Athene, and Apollo—together with other companies and certain individuals, participated in an unlawful RICO enterprise involving phony reinsurance with affiliates. No specific amount of damages is mentioned in the complaint. (See Silva v. Aviva, U.S. District Court, Northern District of California, Case No. 5:15-cv-2665.)

Plaintiffs and Their Attorneys
The plaintiffs are Rachel Silva (a resident of California) and Don Hudson (a resident of Oklahoma). They are represented by Steve W. Berman, Jeff D. Friedman, and Sean R. Matt of Hagens Berman Sobol Shapiro LLP (Seattle); Francis J. Balint Jr. and Andrew S. Friedman of Bonnett Fairbourn Friedman & Balint PC (Phoenix); Chuck Crueger and Erin Dickinson of Hansen Reynolds Dickinson Crueger LLC (Milwaukee); and Ingrid M. Evans of Evans Law Firm Inc. (San Francisco).

Defendants and Other Participants
The defendants are Aviva plc (London, England), Athene Annuity and Life Co. (Iowa), Athene USA Corp. (Iowa), Athene Holding Ltd. (Bermuda), Athene Life Re Ltd. (Bermuda), Athene Asset Management LP (California), and Apollo Global Management LLC (Delaware).

The company participants—in addition to the defendants—identified in the complaint are Cure Life Ltd. (Bermuda), Global Atlantic Financial Group Ltd. (Bermuda), Accordia Life and Annuity Co. (Iowa), Tapioca View LLC (Delaware), Vermont special purpose financial captives Aviva Re USA Inc., Aviva Re USA II Inc., Aviva Re USA III Inc., Aviva Re USA IV Inc., Aviva Re USA V Inc., Aviva Re USA VI Inc., Iowa limited purpose subsidiaries Aviva Re Iowa Inc., Aviva Re Iowa II Inc., Cape Verity I Inc., Cape Verity II Inc., and Cape Verity III Inc.

The individual participants identified in the complaint are Leon Black, Mark Rowan, Joshua Harris, Mark Hammond, Christopher Littlefield, Thomas Godlasky, Michael Miller, Brenda Cushing, Richard Cohan, Guy Hudson Smith III, Erik Askelson, David Attaway, James Belardi, John Fowler, and Maureen Closson.

Paragraphs 537-540 on pages 110-111 of the complaint provide a summary of the allegations. Those paragraphs read:
537. To pull off the reinsurance shell game and purport to move liabilities off Aviva's balance sheet and otherwise give it the appearance of financial strength, Defendants had to create and operate [the Aviva Captives] as well as [the Aviva Affiliates]. Additionally, Defendants had to create and utilize the "unaffiliated" Accordia as well as [the Accordia Captives].
538. The special purpose financial captives, including the Aviva Captives, the Aviva Affiliates, and the Accordia Captives formed the heart of the scheme because their finances are not publicly disclosed under state law, and these entities enabled the RICO Enterprise's unlawful activity to violate statutory accounting requirements, hide liabilities, artificially inflate surplus and RBC [risk-based capital], and improperly pay dividends and fees while fraudulently misrepresenting the financial strength of Aviva in order to sell annuities at inflated prices.
539. Defendants' use of the Aviva Captives, the Aviva Affiliates, and the Accordia Captives made it easier to commit and conceal the RICO Enterprise's fraudulent activities and purpose, because it allowed the generation of phony reserve credits and RBC boosts through circular, non-economic reinsurance and modified coinsurance transactions between entities.
540. The decision to use these entities to misrepresent the true financial condition of Aviva not only facilitated but enabled the RICO Enterprise's unlawful activity; in particular, Aviva used the separately incorporated nature of these entities to perpetrate the fraudulent scheme and the acts of mail and wire fraud that were at the center of the scheme.
General Observations
The lawsuit is in its early stages. Although the names of the attorneys representing the defendants are not yet shown on the docket sheet, a case management conference is tentatively scheduled for September 15. Normally I do not discuss a case until a later stage. However, I mention the case now because it is important, it should be brought to public attention immediately, the plaintiffs' attorneys did not issue a press release about the case, and they have not yet responded to my efforts to speak with them.

The defendants' attorneys may respond initially with procedural matters. However, they may argue that everything done by the defendants and the other participants in the alleged RICO enterprise was in accordance with state laws drafted by the participants and enacted by friendly legislators, in accordance with state regulations drafted by the participants and adopted by friendly regulators, approved by friendly regulators, and signed off on by friendly accountants, actuaries, attorneys, auditors, consultants, company executives, and company directors.

The lawsuit has been referred to Magistrate Judge Paul Singh Grewal. On June 26, a plaintiffs' attorney consented to magistrate judge jurisdiction for all proceedings including trial and entry of final judgment rather than requesting reassignment to a district judge. A federal district judge is appointed for life by the President and confirmed by the Senate. A magistrate judge is appointed—usually for eight years—by district judges to assist district judges. It is puzzling that a case such as this one is to be handled exclusively by a magistrate judge.

Available Material
I am offering a complimentary 149-page PDF consisting of the 131-page complaint and 18 pages of exhibits. E-mail jmbelth@gmail.com and ask for the Silva/Aviva RICO complaint.

Also, I wrote about these matters in blog post nos. 44 (4/22/14), 66 (8/21/14), 71 (11/6/14), 72 (11/12/14), 73 (11/19/14), 93 (4/17/15), 94 (4/20/15), 99 (5/6/15), and 100 (5/11/15).


Wednesday, June 24, 2015

No. 106: Hank Greenberg's Pyrrhic Victory over the U.S. Government

On June 15, 2015, Judge Thomas C. Wheeler of the U.S. Court of Federal Claims handed down an Opinion and Order ("Opinion") in a lawsuit related to the federal government's bailout of American International Group, Inc. (AIG) in September 2008. The lawsuit was filed by Starr International Co., Inc., a large AIG shareholder. Starr is headed by Maurice R. ("Hank") Greenberg, who was AIG's chief executive officer from 1968 until his retirement in March 2005 during an investigation by then New York Attorney General Eliot Spitzer and then New York Superintendent of Insurance Howard D. Mills, III. The Opinion is a Pyrrhic victory for Greenberg because, although Judge Wheeler ruled in Starr's favor on the "illegal exaction" claim, he ruled that AIG shareholders are entitled to zero damages.

On November 21, 2011, Starr filed two lawsuits against the federal government. One was the claims court lawsuit mentioned above. The other was a district court lawsuit against the Federal Reserve Bank of New York (FRBNY). The latter case was assigned to Judge Paul A. Engelmayer. The government filed motions to dismiss both lawsuits. Judge Wheeler granted the motion in part but denied it in significant part. Judge Engelmayer granted the motion in its entirety. (See Starr v. U.S., U.S. Court of Federal Claims, Case No. 1-11-cv-799, and Starr v. FRBNY, U.S. District Court, Southern District of New York, Case No. 1:11-cv-8422.)

Excerpts from the Opinion
Judge Wheeler's Opinion consists of 75 single-spaced pages. Here are six excerpts from the ten-page introductory section, with the page number indicated at the beginning of each excerpt:
Page 2: On the weekend of September 13-14, 2008, known in the financial world as "Lehman Weekend" because of the impending failure of Lehman Brothers, U.S. Government officials feared that the nation's and the world's economies were on the brink of a monumental collapse even larger than the Great Depression of the 1930s. While the Government frantically kept abreast of economic indicators on all fronts, the leaders at the Federal Reserve Board, the Federal Reserve Bank of New York, and the U.S. Treasury Department began focusing in particular on AIG's quickly deteriorating liquidity condition. AIG had grown to become a gigantic world insurance conglomerate, and its Financial Products Division was tied through transactions with most of the leading global financial institutions. The prognosis on Lehman Weekend was that AIG, without an immediate and massive cash infusion, would face bankruptcy by the following Tuesday, September 16, 2008. AIG's failure likely would have caused a rapid and catastrophic domino effect on a worldwide scale.
Page 2: On that following Tuesday [September 16, 2008], after AIG and the Government had explored other possible avenues of assistance, the Federal Reserve Board of Governors formally approved a "term sheet" that would provide an $85 billion loan facility to AIG. This sizable loan would keep AIG afloat and avoid bankruptcy, but the punitive terms of the loan were unprecedented and triggered this lawsuit. Operating as a monopolistic lender of last resort, the Board of Governors imposed a 12 percent interest rate on AIG, much higher than the 3.25 to 3.5 percent interest rates offered to other troubled financial institutions such as Citibank and Morgan Stanley. Moreover, the Board of Governors imposed a draconian requirement to take 79.9 percent equity ownership in AIG as a condition of the loan. Although it is common in corporate lending for a borrower to post its assets as collateral for a loan, here, the 79.9 percent equity taking of AIG ownership was much different. More than just collateral, the Government would retain its ownership interest in AIG even after AIG had repaid the loan.
Page 3: The main issues in the case are: (1) whether the Federal Reserve Bank of New York possessed the legal authority to acquire a borrower's equity when making a loan under Section 13(3) of the Federal Reserve Act...; and (2) whether there could legally be a taking without just compensation of AIG's equity under the Fifth Amendment where AIG's Board of Directors voted on September 16, 2008 to accept the Government's proposed terms. If Starr prevails on either or both of these questions of liability, the Court must also determine what damages should be awarded to the plaintiff shareholders...
Page 7: Having considered the entire record, the Court finds in Starr's favor on the illegal exaction claim. With the approval of the Board of Governors, the Federal Reserve Bank of New York had the authority to serve as a lender of last resort under Section 13(3) of the Federal Reserve Act in a time of "unusual and exigent circumstances,"... However, Section 13(3) did not authorize the Federal Reserve Bank to acquire a borrower's equity as consideration for the loan...
Page 8: A ruling in Starr's favor on the illegal exaction claim, finding that the Government's takeover of AIG was unauthorized, means that Starr's Fifth Amendment taking claim necessarily must fail. If the Government's actions were not authorized, there can be no Fifth Amendment taking claim...
Page 10: ...The end point for this case is that, however harshly or improperly the Government acted in nationalizing AIG, it saved AIG from bankruptcy. Therefore, application of the economic loss doctrine results in damages to the shareholders of zero.
Outline of the Opinion
After the introductory section, the remainder of the Opinion consists of seven sections and an "Appendix of Relevant Entities and Persons." Here are the titles of the sections and subsections:

  Findings of Fact 
The September 2008 Financial Crisis 
AIG's Financial Condition in 2008
September 13-14, 2008"Lehman Weekend" 
September 16, 2008 Loan and Term Sheet 
Development of the September 22, 2008 Credit Agreement 
The Government's Control of AIG
The Creation of a Trust
The Restructuring of AIG's Loan in November 2008
The Walker Lawsuit
Maiden Lane II and III
Reverse Stock Split
The Government's Common Stock
Treatment of [five] Other Distressed Financial Entities 
Expert Testimony [four for each party]
AIG Epilogue
History of Proceedings
JurisdictionSection 13(3) of the Federal Reserve Act
Legal Analysis
The Illegal Exaction Claim
The Fifth Amendment Taking Claim
Summary of Starr's Damages Claim
Economic Loss Analysis
Defendant's Procedural Defense of Waiver

Parties' Statements
Starr issued a statement saying in part it was "pleased that the trial court found that the Federal Reserve acted illegally, discriminatorily, and for improper political purposes in requiring AIG, and AIG alone, to surrender 80% of their equity as compensation for a Federal Reserve loan." Starr also said it "will appeal the ruling that there is no remedy for the Government's illegal conduct, and ask the court of appeals to confirm that the Government is not entitled to keep billions of dollars of citizens' money in its pocket."

The Federal Reserve issued a statement saying in part it "strongly believes that its actions in the AIG rescue during the height of the financial crisis in 2008 were legal, proper and effective." The Federal Reserve did not indicate whether it will appeal the illegal exaction ruling.

Press Coverage
The Opinion was the subject of page-one articles the next day in The New York Times, The Wall Street Journal, and other media outlets. The rush to report about such a complex ruling can produce errors. For example, a Bestwire article in the late afternoon of the day the Opinion was filed contained a significant error. The fourth sentence of the article said Judge Wheeler "ruled the takeover constituted an illegal taking without just compensation that violated the Fifth Amendment of the U.S. Constitution." He did not make such a ruling. The excerpt from page 8 of the Opinion, as quoted above, shows he ruled that "Starr's Fifth Amendment taking claim necessarily must fail." Subsequent Bestwire articles repeated the error by citing the original incorrect statement.

General Observations
I wrote about the two Starr lawsuits against the federal government in the April 2013 issue of The Insurance Forum. There I expressed agreement with observers who characterized the lawsuits as an attempt to rewrite the terms of the AIG rescue package. I still hold that view.

Several points should be kept in mind. First, during those fateful days in September 2008, those who devised the AIG rescue package had only a few hours to work with, and many other matters were demanding their attention at that hectic time.

Second, Judge Wheeler had nearly four years to study the matter (November 2011 to June 2015). That period consisted of nearly three years of pre-trial filings, a 37-day bench trial spanning two months, a transcript of nearly 9,000 pages, more than 1,600 exhibits, testimony of 36 witnesses (the most prominent were Ben Bernanke, Timothy Geithner, and Henry Paulson), and almost a year of post-trial filings and the writing of the Opinion.

Third, there was no time to seek shareholder approval of the rescue package. Even if there had been time, it is frightening to contemplate what might have happened if the shareholders, led by Greenberg, had voted it down.

Available Material
I am offering a complimentary 81-page PDF consisting of Judge Wheeler's 75-page Opinion, Starr's one-page statement, the Federal Reserve's one-page statement, and the four-page article from the April 2013 issue of The Insurance Forum. E-mail jmbelth@gmail.com and ask for the Wheeler/Starr/US package.


Monday, June 22, 2015

No. 104R: Guardian Life Rectifies an Unsuitable Rollover (revised)

[Note: In this revision, Scott Witt is correctly identified as a fee-only insurance advisor. In the original version, I identified him as a fee-only financial advisor. I regret the error.]

In August 2013, Beatrice (not her real name), a 78-year-old resident of New York State, rolled over her retirement accumulation at College Retirement Equities Fund (CREF) into an individual retirement account (IRA) containing a variable annuity issued by Guardian Insurance & Annuity Company, a subsidiary of Guardian Life Insurance Company of America. The rollover was unsuitable. Guardian eventually rectified the situation to Beatrice's satisfaction.

Edgar Montenegro
Edgar Montenegro (CRD# 4768006) is a registered representative of Park Avenue Securities, a Guardian subsidiary. He sold Beatrice on the idea of using her CREF accumulation to buy the Guardian annuity.

Scott Witt
Scott Witt is a Fellow of the Society of Actuaries, a Member of the American Academy of Actuaries, a fee-only insurance advisor, and a Financial Services Affiliate of the National Association of Personal Financial Advisors. His website is at www.wittactuarialservices.com.

Several months after the rollover, Beatrice sought Witt's advice. In March 2015, Witt posted an article about the case on his website. The article, written before the case was resolved, was entitled "An Embarrassing Variable Annuity Sale—and Refusal to Make Amends." Witt did not identify Beatrice, Montenegro, or the companies.

The CREF Accumulation
CREF and its affiliate, Teachers Insurance and Annuity Association of America (TIAA), cater mainly to members of the academic community. Beatrice's retirement accumulation with CREF was $325,000. According to Witt, CREF's annual expense charges were 41 basis points. Because a basis point is one hundredth of a percentage point, the expense charges were less than one half of 1 percent.

Problems with the Rollover
In his article, Witt cited five problems with the rollover. First, a benefit of a variable annuity is that investment earnings are deferred for income tax purposes. However, Beatrice already had that benefit with her CREF accumulation. Witt considers it unnecessary and inappropriate to place a tax deferral vehicle inside an IRA, which is a tax deferral vehicle.

Second, according to Witt, the Guardian annuity imposed 110 basis points of annual mortality and expense charges, 75 basis points of annual investment expense charges, and 20 basis points of annual administrative expense charges. The sum of 205 basis points far exceeded the 41 basis points for the CREF accumulation.

Third, the Guardian annuity included a death benefit at an annual cost of 50 basis points. According to Witt, Beatrice did not need the death benefit.

Fourth, the Guardian annuity included a rider guaranteeing that the eventual lifetime income from the annuity would be enhanced significantly if Beatrice avoided making withdrawals for ten years. The annual cost of the enhanced lifetime income guarantee was 115 basis points.

Fifth, Witt cited "a mistake in the purchase paperwork." Beatrice applied to have $200,000 of her $325,000 CREF accumulation rolled into the Guardian annuity. However, when the annuity was issued, the entire $325,000 was rolled into the annuity. Witt said "it's unclear which financial institution was responsible but it clearly was not Beatrice's mistake." Witt told me CREF informed Beatrice that there were some unauthorized telephone calls regarding her account around the time of the rollover. The "mistake" caused Beatrice to forfeit the enhanced lifetime income guarantee because she had to take required minimum distributions from the Guardian annuity to avoid draconian income tax penalties.

Complaint and Rejection
On July 26, 2014, Beatrice, aided by Witt, registered a complaint with Guardian. She explained why the rollover was unsuitable and asked for a full refund without the surrender charge of about $31,000.

On September 10, 2014, Judy Cummins, a complaint analyst at Park Avenue Securities, rejected the complaint in a four-page letter. She mentioned such things as the information in the prospectus, Beatrice's statement that she had read the prospectus, her agreement to the contract terms, her failure to ask for a full refund during the ten-day free look, and her statement that she would not need access to the funds. According to Cummins, Montenegro said he spoke with Beatrice after the $325,000 rollover (instead of the originally requested $200,000 rollover) and Beatrice agreed to it. Cummins said Park Avenue Securities "found no evidence of impropriety on the part of your Representative" and "We therefore respectfully reject your request for remuneration."

My Letter to Guardian
I knew about Beatrice before Witt posted his article, because he had told me about the case. I felt that Guardian would not have rejected the complaint if the company had conducted a thorough investigation.

On April 24, 2015, I sent a two-page letter by regular mail to Deanna Mulligan, president and chief executive officer of Guardian. I said I was going to post an article about the case on my blog. I said I would not identify Beatrice, but would indicate her age and say she is a resident of New York State. I asked Guardian for a statement, suitable for inclusion in the article, explaining how Guardian will restore Beatrice to her original financial position, or, alternatively, why Guardian will not restore her to her original financial position. I sent copies of the letter to Beatrice, Montenegro, Cummins, Witt, and Roger Ferguson, chief executive officer of TIAA-CREF. I requested the statement by May 11.

Guardian's Response
Jeanette Volpi is head of external communications at Guardian. On May 8, I received this statement from her by e-mail:
Guardian is legally constrained by federal privacy laws, as well as the Company's privacy policy, from providing client information publicly, but can confirm we are working directly with the client identified to address her concerns.
Guardian conducted an investigation and resolved the matter to Beatrice's satisfaction. The settlement terms are confidential.

General Observations
It is unfortunate that the rollover ever took place, and that Guardian initially rejected Beatrice's complaint. However, the company is to be commended for eventually doing the right thing.


Friday, June 19, 2015

No. 105: Phoenix Changes Its Independent Auditor

On June 11, 2015, Phoenix Companies, Inc. filed an 8-K (material event) report disclosing that it changed its independent registered public accounting firm. Phoenix dismissed PricewaterhouseCoopers LLP (PwC) and appointed KPMG LLP, effective June 11. Normally an auditor change at a large public company is major news, but in this case the change appears to have slipped under the media radar.

10-K Report for 2014
On March 31, 2015, Phoenix filed its 10-K report for 2014. Included was PwC's independent auditor report dated March 30. PwC expressed the opinion that the financial statements present fairly the financial position of the company in conformity with generally accepted accounting principles. PwC also expressed the opinion that the company did not maintain effective control over financial reporting in several areas.

Proxy Statement
On April 2, 2015, Phoenix filed its proxy statement announcing the annual shareholder meeting scheduled for May 14. The board recommended that the shareholders ratify the appointment of PwC as the independent registered public accounting firm for fiscal year 2015.

Audit Committee Report
The proxy statement included the report of the audit committee of the Phoenix board of directors. The audit committee report said:
Notwithstanding the Audit Committee's appointment of PwC for fiscal 2015 and the outcome of the shareholder vote on this proposal, the Audit Committee has authorized and directed management to engage in a request for proposal process to identify an independent registered public accounting firm for potential appointment to audit and report on our consolidated financial statements for fiscal year 2015... PwC has indicated to management its intention to participate in this request for proposal process. As a result of the request for proposal process, PwC may remain our independent registered public accounting firm for 2015 or another independent registered public accounting firm may be selected. The determination by the Audit Committee to retain PwC or appoint another independent registered public accounting firm is expected to be made subsequent to the 2015 Annual Meeting.
The audit committee said audit costs in 2014 and 2013 were $52.3 million and $58.3 million, respectively. Those amounts included audit fees of $33.8 million and $24.7 million, respectively, and additional fees associated with the restatement of financial statements for the periods included in the 10-K report for 2012.

Shareholder Meeting
On May 15, Phoenix filed an 8-K report about the shareholder meeting. The company said 3,408,701 shareholders voted for ratification of the appointment of PwC, 793,015 voted against, and 8,673 abstained.

8-K Report Filed June 11
Phoenix said in the 8-K report filed June 11 that there were no "disagreements" or "reportable events," as those terms are defined in the regulations. In a news release attached to the 8-K as an exhibit, the company said: "The change was not the result of any disagreement between the company and PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure." Also. as indicated in the audit committee report, PwC participated in the request for proposal process.

General Observations
It seems clear that PwC did not resign and was not fired. I believe that the audit committee's request for proposal process and subsequent auditor change grew out of cost concerns.

Available Material
I am offering a complimentary 15-page PDF consisting of three items: the 3-page independent auditor's report by PwC dated March 30; the 4-page audit committee report included in the April 2 proxy statement; and the 8-page 8-K report dated June 11, including its two exhibits. E-mail jmbelth@gmail.com and ask for the Phoenix auditor change package.


Monday, June 15, 2015

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.