Monthly LRA Update: May 2020

TAX DEVELOPMENTS

IRS Private Letter Ruling on Policyholder Implications of Assumption Reinsurance Transaction

On May 1, the IRS publicly released a Private Letter Ruling (Number 202018003) stating that for purposes of sections 101(j), 264(f), 7702, and 7702A of the IRC, a reinsurance transaction will not constitute a material change of certain life insurance contracts and will not affect the date the contracts were issued or entered into.

As set forth in the PLR, the Policyholder (certain members of a consolidated group) acquired private placement variable life insurance contracts that insured the lives of selected employees of Policyholder in order to finance certain employee benefit liabilities. The Policies provide that upon the occurrence of certain events (a “Reinsurance Event”), and at the request of Policyholder and subject to any regulatory requirements, the insurer will use its best efforts to enter into an assumption reinsurance agreement (a “Reinsurance Transaction”) with an assuming reinsurer designated by Policyholder (a “Reinsurer”) to reinsure the Policies.

According to the PLR, a Reinsurance Event occurred, and the Policyholder has requested that a reinsurer use its best efforts to enter into a Reinsurance Transaction; the consummation of which is contingent on the receipt of the requested ruling.

The Taxpayer made the following representations:

1. Prior to a Reinsurance Transaction, none of the Policies will have been altered or changed in a manner that would cause them to be treated as newly issued or exchanged for federal income tax purposes.
2. Other than substituting a new insurer, the Policies will not be modified or restructured as a result of a Reinsurance Transaction. The terms and obligations under the Policies will remain unchanged, including the amount and pattern of death benefits, the premium pattern, the interest rate or rates, and the mortality and expense charges guaranteed under the Policies.
3. After a Reinsurance Transaction, Policyholder will have no further recourse against the original insurer except for retained liabilities described in the Policies.

Overall, this Private Letter Ruling is similar to previous rulings related to the concept of assumption reinsurance transactions for life insurance contracts. In our September 2017 LRA Update, we covered PLR 201736019.

A noteworthy difference in this PLR’s fact pattern is that the assumption reinsurance transaction is arising at the request of the Policyholder pursuant to the terms of the Policies.

As always, the ruling was based upon the information and representations submitted by Taxpayer and applies only to the Taxpayer requesting it.

OTHER DEVELOPMENTS

Athene to Pay $45 Million to NY for Unlicensed Pension Risk Transfer Business

On April 13, the NY DFS announced the terms of a settlement with Athene Holding Ltd. whereby Athene would pay a $45 million penalty for violations of NY insurance law related to Athene’s pension risk transfer business. The NY DFS determined that Athene had solicited and transacted business in NY without a license.

In September 2019, NY issued a circular to all life insurers and insurance producers, advising them of their obligations under New York Insurance Law and directing insurers and producers to fix any violations.

As part of its agreement with the NY DFS, Athene will transfer the handling of transactions from Athene Annuity & Life Company to its New York-based subsidiary, Athene Annuity & Life Assurance Company of New York. The NY DFS noted that it is actively investigating other potential violations in the pension risk transfer markets.