Tuesday, June 28, 2016

No. 169: Cost-of-Insurance Increases—A Federal Judge Denies AXA Equitable Life's Outrageous Request for Secrecy

In No. 143 (posted February 15, 2016) I discussed a cost-of-insurance (COI) class action lawsuit filed February 1, 2016 against AXA Equitable Life Insurance Company. The original complaint, which I offered to my readers in No. 143, alleged breach of contract relating to AXA's singling out of certain policyholders for substantial COI increases. The case was assigned to U.S. District Judge Jesse M. Furman. In this follow-up I discuss important subsequent developments in the case. (See Brach Family Foundation v. AXA Equitable Life, U.S. District Court, Southern District of New York, Case No. 1:16-cv-740.)

The Amended Complaint
On May 2 the attorneys for Plaintiff Brach filed an amended complaint containing redacted (blacked out) sentences or parts of sentences in 12 of the 80 paragraphs. The same day a Brach attorney sent a letter to Judge Furman explaining that, pending the entry of a protective order, the parties had agreed to comply with a protective order AXA had drafted. A provision of the draft protective order required that all material designated as confidential discovery material be redacted. However, the Brach attorney said Brach's compliance with the draft protective order is not a stipulation to the terms of the draft protective order, and Brach believes that nothing in the amended complaint warrants redaction.

On May 3 Judge Furman issued an order temporarily allowing the unredacted version of the amended complaint to be filed under seal. He also ordered AXA to submit a letter by May 10 explaining why the proposed redactions are consistent with the presumption in favor of public access to judicial documents. He said he was inclined to allow some but not all the information to remain redacted. He also ordered the parties to appear for a May 16 telephone conference to address the issues.

On May 10 an AXA attorney submitted a letter to Judge Furman and attached a version of the amended complaint with fewer redactions. (That version of the amended complaint has not been made public, and I have not seen it.) The AXA attorney said the remaining redactions are "highly confidential business information, the public disclosure of which would place AXA at a competitive disadvantage."

On May 13 a Brach attorney submitted a letter to Judge Furman in advance of the May 16 telephone conference. The Brach attorney said "the Court should let putative class members and the interested public view and evaluate the Amended Complaint in its entirety."

On May 16, after the conference, Judge Furman issued an order denying altogether AXA's effort to seal the unredacted version of the amended complaint. He ordered Brach's attorney to place an unredacted version of the amended complaint in the public court file. He also attached to the order, thus placing in the public court file, the May 10 letter from the AXA attorney (but not the version of the amended complaint with fewer redactions) and the May 13 letter from the Brach attorney.

Later Developments
On May 27 AXA filed a motion to dismiss the amended complaint, together with documents in support of the motion. Presumably Brach will file a response to the motion, and AXA will file an answer to the response. Further developments, such as Judge Furman's ruling on the motion to dismiss, and perhaps rulings on class certification, remain to be seen.

The Redactions
By comparing the redacted and unredacted versions of the amended complaint, it is possible to see exactly what AXA wanted to keep secret. Here are four of the paragraphs that contained redactions. I show in boldface type the sentences and parts of sentences that AXA wanted to keep secret. My insertions are in brackets.

Paragraph 4: The size of the COI increase is extraordinary. AXA projects that the rate hike will increase its projected profits by approximately $500 million. The AXA COI increases range from approximately 25% to 70% as compared to prior COI charges. In its most recent SEC filing, AXA states that the COI increase will be larger than the increase it previously had anticipated, resulting in a $46 million increase to its net earnings—a figure that is in addition to the profits that management had initially assumed for the COI increase. [The "recent SEC filing" referred to is the 2015 10-K report filed March 18, 2016. The statement referred to is on page 39 of the report.]

Paragraph 26: First, there is no actuarially acceptable justification for increasing the COI rates on the selected group of policies—those with issue ages 70 and above and current face value amount of $1 million and above. Prior to the COI increase, AXA's mortality rate assumptions for any given insured were equal for a $900,000 and a $1 million face value policy. The COI increase, however, was not graded (i.e., gradually imposed across face-amount ranges) but applied in a step (i.e., those with [a] $1 million policy got a full increase, and those with a $900,000 policy got no increase), and thus the COI increase results in a $1 million policy becoming significantly more profitable to AXA (and more expensive to the COI rate hike victim) than a $900,000 policy, resulting in inequitable treatment of all policyholders of a given class.

Paragraph 50: AXA also claims that the increase was based on a change to its expectations of future "investment experience." The truth, however, is that the sensitivity of profits from investment income of the cash flows to AXA generated by these policies hit with the COI rate increase is trivial compared to the scale of the COI increases, such that alleged changes in mortality rates are clearly the dominant factor in the COI increase, and changes in investment income, if any, are a minor factor which on their own, would not justify the size and scale of the COI increase.

Paragraph 74: Prior to the COI increase, AXA alleges that it had a $500 million shortfall in future best estimate cash flows. AXA, however, claims that it repriced the program five times between 2004 and 2013, updating their internal mortality assumptions, with the first reset in 2007, without ever disclosing any shortfall to policy owners in the annual illustrations or to regulators. An alleged $500 million shortfall does not appear overnight. AXA has regularly updated its mortality assumptions and AXA knew about this alleged profitability shortfall for years, but unlawfully continued to use the original pricing through March 2016, and continued to provide illustrations and annual statements that were materially misleading and unlawfully more favorable than AXA's best estimate of pricing. [Italics in original.]

General Observations
It is outrageous for AXA to have tried to redact the amended complaint. With such redactions of sentences and parts of sentences it would have been impossible for a reader to understand what is being alleged in the amended complaint. Fortunately Judge Furman reached the correct conclusion by disallowing all AXA's proposed redactions.

Because of the significance of the developments in this case, I am offering readers the redacted version of the amended complaint and the unredacted version filed later. Only by comparing the two versions is it possible for readers to understand what AXA tried to keep secret and the significance of the redactions.

AXA has not yet filed a protective order for possible approval by Judge Furman. It remains to be seen whether AXA will make such a filing.

Those interested in the developments reported here might wish to look at No. 26 (posted January 29, 2014). There I described the unsealing of numerous documents in lawsuits against Phoenix Companies, Inc. The lawsuits involved COI increases, and a judge in the same court as the current case issued the order unsealing the documents.

Available Material
I am offering a complimentary 70-page PDF consisting of the 29-page redacted version of the amended complaint filed May 2, the 29-page unredacted version of the amended complaint filed May 16, the two-page letter submitted to Judge Furman by one of Brach's attorneys on May 2, the one-page order issued by the judge on May 3, and the nine-page order issued by the judge on May 16. The May 16 order includes the May 10 letter from an AXA attorney (but not the version of the amended complaint with fewer redactions) and the May 13 letter from a Brach attorney. Email jmbelth@gmail.com and ask for the June 2016 Brach/AXA package.