Penn Mutual Pays $110 Million Settlement in Class Action Lawsuit

Last week we reported on on a $37.5 million settlement paid by Mass Mutual Life Insurance Company for a lawsuit that alleged the carrier “was obligated to pay additional dividends on its participating policies.”  Recently, a similar lawsuit settled for a much higher sum.  Penn Mutual Life Insurance Company settled a suit for $110 million that alleged that the carrier failed “to pay the full amount of annual policy dividends out of divisible surplus that are due.”  The suit was initially filed in November of 2012 by a husband and wife who together owned 5 Penn Mutual participating whole life contracts, on behalf of them and “all persons similarly situated.” (1)

The suit (Harshbarger et al v. Pennsylvania Mutual Life Insurance Company) grew out of Pennsylvania law that requires mutual carriers domiciled in that state to “provide for the payment of dividends from surplus (or profits) on an annual basis,” and include in that dividend “all surplus that exceeds a maximum annual “safety fund” limit (i.e., all surplus in excess of 10% of its reserves, and not including the excess market value of its securities over their book value) (the “Safety Fund Limit”).”  (1)

The case wound its way through the United States District Court for the Eastern District of Pennsylvania and last month reached a settlement in a Stipulation of Settlement filed on the 25th of April.

Per information provided, the proposed settlement will include participating policies “in force at any time from January 1, 2006 through December 31, 2015.”  The settlement amounts were as follows:

  • For policies in force as of 12/31/2015: “A Terminal Dividend in an amount equal to 1.8% of the total Cash Surrender Value upon termination of each In Force Settlement Policy (whether by surrender or upon death of the insured).” This is expected to amount to $97 million in payouts.
  • For policies terminated “by lapse or surrender” before 12/31/2015: “A pro rata share of a $13 million Terminal Dividend.”

Penn Mutual is required to pay the benefits “automatically,” and there is no need for class members to “file a claim or take any other steps to receive the payments due to them under the Proposed Settlement.”  (2)

Penn Mutual denied “any and all wrongdoing,” considering it “desirable” to settle the case to “provide substantial benefits to Penn Mutual policyholders,” avoid “further expense and disruption of the management and operation of Penn Mutual ’s business,” and the “burdens, and uncertainties associated with a potential finding of liability and corresponding injunctive and related relief for Plaintiffs.”  (3)

Penn Mutual, like Mass Mutual, operates as a mutual company, owned by its policyholders, not outside stock holders.

  1. Harshbarger et al v. Pennsylvania Mutual Life Insurance Company Class Action Complaint filed 11/1/2012
  2. Harshbarger et al v. Pennsylvania Mutual Life Insurance Company, Document 49, Filed 04/25/17
  3. Harshbarger et al v. Pennsylvania Mutual Life Insurance Company, Document 47. Filed 04/25/17

Mass Mutual Class Action Settlement Means Small Payout for Participating Policyholders

A class action lawsuit brought against Mass Mutual Life Insurance Company has resulted in preliminary approval of a $37.5 million payout. The payout benefits policyholders of Mass Mutual participating policies held between January 1st, 2001 and December 31st, 2016. A participating policy is one that receives dividends. ITM TwentyFirst has begun to receive notices of the payout that was agreed to in a document filed March 13th of this year in United States District Court District of Massachusetts.  ITM TwentyFirst manages or reviews almost 1,000 policies from the carrier, the majority being whole life participating policies.

The settlement grew out of a case filed in 2012 against the carrier that, according to information provided by the court (1), alleges the carrier “withheld more surplus than allowed by Section 141 of Chapter 175 of the General Laws of Massachusetts.”  The suit, which was brought by a Massachusetts resident on behalf of herself and others with a similar claim, maintained that “MassMutual therefore was obligated to pay additional dividends on its participating policies in years during the Settlement Class Period.”

Mass Mutual, as its name implies, is structured as a mutual insurance company, owned by its policyholders, not outside investors.  The carrier denied any wrongdoing in this case, saying they settled the case to avoid additional expenses, disruption, and risk.

The amount of the payout “is based on annual dividends paid on each participating policy…as a pro rata share of the total amount of annual dividends MassMutual paid on all participating policies issued during the Settlement Class Period.” Therefore, the larger the dividends received by a policyholder during this time, the higher the benefit.

If you presently own a policy that is part of this settlement your benefit will be received as a paid-up addition to your policy. If your policy for some reason cannot receive paid-up additions, or if you previously owned a policy that is part of the settlement but no longer do, you will receive a check for your pro rata share.

You do have options as a policyholder.  You can exclude yourself and retain rights to pursue further claims against the carrier by notifying the court by July 3rd of this year, you can object to the settlement in writing by the July 3rd date, or you can attend a hearing scheduled for July 27th in Boston to speak out on the case. If you do nothing, the settlement amount will be paid out to you as noted above.

Attorney fees will be paid out of the settlement, but will be limited to no more than 25% of the settlement amount.

This is a preliminary settlement and if and when the court approves a final settlement, “a final order and judgement dismissing the case will be entered in the Action.”

While the $37.5 million settlement number may seem large, Mass Mutual will pay out an estimated $1.6 billion in dividends this year (2). The settlement amount will average approximately $22 per policyholder, a fraction of the dividends paid yearly on a typical well-seasoned Mass Mutual whole life policy.

For additional information, a website has been set up at www.mmlisettlement.com.  For a copy of the Agreement and the Class Notice, email mbrohawn@itm21st.com.

  1. Class Notice, United States District Court for the District of Massachusetts, Karen L. Bacchi v. Massachusetts Mutual Life Insurance Company
  2. Mass Mutual Press Release dated November 7, 2016

Lawsuits Consolidated Against Lincoln National For Cost of Insurance Increase

In August of 2016 we wrote about a cost of insurance (COI) increase from Lincoln National (now Lincoln Financial Group) on a block of policies originally underwritten and issued by Jefferson Pilot from 1999 to 2007.  Lincoln Financial purchased Jefferson Pilot for roughly $7.5 billion in cash and stock in a transaction that closed in 2006.

At the beginning of this year we wrote about a lawsuit filed against Lincoln for that COI increase.  Since then, additional lawsuits have been filed, and on April 19th four suits, including the one we wrote about, were combined into a Consolidated Class Action Complaint in the United States District Court Eastern District of Pennsylvania.  The combined complaint was brought on behalf of the plaintiffs and “all similarly situated owners of JP Legend 300, and JP Lifewriter Legend 100, 200, and 400 series life insurance policies.”

The lawsuit charges that Lincoln breached the policy contracts in several ways by implementing the COI increases since they were based on “prohibited factors … designed to recoup past losses, [and were] non-uniform across insureds of the same class.”

The suit indicates that Lincoln effected the increases despite providing policyholders with in force illustrations that “reflected no change in future COI rates” from 2010 to 2014 and since that time in interrogatories filed with regulators, stated it “expects mortality experience to improve.”

Lincoln, when announcing the COI increases, cited three reasons, “lower investment income,” which was attributed to the historic low interest environment, changes in their mortality tables both negative and positive, and higher expenses, “including higher reinsurance rates.”

The suit claims that Lincoln’s “future investment returns could not reasonably be lower than what Lincoln originally expected,” and that Lincoln “cannot now claim that any change in investment return justifies the increase,” since the carrier provided in force illustrations from 2010 up to 2016 that showed no COI increase that were based on “Lincoln’s then-current assumptions as to mortality, interest, and any other experience factors that underlie the COI rates.”  The suit also points out that Lincoln’s own financial information disclosed that “investment income” had grown in those years.

Per the lawsuit, Lincoln is limited by contract to increasing insurance rates based on their “expectation of future mortality, interest expenses, and lapses” and cannot raise rates “to cover for improper dividends Lincoln Life paid to Lincoln National, or miscalculations concerning past mortality assumptions, or past interest rates, expenses or lapse rates,” or to “earn future profits higher than the level projected at the time the Policies were priced.”  The suit claims that Lincoln “admits that it is relying on its ‘past’ and ‘continued’ alleged lower investment returns to justify the increase.” In letters to policyholders outlining the reasons for the increases Lincoln referenced “nearly a decade of persistently low interest rates, including recent historic lows, and volatile financial markets.”

While Lincoln cites “higher reinsurance rates” as a reason for the COI increase, the suit claims “reinsurance costs cannot provide material support for the increase, and reinsurance costs are not an enumerated permissible factor for an increase.”

The suit contains 11 Claims for Relief, including a request that the court issue an injunction against the carrier from continuing to charge the higher rates, and “ordering any policy to be reinstated that was surrendered or terminated as a result of the COI increase.”

ITM TwentyFirst manages or tracks over 25,000 life insurance policies for trustees and institutions nationwide and has reviewed over $150 billion in life insurance death benefit.  While we take no sides in COI increase court cases, we will be watching with great interest and will report back as warranted.

For a copy of the Consolidated Complaint, please contact mbrohawn@itm21st.com

Special thanks to Joseph Belth for information used in this update.

1.) Lincoln National to Buy Jefferson-Pilot, Associated Press, October 1, 2005

Genworth Joins the List of Carriers Restricting In Force Ledgers

Since the beginning of the year, we have written about two carriers restricting their in force ledgers.  John Hancock recently noted a “temporary” situation on its Performance UL policies issued in certain states from 2003 to 2010, and alerted us that current assumption illustrations were unavailable for those policies.  Current assumption illustrations are those based on the current interest being credited and the current cost of insurance (COI) being charged on a policy.  In March of this year, Transamerica alerted us that they would “only run illustrations based on the guaranteed maximum charges and the guaranteed minimum interest rate” on a block of in force policies.  We noted that this was the second time that Transamerica placed restrictions on a block of policies.  The prior restriction was a precursor to a cost of insurance increase. 

Last week, our servicing team in Iowa received notice from Genworth that they would be unable to provide current assumption illustrations on a policy we manage.  They noted “existing illustration regulations” which limited them to only providing illustration projections “based on contractually guaranteed interest and cost of insurance, i.e., the lowest interest and highest cost of insurance rates allowed by your policy.”

We caution reading too much into this Genworth notice as the restriction appears to be limited and no COI increase has been announced.  We will, however, be tracking all the referenced policies for any changes in their cost structure.

Principle Based Reserving May Affect New Life Insurance Policy Pricing Going Forward

A new methodology for calculating policy reserves for life insurance policies has taken effect. The new methodology grew out of the 2009 National Association of Insurance Commissioners (NAIC) revisions to the Model Standard Valuation Law. Dubbed Principle-Based Reserving (PBR), the law was to take effect on the first day of the next calendar year if 42 states enacted the revisions by July 1st. The threshold was passed in 2016 and as of today, 46 states have adopted the revised laws.

Insurance companies are required to set aside reserves to pay future claims, and the reserve requirements are specified by state regulation and laws. The current method of reserving will remain unchanged for in force business, as PBR only affects policies issued on or after January 1, 2017. However, life insurers will have three years to implement the new methodology. Currently, the requirements will be altered for life insurance policies only, but over time they are expected to apply to other products as well.

According to information provided by the NAIC (1), the new approach will lessen the need for changes to regulations and laws as new products are introduced. Under the new methodology, states would “establish principles upon which reserves are to be based rather than specific formulas.” Under the current formula, the risks, liabilities and obligations are not always correctly “reflected,” and “for some products this leads to excessive conservatism in reserve calculations, for others it results in inadequate reserves.” A study by the NAIC disclosed the new method will lower reserves for competitive level premium term insurance. Universal life policies with secondary guarantees will see both “higher and lower reserve requirements,” which was not unexpected, “given the variations in company interpretations of the reserve requirements for this product type that were in effect when this study was done.” Per the study, reserves for most other products, including current assumption universal life and whole life, will remain relatively unchanged.

Reserve requirements are only one of the many factors affecting the pricing of life insurance. Others factors include mortality expenses and investment returns, along with overhead expenses, other than reserving.

While it remains to be seen exactly how pricing will be affected, the NAIC believes the “right sizing” of reserves will benefit consumers since holding higher reserves tends to increase costs, and holding reserves that are too low puts the consumer at risk. The new regulations will also allow for the introduction of new products that could offer multi-benefits and more flexibility for consumers.

For those of us managing in force life insurance, the new methodology will change little, though new and replacement products going forward may be more or less attractive because of pricing changes.

1.) PBR Educational Brief, June 21,2013, The National Association of Insurance Commissioners, and The Center for Insurance Policy and Research

The Prince Estate Sells His Music Vault, How Will That Affect His Legacy?

In 2004, Prince took part in a ceremony honoring George Harrison at the Rock and Roll Hall of Fame.  Sharing the stage with such rock luminaries as Steve Winwood, Tom Petty, and Jeff Lynne, Prince joined the group in a rendition of “While My Guitar Gently Weeps” by providing firepower on the song’s guitar solo, and he did not disappoint.  About halfway through the six minute and fifteen second YouTube video, Dhani Harrison, George’s son, smiles at Prince, knowing what is to come. Prince then launches into a three-minute performance in which he doesn’t just play notes, but makes the guitar an extension of his body.  Great guitarists make it look easy – it just flows, and that night it did for Prince.  By the time the last note rang out, with Prince tossing his vintage Fender Telecaster into the audience, the members understood what a singular talent he was.

Most people don’t think of Prince as a great guitarist, they remember him for his songs, and not just the songs he made famous like “Little Red Corvette,” “Purple Rain,” and “1999,” but also the songs he wrote for others.  “Nothing Compares 2 U” made Sinead O’Connor a star – briefly.  He gave the Bangles arguably their biggest hit with “Just Another Manic Monday,” a tune he wrote under the pseudonym of Christopher.

Prince did not have a home studio, he had a 60,000-square foot entertainment complex as his home –  he literally lived in the studio.  He put out 39 albums and contributed to many more recordings during his lifetime, but the vault he left behind included even more than that. He battled throughout his career to manage the creation and the delivery of his music on his terms – passing up millions to ensure that he alone controlled his art.

He was a prolific songwriter and like anyone prolific in his or her craft, among the many gems there will be clunkers. Which is why it was upsetting to read that his estate had signed a $30M deal giving Universal Music Group access to the vault.

Many articles have been written about the estate planning mistakes Prince made as he did little right in that area.  His money, estimated at more than $150 million (2), may not have gone to the right people or causes, but I imagine it is the possible tarnishing of his music that would be most disturbing to him.  I suspect we will soon hear songs Prince never intended to see the light of day – at least not without his special polish.

In the end, that is his estate planning failure – someone who spent his life attempting to control the most important thing in his life, his music, lost control in death.

Estate planning focuses on lowering taxes and maximizing assets for the next generation, but for many the most important asset left behind is legacy.   Let’s hope his lives on as he would have wanted.

  1. Auctions for Prince’s Music Leaves Some Bidders Feeling Left Out, WSJ, March 27, 2017
  2. Bankrate.com

TOLI Trustees Need To Be Aware Of Life Settlements

It is estimated that every year, seniors in the US surrender or lapse over $112 billion dollars in life insurance death benefits (1). Most of them probably have no idea of their options, but grow tired of the premium payments and walk away without maximizing the value of an asset they may have paid for over a lifetime. For the uninformed consumer, this could be just a lost opportunity, for the Trust Owned Life Insurance (TOLI) trustee, this can be a source of potential liability.

An alternative to a policy lapse or surrender is a life settlement, the sale of a life insurance policy for a lump sum greater than the policy’s cash value and less than the death benefit. The purchaser of the policy will maintain the policy by paying the policy premium until the death of the insured.

The life settlement industry grew out of the “viatical” movement of the of the 1980s when AIDS victims were given the opportunity to sell their life insurance policies to a third party for a lump sum payment to be used to provide medical and other care in the final years, sometimes months, of life. Advances in the treatment of AIDS made these types of policy sales less common, but the idea of life insurance as an asset that can be sold grew into the life settlement, or secondary marketplace, we see today.

Originally the industry was lightly regulated and some who sold their policies were taken advantage of, but today’s life insurance settlement marketplace is heavily controlled. The vast majority of states (42) have strict regulations that provide a framework for the orderly transfer of policies, with required consumer disclosures that protect the policy seller. The improved regulations have dramatically decreased issues in the sales process.

For the TOLI trustee managing life insurance today, life settlements are an option that must be considered. Because of changes in the estate tax, increased policy costs, and the natural evolution of trust goals, there are more “unwanted” policies to deal with than ever. Those of you who have attended our ITM TwentyFirst University sessions in the past know that we have developed many methods for analyzing options to maximize the value of a life insurance policy. We do this because it is our clients’ (TOLI trustees) responsibility to maximize the value for their clients (life insurance trust beneficiaries), and life settlements can be a way to do that.

Typically, life settlements are available to insureds age 65 and older, though health will play an important role in whether an offer is forthcoming. Most policies sold are universal life policies – especially current assumption universal life, though other policies, even term insurance policies that can be converted to a permanent policy, can be sold. The offers depend on the death benefit of the policy, the annual premium needed to carry the policy, the life expectancy of the insured, and the rate of return that the buyer needs to make the purchase a viable investment.

The sale of a policy has potential tax implications to the seller. A life insurance policy held in trust until a death benefit is paid is received income and estate tax free, however if a policy is sold there is a possible tax liability to the trust.

While all the advantages and disadvantages of a policy sale are beyond the scope of this article, we believe that the full discussion of life settlements in the TOLI world is important enough to schedule a webinar session that will provide a TOLI trustee (and all financial professionals) with a thorough understanding of the process. Our next free webinar session, entitled Learning When Why and How to Do a Life Settlement, will be held on March 28th at 2 p.m. Eastern Time, and will provide one hour of continuing education for CFP, CTFA and FIRMA members. You can register here.

  1. LifeHealthPRO, February 25, 2015, Forfeited Life Insurance Benefits Pegged at $112 Billion