July 2017

JUDICIAL DEVELOPMENTS

FNB PA v. Transamerica – Summary Judgement Ruling

On July 6, the District Court (PA-W.D.) issued its memorandum opinion with respect to Transamerica’s motion for summary judgment. The court entered judgment in favor of Transamerica.

This dispute centered on whether FNB was paid the entire amount it was owed after it surrendered certain Separate Account BOLI policies. FNB claims that in addition to the amount it was paid at surrender (approximately $18 million), it was owed an amount known as the “Bank Enhancement Amount” (worth more than $2.5 million) from a third-party, and that Transamerica’s actions directly prevented FNB from receiving it.

The opinion summarized the central issues of the case as follows:

The amount owed to the Policyowner at surrender under the Stable Value Subaccount is governed by various provisions in the SVA and the EAA. Under the EAA, JP Morgan promised that, subject to certain limits and conditions which had to be “strictly satisfied,” it would pay an amount known as the “Bank Enhancement Amount” to Commonwealth General [Transamerica’s affiliate] at surrender. Two conditions in the EAA are relevant to this dispute. The first condition was that “[t]he Polices are not, and have not been previously, owned by an entity other than the Policyowner on or prior to the Immunization Termination Date.” The second condition required that, within a specified time period, the Policyowner deliver “a fully executed and complete Surrender Certificate” that is “substantially in the form of the document attached as Exhibit C” to the EAA. Failure to strictly satisfy either of these conditions under the EAA discharged JP Morgan’s obligation to pay the Bank Enhancement Amount to Commonwealth General.

The opinion went on to evaluate each of the two conditions in detail and ultimately concluded that JPMorgan was correct in each of its determinations.

The legal analysis of the first condition described above appears to be highly technical. FNB had asserted that it was deemed to be a continuation of the original policyowner (a community bank that FNB acquired in a merger). The court determined otherwise.

The second condition’s violation appeared to be more straightforward. FNB asserted that it was entitled to modify the Surrender Certificate because its demands for adequate assurances (i.e., advance clarification of JPMorgan’s position) were not met. The court disagreed and noted, “Because it is undisputed that FNB failed to satisfy this condition, JP Morgan was justified in its refusal to pay the Bank Enhancement Amount.”

Key Takeaways

In reviewing this litigation, we recommend that BOLI policyowners consider the following takeaways:

Recognizing the complexities that are commonly found in stable value agreements, pre-M&A due diligence should include detailed reviews of any BOLI policies that utilize SVP features;
Policyowners that have acquired SA BOLI policies that include SVP via acquisition of another institution should carefully review the fact patterns to determine if any similar provisions exist in their agreements. For example, are there any provisions that may permanently prevent the policyowner from qualifying for a book value surrender? In the FNB case, the first condition appears to have been a permanent failure (i.e., even if the policies had been held for a longer time period post-acquisition, it is unclear whether FNB could have satisfied that condition).
Policyowners that own SA BOLI policies that include SVP should understand the precise requirements that need to be satisfied in order to qualify for book value upon surrender. Even recognizing that surrendering policies is deemed unlikely for most BOLI owners, the presence of surrender requirements may impact the appropriate accounting treatment of the policies. For example, if surrender requirements are unlikely to be satisfied, is it appropriate to continue recording the policies at book value?

The court’s opinion is available upon request.

Case Citation: No. 14-1007, United States District Court, Western District, Pennsylvania

TAX DEVELOPMENTS

Joint Statement on Tax Reform

After its attempts to repeal and replace the Affordable Care Act were unsuccessful, the Republican-controlled Congress now appears ready to move on to the topic of tax reform. On July 27, House Speaker Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Committee Chairman Orrin Hatch (R-UT), and House Ways and Means Committee Chairman Kevin Brady (R-TX) issued a joint statement on tax reform.

Of note, the topic of implementing a border adjustment tax has been set aside.

Over the weekend, House Ways and Means Committee Chairman Kevin Brady, indicated that the timetable for getting legislation to the President’s desk is before the end of the year.

OTHER DEVELOPMENTS

Basel Consultative Documents Regarding Short-Term Securitizations

On July 6, the Basel Committee released two consultative documents regarding Short-Term Securitizations:

The STC Criteria primarily addresses considerations that asset-backed commercial paper (ABCP) conduits would need to satisfy to be classified as “simple, transparent and comparable.”

The STC Capital consultative document outlines proposed capital treatment for STC Securitizations as well as additional requirements that would apply in order to achieve the more efficient capital charges. Section 5 includes the following table of proposed risk weights (applicable under an external ratings-based approach):

Both consultative documents are open for public comment by October 5, 2017. We do not expect either of these developments to have a material impact on risk-weighted assets for BOLI programs, though finalization of STC securitization standards and capital rules may increase the ability and desire to utilize investments in ABCP conduits within short duration BOLI investment allocations.