Senate Finance Committee – Tax Reform Update
As reported previously, the Senate Finance Committee continues to review various topics relating to tax reform. In June, the leaders of the Committee issued a letter to all senators requesting legislative language or detailed proposals on provisions that should be retained, added, repealed, or reformed. They have asked for submissions by July 26.
Separately, in early June, the Committee released a paper titled, Types of Income and Business Entities. Among various topics identified, the paper explored the possibility of reforms that would create greater parity between debt and equity financing (e.g., limit certain interest expense deductions) and discussed taxation proposals relating to financial products (including derivatives).
Oregon H.B. 3367 – Status Update
As we reported in our April LRA, a bill was introduced in the Oregon House of Representatives in February that would add to taxable income for Oregon tax purposes, amounts from life insurance contracts or annuity policies, excluded from federal taxable income because of operation of federal law, including sections 72, 101, 7702 and 7702A of the Internal Revenue Code.
On June 21st, this bill was marked for a public hearing. However, the proposal itself was not discussed. We received an update from one insurance carrier’s government relations team indicating that it believes the proposal is dead for the year.
Capital Rules – Update
According to a newsletter released by the Katten law firm, the Federal Reserve Board announced that it will vote this Tuesday (July 2) on the final version of rules that will require financial institutions to achieve higher levels of high-quality capital. As of publication of this LRA, no details of the final regulation were released/available.
Earlier in the month, FRB Governor Sarah Bloom Raskin delivered a speech at the Ohio Bankers Day in which she stressed two imperatives related to implementation of revised capital rules (particularly for community banks): timeliness and simplicity.
As reported previously, a number of bills have been proposed in the U.S. House and Senate related to bank capital rules. None progressed in June; we will continue to monitor them.
NAIC Review of Non-Variable, Insulated Products
In June, the National Association of Insurance Commissioners (NAIC) held a conference call to discuss comments received by the Separate Account Risk (E) Working Group (SARWG) in response to a January 9 exposure draft. As we’ve reported previously, the NAIC continues to review the use of non-variable, insulated products with particular scrutiny toward whether the products increase risk to the general account and/or create an inappropriately favored class of policyholders.
The exposure draft released in January by the NAIC discussed regulatory considerations relating to certain non-variable, insulated products including: market value adjusted annuities, deferred annuities, hybrid BOLI/COLI products, guaranteed investment contracts and group annuity contracts. BOLI/COLI products were identified as “Group C.” The exposure document identified product attributes, reviewed the applicability of guaranty fund assessments and identified certain proposed recommendations.
Notably, the exposure draft took the view that the hybrid BOLI products did not have any contractual elements that would warrant inclusion in an insulated separate account. Further, the NAIC noted that products with characteristics that meet the safe harbor requirements of SEC Rule 151 generally should not be insulated from general account claims. However, the NAIC acknowledged the reliance of banks in particular on the insulative aspect of hybrid BOLI and encouraged feedback from the industry.
Commenters generally disagreed with the NAIC’s views and proposed recommendations. In particular, the ACLI responded that the SARWG was placing too much emphasis on whether or not investment risk was shifted to the insurer (i.e., if the carrier bears investment risk, then the product should not be insulated). The ACLI noted that a number of factors might compel a customer to prefer an insulated product (e.g., accounting considerations, counterparty diversification, reporting transparency, etc.). Finally, the ACLI identified principles that should be embraced to ensure equitable treatment between the general account and insulated separate accounts and to manage solvency risk concerns, including:
- The insulated assets in a separate account must derive only from funds contributed by customers, plus earnings thereon, less any withdrawals and fees;
- Every product should be filed with an opinion provided by a qualified actuary as to the sufficiency of the pricing (i.e., the opinion should represent that the general account is adequately compensated for its provision of a guarantee related to the contract liabilities); and
- Any reserves in excess of the amount held as insulated in a separate account must be held as a non-insulated amount, or in the general account, or in a non-insulated supplemental separate account.
Great-West Life & Annuity Insurance Company also submitted a comment letter regarding its hybrid BOLI product. The Great-West letter discussed operational aspects of its product and regulatory considerations associated with its approval by the Colorado Division of Insurance and more than 44 other state insurance regulatory authorities.
Exposure draft and comment letters are available upon request.
FSOC Non-Bank SIFI Designations
In a closed-door meeting, the FSOC voted to propose the designation of non-bank systemically important financial institutions (SIFIs). Although FSOC did not disclose the identities of these companies, AIG, GE Capital and Prudential Financial each publicly confirmed their proposed nonbank SIFI status.
If the proposed designations become final, these companies will become the first to be subjected to FRB oversight and supervision under Title I of the Dodd-Frank Act.
SEC Money Market Reform Proposals
On June 5, the SEC voted unanimously in favor of two alternative money market fund (MMF) reform proposals to address their susceptibility to runs. Key aspects of the two proposals include:
- Require all institutional prime MMFs to operate with a floating net asset value (NAV).
- Require that non-government MMFs impose a 2% liquidity fee if a fund’s level of weekly liquid assets falls below 15% of the fund’s total assets. Additionally, funds’ boards would have the ability to gate redemptions in certain circumstances.
A “retail” MMF would be designated by a restriction of shareholder redemptions to no more than $1 million in any one business day. The SEC noted that final rules may embrace a combination of the approaches.
The proposals will be open for public comment for 90 days following publication in the federal register.
Hartford Life Developments
In early June, a Bloomberg article noted that Hartford Life will be applying investment restrictions on existing account balances for a number of their variable annuity products. According to the prospectus amendment filed on 4/23/2013, contract owners are required to allocate the Contract Value in accordance with the new investment restrictions by October 4, or they may risk losing certain guaranteed benefits. The $65.5 billion U.S. variable annuity business is one of several business lines that were placed in run-off. Hartford refers to these run-off businesses under the heading “Talcott Resolution” within its financial statements.
In a separate development, Standard & Poor’s downgraded Hartford Life Insurance Company (HLIC) to BBB+ from A- on June 17. We distributed a detailed announcement to clients with Hartford Life exposure. Details are available upon request.
Finally, on June 27, Hartford Life announced that it had reached a definitive agreement to sell its subsidiary, Hartford Life International Limited (HLIL) to a Berkshire Hathaway company for $285 million. HLIL is a Dublin-based company that sold variable annuities in the U.K. from 2005 to 2009.
Texas H.B. 2383 – Life Settlements approved for Medicaid Long-Term Care
On June 14, Texas Governor Rick Perry enacted TX H.B. 2383. The law enables state residents to use the proceeds of a life settlement to help fund Medicaid long-term care expenses. Similar bills have been filed in California, Kentucky, Florida, Louisiana, Montana, North Carolina and New Jersey.
In a related development, Moody’s issued a report indicating that this legislation is “credit negative” for the life insurance industry. According to Moody’s, “The state’s endorsement and potential expansion of life settlements will pressure life insurers’ profitability as life settlements keep in force policies that would otherwise have been surrendered.”