BRIDGEPORT, Conn. (CN) – An investment firm claims in court that Phoenix Life Insurance’s managers are using “desperate and illegal attempts to keep the company afloat so they can continue to pay themselves millions of dollars each year.”
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The complaint continues: “Meanwhile, the company is secretly trying to purge billions of dollars of future liabilities by causing policyholders to lapse or surrender their policies, refusing to pay death benefits when policies mature, and canceling its own policies while keeping the premiums.”
Lima LS PLC is the only plaintiff in the federal complaint against Phoenix and four of its current or former officers.
Lima, based in London, “is a participant and investor in the secondary market for Phoenix life insurance policies,” according to the complaint. As of July 30, 2012, Lima holds the interest in 197 Phoenix policies currently in force (the ‘In Force Policies’). These policies were issued between 2003 and 2009 and total $1.15 billion dollars in face amount. Phoenix has collected approximately $137.4 million in premiums on the In Force Policies, and Lima continues to pay Phoenix approximately $3.4 million each month in premiums on these policies. As of July 30, 2012, Lima has lapsed or surrendered (i.e., sold to Phoenix) a total of 52 policies and received $0 in return for those policies (the ‘Lapsed Policies’). The Lapsed Policies had a total face amount of $229 million. Phoenix received a total of $16.6 million in premiums on the Lapsed Policies before they were lapsed.”
The complaint states: “Between roughly 2003 and 2009, Phoenix made hundreds of millions of dollars selling billions of dollars in life insurance policies that were later sold to investors on the secondary market for life insurance. In addition to lining their own pockets, Phoenix’s management took the premiums generated from these sales and sunk them in high-risk investments. They also planned to take these revenues and buy life insurance policies on the secondary market, which would increase demand for Phoenix policies in the primary market and hedge against the mortality risks from the company’s new sales of life insurance. Management’s strategy was straightforward: (a) use the demand for life insurance policies in a burgeoning secondary market to generate premium revenue from new sales of life insurance in the primary market, (b) turn a huge profit on those premiums by earning spreads on high-risk investments, and (c) offset the company’s mortality exposure by buying policies in the secondary market.
“That seemingly flawless plan crumbled when the national financial crisis struck in 2008, causing Phoenix to incur over a billion dollars of losses on its investment portfolio and to reveal the following in its 2008 annual report filed with the Securities and Exchange Commission: ‘The value of our investment portfolio has declined which has resulted in, and may continue to result in, higher realized and/or unrealized losses. For example, in 2008 the value of our general account investments decreased by $1.3 billion, before offsets, due to net unrealized losses on investments.’ …”
In a few months, Lima claims, Phoenix’s stock price plunged by 98 percent – from $13.98 to 29 cents – or nearly $1.5 billion in shareholder equity. And, Lima claims, Phoenix “suffered several credit rating agency downgrades that crippled the company’s ability to sell new life insurance, and lost two of its main distributors who stopped selling Phoenix policies due to concerns about the company’s reputation and ability to pay future claims.”
The complaint continues: “Since then, Phoenix and its management have been trying to recoup the Company’s massive losses by eradicating the liabilities associated with billions of dollars in policies that the Company sold between approximately 2003 and 2009 – most of which are now owned by investors who purchased them on the secondary market. Since as early as 2009, Phoenix has been engaged in a subversive scheme to create uncertainty about whether it will honor the terms of its own policies, forcing policyholders like Plaintiff to have to decide whether to (a) forfeit their investments by lapsing or surrendering their policies back to Phoenix, and let Phoenix keep all or most of the premiums while it never has to pay the death benefits, or (b) continue paying premiums to Phoenix, even though Phoenix might never honor their policies but will nevertheless keep their premiums. All the while, Phoenix continues to induce policyholders to continue paying premiums to Phoenix by affirmatively representing to them in policy statements and correspondence that their policies are ‘in force’ and ‘active.’ But after collecting premiums for years, Phoenix then tries to keep their premiums and void their policies or refuse to pay the death benefits when they come due.
“Plaintiff brings this action against defendants based on their anticompetitive and exclusionary attempts to destroy competition and attain or maintain a monopsony in the secondary market for life insurance policies issued by Phoenix. To accomplish their unlawful scheme, defendants have used Phoenix’s unique position as the issuer of Phoenix policies to erect strategic barriers that have excluded other buyers or potential buyers from this market. As virtually the only buyer left in the market, Phoenix is now able to set market prices at nothing or next to nothing. Defendants’ conduct has not only injured market participants, it has undermined the integrity of Phoenix’s own life insurance contracts to the detriment of consumers, Phoenix’s policyholders, potential buyers of Phoenix policies, and competition in the secondary market.
“Furthermore, in connection with defendants’ overall strategy to attain or maintain a monopsony on the secondary market for Phoenix policies, the individual defendants have conducted the affairs of Phoenix through a pattern of racketeering activity that has entailed fraudulently inducing plaintiff and other policyholders to continue paying premiums to Phoenix while the individual defendants have no intention of allowing Phoenix to honor the terms of its own policies. They will, instead, attempt to force policyholders to lapse or surrender their policies, or else try to rescind their policies or deny the death benefits when the policies mature. If their plan is successful, Phoenix will, over time, end up paying only a very small percentage of the death benefits on the policies it issued.”
A monopsony is a monopoly on the purchase of a product, as opposed to the sale of a product.
Named as defendants are PHL Variable Insurance Co., Phoenix Life Insurance Co., Phoenix Companies Inc., Phoenix Cos. CEO James D. Wehr, executive vice president of business development Philip K. Polkinghorn; executive vice president of distribution Edward W. Cassidy; and former CEO Dona D. Young.
Lima seeks punitive damages and costs for antitrust violations, unfair trade and RICO fraud.
Its lead counsel is Alfred Pavli with Finn Dixon & Herling, of Stamford. Lima LS PLC is represented by Alfred U. Pavlis and Richard S. Gora with Finn, Dion & Herling of Stamford.