September 2017

TAX DEVELOPMENTS

IRS Private Letter Ruling on Policyholder Implications of Assumption Reinsurance Transaction

On September 8, the IRS publicly released a Private Letter Ruling (Number 201736019) regarding the federal income tax implications of an assumption reinsurance transaction on a group flexible premium variable life insurance policy. As set forth in the PLR, a Policyholder requested the ruling prior to consenting to an assumption reinsurance transaction that was being contemplated between the policy’s issuer and a reinsurer. The policyholder is identified as a life insurance company (i.e., this case involves an I-COLI policy). The issuer and reinsurer were both subsidiaries of a common parent and the assumption reinsurance transaction was represented as being necessary to accommodate a corporate restructuring of the insurance company.

The IRS was asked to rule on the following issue:

For purposes of sections 101(j), 264(f), and 7702, whether the transfer of Policy from Issuer to Reinsurer pursuant to the Reinsurance Contract will cause Policy to be materially changed or will affect the date Policy was issued or entered into.

The IRS concluded that the assumption reinsurance transaction would not constitute a material change or affect the date the policy was issued. This conclusion is consistent with our general understanding that an assumption reinsurance transaction has no adverse tax implications for a policyholder.

It is worth noting that the PLR included the following points:

  • All terms of the reinsured underlying policies remain unchanged, including the amount and pattern of death benefit, the premium pattern, the rate guaranteed on issuance of the contract, and the mortality and expense charges;
  • The substitution of the reinsurer for the original insurer is the only modification to the underlying contracts; and
    Policyholder represented that, prior to entering into the Reinsurance Contract, the policy will not have been changed in a manner that would cause it to be treated as newly issued or entered into for federal income tax purposes.
  • As always, the ruling was based upon the information and representations submitted by Taxpayer and the ruling applies only to the Taxpayer requesting it.

 

Tax Reform Framework Released

On September 27, the Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance released an initial framework for tax reform. Highlights of the framework as it relates to businesses include:

  • Targets a corporate tax rate of 20%;
  • Aims to eliminate the corporate AMT;
  • Grants immediate expensing of new investments in depreciable assets for at least five years;
  • Partially limits the deduction for net interest expense incurred by C corporations; and
  • Repeals or restricts numerous special exclusions and deductions (R&D and low-income housing will not be impacted).

The framework also states that “special tax regimes” that exist for certain industries will be “modernized.” The ACLI released a statement on the release of the tax reform framework.

 

Senate Budget Committee Releases Fiscal Year 2018 Budget Resolution

Touted as an initial step toward advancing tax reform, on September 29, the Senate Budget Committee released its Fiscal Year 2018 Budget Resolution. According to Budget Committee Chairman Mike Enzi’s (R-WY) press release, highlights of the budget resolution include:

  • Reduces spending by $5.1 trillion
  • Provides reconciliation instructions to spur economic growth:
    • Finance Committee—$1.5 trillion for comprehensive tax reform
    • Energy and Natural Resources—$1 billion in deficit reduction

According to Senate Finance Committee Chairman Orrin Hatch’s (R-UT) press release, the $1.5 trillion budget instruction to the Finance Committee “will give the committee and the entire Congress the headroom needed to produce comprehensive tax reform that will spur economic growth…”

We did not observe any provisions in this resolution that would be directly applicable to BOLI programs.

 

REGULATORY DEVELOPMENTS

Comment Letter re BOLI Exclusion under Volcker Rule

As we reported last month, the OCC was seeking comments and suggestions with respect to the Volcker Rule regulations. The comment period ran through September 21.

We submitted a comment letter with two suggestions related to the BOLI exclusion currently set forth in the Volcker Rule regulations:

  1. That BOLI cannot be used to circumvent the intent of the Volcker Rule; and
  2. That BOLI insurance companies can have non-banking customers (e.g., corporations) as policyholders with interests in an applicable separate account.

Our comment letter further describes each of these recommendations.

 

Banking Regulators Propose Simplifications to the Capital Rules

On September 27, the banking regulators released a proposal to simplify aspects of the generally applicable capital rules related to the treatment of acquisition, development, or construction (ADC) loans; items subject to threshold deduction including MSAs and temporary difference DTAs; and minority interests includable in regulatory capital.

The proposal also includes a number of technical corrections to the existing rules. We have reviewed these proposed changes and none appear to have any direct impact on BOLI programs.

The proposal will be open for public comment for 60 days after it is published in the Federal Register.

 

JUDICIAL DEVELOPMENTS

Transamerica COI Litigation – Jury Awards Damages to Plaintiffs

On September 13, a federal jury (CA – Central District) returned a verdict in favor of plaintiffs (DCD Partners, LLC and Rev. Dr. J. Benjamin Hardwick) versus Transamerica Life Insurance Company in a lawsuit challenging Transamerica’s COI increases on a certain group of policies. The jury found that Transamerica breached the insurance policy contract and the covenant of good faith and fair dealing. It awarded damages to the plaintiffs in an amount of $5.6 million. According to the jury instructions, the damages amount is an amount equal to the increases in the Monthly Deduction Rate of the policies.

This lawsuit was originally filed in April 2015. The following background was provided in the plaintiff’s complaint:

Historically, inner-city African-Americans have experienced difficulties in obtaining life insurance. Therefore, Reverend Dr. J. Benjamin Hardwick, Pastor of the Praises of Zion Baptist Church, worked with Transamerica to develop a race-neutral life insurance program that would provide benefits to the members of his congregation to, for example, pay burial expenses. Pursuant to the program, an investor, in exchange for a portion of the benefits, would pay the premiums on the policies issued on members of the congregation who chose to take part in the program. The remainder of the benefits would be provided to the named insured’s designated beneficiary and non-profit entities that provide services to youth and families while improving the quality of life in the South Los Angeles community. In March 2004, Transamerica issued 1,229 policies (“Pool 1”) under the program. Then in November 2004, Transamerica issued an additional 1,171 policies (“Pool 2”) (Pool 1 and Pool 2, together, are referenced herein as the “Policies”).

The complaint went on to assert that Transamerica “more than doubled” the amounts it charged for the policies, making the premiums cost-prohibitive for the plan.

While a jury verdict does not carry precedential value, it is worth noting that a pending class-action complaint against Transamerica (Feller et al v. Transamerica) is also taking place in the California Central District court. On September 18, Transamerica filed a motion challenging jurisdiction for one of the named plaintiffs in that proposed class-action.

 

Lincoln COI Litigation Update

In September, the U.S. District Court (PA – E.D.) entered rulings on Lincoln National’s motions to dismiss two separate cases challenging the company’s recent COI rate increases.

In Bharwani v. Lincoln (a consolidated class action of individual insureds), the plaintiffs largely survived Lincoln’s motion to dismiss. While Lincoln contends that its public explanations for the COI rate increases are consistent with the factors identified in the policies, the Court found the statements to be ambiguous, noting that “some of Lincoln’s statements can fairly be read as suggesting Lincoln based the COI rate increase on impermissible factors, such as past low interest rates and resulting losses.”

In EFG Bank AG, et al. v Lincoln, the same judge also ruled largely in favor of the plaintiffs (a contingent of entities involved in a life settlement structure) allowing their complaint alleging breach of contract and breach of implied covenant of good faith and fair dealing to proceed.

At present, there are a number of class actions in process challenging various insurers’ COI rate increases. In addition to Lincoln, we are monitoring actions against Transamerica, Nationwide, and Axa. We have also reported on resolved COI-related cases involving Conseco, Midland National, Lincoln Benefit, and Phoenix. To date, we are not aware of any challenges including corporate owners of policies, though the EFG Bank AG litigation is on behalf of life settlement investors.

Bharwani v Lincoln: Case 2:16-cv-06605

EFG v Lincoln: Case 2:17-cv-02592

 

OTHER DEVELOPMENTS

Senate Passes FSOC Insurance Member Continuity Act

On September 27, the FSOC Insurance Member Continuity Act was enacted. This act, which received bipartisan support, modified the term of the independent member of the Council with insurance expertise to allow him/her to serve for up to 18 months after the initial term if a successor has yet to be confirmed. This act was applauded by the ACLI.

 

FSOC Rescinds Non-Bank SIFI Designation of AIG

Following weeks of speculation, on September 29, FSOC announced that it has rescinded its determination that AIG would be subject to supervision by the Board of Governors and enhanced prudential standards.

It has also been widely reported that Prudential may be seeking to overturn its designation as a non-bank SIFI. To date, we are not aware of any official announcements from Prudential or the FSOC with regard to Prudential’s designation.

 

NJ Passes Law Requiring Life Insurers to Use Federal Death Master File to Identify Potential Matches

On September 13, New Jersey passed a law (A2511) requiring life insurers to use federal death master file to identify potential matches. The law requires life insurers to cross-check every policy and account against the federal death master file no less frequently than semi-annually.

According to a Carlton Fields publication, this law was based on the NCOIL Model Unclaimed Life Insurance Benefits Act.