Two More Lawsuits Filed Against AXA For Cost of Insurance Increases

Two lawsuits were filed one day apart last week against AXA Equitable Life Insurance Company for cost of insurance (COI) increases in its AXA Equitable Flexible Premium Universal Life Athena II policies. We “looked under the hood” of the AXA policies affected by these cost increases back in November of 2015. The increases were limited to those policies originally issued to people age 70 and above with a policy face value amount of $1 million or more, which factored into the substance of both lawsuits. There are now at least three lawsuits filed against AXA, including one we wrote about back in February of last year.

The first suit, filed January 18 in Arizona (Wenokur v AXA Equitable), accuses AXA of “improperly targeting a subset of policyholders who exercise their contractual rights to keep their accumulated policy account values as low as possible and pay flexible premiums.” According to the suit, the “exorbitant” cost increases were designed to force policyholders to “take one of two unsavory courses of action”; either pay increased premiums that the carrier “knows would no longer justify the ultimate death benefits” or surrender or lapse their policies.

Though AXA stated the increase was “warranted” because “affected insureds are dying sooner than AXA anticipated,” the suit points out that in a regulatory filing in February of 2015, the carrier answered no to the question asking whether its “anticipated experience factors underlying any nonguaranteed elements [are] different from current experience,” and also pointed out that “mortality trends for the affected insureds have improved substantially since the time the policies issued.”

The lawsuit states that AXA “violated the terms of the policies” by “targeting only a subset of a risk class” and by basing the increase on unreasonable assumptions, breached the contract. Though AXA based the increase at least partly on expectations of “investment experience” in the future, the suit points out that investment experience is not a listed factor that may be considered for increasing COI rates, though “investment income” is, but “even if AXA’s investment income has changed, this factor cannot justify inflicting a COI increase solely on the subset of AUL II policies upon which AXA has sought to impose the COI increase (those with higher issue-ages and face-amounts).”

The second suit (Hobish v AXA Equitable), filed the next day in the Supreme Court of the State of New York, accuses AXA of “breach of the terms of the policy, deceptive business practices, and excessive, unconscionable and unlawful premium increase.”

The insured was issued the policy at a standard nonsmoker rating class. According to the suit, the policy contract stated that any changes to interest rates, charges, or other deductions would be on a “basis that is equitable to all policyholders of a given class.” When contacted by the insured, the carrier stated the cost increase would apply only to a class of insureds “with issue age of 70 and above and with a face amount of $1 million and above.” According to the lawsuit, nowhere was that class identified. The only policy class that was identified was the insured’s rating class of standard non-smoker. “Nothing in the policy permits AXA to imposed a COI increase based on the issue age or face value of the policy,” according to the suit.

The lawsuit also accuses AXA of deceptive business practices in violation of New York business law since they targeted consumers aged 70 and “misled” these consumers “into believing they would not be targeted for premium increases” that were “not applied generally and equitable to all members of a designated class.”

The suit cites the “predatory increase” in the cost of the policy as a “flagrant tactic to increase revenues and to drive aging individuals out of their policies.” In this case, the plaintiffs surrendered the policy on the insured, then age 92, “under protest” four months after the cost increase took effect. They received $412,274 as surrender value for the $2 million policy, after funding the policy with a total of $913,804 in premium payments.

For copies of both of these lawsuits, email mbrohawn@itm21st.com

Ratings Agency Downgrades Outlook For Life Insurance Sector, But Others See Positive Opportunities For The Future

A report just out from Moody’s on the global life insurance market has downgraded the sector for 2017 from Stable to Negative. (1) The historically low interest rate environment is cited as a main reason. Moody’s acknowledges the “post-U.S. election bump in yields” we have seen after Donald Trump’s victory, but still believes the low rates will continue “to depress the sector’s investment returns and profitability.” While interest rates may be pushing slightly higher, rates credited to policies take a longer time to turn around, a fact we acknowledged over two years ago (see: Turning the Battleship Around…An Update.) For Moody’s, the low rates are “the main driver for the outlook change to negative.”

Another consideration was the increased market volatility that could occur because of higher worldwide political risks and uncertainty in 2017. This could negatively affect carriers’ earnings and drive risk-averse clients to products containing higher guarantees, which demand larger and costlier reserves. Increased regulation and higher reserve requirements were other factors affecting the rating downgrade.

The low interest rate environment also drives carriers to chase higher returns in illiquid and alternative investments, as well as equities. While these asset classes may bring higher returns, they pose more risk than the fixed investments that make up the bulk of a carrier’s portfolio.

The United States, Japan, the United Kingdom, Germany and the Netherlands were among the specific countries Moody’s cited as earning a Negative grade.

In another report out this year, EY believes “stagnant growth and lingering low interest rates” mean the life insurance sector “faces a challenging future,” but points out some areas of change that might positively affect the industry. (2) These include “new thinking and cultural shifts,” especially in the area of innovation. The industry as a whole has been slow to modernize, and developers in other areas are beginning to creep into the life insurance space. These “disruptors” are providing applications and systems designed to improve the customer experience, while streamlining the life insurance process. Data-driven companies entering or in the marketplace, including ITM TwentyFirst, will change the way life insurance is underwritten, sold, and monitored. The report points out the “perception problem” of an industry with difficult to understand products that many believe are out of touch with today’s consumers and cites the need for “engaging and educating customers with media…that customers are comfortable with.” By adapting to the changing world, EY sees tremendous opportunity for innovative companies in the space.

The ITM TwentyFirst team of independent life insurance professionals helps to empower policy owners to make informed decisions and realize the full value of life insurance assets. We appreciate the opportunity to be a part of the state-of-the-art changes taking place in the evolution of life insurance and life insurance policy management.

  1. “Life Insurance – Global: 2017 Outlook – Low Interest Rates, Risk of High Volatility and Legislative Changes Turn Outlook to Negative,” Moody’s Investors Service, December 5, 2016
  2. “2016 Life Insurance and Annuity Executive Survey,” EY, 2016

Dividends at The BIG 4 Carriers Mostly Down, But Are Interest Rates Finally Going Up?

A couple of weeks ago, we reported that Northwestern Mutual had declared its 2017 dividend and had not only lowered it but also increased some costs (see: Northwestern Mutual Dividend and Crediting Rates Drop, Expenses Rise). Northwestern Mutual was the first of the so-called “Big 4” mutual carriers to report. These A++ (AM Best)–rated companies are considered to be the gold standard among life insurance carriers. The others in the group (New York Life, Massachusetts Mutual, and Guardian Life) have now all reported in, and all but New York Life experienced a drop in their dividend interest rate (DIR).

These Big 4 mutual carriers are among the most solid, stable businesses in the country. Unlike the vast majority of carriers, which sell their products through a brokerage system, the Big 4 sell their products directly to the public through an agency system of career agents tied to the companies. The career model tends to increase persistency and repeat business among clients and loyalty among agents. However, even these firms have felt the sting of low interest rates and are struggling with their investment returns. As we noted in our prior post, Northwestern Mutual’s chief investment officer told the Milwaukee Business Journal that the low interest rate environment resulted in the company’s generating $6 billion less in income than it would have in a normal interest rate environment.

The DIRs below-right represent the investment components of the dividends paid. Other factors besides the investment portion include 1-divactual expenses and mortality experiences. If mortality and expenses are more favorable than expected, it positively affects the dividend paid.

While the DIR may have dropped at most of the carriers, the actual total dollar amount paid out to policyholders actually increased at two of the carriers. Policyholders own mutual carries like the Big 4 carriers, and the divide1-payoutnds received represent a portion of the divisible surplus left after all expenses and claims have been paid. As can be seen in the chart to the right,  New York Life and Guardian Life will pay out more to policyholders in 2017 than in 2016.

Since the presidential election, we have seen a bit of an upturn in interest rates, and many prognosticators are anticipating a trend to higher rates in the Trump administration. An article in the Wall Street Journal last week cited the head of U.S. short-rates strategy at a major US bank, who believes that “government bond yields are likely to rise further.” That same article pointed out that “Investors have been scrambling for the past two weeks to position themselves for a Trump presidency that they believe will mean higher growth, higher inflation and a Federal Reserve that will be under pressure to raise interest rates in a way that hasn’t been seen for more than a decade.” (1.) While higher rates are not a simple fix, as they will affect many parts of the economy negatively, for many carriers that rely on fixed vehicles as their primary investment, higher rates, on balance, would be welcome.

  1. Traders Convinced Higher Rates Are Near, Wall Street Journal, by Min Zeng, November 23, 2016

New York State Floats Regulation To Require Life Insurance Carriers To Justify Cost Increases

Yesterday, the New York State Department of Financial Services proposed a new regulation designed to “protect New Yorkers from unjustified life insurance premium increases.”

In a press release dated November 17, 2016, Maria T. Vullo, the Financial Services Superintendent, proposed a regulation to “govern life insurance company practices related to increases in the premiums of certain life insurance and annuity policies.”  The regulation would provide the agency the opportunity to review increases by requiring the carriers to provide notification “at least 120 days prior to an adverse change in non-guaranteed elements of an in-force life insurance or annuity policy.” In addition to notifying the agency, the regulation would require the carriers to “to notify consumers at least 60 days prior to an adverse change in non-guaranteed elements of an in-force life insurance or annuity policy.”

According to Superintendent Vullo, “under New York law, life insurers may only increase the cost of insurance on in-force policies when the experience justifies it and only in a way that is fair and equitable.” She went on to note that her agency “will not stand by and provide life insurers free reign to implement unjustified cost of insurance increases on New Yorkers simply to boost profits.” (1)

The regulation is designed to “establish standards for the determination and any readjustment of non-guaranteed elements that may vary at the insurer’s discretion for life insurance policies and annuity contracts.” It requires carriers to “establish board-approved criteria for determining non-guaranteed charges or benefits” and mandates an agency review of “the anticipated experience factors and non-guaranteed elements for existing policies whenever the non-guaranteed elements on newly issued policies are changed.” The regulation defines experience factors as “investment income, mortality, morbidity, persistency, or expense that represents the insurer’s financial experience on a policy. Profit margin is not an experience factor.” (2)

An article in The Wall Street Journal (WSJ) notes that although the regulation only applies to New York state, it “could be widely copied by other insurance departments.” We at ITM TwentyFirst have reported often about the cost of insurance (COI) increases that have hit the life insurance industry and the lawsuits that have followed. The WSJ article reports that those lawsuits have alleged that “insurers are hiding behind the little-used contract provisions to rummage up cash for shareholder dividends.” But the article also points out that “insurers maintain they are acting in accordance with policy provisions allowing higher charges up to a maximum amount, based on expectations of future policy performance.”  (3)

According to the press release from the New York State Department of Financial Services, “the proposal is subject to a 45 day public comment period following publication in the State Register on November 30, 2016 before its final issuance.”  We will be following the progress of the proposed regulation and provide updates when warranted. For a copy of the NY Department of Financial Services Proposed Insurance Regulation 210, contact mbrohawn@itm21st.com.

 

  1.  NY Department of Financial Services Press Release, November 17, 2016
  2. NY Department of Financial Services, Proposed Insurance Regulation 210, November 17, 2016
  3. New York Regulator Aims to Require Life Insurers Justify Higher Rates on Old Policies, Leslie Scism, The Wall Street Journal, November 17, 2016

Judge Rules That Consolidated Lawsuit Against Transamerica for COI Increase Can Be Heard

On November 8th, a United States District Court judge in California’s Central District ruled that a consolidated class-action lawsuit against Transamerica could move forward. The lawsuit’s main allegation concerned Transamerica’s “breach of faith” for the cost of insurance (COI) increase in their Universal Life policies.
We reported back in September of 2015 that Transamerica increased costs in several of its Universal Life insurance policies (see: Transamerica Cost Increase Causes Premium to Maturity to More Than Double: A Case Study for Trustees). Earlier this year we discovered another Transamerica cost increase while working on a policy review, which we subsequently covered in Transamerica Cost of Insurance Increases: Is the Other Shoe Now Dropping? That increase was dramatically higher than the first one. Transamerica acknowledged this new increase shortly after we discovered it.
The Transamerica cost increase dramatically raised the carrying costs of life insurance policies and several class-action lawsuits were filed against the carrier. Three of those lawsuits were combined: one filed in California by Consumer Watchdog (see: Consumer Group Files Suit Against Transamerica for Cost of Insurance Increases); a second California lawsuit, Thompson v. Transamerica Life Insurance Company (see: Another Class Action Lawsuit Filed Against Transamerica for Cost Increases); and one originally filed in the Southern District of Florida (see: Preliminary Injunction Motion Filed in South Florida Against Transamerica to Stop Cost of Insurance Increases). In a June 10, 2016, Consolidated Class Action Complaint filed in the Central District of California, the plaintiffs asserted “seven claims against Transamerica on behalf of themselves and all others similarly situated”. On August 1, 2016, Transamerica filed a motion to dismiss the complaint.
In the complaint filed, the plaintiffs argued that Transamerica was not allowed to set monthly deductions (which included the COI) “in whatever amount or by whatever method it determines.” The plaintiffs also argued that the standardized policy language requires that Transamerica can only change deductions based on underlying mortality rates and that Transamerica was not allowed to “set or increase [monthly deduction rates] to recoup past losses” because of low interest rates or other factors. They further argued that the deduction increase of “as much as 100%” caused “an astronomical increase in the premiums necessary to maintain coverage under the policies” which was designed to induce “shock lapses.”
On October 31, 2016, the court heard oral arguments. On November 8th, the Honorable Cristina A. Snyder ruled against Transamerica; their motion to dismiss the plaintiffs’ claims was denied.
For a copy of the Civil Minutes in the case, please email mbrohawn@itm21st.com.

Cost of Insurance Increase Announced by Lincoln Financial

Lincoln Financial Group is the latest carrier to announce cost of insurance (COI) increases.  In correspondence to producers today, Lincoln announced COI changes in some Legend Series Universal Life policies issued between 1999 and 2007.  The majority of the changes are increases, but also included some decreases, “reflecting Lincoln’s commitment to acting fairly and responsibly.”  This block of Universal Life policies was originally underwritten by Jefferson Pilot (Lincoln Financial purchased Jefferson Pilot in 2006.)  In making the announcement, Lincoln noted that it is “operating in a challenging and changing environment” and faces “persistently low interest rates, including recent historic lows, volatile markets, and an evolving regulatory landscape.”
Back in May of this year we reported that Lincoln Financial, acting as administrative agent and reinsurer, raised COI rates on a specific block of universal life and variable universal life policies issued by Aetna Life Insurance and Annuity Company (now Voya Retirement Insurance and Annuity Company.)  (See: Another Major Carrier Raising Cost of Insurance Charges)
Lincoln’s announcement today is the latest in a series of COI increases that started just over a year ago and includes some of the largest, most prominent carriers in the life insurance market; including Transamerica, Voya, Legal & General, and AXA.  The cost increases across these carriers ranged from low single digits to as much as 600 percent.  The increases have dramatically and negatively affected thousands of policies, causing many policy holders to reduce policy death benefits or surrender policies for a fraction of the expected benefit.
Lincoln Financial, like the others it follows, has placed at least a portion of the blame on interest rates. Unfortunately, it does not appear that the historically low interest rate environment is nearing an end. As we mentioned in one of our last blog entries (see: Low Interest Rate Winners and Losers), over 35 percent of all government debt among major countries is trading at negative interest rates.   In fact, in Switzerland, government bonds with a maturity of almost a half century are yielding below zero. (1).
And in the US, the Federal Reserve, which has held the federal-funds rate at 50 basis points or less since the end of 2008, is now realizing that we may have a “new normal.”  A Wall Street Journal article yesterday noted that the “Fed has revised down its estimates of how high the fed-funds rate will go in the long run. Most officials see it reaching 3% or less. Four years ago the consensus was 4% or more.”  While the Fed is expected to boost the federal-funds rate by perhaps a quarter percentage point this year, the article goes on to state that “it isn’t likely to raise them much beyond its next few moves in the months and years ahead.” (2)
The outlook for the next couple of years might just be more of the same, low interest rates and COI increases.  We at ITM TwentyFirst will keep you updated on Lincoln’s announcement as we receive more details related to the policies we manage.
  1. Central Bank Buying Puts Squeeze on Bond Market, Wall Street Journal, July 7, 2016.
  2. Federal Officials Brace for (Familiar) New Normal, Wall Street Journal, August 21, 2016

401(k) Lawsuits Flourishing – Is TOLI (Trust Owned Life Insurance) Next?

In the past few years, we have seen a rash of lawsuits against 401(k) plan sponsors. Most of these suits allege that plan sponsors shirked their fiduciary duties, usually for allowing excessive fees or self-dealing.

Well-known firms like Lockheed Martin and Boeing have signed multimillion-dollar settlements with their employees. Even financial firms that provide 401(k) plans to the public have recently been sued by their employees. (1)  Some have already settled suits in favor of their employees. Banks are not exempt either. In May of this year, suits were filed against two large banks, accusing them of “self-dealing” (2) and providing “proprietary investments options and recordkeeping services at the expense of performance.” (3)

The suits include some of the largest and most respected plan providers. Vanguard, long known as a low-cost provider of mutual funds, was cited in a lawsuit brought in December of last year by participants and beneficiaries of the Anthem Inc. 401(k) plan. An attorney familiar with the case was quoted as saying, “Even so-called low cost might be too high cost.” (4)

All of these cases were brought under the Employee Retirement Income Security Act of 1974 (ERISA), established to provide minimum standards for retirement and health plans in private industry. ERISA also gives plan participants the right to sue for breach of fiduciary duty by the plan sponsor. And although there have been lawsuits in the past under ERISA, the past few years have seen the beginning of the deluge — and it does not seem like it will let up.

According to research by the Investment Company Institute, the average fees paid by 401(k) plans declined by about 30 percent between 2000 and 2014. An attorney who represents employees believes these fee decreases are directly related to the series of lawsuits over the past decade. (5) You can easily argue that the lawsuits are creating a positive outcome for the average investor.

TOLI trustees are generally subject to the Uniform Prudent Investor Act (UPIA) as adopted in their state, which outlines the responsibilities and fiduciary requirements of being a trustee of a life insurance trust, including, but not limited to, “investing as a prudent investor would” as well as “investigating” and “monitoring” trust assets (Section 2), reviewing the trust assets and disposing of “unsuitable assets within a reasonable time” (Section 4), investing and managing trust assets “solely in the interest of the beneficiaries” (Section 5), acting impartially “in investing and managing the trust assets” (Section 6), and only incurring costs that “are appropriate and reasonable” (Section 7). The UPIA actually references the ERISA, noting that the UPIA is a “comparable prudence standard” in relation to the ERISA laws imposed by Congress.

Although it has been used as a reason for TOLI lawsuits, the UPIA has not created the volume of lawsuits that has been created by ERISA — yet.

A recent article in Estate Planning magazine notes there is a “growing concern” among estate planning professionals that “over the next ten to 15 years there will be an onslaught of litigation by trust beneficiaries against the trustees of life insurance trusts.” (6) The article cites the low interest rate environment and cost of insurance increases that have occurred, which have wreaked havoc on policy performance. But it also points out other areas that could spur litigation. For example, hidden issues surrounding the trust document that may cause an adverse outcome, and inadequate or incompetent trust administration that might generate a negative result. The article goes on to highlight the responsibilities of a TOLI trustee to review and manage the asset to maximize the value to the beneficiary, another possible area of litigation.

We at ITM TwentyFirst could not agree more. In fact, we could provide many more examples of situations we have seen that could create litigious situations for a TOLI trustee. As part of our fall ITM TwentyFirst University schedule, we will be providing a special webinar on this very subject. Titled How TOLI Trustees Can Avoid Getting Sued, it will include real-life scenarios where trustees could have been liable for hundreds of thousands of dollars of damages and also provide trustees with solutions to mitigate their liability. If you are a TOLI trustee, you will want to take part. Just click here to register.

https://www.itm21st.com/Education

  1. New York Life Accused of Profiting Off Workers’ 401(k)s, Bloomberg BNA, July 20, 2016
  2. Participants File Self-Dealing ERISA Suit Targeting M&T Bank, Planadvisor.com, May 16, 2016
  3. BB&T Finds Itself Targeted in Self-Dealing ERISA Suit, Plansponsor.com, May 23, 2016
  4. New 401(k) Suit Targets Vanguard Fund Fees, InvestmentNews, January 5, 2016
  5. Uptick in Fee Litigation Reshaping 401(k) Industry, Bloomberg BNA, June 9, 2016
  6. Troubling Trend for Trust-Owned Life Insurance Trustees, Estate Planning (a Thomson Reuters/Tax & Accounting journal), August 2016