First National Bank of Pennsylvania v. Transamerica and Clark Consulting – BOLI Surrender Litigation
On July 28, 2014, First National Bank of Pennsylvania (FNB) filed a civil complaint against Transamerica Life Insurance Company and Clark Consulting in connection with the surrender of a separate account BOLI program.
According to the complaint, Park View Federal Savings Bank purchased the policies in October 2006. In August 2009, Park View changed its investment election to a 100% allocation to a stable value fund (according to the complaint, the stable value provider was JP Morgan Chase Bank, N.A.). FNB acquired Park View Federal Savings Bank (the original purchaser of the policies) in October 2013. On March 4, 2014, FNB provided a Surrender Notice to Transamerica. The cash surrender value at that date was allegedly $21.25 million. FNB expected to incur a surrender charge of ~$660k; resulting in a net surrender value of ~$20.59 million.
Upon surrender, Transamerica took the position that FNB was not entitled to the full book value because it was unable to represent that the policies had “not been previously owned by an entity other than the Policyowner.” As such, Transamerica has agreed to pay just under $18 million.
FNB’s complaint included copies of the insurance policy and application as exhibits; however, it did not include copies of the private placement memorandum, stable value agreement (or description), or letter agreement (if applicable).
Transamerica and Clark Consulting have not yet filed a response to the complaint. A copy of the complaint is available upon request.
Case Reference: First National Bank of Pennsylvania v. Transamerica Life Insurance Company & Clark Consulting No. 2:14-cv-01007-CB (W.D. PA)
Revisions to the Risk-Based Capital Definition of Eligible Guarantee for Advanced Approaches Banks Finalized
As a follow up to our June LRA update, in July the FRB, FDIC and OCC announced the finalization of a technical correction to the definition of “eligible guarantee” in the agencies’ risk-based capital rules. This change only impacts advanced approaches institutions.
The final rule is substantially similar to the proposed rule and adopts the definition of eligible guarantee without change. The effective date is 10/1/2014; however, the agencies will allow advanced approaches banking organizations to adopt the final rule before the effective date.
NAIC Efforts Regarding Separate Accounts – Update
In July, the NAIC’s Financial Condition (E) Committee released a summary of its various activities relating to separate account products. Most of the deliberations surround non-unitized (i.e., non-variable or “hybrid”) separate account products, which include certain guarantees provided by the insurance company through its general account.
Items of potential interest to BOLI/COLI policyowners include:
- Separate Account Risk (E) Working Group (SARWG) analysis and recommendations for non-variable products including requirements for insulated asset treatment, product pricing and compensation to the general account for any guarantees provided.
- Financial Analysis Working Group (FAWG) study of non-unit linked activity (e.g., BOLI and COLI) which found 300 products identified as non-variable, of which, 81 were noted not to be legally insulated. Additionally, FAWG noted that 15 insurers paid guarantees in 2010, but reported no risk charge paid to the general account.
- Receivership & Insolvency Task Force and Receivership Separate Accounts (E) Working Group is studying receivership issues related to separate accounts and will report on possible solutions.
- Capital Adequacy (E) Task Force is, among other things, considering if the insurer risk-based capital formula should be changed to increase the capital charge associated with separate account products, which, in many instances, have increased in size and complexity in relation to general account products.
We will continue to monitor these deliberations.
SEC Adopts Money Market Fund Reform Rules
On July 23, the SEC adopted amendments to the rules that govern money market mutual funds via a 3-2 majority vote of the commissioners. The new rules require a floating net asset value (NAV) for institutional prime money market funds and provide non-government money market fund boards new tools—liquidity fees and redemption gates—to address runs.
The floating NAV requirement will not apply to retail money market funds, including retail funds and all government money market funds (whether or not they are institutional funds).
According to a Morrison & Foerster publication, the Department of Treasury and IRS are expected to provide tax relief as it relates to operational elements of the floating NAV requirements.
The final rules provide a two-year transition period.
IRS Revenue Ruling 2014-15 – Additional Publication
As we reported in our June LRA, the IRS recently released Revenue Ruling 2014-15. The revenue ruling provides guidance to employers funding their retiree health benefits through a wholly owned subsidiary.
The Groom Law Group has released a publication describing the ruling and providing observations for employers to consider.