Early Dismissal of Complaint Challenging Universal Life Credited Rates

While challenges to insurers’ exercises of discretion in setting cost of insurance rates has been the principal focus of litigation involving universal life (UL) insurance products for quite some time, a putative class action filed in a California federal court in December has the insurer’s determination of credited rates in its crosshairs. LSIMC v. Am. General Life Ins. Co., No. 2:20-cv-11518 (C.D. Cal.).The plaintiff alleged that American General breached its UL contracts “by redetermining credited rates based on factors other than its expectations of future investment earnings.” However, in a June 7 ruling District Judge Stephen J. Wilson granted the insurer’s motion to dismiss the operative complaint — a first amended complaint that had been filed in response to American General’s initial dismissal motion.

In particular, the plaintiff claimed that American General’s lowering of the interest rates to the guaranteed minimum on many policies amounted to a breach of a provision in the subject contracts, which has a clause stating: “Any redetermination of interest rates will be based only on expectations of future investment earnings.” The amended complaint seized on purported “admissions” by American General in its initial motion to dismiss that it designs UL policies “to achieve a profit spread” and adjusts interests rates “to try to maintain this projected spread,” and further claims that the contracts have been breached “[b]ecause neither profit targets nor competitive environment goals are ‘expectations of investment earnings.’” In granting American General’s motion to dismiss, Judge Wilson found the allegations of a profit motive — which he said was alleged “in conclusory fashion” — was, at this stage, “too attenuated from the 3% interest rate calculation to render the Plaintiff’s theory of breach plausible.”

Notably, among the changes in the amended complaint was the addition of an allegation that American General’s 2019 annual statement shows “a 4.9% annual return — 1.9% higher than the new premium crediting rate that AmGen declared in each of 2019 and 2020.” Judge Wilson found the allegation to be “[t]he only fact in the FAC related to Defendant’s return on investment.” But, as he further recognized, “[t]hat Defendant received a companywide return 1.9% higher than the credited minimum 3% interest rate, however, does not by itself give rise to a reasonable inference that redeterminations before, during, or after 2019 were based on a factor other than expectations of future investment earnings.” The court also pointed out the plaintiff’s failure to “plead facts suggesting that this 1.9% variance changed over time, or that the existence of such a variance in a single year reflects a profit or other impermissible basis for that year’s or the next year’s redetermination.” Further, the court found that the lack of allegations in the complaint about American General’s investment returns in other years “is especially important given the policy’s prospective focus — allowing redeterminations based on ‘expectations of future investment earnings.’”

Judge Wilson also addressed the plausibility of the plaintiff’s theory that “any single-year variance between the credited interest rate and companywide return on investment is not allowed by the policy,” but he not only found no showing by the plaintiff how the policy supports such an interpretation, he found such an interpretation “would be inconsistent with the prospective character of interest rate determinations, and the policy language emphasizing future expectations.” He further noted that “[i]nvestments can exceed expectations, and an interest rate can be ‘based on’ expectations without precisely equaling actual returns.”

But, as the order also granted leave to do the same, the plaintiff has already filed a second amended complaint, and thus the possibility that the lawsuit might generate more litigation against issuers of UL polices focused on credited rates remains.