Wednesday, May 16, 2018

No. 266: Phoenix's Cost-of-Insurance Increases—A Pair of New Lawsuits

Phoenix Companies, Inc. (Phoenix) was a publicly owned company with shares traded on the New York Stock Exchange. In June 2016 Nassau Reinsurance Group Holdings, L.P. (Nassau), a private equity firm based in New York City, acquired Phoenix, which became a privately owned company. PHL Variable Life Insurance Company (PHL) and Phoenix Life Insurance Company (PLIC) are Phoenix subsidiaries.

Over the years Phoenix and its subsidiaries were defendants in many lawsuits relating to cost-of-insurance (COI) increases on Phoenix Accumulator Universal Life (PAUL) policies. They were large policies often used in stranger-originated life insurance (STOLI) arrangements. All the lawsuits were settled.

For further background on Phoenix's litigation relating to COI increases, I suggest readers review my article in the November 2013 issue of The Insurance Forum (offered in the complimentary package mentioned at the end of this post). I also suggest readers review my No. 26 (January 29, 2014) found here, and my No. 103 (June 15, 2015) found here.

The Fan Lawsuit
On February 13. 2018, Derek Fan and Robert Putz filed a class action lawsuit against PLIC, Nassau, and PHL. On May 1 the plaintiffs filed an amended complaint. Here are four paragraphs (lightly edited) from the "Nature of the Action" section of the amended complaint:
2. This case arises from Defendants' breach of express and implied contractual obligations contained in Phoenix's universal life insurance policies and whole life policies.
4. Plaintiff Fan and the other universal life policyholders in the proposed class purchased these universal life policies so that they and their families would be protected in the event that the policyholder died. However, beginning in 2017, Defendants PHL and Nassau suddenly and unilaterally began increasing the cost of insurance charged to universal life policyholders and began withdrawing those costs from the cash value of the universal life policies of Plaintiff Fan and the Class, falsely stating the increases were permitted by the terms of the policies.
8. As described in detail below, Defendants' conduct is unlawful. While the universal life policies permit PHL and Nassau to adjust the COI rates periodically, they allow PHL and Nassau to do so based only on certain specified factors and they prevent those Defendants from changing the rates to recoup prior losses. As numerous courts have recognized, insurers are legally prohibited from basing COI increases on anything other than the factors specified in the policies.
9. Despite their representations to policyholders, Defendants' true reasons for imposing the drastic increases were to: (a) subsidize PLIC's cost of meeting its interest rate guarantees under the policies; (b) recoup past losses in violation of the terms of the policies; (c) induce policy terminations by policyholders; and (d) allow Defendant Nassau to recoup its costs for its 2016 acquisition of PLIC and PHL (and other Phoenix-related businesses) and the capital contributions that Nassau made to strengthen the financial condition of the Phoenix-related businesses.
The Advance Trust Lawsuit
On April 19, 2018, Advance Trust & Life Escrow Services (Waco, TX) filed a class action lawsuit against PHL. Advance Trust is suing in its capacity as nominee of the Life Partners Position Holder Trust, which owns eleven PAUL policies with a combined face amount of $43 million. Here are the first four paragraphs (lightly edited) from the "Nature of the Action" section of the complaint:
1. This is a class action brought on behalf of Plaintiff and similarly situated owners of life insurance policies issued by PHL. Plaintiff seeks to represent a class of PHL policyholders who are being subjected to an unlawful and excessive COI increase by PHL in violation of their insurance policies.
2. This COI increase represents the newest attempt by PHL to financially abuse its policyholders and induce lapses. PHL and its New York sister company PLIC first implemented a COI increase in 2010 on a subset of PAUL policies. The New York Department of Financial Services, California Department of Insurance, and Office of the Commissioner of Insurance of Wisconsin concluded that the 2010 increase was illegal.
3. Undeterred, PHL and PLIC then announced a second COI increase in 2011, also on a subset of PAUL policies. A class action lawsuit was filed by plaintiffs represented by the undersigned law firm, after which PHL and PLIC ultimately settled for more than $130 million in monetary and non-monetary benefits. Among the prospective relief agreed to by PHL and PLIC was a COI rate increase freeze, in which PHL and PLIC agreed not to increase the COI rate schedule any further on class members through and including December 31, 2020. The release in that settlement specifically carved out and "does not include any future COI rate adjustments assessed by" PHL.
4. In June 2016, PHL and PLIC were sold to a private equity firm, Nassau, with the immediate priority of "improving the company's profitability." Fourteen months later, in August 2017, PHL and PLIC sent cryptic letters to policyholders notifying them of a new, third COI rate increase on "certain PAUL and Phoenix Estate Legacy policies," including the prior settlement class. The amount of the new COI rate increase and the actuarial justification for it were not disclosed. PHL disclosed only that "There will be an overall increase to cost of insurance rates, as well as progressive increases to cost of insurance rates beginning when an insured reaches age 71 thorough age 85." [Blogger's note: The August 21, 2017 notification letter is in the complimentary package offered at the end of this post.]
The Judge
The Fan and Advance Trust cases are related, and both have been assigned to Senior U.S. District Judge Paul A. Crotty. President George W. Bush nominated him in February 2005, and the Senate confirmed him in April 2005. He assumed senior status in August 2015. (See Fan v. PLIC and Advance Trust v. PHL, U.S. District Court, Southern District of New York, Case Nos. 1:18-cv-1288 and 1:18-cv-3444.)

The Life Partners Connection
Life Partners, Inc. (Waco, TX) was for many years an intermediary in the secondary market for life insurance policies and the primary operating subsidiary of Life Partners Holdings, Inc. (LPHI). Although LPHI shares traded publicly on NASDAQ, the company was totally controlled by Brian D. Pardo, its chief executive officer, because he owned a majority of the outstanding shares. The company's main business was acquiring policies in the secondary market and reselling to investors fractional interests in those policies.

In January 2012 the Securities and Exchange Commission (SEC) filed a civil lawsuit in federal court against LPHI, Pardo, and two other officers alleging civil violations of federal securities laws and regulations. The SEC later dismissed the charges against one of the two other officers.

In January 2014 the case went to trial. The jury found LPHI, Pardo, and one other officer guilty of some and not guilty of other civil violations of federal securities laws and regulations.

In December 2014 the federal district court judge issued an order imposing huge civil monetary penalties against LPHI, Pardo, and one other officer. The penalty imposed against LPHI was more than twice the company's total assets, prompting me to refer to the penalty as a "death sentence" for the company.

In January 2015 LPHI filed for protection under Chapter 11 of the federal bankruptcy law. Following complex and lengthy proceedings in federal bankruptcy court, arrangements were made for the handling of LPHI's assets to protect those who had invested in fractional interests in the life insurance policies that had been acquired originally by LPHI. The plaintiff in the Advance Trust case now owns some policies that once were owned by LPHI.

For further background on Life Partners, I suggest readers review my article in the April 2012 issue of the Forum (offered in the complimentary package mentioned at the end of this post). I also suggest readers review my No. 29 (February 10, 2014) found here, and my No. 84 (February 26, 2015) found here.

General Observations
The Fan and Advance Trust cases have a long way to go, but I think they will be settled eventually. Earlier cases about Phoenix's COI increases on large universal life policies survived motions to dismiss and then bogged down into long battles before settling. The Fleisher case, for example, was settled almost literally on the courthouse steps. The parties to these cases usually decide it is simply too expensive to continue through a trial and the inevitable appeals process.

Available Material
I am offering a complimentary 74-page package consisting of the amended complaint in the Fan case (39 pages), the complaint in the Advance Trust case (28 pages), the August 2017 Phoenix notification letter (2 pages), and my articles in the April 2012 and November 2013 issues of the Forum (5 pages). Email and ask for the May 2018 package about Phoenix's recent COI increase.