Racketeering Statute Cited In Shadow Insurance Disputes

Do reinsurance transactions used to transfer life and annuity liabilities onto in-house insurance companies amount to organized crime?

Yes, indeed, plaintiffs allege in their complaints against life and annuity carriers who they say are guilty of violating the Racketeer Influenced and Corrupt Organization Act (RICO), a federal law often used to prosecute mafia crime bosses.

Defendants, which include not only life and annuity companies, but reinsurers and hedge funds, have moved to dismiss the allegations as “far-fetched” and “implausible.”

RICO expert Jeffrey E. Grell, a principal at Grell Feist Prince in Minneapolis, said that citing RICO laws in reinsurance transactions is a long shot and a “pretty creative use of the statute” on the part of the plaintiff’s bar.

In a lawsuit filed in in January in U.S. District Court, Kansas City resident Dale R. Ludwick claims Fidelity & Guaranty Life (F&G) misrepresented its financial condition when she paid $68,382 in connection with the purchase of a “Simplicity Elite 14” fixed annuity in September 2013.

“In RICO, causation has to be direct — no intervention between the alleged fraudulent act and the plaintiff’s injury,” said Grell.

But in Ludwick, “there’s a long chain of causation,” Grell said in an interview with InsuranceNewsNet last week.

Defendants include Harbinger Group (HRG Group), F&G Life, Raven Reinsurance and Cayman Island-based Front Street Re. Wilton Reassurance Co., a subsidiary of Wilton Re U.S. Holding Inc., is named as a “nonparty” in the suit.

The suit seeks class action status for annuity purchasers who bought annuities as far back as April 6, 2011.

Plaintiffs claim that in addition to “sham reinsurance transactions” conducted by F&G through captive reinsurers, the companies acted in concert as part of “RICO enterprise.”

The companies bypassed accounting requirements, masked liabilities, inflated surpluses, misstated risk-based capital ratios, improperly paid dividends and generated “phony reserve credits through circular, non-economic reinsurance transactions,” the suit alleges.

Plaintiffs also allege that through telephone solicitations and the reliance on mail and wire networks to process annuity applications, payments and commissions, the “RICO enterprise” had the “common or shared purpose of defrauding consumers by concealing the negative surpluses and financial instability of F&G Insurance” to sell annuities at inflated prices.

Indeed, the complaint alleges that Raven Re was formed to shield F&G Insurance’s liabilities “and has served as a corrupt entity” crated to accept the ceded liabilities from F&G Insurance without the ability to independent pay F&G Insurance’s claims from 2011 onward.

Lawyers for the insurance companies argue the case should be dismissed because the arguments don’t meet RICO criteria.

Defendants say the complaint is pre-empted under the McCarran-Ferguson Act, which precludes any federal law superseding state insurance laws. Neither has Ludwick alleged any out-of-pocket injury nor does her complaint reveal any mail or wire fraud, lawyers for the insurance companies write in court documents.

“As a result, Plaintiffs RICO claims fail,” the defendants claim in court papers.

A message left with an attorney representing the plaintiff and one with the attorney representing the defendants were not returned.

Grell said it would be difficult for the plaintiffs to graft RICO complaints because the plaintiff hasn’t been injured. “If things go as planned, the customer (Dale Ludwick) will get what they bargained for,” he said.

The insurers met their capitalization as required by law and sanctioned by state regulators, “and we have to assume they were out selling products that they believed would be adequately capitalized,” Grell added.

“Their damage theory doesn’t make sense,” he also said. “They are clearly trying to think outside the box but lots of times when lawyers do this it doesn’t go very far.”

In the wake of a 2013 report by New York regulators pointing to reinsurance transactions as a “shadow insurance” system allowing life insurance companies to hide liabilities from the balance sheet, several life insurers have been sued for misrepresenting their true financial condition.

Those suits, pending in court, were filed against big insurers including AXA, MetLife and Lincoln Financial and allege lack of transparency and financial disclosure. (MetLife has denied the allegations.)

These complaints make no mention of racketeering and organized crime.

But in another case, Silva et al v. Aviva PLC et al, filed in June in U.S. District Court in California, defendants Aviva PLC, Athene Annuity and Life Co., Athene USA Corp., Athene Holding Ltd, Athene Life Re Ltd., Athene Asset Mgmt. and Apollo Global Management are accused of violating RICO laws in connection with reinsuring liabilities.

Lawyers representing insurance companies say they’ve noticed an increase in RICO citations as plaintiffs file suit against life insurance carriers for reinsurance transactions.

In a shadow insurance transaction, a life insurance carrier reinsures a block of life and annuity contracts through a reinsurance subsidiary or captive insurance company, often in another state or abroad where regulation is more opaque.

The transaction allows the parent insurance company to shift liability for claims onto the subsidiary and into the shadow. At the same time, it allows the parent to reduce legally required reserves because the liability — in theory — no longer rests with the parent company.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].