Monthly LRA Update: January 2023

LEGISLATIVE DEVELOPMENTS

Consolidated Appropriations Act Enacted

On December 29 President Biden signed H.R. 2617, the “Consolidated Appropriations Act, 2023” into law. This omnibus legislation included consolidated appropriations for the fiscal year ending September 30, 2023, additional support for the situation in Ukraine, and various other provisions.

The legislation also included a package of reforms referred to as the SECURE 2.0 Act of 2022 (Division T of the Act) that focus on retirement plans. Noteworthy changes include

● Required Minimum Distribution ages are being increased to 75 over the next ten years

● Expanding Automatic Enrollment in retirement plans

● Modifications to catch-up contribution limits and rules

Insurance-Dedicated Exchange Traded Funds

The Act also requires the Secretary of the Treasury to amend the diversification rules for variable insurance contracts in order to facilitate the use of exchange-traded funds as investment options under variable contracts within the meaning of IRC § 817(d). The Act will allow certain financial institutions acting as clearing agencies or market makers to own shares of the insurance-dedicated ETF to facilitate necessary trading operations.

The Act sets a 7-year deadline for these amendments.

TAX DEVELOPMENTS

IRS Notice 2023-7 – Initial Guidance Regarding Corporate Alternative Minimum Tax

On December 27 the IRS published Notice 2023-7, which announced an intention to issue proposed regulations addressing the application of the new corporate alternative minimum tax (CAMT) that was enacted with the passage of the Inflation Reduction Act of 2022. Notice 2023-7 also provides interim guidance regarding certain issues deemed to be “time-sensitive”, such as rules with respect to the depreciation of property to which § 168 applies

and a safe harbor method for determining whether a corporation is an “applicable corporation” subject to the CAMT.

As we have noted previously, we do not anticipate any of the CAMT regulations having a direct effect on BOLI programs. We anticipate that earnings from BOLI programs will be included in the definition of “adjusted financial statement income” (AFSI). Even so, we will continue to provide updates on the implementation of the CAMT.

JUDICIAL DEVELOPMENTS

Athene v. American General, et al. – COLI SVP Dispute Settled

In our April 2022 LRA Update we reported that the parties notified the court that they had agreed in principle to a settlement. On December 23 this matter was dismissed with prejudice. Since it was private litigation, the terms of the settlement do not appear to be disclosed.

To briefly recap this dispute:

● In October of 2000 and June of 2001, American General separately sold two substantially similar group-variable life insurance policies to Plaintiffs in return for $150 million in premiums.

● Athene chose to invest in a portfolio named the SVP Balanced Portfolio, which was comprised of two components: 1) an equity and bond portfolio; and 2) a guarantee from non-party Zurich Insurance Company that is calculated as “the difference between (i) the total value of the SVP Balanced Portfolio and (ii) the net asset value of the equity and bond portfolio.

● In 2001 Athene provided notice of its intention to surrender the policies at a time that the SVP product value was $23 million. Instead of proceeding with the surrender, the

parties agreed to amend the Transaction Documents to, among other things, set a minimum crediting rate of eight percent and a cap of ten percent. Importantly from AGL’s perspective, the renegotiation also vested “sole discretion” with AGL as to when surrender proceeds would be paid.

● Over time, the SVP Product has grown to become a larger and larger portion of the SVP Balanced Portfolio value.

● In late 2011 and early 2012 AGL issued amendments to “cap” the value of the SVP Product at fifty-five percent of the total value of the SVP Balanced Portfolio and to clarify that surrender proceeds would not be paid until the value of the SVP Product is at or below zero.

● In May 2020 the Court granted defendants’ motion to dismiss as it related to allegations that Athene’s surrender and/or reallocation rights were impaired. The Court concluded that those allegations were not ripe for adjudication. However, the allegations that the fifty-five percent cap improperly impacted death benefit proceeds was not dismissed.

● In April 2022 the Court granted an order to stay discovery and all other pending deadlines because the parties had agreed in principle to a settlement that would resolve the proceedings.

Docket: C.A. No. N19C-10-55-PRW CCLD

OTHER DEVELOPMENTS

BCBS Evaluation of the Impact of Basel III Reforms

On December 14 the BIS published a report evaluating the impact and efficacy of the Basel III reforms implemented between 2009 and 2019. The examined reforms included the adjustments to the risk-based capital framework and the implementation of leverage ratios, the Liquidity Coverage Ratio (LCR), and the Net Stable Funding Ratio (NSFR).

Key findings include

● Banks have significantly increased their Common Equity Tier 1 Capital since the implementation of the Basel III reforms

● Banks have improved liquidity positions by increasing HQLA holdings and decreasing reliance on short-term funding sources

● While the reforms may have limited lending by banks with weaker initial regulatory ratios, there was no indication that the reforms impaired the aggregate supply of credit to the economy

● The report acknowledges that the Basel III reforms have resulted in greater regulatory complexity; however, this report does not assess whether the complexity could be reduced while maintaining the same level of overall resilience in the banking system.