December 2018


COI Litigation Update – John Hancock Proposed Class Action Settlement

As we have reported previously, John Hancock Life Insurance Company (U.S.A.) has agreed to settle class action complaints relating to its Cost of Insurance (COI) charges assessed under numerous life insurance policies. We have confirmed that one of the proposed settlements, 37 Besen Parkway, includes some BOLI/COLI policies.

On November 1, the US District Court for the Southern District of New York provided preliminary approval for the proposed settlement. Notices were to be sent to class members within 30 days (i.e., by November 30); however, because John Hancock experienced technical delays in providing the name and address information for certain older policies, the parties agreed to extend the deadline.

Today (January 2, 2019), we received copies of the settlement notices from the class action counsel, indicating that the packages have now been sent by the Settlement Administrator. Noteworthy aspects of the notices include

  • Recipients do not need to take any action to participate in the settlement
    • Alternatively, instructions are provided to either object, in part or in whole, to the settlement or to opt out of the settlement
  • John Hancock has agreed to fund a cash Settlement Fund in the amount of $91,250,000
    • If the Court approves the Settlement, Settlement checks will be mailed to the owners of Settlement Class Policies on a pro rata basis as follows: a minimum settlement payment of $100 per policy plus a share of the remaining Net Settlement Fund, in proportion to the Settlement Class Members’ share of the overall COI and Age 100 Rider overcharges paid during the applicable statute of limitations through August 2016. Policies owned by class members issued before 12/31/1996 shall have alleged COI Overcharge discounted by half due to an alleged prior release in Duhaime et. al. v. John Hancock Mutual Life Insurance Company, et. al. (D. Mass. 1996).
  • Settlement checks will be issued within 30 days after the Final Settlement Date
  • Elections to opt out must be postmarked by February 4, 2019
  • The Fairness Hearing is scheduled for 10:00 AM on February 19, 2019



JCT Releases General Explanation of Tax Cuts and Jobs Act

On December 20, the JCT released a General Explanation of Public Law 115-97, commonly referred to as the Tax Cuts and Jobs Act, or “TCJA.” For each provision, the JCT includes a description of prior law, an explanation of the provision, and the effective date. Throughout the document, footnotes identify provisions for which the JCT believes technical corrections may be necessary to achieve the intention of the statute. In total, we counted more than 75 instances where the document indicated the potential need for technical corrections.

Explanation of Reportable Policy Sale Rules

Subpart B, Section J. (Tax Reporting for Life Settlement Transactions and Clarification of Tax Basis of Life Insurance Transactions, and Exception to Transfer for Valuable Consideration Rules (secs. 13520–13522 of the Act and secs. 101 and 1016(a) and new sec. 6050Y of the Code)), describes the TCJA changes impacting life settlement transactions and the tax basis of life insurance transactions. Of note, with respect to the definition of a Reportable Policy Sale under §101(a)(3)(B), footnote 1160 explains that “A substantial family, business or financial relationship with the insured apart from the interest in the life insurance contract” is not further defined in the statute. While the JCT did not indicate this provision as potentially needing a technical correction, the footnote indicates that the Treasury Department is directed to provide guidance as to the definition.

Explanation of New DAC Rules

Under Subpart B, Section I. (Capitalization of Certain Policy Acquisition Expenses (sec. 13519 of the Act and sec. 848 of the Code)) the JCT describes the new DAC provisions as follows:

The provision extends the amortization period for specified policy acquisition expenses from a 120-month period to a 180-month period beginning with the first month in the second half of the taxable year. The provision does not change the special rule providing for 60-month amortization of the first $5 million of specified policy acquisition expenses (with phaseout). The provision specifies that for annuity contracts, the percentage is 2.09 percent; for group life insurance contracts, the percentage is 2.45 percent; and for all other specified insurance contracts, the percentage is 9.20 percent.

This paragraph concludes with a footnote stating, “A technical correction may be needed to correct statutory references so that the provision achieves this result.” It is not clear to us what aspect of this new rule may require a correction.

Updated Budget Scoring

The document also included updated scoring for the estimated budget effects of the TCJA. In total, the JCT estimates that the law will cost ~$1.46 trillion over the 10-year timeframe. The collective impact of the various insurance reforms was estimated to provide just under $40 billion in additional tax revenue (only $207 million was attributable to the life settlement/transfer for value provisions).


Year-End Tax Package Passed by the House

On December 20, the House passed the year-end tax package that includes tax relief for communities hit by natural disasters, permanent solutions to two temporary tax policies, retirement and savings provisions, bipartisan IRS reform, and a few minor time-sensitive technical corrections to the Tax Cuts and Jobs Act (TCJA).

As we reported previously, the technical corrections to the TCJA do not include any adjustments to the so-called Reportable Policy Sale rules. We have been advised that the ACLI and AALU continue to work on draft legislative clarifications with a goal of them being included in the next Bluebook.

The Senate is not expected to take any action on this legislation before the 115th Congress concludes tomorrow (January 3).


Bank Regulators Allow Three-Year Regulatory Capital Phase-in for New CECL Accounting Standard

On December 21, the federal bank regulatory agencies approved a final rule modifying the regulatory capital rules and providing an option to phase in the regulatory capital effects of the updated accounting standard known as the “Current Expected Credit Losses” or CECL methodology. This final rule is effective on April 1, 2019. Banking organizations may adopt this final rule prior to that date.

In general, the final rule provides an optional three-year phase-in whereby the adverse impact of the accounting change on retained earnings (the “day-one adverse effects of CECL”) will be reflected in regulatory capital over a four-year period as shown in the table below (see section III. B. CECL Transition Provision for a detailed description of the rule’s mechanics).


Percentage of Day-One Adverse Effects of CECL Reflected in Regulatory Capital

Beginning of Year 1 25%
Beginning of Year 2 50%
Beginning of Year 3 75%
Beginning of Year 4 100%

CECL is set to become effective for some institutions in fiscal years beginning after 12/15/2019. Below is a table of current CECL Effective Dates.

CECL Effective Dates
U.S. GAAP Effective Date Regulatory Report Effective Date*
PBEs that are SEC Filers Fiscal years beginning after 12/15/2019, including interim periods within those fiscal years 3/31/2020
Other PBEs (Non-SEC Filers) Fiscal years beginning after 12/15/2020, including interim periods within those fiscal years 3/31/2021
Non-PBEs Fiscal years beginning after 12/15/2021, including interim periods within those fiscal years 3/31/2022
Early Adoption Early adoption permitted for fiscal years beginning after 12/15/2018, including interim periods within those fiscal years 3/31 of year of effective date of early adoption of ASU 2016-13












*For institutions with calendar year-ends

According to the final rule’s explanation, the banking regulators approved the proposed rule with limited, non-substantive changes. In response to commenters’ requests to seek further delay in CECL implementation, the regulators noted that they “are committed to closely monitoring the effects of CECL on regulatory capital and bank lending practices.”

As we have reported previously, we do not believe the CECL standard will have any direct impact on the accounting treatment for BOLI/COLI.


FDIC Issues Notice of Proposed Rulemaking to Revise Company-Run Stress Testing Requirements

On December 18, the FDIC issued a notice of proposed rulemaking that would revise the FDIC’s requirements for stress testing by FDIC-supervised institutions, consistent with changes made by Economic Growth, Regulatory Relief, and Consumer Protection Act.

The proposed rule would amend the FDIC’s existing stress testing regulations to change the minimum threshold for applicability from $10 billion to $250 billion, revise the frequency of required stress tests by FDIC-supervised institutions from annual to periodic, and reduce the number of required stress testing scenarios from three to two. The FDIC proposes the elimination of the “Adverse” stress-testing scenario (“baseline” and “severely adverse” will continue to apply).

Comments on the rule proposal are due by February 19.


Regulators Extend Comment Period for SA CCR Proposal

In response to a request from various banking industry associations (including SIFMA, ABA and ISDA), the banking regulators have extended the deadline for comments for the proposed rule, Standardized Approach for Calculating the Exposure Amount of Derivative Contracts.

Comments are now due on or before February 15.



NTIS Death Data Improvement Project – Update

On December 12, the NTIS sent Death Master File (DMF) subscribers an email describing its efforts to improve the Social Security Administration’s (SSA’s) death data. The email indicated that the SSA will add nearly 3 million death records to the DMF over the next several months. As was the case with the last round of added records, the SSA notes that many of these records reflect a higher volume of zeroes in the date of death field. This generally occurs on older records.

The SSA did not explain the basis for determining that the records should be included in the DMF. It remains unclear as to how many death records the SSA maintains external to the DMF.

Here is the upcoming schedule of additional records being added to the DMF:

  • 12/16/18: 10,000 records
  • 02/24/19: up to 1.7m records
  • 03/24/19: 10,000 records
  • 04/21/19: up to 1.2m records