August 2013

REGULATORY DEVELOPMENTS

FFIEC Proposed Revisions to Call Reports

On August 12, the Federal Register included proposed revisions to the regulatory capital components and ratios portion of Schedule RC–R, Regulatory Capital, in the Consolidated Reports of Condition and Income (Call Report or FFIEC 031 and FFIEC 041) and to the Risk-Based Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC 101).  The proposed revisions to the Call Report and the FFIEC 101 are consistent with the revised regulatory capital rules approved by the agencies during July 2013.

Note: The agencies have not yet released proposed revisions to incorporate the standardized approach risk-weighting requirements.  The agencies expect to publish a separate proposal to revise the risk-weighted assets portion of Call Report Schedule RC–R to incorporate the standardized approach for calculating risk-weighted assets.  Those revisions will take effect March 31, 2015.    

Comments must be submitted on or before October 11, 2013. (Links: FFIEC 101 Form; FFIEC 101 Instructions; FFIEC 031 Form and Instructions)

FFIEC 101

In general, institutions subject to the advanced approaches will begin reporting on the revised FFIEC 101 effective March 31, 2014.  Updates have been proposed for Schedules B, C, D, H, I, J, P, Q, and R.

General Account BOLI exposures would appear to be reflected in Schedule B (summary of wholesale exposures) and Schedule C (Wholesale Exposure: Corporate).

Separate Account BOLI exposures would appear to be reflected in Schedule R (Equity Exposures) under lines 11-13 (Equity Exposures to Investment Funds).  Consistent with the final capital rules, the proposed instructions for Schedule R state:  “Investments in a separate account (such as bank-owned life insurance) must be treated as if they were an equity exposure to an investment fund as described in section 154 of the advanced approaches rule.”  Even though application of a full look-through approach requires underlying exposures to be classified (e.g., wholesale, securitization, etc.) and risk-weighted as if held directly; it does not appear that the underlying exposures would be reflected in the schedules for each type of exposure.  In other words, the entire carrying value and total risk-weighted assets amounts appear to be reflected in Schedule R (lines 11-13).

FFIEC 031 and FFIEC 041

In general, institutions subject to the advanced approaches will begin reporting on the revised Call Report Schedule RC–R effective March 31, 2014.  All other institutions that are required to file the Call Report will begin reporting on the revised Call Report Schedule RC–R effective March 31, 2015.

Line items 40a and 40b will reflect an institution’s total risk-weighted assets.  According to the instructions, 40a is the amount of total risk-weighted assets using the general risk-based capital rules (as reported in Schedule RC-R, Part II, item 62) until 1/1/2015.  Starting on 1/1/2015, total risk-weighted assets will be calculated under the standardized approach.  Advanced approaches institutions will report their total RWA under the advanced approaches in line item 40b.

 

JUDICIAL DEVELOPMENTS

Cost of Insurance Litigation Update

Conseco Life Class Action in California

As we reported in our March LRA update, a certified class action is ongoing in the Northern District of California.  The lawsuit was brought on behalf of policyowners of Conseco “Lifetrend” 3 or “Lifetrend” 4 Policies.  Plaintiffs in the lawsuit claimed that Conseco breached the policies by implementing increases in the cost of insurance rates and expense charges in October 2010.

In July, the court provided preliminary approval of a proposed settlement.  Conseco has agreed to pay plaintiffs’ attorneys’ fees and reimbursed litigation expenses in an amount up to $8 million.  Conseco’s payment of these amounts is in addition to the relief class members will receive.

A fairness hearing has been set for November 1, 2013.

Citation: In re Conseco Case No.: 3:10-MD-02124-SI

Mai Thao v. Midland National Life Insurance in Wisconsin

The plaintiff (seeking class certification) asserts that Midland National violated the policy provisions by including an “Expense Add-on” in determining the applicable COI rates.  Ruling in favor of Midland National, the district court dismissed the complaint and awarded attorneys’ fees to Midland.

The plaintiff has appealed the rulings to the US Circuit Court of Appeals (7th Circuit).  The appeal notes that the policy identifies three items that comprise the “Monthly Deduction”: 1) the Expense Amount; 2) the Cost of Insurance; and 3) the Rider Charge.  According to the appeal, Midland historically charged the maximum permitted Expense Amount under the plaintiff’s policy.

The plaintiff asserts that the COI provision places two limits on how Midland determines the COI rates:

  1. Midland guarantees that the monthly rates will not exceed a table of guaranteed maximum rates; and
  2. Midland promises that the “Cost of Insurance Rates are based on the Issue Age, completed Policy Years, Sex, Specified Amount and Premium Class of the Insured.” (emphasis added)

In practice, Midland also applies an “Expense Add-on” in the determination of COI rates.  The plaintiff asserts that “based on” is a term of limitation that obligates Midland to refrain from including other factors in setting its COI rates.  The district court essentially ruled that no such limitation applied.  The appeal argues that the district court’s interpretation: (a) fails to consider what a reasonable insured would understand the Policy’s Cost of Insurance provisions to mean; (b) renders the “based on” clause and its express list of five factors superfluous; and (c) renders the caps on other authorized policy charges meaningless.

We are often troubled by the degree of discretion an insurer has to increase charges and/or lower crediting rates with general account BOLI policies.  We strongly recommend clients obtain the strongest, most transparent guarantees possible when structuring all BOLI programs.  We also recommend and assist clients to inventory and organize applicable policy provisions to assess and gauge their exposure to such practices.

Citation: Mai Thao v. Midland National US Circuit Court of Appeals – 7th Circuit Case Number: 13-1272

 

Feingold v. John Hancock – Death Benefit Payment Practice

On August 20, a federal district court in Massachusetts dismissed a class action complaint by an insured’s heir (Feingold) against John Hancock.  Feingold initiated his suit to challenge John Hancock’s practice of retaining insurance policy proceeds until a policy beneficiary submits a claim.  Among other arguments offered, Feingold referenced the well-publicized scrutiny relating to insurers’ use of Social Security Death Master File sweeps to discontinue annuity payments but not to determine where life insurance policies may be payable.

Notably, this court ruled that “Both the insurance policy and state law allowed John Hancock to hold the policy proceeds until Feingold provided proof of his mother’s death.”

In May 2011, John Hancock entered into a Global Resolution Agreement (GRA) with various states relating to this matter (several other insurance carriers have also entered into settlements).  In the GRA, John Hancock agreed to run death claim sweeps on a quarterly basis and attempt to locate beneficiaries of life insurance policies.

Citation: Feingold v. John Hancock Life Insurance Co., No. 1:13-cv-10185-JLT (D. Mass.) 

 

OTHER DEVELOPMENTS

NAIC Private Equity Issues Working Group

As we’ve reported in recent LRA updates, insurance regulators are increasing scrutiny of transactions in which private equity investors acquire insurance companies (primarily focusing on fixed annuity underwriters).  In July, the NAIC’s Financial Condition (E) Committee decided to create a working group to address the issues outlined in a referral memorandum.  The group will consider procedures for state insurance regulators to use in order to mitigate potential concerns with management of assets by private equity firms or hedge funds.