2013 1211 – DOC 735-2 : Deposition of Michael Tivilini- Walker v LSW – 215p

2013 1211 - DOC 735-2 : Deposition of Michael Tivilini - Walker v LSW - 215p

Michael Tivilini - LSW - primarily designing products, product design

(p179) - START - Mr. Perla Examination of Michael Tivilini

Q Can you describe for me your educational experience, beginning with college. (p10-11)
I started reporting to Elizabeth MacGowan. -- 2004 or '5.
- I mean, primarily designing products, product design
A You know, I'm not a lawyer. It's -- you know, I think compliance would ultimately -- or the responsible officer would ultimately -- you know, have the ultimate responsibility. But yes, a lot of the disclosures that were in here, I, you know, wrote or helped write. (p61)
THE WITNESS: I'm not sure. I mean, ultimately, I think the responsible officer would be responsible.
Q BY MR. FOSTER: And who was the responsible officer?
A I believe Elizabeth. (p62-63)
Q I want to ask you about the line "One policy fee." What does that refer to?
MR. PERLA: Objection.
THE WITNESS: I don't know. This isn't a page that -- this was a page -- this was a preexisting page in the illustration system. I think what they're trying to say here -- well, I don't know. (p71)

A I mean, it's five bucks a month, you know. No, I don't recall it.
Q So since it's only five bucks a month, why would the company be touting one policy fee? (p76-78)
Q BY MR. FOSTER: Have you heard of someone named Patrick Kelley?
A No.
Q Have you heard of a concept known as tax-free retirement?
A No. (p91)
THE WITNESS: life insurance is kind of -- is given special tax treatment by regulators because, you know, they believe life insurance is a good thing. (p91)
THE WITNESS: I mean, it's one of the things you would look at. Certainly, life insurance illustrations are, you know, one way of showing how the policy is going to behave under a certain set of assumptions.
Q BY MR. FOSTER: Are there any documents besides life insurance illustrations that consumers were provided with that show how the policy will behave under a particular set of circumstances?
MR. PERLA: Objection.
THE WITNESS: I don't believe so, no. (p119)

Q BY MR. FOSTER: Why does it matter when you get your interest? (p125)
THE WITNESS: I mean, we certainly did sensitivity testing, you know, to determine certain things like minimum premiums, you know, to make sure that, you know, even under bad scenarios, the policy would carry for a certain number of years. (p126)

Target Premium

Q Are you familiar with the phrase "target premium"?
A Yes.
Q What's the target premium?
A Well, it kind of has multiple -- multiple uses. It's -- primarily, it's the premium upon which the agent will earn top-level commission rate. (p108).
A The other -- the other purpose of target premium is it's a premium that you'd like to get the policyholder to pay because it really would make the policy very safe. I mean, it was -- something I used to say to agents about these policies was, If you can get the policyholder to pay target premium, these will never lapse. (p109)
The Witness: All right, if this is at 4 percent, do these policies still carry the target premium? (p129)

Cash Value - Can't Lose Money

Witness: ...I mean, a volatile market is not necessarily bad for this product because when the market goes up, you make money. And when the market goes down, you don't lose any money. As opposed to, like, a VUL. (p136)

Reputational Risk

THE WITNESS: Yes. Once a company starts not following -- not following through on their current values, they have a hard time ever selling any insurance again. (p146)

Q And how would future buyers find out what LSW did with its Provider product?
THE WITNESS: I don't know. That's something that -- I mean, in terms of -- in terms of whether the -- in terms of whether --
Q BY MR. FOSTER: Well, you said that LSW would provide it because of sanity --
A Right. (p146)

Q -- because they'd be concerned about losing future sales on different products.
A Right.
Q But who would tell consumers about that? (p147)

Agent Understanding

Q BY MR. FOSTER: And the following sentence says: "The goal of the team would be to research, recommend, and implement ways to improve home office field and consumer understanding of the product and to reduce the risk that the product or its features would be sold in a misleading or inappropriate manner." Why was this a concern? (p157)

Q Were similar concerns raised about agents understanding the Paragon product?
MR. PERLA: Objection.
THE WITNESS: No. I mean, I think by that time, we felt the agents understood the products. (p161)

Consumer Understanding - How it Works

lapse assumptions
- The Witness - You know, if they pay heavy premiums, they're not going to have a problem.
- So either they would lapse or they would die. (p175)

The Witness: Beyond that, I don't know that there was any -- I mean, once again, it's -- it's a flexible -- you know, it's a flexible product. And at some point, the consumer does need to understand what he's actually bought and how it works. (p178)

Q And you referred to "traditional policies." What did you mean by that?
A Whole life policies. Non -- let's see. I guess term would be included. Term and whole life.
Q Anything else?
A I don't recall specifically. UL would be handled separately. (p11)

Q Can you describe for me your educational experience, beginning with college.
A Went to a number of schools. Williams College. Graduated from the University of Illinois. Went to Washington University for graduate school for a short period of time. My background was in mathematics.
Q So you obtained a degree in mathematics from the University of Illinois?
A No.
Q What was your degree from the University of Illinois?
A I didn't actually get a degree.
Q Okay. And where did you obtain a degree from?
A I never did obtain a degree.
Q Okay. And the graduate program, did you obtain a degree --
A No. (p10-11)

I started reporting to Elizabeth MacGowan. -- 2004 or '5.
I mean, primarily designing products, product design.

Q And was there a monthly administrative charge for the Provider product?
A I guess I call it a unit load. Is that what we're -- is that what you're talking about? The monthly administrative charge sounds like a -- sounds like the policy charge to me. I don't know what we -- I'm not sure what we called it. (p32)

Q MR. FOSTER: And when you say it was "new money product," what do you mean? (p35)

Q BY MR. FOSTER: The company could hold lower reserves because it would have less potential liability on the guarantee?
A Exactly. I mean, this was never intended as, like, a no-lapse guarantee product. This was intended as a product that would be heavily funded. And, you know, the guarantee is really not particularly strong for the very reason that you're trying to provide as much value to the policyholder as possible. (p37)

THE WITNESS: Well, a typical UL might guarantee 4 percent annually or something. (p38)

THE WITNESS: No. I would say the first two parts are true. If they're weaker guarantees, you're able to hold less reserves, which frees up money to spend on the policyholder, basically through the form of either less -- lower charges or taking, you know -- you know, purchasing the largest possible option position possible for the equity index strategies. That type of thing. (p41)

Q BY MR. FOSTER: And the LSW Provider illustrations, those don't disclose that the cost of insurance can be higher because of the manner in which the guarantee is calculated?
MR. PERLA: Objection.
THE WITNESS: No. I don't believe they do. Nor do I believe should they. (p43)

BY MR. FOSTER: Do you want to flip through it.
A Is this the entire illustration?
Q It is. It's the basic illustration.
A I don't see anything in the illustration.
Q Is there any reason you can think of why the calculation in the guarantee should not be disclosed in the illustration?
MR. PERLA: Objection.
THE WITNESS: No. (p50)

THE WITNESS: No. It's suicide not to. You know, to -- on any UL policy, even if something isn't guaranteed, you pay it. Otherwise you're never going to sell another UL policy.

Q BY MR. FOSTER: And that's because the enhancement is something that consumers look at in purchasing the policy?
MR. PERLA: Objection.
THE WITNESS: It's just you have a set of current charges. And really, the only time you would ever change those charges is if Armageddon happened, you know, and wherever. There was a you know, a horrible, horrible -- something had to be done to just -- you know, the profitability of the line was severely, severely impaired. Otherwise you would never raise those charges because it would upset policyholders and agents and everybody else. (p52-53)

THE WITNESS: It's true in any cash-value life insurance product, whole life, any UL. If you're not looking -- if you're just looking for death benefit, those aren't the products for you. (p57)

Q BY MR. FOSTER: So in your view, the annual 20 guarantee for Provider is 0 percent?
MR. PERLA: Objection.
THE WITNESS: No. It's 0 percent on an annual basis, with a catch-up, basically after five years, if you've experienced a really bad time in the market, we guarantee you 2 percent. (p58)

Q BY MR. FOSTER: And is there anything in the illustration that indicates that the annual guarantee is 0 percent?
MR. PERLA: Objection.
THE WITNESS: Not that this -- not in this illustration that I saw. (p59)

A You know, I'm not a lawyer. It's -- you know, I think compliance would ultimately -- or the responsible officer would ultimately -- you know, have the ultimate responsibility. But yes, a lot of the disclosures that were in here, I, you know, wrote or helped write. (p61)

Q Can you describe for me the process of developing the Provider illustration? (p61)

Q BY MR. FOSTER: How was it more complex than a 18 standard UL policy?
MR. PERLA: Objection.
THE WITNESS: The fact that there were, like, potentially 60 buckets of different cash at once, instead of a regular UL policy, where there's just one chunk of cash. (p61)

A Like I said, I mean, presumably compliance would see it at some point. It went -- a lot of people had a hand in it.
Q BY MR. FOSTER: And who was responsible for the disclosures made in the illustration?

THE WITNESS: I'm not sure. I mean, ultimately, I think the responsible officer would be responsible.
Q BY MR. FOSTER: And who was the responsible officer?
A I believe Elizabeth.
Q And prior to the introduction of the Provider product, were there meetings discussing the content of the Provider illustration?
MR. PERLA: Objection.
THE WITNESS: Yes.
Q BY MR. FOSTER: And what were the issues discussed in those meetings? (p62-63)

Q BY MR. FOSTER: So you don't think the company should ever lower the participation rate to something that's approaching 30 percent?
MR. PERLA: Objection.
THE WITNESS: Well, there could be some situation whether the company has a fiduciary responsibility to do that. But the company operating normally, in normal times, no.
Q BY MR. FOSTER: Would it surprise you to hear that the company had lowered the Paragon participation rate on an index crediting method to 40 percent?
MR. PERLA: Objection.
THE WITNESS: Yes, it would surprise me.
Q BY MR. FOSTER: And why would that surprise you? (p68)

Q BY MR. FOSTER: And so the caps and participation rates provided to the policyholder on the Provider product are a function of return on investments?
MR. PERLA: Objection.
THE WITNESS: For the most part, yes.
Q BY MR. FOSTER: And is that true for the Paragon product, as well?
A Yes. (p70)

Exhibit 48.
A Yeah.
Q At page LSW 2330, you see at the bottom of that page, there's a line, it says: "One policy. One policy fee. One premium. One company"?
A Yes.
Q I want to ask you about the line "One policy fee." What does that refer to?
MR. PERLA: Objection.
THE WITNESS: I don't know. This isn't a page that -- this was a page -- this was a preexisting page in the illustration system. I think what they're trying to say here -- well, I don't know.
Q BY MR. FOSTER: And when you say it was a preexisting page, what does that mean?
A I had nothing to do with creating this page or reviewing this page. I don't -- so I don't know exactly what everything refers to. (p71)

Q Was it a page used on an earlier product?
A Yes. This probably would have been used on Harbor and Horizon.
Q Do you know if you came up with the phrase "One policy fee"?
MR. PERLA: Objection. (p71)

THE WITNESS: I did not, no.
2 Q BY MR. FOSTER: Were there any discussions at
3 LSW about the use of that phrase on the Provider
4 illustration?
5 A No.
6 Q Were there any discussions at LSW about the use
7 of that phrase on the Paragon illustrations?
8 A No.
9 Q It's not accurate, is it, because there's more
10 than one fee applicable to the Provider product?
11 MR. PERLA: Objection.
12 THE WITNESS: I can't say. I mean,
13 there's only one fee called "policy fee," but --
14 there's only one policy fee. You're not getting
15 charged policy fees on all these other riders,
16 apparently. I think maybe that's the point
17 they're saying.
18 Q BY MR. FOSTER: Well, there's a premium expense
19 charge for --
20 A There are other charges, yes.
21 Q And administrative charge?
22 A COI, yes.
23 Q Yeah, cost of insurance charges.
24 A But I'm not -- it's -- I believe there is only
25 one policy fee in this example. (p72)

Q BY MR. FOSTER: Is there anything in the illustration that would alert a policyholder that the monthly administrative charge is not the one policy fee described in the illustration? (p74)

THE WITNESS: Yeah. I'm speaking to the page 2331, where it says: "One policy. One policy fee. One premium. One company."
Q BY MR. FOSTER: And you think that because you know that there's a specific charge called a policy fee, correct?
A Yes.

Q BY MR. FOSTER: And is there anything in this illustration that would alert a consumer that there's a specific charge called a policy fee?
MR. PERLA: Objection.
THE WITNESS: I don't see anything in here. (p75)

A I mean, it's five bucks a month, you know. No, I don't recall it.
Q So since it's only five bucks a month, why would the company be touting one policy fee?
MR. PERLA: Objection.
THE WITNESS: I don't know. Like I said, this was -- this stuff was written before I even joined the -- joined the product development. So I can't really speak to this.
Q BY MR. FOSTER: Do you think that phrase "One policy fee" is accurate as applied to the LSW Provider product?
MR. PERLA: Objection. Asked and answered.
THE WITNESS: Literally, yes. There's one policy fee. There are other policy charges.
Q BY MR. FOSTER: Do you think it's misleading for a consumer who receives the LSW Provider illustration?
MR. PERLA: Objection.
THE WITNESS: I really don't because the total of the charges is shown in the illustration, regardless of what this says here. You know, it's -- all the charges are reflected in the illustration. So looking at the illustration, it's showing all the charges that are going to be taken out of the policy. So no, I don't think it's particularly deceptive.
Q BY MR. FOSTER: Now, when you say the Provider illustration shows the charges that are taken out of the policy, you mean that's reflected in --
A It's reflected.
Q -- the accumulated values --
A Exactly.
Q So for a policyholder to calculate the amount of the charges, they'd have to back the charges out from the accumulated values to display it in the illustration?
MR. PERLA: Objection.
THE WITNESS: No. They would have additional pieces of information where they could use to get all of this information. The data pages that would come with the policy would have
all of the charges guaranteed and current on it, I believe.
Q BY MR. FOSTER: Okay. So setting aside the -- is there any itemization of the charges besides the monthly administrative charge?
A Not on this one. (p76-78)

Q BY MR. FOSTER: Have you seen Provider illustrations with other charges itemized?
A I can't recall. I believe the system has the ability to produce it if it's desired. I don't believe it's a requirement. So it's not something that's automatically produced.
Q Was there any discussion at LSW about whether itemization of the fees and charges should be automatically produced with the Provider illustration?
MR. PERLA: Objection.
THE WITNESS: No. (p78-79)\

MR. FOSTER: There's an optional report with fees and expenses.
MR. PERLA: Okay. Thank you.
Q BY MR. FOSTER: So if you'd turn to page LSW 12295 of MacGowan Exhibit 9.
A 122 -- okay.
Q Do you see there's a page there that's headed "Policy Charges and Expenses"? (p79)

Q BY MR. FOSTER: Have you heard of someone named Patrick Kelley?
A No.
Q Have you heard of a concept known as tax-free retirement?
A No. (p91)

THE WITNESS: life insurance is kind of -- is given special tax treatment by regulators because, you know, they believe life insurance is a good thing. (p91)

Q So the surrender squeeze was something that could happen with the Provider policy?
MR. PERLA: Objection.
THE WITNESS: Yes. Also Harbor or Horizon. Any UL policy out there. (p100)

THE WITNESS: Given a certain set of assumptions, how the policy would perform. (p102)

Q Are you familiar with the phrase "target premium"?
A Yes.
Q What's the target premium?
A Well, it kind of has multiple -- multiple uses. It's -- primarily, it's the premium upon which the agent will earn top-level commission rate. (p108)

Q Were you involved in any discussions about whether the target premium should be listed on the illustration?
A I mean, no. No. I mean, I certainly was involved in discussions about target premium. The other -- the other purpose of target premium is it's a premium that you'd like to get the policyholder to pay because it really would make the policy very safe. I mean, it was -- something I used to say to agents about these policies was, If you can get the policyholder to pay target premium, these will never lapse.
Q And turning to the commissions aspect --
A Yes.
Q -- of target premium, did you ever hear any discussions that that information should be available for agents but not for policyholders? (p109)

THE WITNESS: I mean, it's one of the things you would look at. Certainly, life insurance illustrations are, you know, one way of showing how the policy is going to behave under a certain set of assumptions.
Q BY MR. FOSTER: Are there any documents besides life insurance illustrations that consumers were provided with that show how the policy will behave under a particular set of circumstances?
MR. PERLA: Objection.
THE WITNESS: I don't believe so, no. (p119)

Q BY MR. FOSTER: Why does it matter when you get your interest?
MR. PERLA: Objection.
THE WITNESS: Because of the effect on your accumulated value and, therefore, on your COI charge. Also -- let me think about it for a second. That's the main reason.
Q BY MR. FOSTER: What would the effect on your COI charge be? (p125)

A Well, if your interest rate was higher, it would reduce your COI, your total COI charge. If the interest rate was lower, it would increase it. So, I mean, actually, I'm not positive how to answer. I'm not sure. I'd have to run some models to see -- answer your question, or to answer it precisely.
Q Did LSW run any models on how the sequence of returns could affect the Provider product?
MR. PERLA: Objection.
THE WITNESS: "Affect the Provider product," what do you mean?
Q BY MR. FOSTER: Affect the -- did LSW run any models in how the sequence of returns could affect the accumulation of non-guaranteed values on the Provider product?
MR. PERLA: Objection.
THE WITNESS: I mean, we certainly did sensitivity testing, you know, to determine certain things like minimum premiums, you know, to make sure that, you know, even under bad scenarios, the policy would carry for a certain number of years. (p126)

The Witness: All right, if this is at 4 percent, do these policies still carry the target premium? (p129)

(p130) Monte Carlo Simulations

THE WITNESS: If the volatility was positive volatility, it would make -- it would make the policy values larger. If the volatility was -- I mean, a volatile market is not necessarily bad for this product because when the market goes up, you make money. And when the market goes down, you don't lose any money. As opposed to, like, a VUL. (p136)

Q BY MR. FOSTER: And would there be anything to prevent them from not providing the non-guaranteed --
A Sanity.
MR. PERLA: Objection.
Q BY MR. FOSTER: And you say sanity because future buyers buying other LSW products would know this? (p145)

THE WITNESS: Yes. Once a company starts not following -- not following through on their current values, they have a hard time ever selling any insurance again. (p146)

Q -- because they'd be concerned about losing future sales on different products.
A Right.
Q But who would tell consumers about that? (p147)

(p151-156)

change to VUL, Resignation
Elizabeth McGowarn, DeSantos - e-mail chain in Exhibit B
went to American National Insurance Company in Texas to work on IUL
indexed universal life sales risks

Q Were similar concerns raised about agents understanding the Paragon product?
MR. PERLA: Objection.
THE WITNESS: No. I mean, I think by that time, we felt the agents understood the products. (p161)