We recently received confirmation from Transamerica that they are raising cost of insurance charges on their Ultra 115 and Survivorship 115 products issued in 1998 and 1999. Increases will take effect on the policy anniversary dates beginning August 1, 2017. Although illustrations are not yet available, we have learned that the increases are expected to be 58%. Updates will be posted as they become available.
In May of 2016, we reported that Lincoln Financial Group, acting as administrator and reinsurer, had raised cost of insurance (COI) rates on a block of policies issued by Aetna Life Insurance and Annuity Company (now Voya Retirement Insurance and Annuity Company.) In August of the same year, we reported that they were raising COI on a block of Legend Series Universal Life policies issued between 1999 and 2007 originally issued by Jefferson Pilot (Lincoln Financial purchased Jefferson Pilot in 2006). This January, we reported that the first class action lawsuit had been filed dealing with that increase, and in May, we reported that four lawsuits, including the first one we reported on, had been consolidated in the United States District Court Eastern District of Pennsylvania.
This week, we received communication on another round of increases from the carrier. According to a representative of Lincoln, the COI increases will affect the following policies: Legend 3000, LifeSight 30, 31 and 32, UL 101, 102, 103, 130 and 131 and Vision 20.
In correspondence received from Lincoln regarding a Vision 20 policy we manage, it was noted the increases will begin on August 4th, 2017. The increases were made after Lincoln “updated projections” of their “future costs for providing this coverage,” and after undertaking an “in-depth actuarial analysis along with a rigorous review process.”
Per a FAQ sheet provided by the carrier, the rates are based on “future expectations” of “certain cost factors, including mortality, interest, expenses and the length of time policies stay in force.” Those “cost factors have changed; therefore, policy COI rates have been adjusted to appropriately reflect those future expectations.”
Lincoln has provided several options for policyholders including: continuing to pay the current premium, though “at some point premiums may need to be increased in order to keep the policy in force,” reducing the death benefit of the policy to lower the costs, replacing the current policy with another, or surrendering the policy for the cash surrender value.
Lincoln representatives could not tell us the size of the COI increase. They have provided a number of contact options and have suggested “the best way to learn how these COI changes will impact policy performance and to make an informed decision on managing your policy is to request an inforce illustration.”
We have requested inforce illustrations, and will be analyzing the information to determine the size of the increase and the effect on the carrying costs of policies. We will report back at a later date.
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 email@example.com
Special thanks to Joseph Belth for information used in this update.
1.) Lincoln National to Buy Jefferson-Pilot, Associated Press, October 1, 2005
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.
In November of 2015 we published a blog noting that Transamerica was no longer providing inforce illustrations with “current assumptions” on a number of universal life policies. We pointed out the challenges that raised in managing policies without an understanding of “what Transamerica is actually charging and crediting” in the policies.
This week, Transamerica announced that beginning March 15th they would “only run illustrations based on the guaranteed maximum charges and the guaranteed minimum interest rate” on another block of inforce policies.
Per the carrier, the “decision was made following significant review of NAIC regulations” relating to current assumption inforce illustrations and their “interpretation of those NAIC regulations.”
For the affected policies, Transamerica will provide only the current accumulation value of the policy and the current monthly deduction amount. The policy owner (or servicer) will then have to compute whether the current policy premium will be sufficient to “sustain the policy until the next anniversary.”
This announcement follows a similar announcement by John Hancock that we noted just last month. In that blog entry, we mentioned that we did not “wish to speculate on the future actions” of the carrier as to future COI increases and we will not here. But we would be remiss if we did not point out that the notice from Transamerica in November of 2015 was a precursor to COI increases we uncovered in February of 2016 on the very same policies.
As always we will provide updates as warranted.
Last July, a lawsuit was filed against Nationwide Life Insurance Company of America alleging the carrier “made false representations and omissions of material facts regarding the cost of insurance charges and cost of insurance rates” for two variable life policies. The plaintiffs in the case included the grantor of a life insurance trust, who was also the insured, his daughter, Laura, who was the trustee as well as the agent of record on the policies.
A life insurance trust created in 1994 purchased one $500,000 policy that year, and another in 1996. According to court documents, two decades later, in 2014, the plaintiffs determined that there might be a problem with the policies, when a review of the policies’ quarterly statements disclosed that “policy charges were eroding the policies’ account values.” Although the original suit mentions that a variable policy allows the owner to allocate the cash value among an array of “separate accounts,” it does not mention the rates of return obtained in the policies, or if they suffered any market losses.
According to the complaint, after attempting to gather information from the carrier as to how the cost of insurance was calculated, Laura was told by the carrier’s Office of Compliance that she would be “unable to get that question answered.”
In April of 2015, the plaintiffs sent a letter to the carrier concerning their issues around the cost of insurance and the carrier’s “false representations and omissions.” Although the letter specifically said that the claims outlined in the letter were not claims against Laura, Nationwide filed a Uniform Termination Notice against her, stating that a written complaint was filed for “misrepresentation in the purchase of a variable life insurance policy.” The plaintiffs believed this was “an egregious and abusive act of retaliation” against Laura.
The plaintiffs claimed breach of contract and fraud among other charges. The policies provide that “current cost of insurance rates” are determined “based on . . . expectations as to future mortality costs and expenses.” However, according to the suit, the carrier, “repeatedly has increased the amount of the cost of insurance charges deducted . . . for reasons wholly unrelated to changes in future expectations.”
The lawsuit pointed out the policies had “exorbitant” COI increases with “the monthly cost of insurance charges deducted by Nationwide from the policies” increasing “substantially each year (except for one year)” in both policies. The total COI percentage increases from initial policy issue until 2016 were 430% in the 1994 policy and 398% in the 1996 policy. According to the suit, the increased costs “wholly unrelated to changes in future expectations” caused the policies cash values to be “drastically eroded” leaving the policies “in imminent danger of lapsing.”
The suit asked for “compensatory damages in the form of two paid up life insurance policies … (with no future premiums required), each with a death benefit of $500,000 plus the cash value of the policy.” Note: Both variable policies were issued as Option B, which pays the stated death benefit, plus the cash value in the policy at death.
While it is clear that the cost of insurance went up almost every year since policy issue, it is not clear that the actual “cost per thousand” charges were higher than shown in the original policy “as sold” illustrations, as with other COI increase cases like Transamerica and AXA. We, at ITM TwentyFirst, have been unable to determine any COI increases in the Nationwide variable life policies that we manage, except for the year to year increases that are seen in every universal life chassis product that reflect the increasing age of the insured.
In Nationwide’s Motion to Dismiss filed August 31, 2016, the carrier characterized the case as “buyer’s remorse,” with plaintiffs creating a “reason to walk away . . . free of charge” after obtaining 20 years of “valuable life insurance coverage,” and taking the position that Nationwide was “required to charge the same amount for . . . coverage every year,” which is “contradicted by the plain terms of the policies.” Nationwide pointed out that the trustee was “a sophisticated consumer,” a life insurance agent who purchased the policies “in her capacity as Trustee.”
Nationwide included over 140 pages in their motion exhibit that included both policy contracts and copies of statements received by the plaintiffs over the years, illustrating policy performance and the increasing cost of insurance. The motion also included contract language that specified “cost of insurance rates are based on the Insured’s Attained Age, Sex, Premium Class and Duration,” language that was not included in the original plaintiff’s complaint, a “major omission,” according to Nationwide.
On January 9th of this year, Warren Eginton, Senior United State District Judge, US District Court for the district of Connecticut, denied Nationwide’s motion. On February 1st of this year, the same judge issued a Stipulated Order that FINRA would “expunge the U5 Amendment” against Laura and the agent/trustee would drop any complaints against FINRA, with each party bearing their own legal costs.
Unlike many COI increase lawsuits we have written about in the past, this is not a class action suit, and it may find its way to a confidential settlement before a final verdict, but if it does not, the outcome will be interesting. We will be providing updates as they unfold.
Late last week, a Second Amended Class Action Lawsuit was filed in the United District Court, Southern District of New York in the Brach Family Foundation vs. AXA Equitable Life Insurance Company case we first wrote about on February 2, 2016.
The 35-page document expands and adds to the original 18-page Class Action Complaint filed February 1 of last year, and follows on the heels of two unrelated lawsuits filed against AXA last week.
The suit, brought on behalf of the foundation and “similarly situated owners” of Athena Universal Life II policies subjected to the COI increase, alleges the increase was “unlawful and excessive” and that AXA violated “the plain terms” of the policy and “made numerous, material misrepresentations in violation of New York Insurance Law Section 4226.”
The rate hikes, which were applied in March of last year, were targeted to a group of approximately 1,700 policies issued to insureds with an issue age of 70 and up, and with a policy face amount of $1 million and up. Since the increase was focused on this “subset”, the suit alleges that the increase was unlawful because the policies require that if a change in rates occurs it must be “on a basis that is equitable to all policyholders of a given class.” The suit points out that there is no “actuarially sound basis” to treat policyholders differently simply because one may be 69 and one 70 at issue age, or because one may have a policy with a face amount above or below $1 million. The suit also points to actuarial studies that indicate there are actually “lower mortality rates for large face policies.”
The suit notes that there are six “reasonable assumptions” that COI changes can be based on: expenses, mortality, policy and contract claims, taxes, investment income, and lapses. AXA has stated that the COI increase was based on two of those: investment experience and mortality.
In order for the increase to be “based on reasonable assumptions” for investment income, the increase has to “correspond to the actual changes in investment income observed,” according to the lawsuit, which points out that “since 2004, there has been no discernible pattern of changes in AXA’s publicly reported investment income” that would “justify” any type of COI increase.
AXA defended its increase, in part, by stating that insureds in these policies were dying sooner than projected. However, the lawsuit claims that “mortality rates have improved steadily each year” since the policies were issued. According to the lawsuit, the Society of Actuaries has performed surveys comparing observed mortality of large life insurance carriers to published mortality tables and has found that the “surveys have consistently showed mortality improvements over the last three decades, particularly for ages 70-90.” The suit points out that AXA informed regulators in public filings as late as February 2015 that it “had not in fact observed any negative change in its mortality experience,” and answered no when asked if “anticipated experience factors underlying any nonguaranteed elements [are] different from current experience.” When questioned whether there may be “substantial probability” that the illustrations used for sales and inforce purposes could not be “supported by currently anticipated experience,” the carrier again answered no.
The suit alleges that if AXA’s “justifications” for the COI hikes are valid, “then AXA applied unreasonably extreme and aggressive haircuts to the 75-80 mortality table when setting original pricing of AUL II, and these pricing assumptions were designed to make AXA’s product look substantially cheaper than competitors’ and gain market share” and by doing so, AXA engaged in a “bait and switch” which resulted in “materially misleading illustrations, including all sales illustrations at issuance” in violation of New York Insurance Law Section 4226(a).
By focusing the increase on older aged insureds, the suit alleges AXA “unfairly targets the elderly who are out of options for replacing their insurance contracts” and forces the policyholders to either pay “exorbitant premiums that AXA knows would no longer justify the ultimate death benefits” or reduce the death benefit, lapse or surrender the policies. According to the lawsuit, any of these actions will allow AXA to make a “huge” profit from the “extraordinary” COI increase. According to the lawsuit, AXA originally projected that the COI increases, which ITM TwentyFirst has noted ranged from 25-72%, would increase “profits by approximately $500 million.” The lawsuit also notes that in its latest SEC filing, the carrier said that “the COI increase will be larger than the increase it previously had anticipated, resulting in a $46 million increase to its net earnings,” which the suit points out is “in addition to the profits that management had initially assumed for the COI increase.”
For a copy of the Second Amended Class Action Lawsuit in the case, contact firstname.lastname@example.org