Monthly LRA Update: May 2022

JUDICIAL DEVELOPMENTS

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

On April 18 the Delaware Superior Court granted an order to stay discovery and all other pending deadlines because the parties have agreed in principle to a settlement that would resolve the proceedings.

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 55% cap improperly impacted death benefit proceeds was not dismissed

Terms of the pending settlement have not been disclosed.

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

REGULATORY DEVELOPMENTS

Financial Industry Associations Request Review of SA-CCR

On April 21 the ISDA, the Institute of International Finance (IIF) and the Global Financial Markets Association (GFMA) submitted a letter to the Basel Committee on Banking Supervision (BCBS), requesting that the BCBS revisit the SA-CCR framework.

The letter observes that aspects of the standard “result in excessive risk exposures with associated impact on capital and end-user cost.”

TAX DEVELOPMENTS

Treasury Greenbook Released

On March 28 the US Treasury released the General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals, commonly referred to as the Greenbook. This year’s Greenbook included two explanations that could have applicability for BOLI programs.

Expand Pro Rata Interest Expense Disallowance for Business-Owned Life Insurance

Under current law, interest expense deductions allocable to unborrowed life insurance cash values covering the lives of past and current employees and directors are permitted. The Biden Administration proposal would repeal the exception from the pro rata interest expense disallowance rule for contracts covering employees, officers or directors.

The proposal would apply to contracts issued after December 31, 2021.

This topic was proposed in each of the Obama Administration budget proposals as well. Note that in the past, the proposal for this topic was always marked to apply to contracts issued after the end of that calendar year. This year’s explanation is largely, but not entirely, prospective in nature.

We have computational models set up to assess the potential economic impact of this provision. Please reach out to us if you are interested in the topic.

Corrections to DAC Changes in TCJA

The Greenbook notes that the Tax Cuts and Jobs Act intended to modify the DAC tax rates for various contracts:

• Annuity contracts: from 1.75% to 2.09%;
• Group Life contracts: from 2.05% to 2.45%; and
• Other Life Insurance contracts: from 7.70% to 9.20%.

The “Other Life Insurance” contracts rate is applicable to BOLI programs.

The Greenbook states that a drafting error (which misidentified the appropriate IRC language) may result in only the annuity contracts percentage being implemented. Therefore, “a reasonable reading of the law could claim that only the percentage for annuity contracts was changed by TCJA.”

The proposal would clarify that the intended rates are applicable for each category with an effective date as of the enactment of the TCJA (i.e., retroactive application). The proposal also makes a technical correction related to international and nonproportional reinsurance lines of business.

It is our understanding that BOLI insurers had repriced for the 9.2% DAC rate, and, therefore, this issue may not have any appreciable impact.