Ferguson vs Crown Life and William Casteel - V4of23 - 204p
- 1995 0818
- URMAS VILMANSEN (By Deposition)
- Direct Examination by Mr. Bostwick----------------- 657
- Direct Examination (Contd.) by Mr. Bostwick-------- 754
- [(p754-) - DIRECT EXAMINATION - Continued - Questions read by Mr. Bostwick (Ferguson)]
- 754 - Exhibit 8 is another memo that you wrote on the 17th of February to Dave Ferguson, and in the first sentence you say:
- 'As promised to you, I am working on writing up what I think is a "least damaging" approach to reduction of "our dividend scale." Let me visit with you first about the introduction there as promised to you.'
- 757 - I want to show you Exhibit 9. I take it this is some ·
information passed on to the general agents by yourself
regarding the introduction of the M.V.P. product?
"A That is correct.
"Q And as I understand it -- you tell me if I'm wrong -the
chief characteristic or selling point of this product
was that it achieved a vanish in five years?
The premiums end after five years, but it's not a
true vanish because the basic policy, instead of
continuing to be an active policy where there's still a
contractual agreement to pay a premium for coverage,
instead it becomes a reduced paid-up policy.
"Q And was M.V.P. selected as the name because it was an
acronym for 'modified vanishing premium'?
"A Yes, and also an acronym for many other things.
11Q Like 'most valuable player'?
".A Yes, we're trying to get a certain ballplayer to .buy
this.
"Q Are you serious?
"A Mm-hmm.
"Q Who was that?
"A Don Mattingly, but they decided not to."
- 759 - 27th day of February of '86 that
you're writing this?
"A Yes.n
"Q Exhibit 10 is titled 'M.V.P. Text for Dave Ferguson'.
Is this a text of a speech that you wrote for Mr.
Ferguson?
Yes.
nQ Do you know where he was supposed to give this speach
(sic)?
"A No, I don't.
"Q Do you know whether or not he ever gave this speech?
"A I know that he did present it, and he told me that it
went well, but I cannot remember what the event was.
- nTHE DEPONENT: I don't know
specifically. But it would have been to the general
agents.
- 760 - Let me show you what's been marked as plaintiffs'
Exhibit 11 entitled 'Conserve-Plus Fact Sheet'. Is this
something that was distributed to the general agents?
"A This was distributed to the general agents in a
brochure that was made available for them to provide to
brokers. Not a brochure, I'm sorry. It was a folder
- 759-760 - 'Marketing support material'. Was there a video that
went along with Conserver-Plus?
"A Yes, there was.
- Where was that video kept?
"A Where was it kept? It was a VHS format, and a copy
survives in my house to this day.
"Q
"A
RQ
Oh, you've got a copy of the video?
I have a copy of the video.
Would you visit with Mr. Becker at some break in the
proceedings and see if you wouldn't mind getting me a copy
of the video?
- 760 - 11A Did you see 'Patton'? You don't have to see the
video if you've seen 'Patton'.
- 764 - One of the product features listed there, number 4,
is that emphasis has been placed on low initial premium.
Was that, in fact, an emphasis of the Conserver-Plus
product?
"A That was a definite emphasis.
- 765 - Q And Exhibit 17. Is this memo sending out the
computer disks for these two new products, Conserver-Plus
and M.V.P.?
"A Yeah, this provides for a stand-alone microcomputer
system. The Life Ledger program.
"Q
"A
So this is separate and apart from the SIGMA system?
That's correct.
- 770 - "Q On the bottom of the second page, under the heading
'Admired Companies', subheading of 'New England Mutual',
there's a reference to Jim Hicks. Did you get information
from Jim Hicks about New England Mutual?
"A I don't recall, but according to this, I did.
"Q Was Jim Hicks one of the general agents with whom you
discussed the potential change in dividend scale, as
referenced in the first sentence of this memo?
"A I don't remember.
- 772 - In the second paragraph on the first page under the
heading 'Market Sensitivity', you make the statement that:
'As far as Crown Life is concerned, dropping our
dividend scale in the 1970s dramatically hurt sale.a
on participating business.'
What knowledge do you have about that? Is that personal
knowledge?
"A Yes.
ilQ You were there during the dividend scale drop in the
1970s?
"A Yes.
How big was the drop in the 1970s?
"A I don't recall, but it was a deliberate drop to
reduce sales of participating business.
- 773 - If you don't know, you can tell me, but my question
to you is: Legally, actuarially, ethically is it possible
for a company to reduce its dividend scale, despite the
fact that the interest it may be earning out of the market
and the expenses it may be experiencing would support the
current dividend scale?
- .........
- 787-788 - "Q Okay. The third item says:
'Members of the product committee have ,started to
push for the capability of showing more than on set
of dividends on illustration, current and more
conservative.'
That seems like a reasonable request. What happened to
that?"
"A Right. It's a difficult question, because the
illustration system actually had dividends stored in the
rate files that were used for those illustration systems.
So to provide a separate set of dividends would have
required some sort of work done so that those dividends could actually be calculated in the system, as opposed to
coming from a rate file.
- "The other alternative is to have just two sets, one
on the current scale and one on a more conservative scale,
if you like, but again, that would cause a lot of problems
on the actual software. So that was one of the reasons
why we never did that.
- "Also, there is the question about whether or not
you're allowed to show different dividends than you are
currently providing on a current dividend scale. You are
able, as far as I know, to show different accumulation
rates and everything, but whether or not you can show a
different dividend from what is in your scale, I don't
know it that's true in all jurisdictions.
- 791-792 - Q Let's look at Exhibit 28. This is a letter that you wrote to Tom Rhatigan in San Diego. Is he a general agent?
- A He was an associate general agent, and Robert E. Lee owned the agency in San Diego at that time.
- Q He was a general agent present there in the San Diego
office?
- Q I was intrigued by your statement in the second numbered paragraph.
- Q You tell him that the 4-Pay and 5_pay concepts work because of the spread between the dividend rate and the current loan interest rate, but if they get closer together, that concept erodes?
- Q Was that generally recognized among your agents in field force in 1986?"
- THE DEPONENT: I know that some general agents knew this, I know that I talked to some, but whether it was well-known and known by everybody, I can't say.
- [MORE]
- 794-795 - Tillinghast / Tillinghast study
- 803-804 - Exhibit 40 basically is a memo to Jerry Campbell,
senior vice-president of U.S. individual insurance,
regarding portfolio and/or investment generation.
"And essentially one of the questions that relates to
dividends is whether or not you can subsidize one block of
business with another block, and as part of our research I
went and talked to an actuary, Keith Deviney, and I also went and looked up what the American Academy of Actuaries
had to say about it.
- Becker: Objection. It could be misconstrued
- 806 - It says in the second sentence that you examined a
report from the American Academy of Actuaries regarding
dividend recommendations and interpretations.
- [(p654-) - URMAS VILMANSEN - Crown - Senior Marketing Analyst for U.S. Individual Insurance. (By Deposition) - Direct Examination by Mr. Bostwick (Ferguson)]
- 654 - Plaintiff's Exhibit 4 - PROVE and its Applications - Vanishing Premium, dated October, 1984.
- 657 - (see GA Manual Mailing 1984-21).
- Work History
- Crown Life Products
- 666 - "Q The policy at issue in this lawsuit is a
Conserver-Plus policy. Tell me, if you would, just
generally what was involved, from your standpoint, in the
introduction of the Conserver-Plus product.
- 667 - Because Crown has
always been a .general agency company, and so it has to
sell the products successfully to its brokers.
"Q What do you mean by 'bases of presentation'?
"A I mean what sort of illustrative basis it's set up
under. What type of illustration, for example vanishing
premium, or back then minimum deposit.
"Q All right. when you say you got input from the field
force, did you go out to your agents and ask them what
their competitors were doing?
"A Yes.
"Q Did you do that personally, or did you supervisor
someone or a group of people that actually did that for
you?
- 668 - Crown Life Organization explained
- 679 - 11Q Was that separate and apart from the marketing area?
"A Yes. The agency and marketing areas were completely
separate, although we would talk to the agency people
quite regularly.
- [Bonk: Competitors had Vanishing Premium]
- 672 - Art vs Science
- 673 - [Bonk: Actuarial vs Marketing]
- "A Yeah, for the numbers we relied heavily on the
individual actuarial area, and for the language of the
actual policy we would work with the compliance area.
- ECTA - Illustrations
- "Q But the illustration system was called the SIGMA
system?
- We also had an internal mainframe system called CAPS, and agents could call in and they could have proposals prepared at home office and sent to them the next day. We also had some microcomputer basic systems that were developed internally.
- 680 - "A
Sure.
When I talk about vanishing premium, I talk about
what's called a natural vanishing premium.
11 Q I want to use a broader term that what you all have
said, 'vanishing premium', because I think we've got
some -- we may need to back up and define some terms.
"A
"Q
Fair enough.
Vanishing premium has kind of been knocked around
here, N-Pay or . 4-Pay, 5-Pay, modified vanishing premium,
and limited pay option are some of the terms.
"A Mm-hmm.
"Q Generally we're talking about a capability of a
product to provide the consumer with a point past which on
premiums need to be paid out of pocket.
- 682 - "The theory is that the amount of the cash values in
the paid-up additions, plus the dividend stream from the
coming year, which is the vanishing year, up to the
critical year; that the dividends plus a partial surrender
of paid-up additions that are already there will be enough
to pay the premiums for that period of time, and then as
of the critical year, the dividends are sufficient to pay
from there on.
"Q
"A
"Q
"A
"Q
Is that consistent with natural vanish?
That is a natural vanish.
That's what you refer to as your natural vanish?
Yeah.
- 682 - Vanishing Year vs Critical Year
- 682 - "Q So in a natural vanish, the vanishing year is when we
can use a mix of dividends and surrenders?
11A Correct.
"Q And then the critical year is when we can reduce the
surrenders to zero, and that's just completely dividends?
"A Yes.
- 683 - APP - Abbreviated Payment Plan, Vanishing Premium, Equity Rider - Plus Rider (Crown), Leverage,
- 683 - "A No, I think there are two types here, and I think
there are two sets you worry about. The first one is
vanishing-type products, and the second one is leveraged
- 684 - Minimum Deposit, N-Pay, Super Vanish, 4 of 7 years premium, Loans to pay the remainder of the Premium, Tax Deduction, Tax Code - ERTA - 1986 -
- 685-686 - "Q Did that make minimum deposit then obsolete when it changed?
- "A It made the tax deductibility aspect obsolete, I believe.
- 687 - "Q
Yeah, the equity value. It would increase.
The equity value would also increase every year?
That is correct.
And under this scenario, is it necessary that the
687
equity value against which you're borrowing increase at a
greater rate than the loan is increasing?
"A For the policy to stay in force forever, yes.
"Q I can just imagine a situation where if I've got a
limit on how much -- if this concept assumes I'm going to
borrow all of the future premiums, but it includes in
there a limitation that I can't borrow past a certain set
amount that's established by this equity, which amount
increases every year, isn't it important for that type of
scenario that the amount against which I'm borrowing
increase greater than the amount I actually borrow, so
that I never reach the limit?
- 688 - "A It may be presented, and it's presented on the basis
that you're operating under a specific dividend scale at
the time, whenever the policy is purchased, and none of
those are guaranteed. The only guarantee you have are the
premium amount and the guaranteed cash values, and the
basic face amount.
- 689 - 11Q So we've gone through vanishing premium concepts, and
we've gone through what you've called leveraged premium
concepts.
- Mix and Match
- 690 -or putting in the automatic premium loan feature,
which is the default in most insurance companies anyway.
- 691 - "A When you say 'that mix', you're specifically
referring to a combination of vanishing premium or with
policy loan?
"Q Right.
"A We didn't encourage it, no.
"Q Did you make sure that the illustration systems that
you gave to the field force, the gents who were out there
selling the policies, that that system had the capability
of doing that?
"A I'm not sure what capability SIGMA had with respect
to that, and I couldn't comment on what ECTA could do.
- 693 - 11Q Mr. Vilmansen, understanding that you didn't have the
authority or the power to dictate when dividend scales
ought to be changed, or what they ought to be changed to,
it was still within your employment and within the scope
of your employment to communicate what you knew about
those things to other people; wasn't it?
"A Yes, from a marketing perspective.
"Q The things that you knew. And you wrote these memos
because you were trying to communicate information to
people that you thought needed to know that; right?
Yes.
- 693-694 - And although you might have had wishes or desires
that it be done one way, which wishes and desires weren't
necessarily those of Crown Life, you were still authorized
to state your wishes and desires to the people that cared
to hear them?
- 694 - "A No, I'd be careful about that. If it was something
internal, yes. .....
- Exhibit 212 - Memo - From: Mr. Boeckner senior vice-president of U.S.
insurance operations at Crown Life in September, 1985 - Download to information to Lotus 1-2-3
- Things that weren't part of our general systems. And it was exclusively for the use of the general agents, and it was not to be distributed to anybody else.
- 696 - 11A I'm not being paid for outside work, but Crown Life
is paying me for the preparatory work to get ready for
this deposition.
11Q Okay. You're not being compensated, though, for the
time you're spending here actually giving testimony?
"A Well, I fully expect you to compensate me for that,
and I believe my lawyer was -- I .did provide my lawyer
with instructions to contact you with respect to that.
"Q
"A
Well, we may have a misunderstanding in that regard.
We may.
- 698 - I understood
that in some case, in some proceeding, a particular letter
which I sent out to the general agents was signed by me,
and as a result people said, 'Who is this guy?'
"Q And Kevin Hayes came and found you and asked you
about those thing?
"A
"Q
"A
"Q
That is correct.
Did he have a meeting here in Toronto with you?
Yes.
And did you provide him at that time with some of
your file materials that you had kept?
"A Yes.
- 703 - [Reasons for Crown Life to Move it's Home Office from Toronto to Virginia - Official and Unofficial]
- chronological file
- 714 - 1985 1219 - Exhibit 213 -
- 714 - Exhibit 214 - 214 is not dated, but also talks about
the dividend scale. Do you know in this chronology where
214 fits?
"A Okay. 214 was written in preparation of a general
agents' meeting of either the 20th or the 21st of January,
1986. The actual date that was prepared I'm not -- I
couldn't tell you, but it would have been sometime
between -- you know, after the previous memo and before
January the 21st.
- 722 - Q In Exhibit 213, Mr. Vilmansen, you say that: 'Corporate is considering very strongly reducing your dividend scale.'
- -725- - Letter -
- 'The high dividend scale and accumulation rate we
currently use are central to the vanishing premium
concept which we look so good in currently. A drop
in dividends would probably increase our vanishing
premium points, causing a lost of business. Further,
the adverse publicity of dividend scale change would
result in ... '
- 726 - "A It means that 'Further, the adverse publicity of
dividend scale change would result in, would force many of
our agents to spent at least part of their time.'
"Q Okay.
"MR. BECKER: Dividend scale change
would result in adverse publicity.
"MR. TEKELL: I see.
"BY MR. TEKELL:
"Q ' ... and .would force many of our agents to spend at least part of their time defendant instead of promoting Crown Life.'
You foresaw that those were probable consequences of a
reduction in dividend scales?
"A Yes.
- 727 - "Q Was that insight yours only, or was that pretty much common knowledge among people of your stature in insurance companies in general?
"A It think that was pretty well common knowledge among people in marketing in other insurance companies, as well as in Crown.
Q So you weren't telling them anything new about that?
A No. No, no, no.
Q The second page talks about I guess your suggestions on how these consequences can be softened. Is that a fair statement of that?
- 728 - "Q Let's look at Exhibit 207.
"A Yes.
"Q Does that talk about Conserve-Plus?
"A No. This talks about the original Conserver product,
which was different from Conserve-Plus inasmuch as, for
one thing, it did not have a jump in cash value at the
first death.
"Q Okay. Let's look at Exhibit 211, which is a memo
dated August 23rd of 1985. Does this discuss the
Conserver product? Conserver-Plus product.
"A That's what I'm checking. Let's see. This would be
done for the Conserver-Plus product, yeah.
- 728-729 - "Q You and I discussed before about how you would come
up with a concept of a product, and then draw on the
capabilities and talents of various departments to bring that together. Is this part of that process, this memo of August 23rd, 1985?
"A Yes.
"Q Can we use this as an indicating of about when it was
being first proposed, or the middle of the development
process?
- ............
- 730 -
- 731 - General Agents Meeting
- 733 - "Q Tell me then, again, the best of your recollection
about what Exhibit 214 was prepared for.
"A 214 was prepared to set the stage as far as our field
force was concerned, with respect to a potential change in
the dividend scale for Crown Life.
"Q Do you know whether or not it was distributed to any
of the general agents, whether just the product committee
or the .board of directors?
"A I don't believe it was distributed. And I say that
because if it had been given to the board of directors or
to the product committee, I don't think I would have put
that note at the top. I would have said 'distributed to'.
- 733-734 - Note at top
- "A It says "For GA meeting 21/1/86 -- not given out.'
- 734 - "Q Back to 214 then. The information about the dividend
scale reduction as essentially recorded here in Exhibit
214; was that communicated to the board of directors of
the general agents' association?
"A It is my understanding it was.
"Q
"A
"Q
How was it communicated?
I don't know.
What's your expectation about how it was
communicated?
"A I believe it was discussed in a meeting with the
board and with the product committee.
- 735 - general agents' association
- 736 - "A
(No response.)
Or was that selected by Crown Life?
Yeah. I don't -- I can't remember us ever selecting
any committee for the general agents. I do remember, you
know, if somebody had something, you know, we could make
suggestions. Let's say somebody said, 'Well, we're going
to have a .product committee, and Bill Smith's going to run
it.,
•And we say, 'Well, what about Joe Blow from over
here? He knows an awful lot about participating
products.' And they say, 'Oh, well, you know, maybe
that's a good idea. Joe, do you want to be on this?'
- 738 - But I also feel that there would be an
awful lot of pressure inside the GA's own organization to
keep anything from leaking out regarding that sort of an
event.
HQ Leaking out to the general public, or leaking out to
other general agents?
HA Leaking out to competitors mainly.
HQ But it wouldn't be something that you would instruct
them to keep from other general agents, such as Jim Hicks...
- 739 - I dealt on dividends with a specific group of agents
called the dividend committee, and that was it.
Is that different from the product committee?
Yes.
11Q When was the dividend committee -- when did you
interact with them?
11A the dividend committee was set up at some point after
the January meeting ._ I believe it was actually set up
somewhere after the middle of February.
"Q And was that set up by the general agents'
association in response to the information that you shared
about the potential for a dividend reduction with the
dividend committee, you would have no expectation -- would you? -- that that information would be kept secret from
other general agents such as Jim Hicks in Austin?
"A Actually, I think for the dividends I did have the
expectation that at least for the first part of the
negotiations it would be very secret."
11Q So disclosures to the dividend committee: you had an
expectation that that would be kept close to the vest
within the committee at least in the short term?
11A In the short term, yes.
- 741 - Exhibit 208 - Letter - That is a letter with some attachments, and I think the letter and its attachments pretty much speak for themselves, but let me make sure I understand the last several pages that talk about the dividend history and dividend philosophy of Crown Life.
- A Mm-hmm.
Q Is there a title to this document?
A Yeah, the actual name of it is 'Dividend History and
Philosophy'
- 743 - plaintiffs' Exhibit 1, or PX-1. That's a memo, I guess,
to the general agents from Dale Mathews?
"A Yeah. It's actually part of a general agents' rate
book mailing.
- Dale Mathews is an actuary. She was at that time
heavily involved in the U.S. individual product prodding.
- 744 - In this document she's announcing, I guess, the
change in the dividend scale that occurred in 1984.
They'd upped the rate from twelve-and-a-half percent to
thirteen percent for the dividend credit rate?
That is correct.
- 745 - "MR. BECKER: Let me object to the
form of your question. The increase in twelve-and-a-half
percent to thirteen percent is not the dividend scale, but
the dividend accumulation rate. There are comments in the
last paragraph about the dividend scale, but I don't see
any reference to twelve-and-a-half or thirteen percent
there.
- 747 - PX-7 and PX-8.
- These are two memos that you wrote, it looks like
both to Dave Ferguson, on the 17th of February, 1986; is
that right?
"A That is correct.
- 750-751 - "Q What is the basis, then, for your conclusion that
M.V.P. and Conserver-P~us products would not be affected
by the projected dividend drop?
- "A I don't know. Anything I say on that would be
speculative.
11Q Do you think you had some basis for it at the time
you wrote this?
"A Yes, I imagine that we were pricing at those levels,
and there had been good reason -- there had probably been
several internal discussions as to why we would use
whatever overall rate we were using.
- 751 - 'When the re-pricing is done, we should examine ways
to introduce a more conservative dividend scale, but
retain the vanishing premium capability which both
those products have.'
- [Lunch]
-