OPINION AND ORDER
Plaintiffs Jonathan Ross and David Lev-in bring this putative class action on behalf of those who purchased life insurance from AXA Equitable Life Insurance Company
BACKGROUND
Although the Court is not technically limited to the four corners of the' Complaint in assessing whether Plaintiffs have standing, see Tandon v. Captain’s Cove Marina of Bridgeport, Inc.,
A. Life Insurance and Its Regulation in New York State
Many consumers in the United States purchase life insurance to provide surviw-ing loved ones with financial benefits after death, benefits that may help defray the cost of estate taxes and funeral expenses or counteract the loss of the decedent’s income. (Second Am. Compl. (Docket No. 105) (“SAC”) ¶ 33). Nevertheless, although many life insurance policies' are contractually guaranteed for up to fifty years in the future, they are not guaranteed (as bank accounts are) by any federal agency such as the Federal Deposit Insurance Corporation. (Id. ¶ 39). Despite (or perhaps because of) the absence of such federal guarantees, life insurance companies are generally heavily regulated by state government agencies, including the New York State Department of Financial Services (“NYDFS”), which is charged with overseeing the practices of New York-based life insurance companies. (Id.■ ¶ 40).
Given the nature of insurance, the num-. ber of claims a life, insurer needs to satisfy at any given time — and, relatedly, the assets the company needs to satisfy them — is contingent on several factors, including mortality rates. (Id. ¶ 43). Accordingly, state regulations usually require life insurers to establish reserve liabilities (“reserves”), using formulas that account for such factors. (Id. ¶¶ 42-43). To support these reserves, life insurers must hold “admitted assets” — typically high-quality assets that a life insurer can reliably liquidate to pay outstanding claims. (Id. ¶ 42). Nevertheless, while reserve requirements are calculated to cover more than a life insurer’s likely projected risk, they are not sufficient to’ cover the total amount of an ihsurer’s exposure — meaning that in' the event of a major “mortality event” (such as a terrorist attack or a pandemic) that greatly increases the number of claims at a given time, or a market disruption that reduces the assets held by insurance companies, a life insurer could find itself faced with more claims than its reserves are able to cover. (Id. ¶¶ 43-44).
Perhaps because of these concerns, the National Association of Insurance Commissioners introduced two model regulations, known as Regulations XXX and AXXX,. versions of which have since been
B. Reinsurance Transactions
To help minimize the risks involved in offering insurance,, many insurers obtain reinsurance, whereby a primary insurer (or “ceding insurer”) pays a premium to another insurer (the “reinsurer”) in exchange for carrying some or all of the risk the primary insurer took on in writing an initial insurance policy. (Id. ’¶54). In turn, primary insurers may claim “reserve credits” through such arrangements — in essence» reducing the- assets a primary insurer'is required to maintain in support of its reserve liabilities. (Id. ¶¶ 55-57; see Mem. Law Supp. Def.’s Mot. To Dismiss Second Am. Compl. (Docket No. 106) (“Def.’s Mem.”) 5; see also Deck Bruce Birenboim Supp. Def.’s Mot. To Dismiss (Docket No. 107)'(“Birenboim Deck”), Ex. 1 (“NYDFS Report”) 1). Effectively, therefore, reinsurance fulfills two functions: It can help manage risk and can free up capital for' other purposes. (SAC ¶ 55).
Nevertheless, because a primary insurer remains liable on all policyholder claims in the event that the reinsurer defaults, regulators generally allow primary insurers to take reserve credit only when there is sufficient assurance of the reinsurer’s ability to pay claims for which it assumed risk. (Id. ¶¶ 54, 56). There are two categories of reinsurance transactions generally deemed “safe” enough to warrant granting the primary insurer a reserve credit: (1) those with reinsurers who are licensed or accredited by the primary insurer’s own regulators (“authorized reinsurers”); and (2) those with unauthorized reinsurers who post sufficient high-quality, easily liquidated collateral to account for potential obligations — typically by maintaining a trust with a United States financial institution or by obtaining an irrevocable and renewable (“evergreen”) letter of credit from a United States financial institution. (Id. ¶¶ 56-58). Occasionally, a primary insurer will seek reinsurance, not from an unaffiliated third-party insurer but, instead, from affiliated (“captive”) entities— that is, a company owned by the insurer’s parent company. (Id. ¶ 59; NYDFS Re-' port 1). A primary insurer may claim reserve credit for these reinsurance transactions -just as they can for those with unaffiliated third parties, so long as the captive ■ reinsurer meets the above-mentioned requirements — that is, the captive insurer is either regulated by the primary insurer’s own regulators or posts collateral
C. “Shadow Insurance” Transactions
In spite of these requirements for claiming reserve credits for reinsurance transactions, the NYDFS issued a report (the “Report”) in 2012 finding that New York insurers had been using captive reinsurance as a way of conducting an “end-run around higher reserve requirements” and “hidfing] risk.” (NYDFS Report 4). A life insurer would typically accomplish that goal, the Report alleged, by creating a captive insurance entity based in another state or foreign jurisdiction with less stringent regulatory requirements. (Id. at 1). When the primary insurer seeks reserve credits through a transaction with an unauthorized reinsurer, as noted above, that reinsurer must post sufficient collateral that meets the regulatory requirements of the primary insurer’s domicile. (SAC ¶¶ 59, 65). Nevertheless, the NYDFS Report alleges that many life insurers and their captive reinsurers flouted this requirement by exploiting the looser reserve and capital regulations in the jurisdictions in which the captive reinsurers are based. (Id. ¶¶ 64, 66; NYDFS Report 4-5).
In particular, the NYDFS found that many of these captive reinsurance transactions are or have been supported by parental guarantees, meaning the captive rein-surer’s (and thus the primary insurer’s) parent company is liable for any risk assumed by the captive reinsurer. (NYDFS Report 1). And occasionally, under the looser regulatory requirements of the captive reinsurer’s jurisdiction, the companies use these parental guarantees to either back a letter of credit that is posted as collateral in order to obtain reserve credit for the reinsurance transaction, or use the parental guarantees themselves (“naked parental guarantees”) to serve as collateral for the captive reinsurer’s obligations. (SAC ¶¶ 66-67; NYDFS Report 4). In doing so, primary insurers obtain reserve credits — and thus are allowed to reduce the total amount of assets used to support their reserve liabilities — without completely transferring the risk associated with those policies, as the captive reinsurer’s obligations are supported not by its own financial strength, but rather by that of the parent company. (SAC ¶¶9-10, 68; NYDFS Report 1). And before the NYDFS Report was released, little to no detail of these transactions — specifically, to what extent an insurer’s reinsurance transactions were supported by parental guarantees — were revealed in life insurers’ statutory annual statements (hence, the “shadow” in “shadow insurance”). (SAC ¶¶ 9, 90-96,102; NYDFS Report 2-3).
The NYDFS report posits that the undisclosed parental guarantees at the heart of shadow insurance transactions could lead to negative consequences in the insurance industry. Significantly, the NYDFS found that none of the parent companies it had researched had amassed significant reserves or contingent liabilities to support the parental guarantees supplied as part of reinsurance transactions; in fact, most had amassed none at all. (SAC ¶ 71; NYDFS Report 22). Additionally, the factors that would lead to a captive reinsurer being unable to fulfill the claims it assumed, and thus a parent company having to fulfill its parental guarantees — such as changes in mortality rates or substantial decreases in asset returns — are those that would likely implicate the financial health of the parent company’s entire insurance operation, meaning a parent company would likely already be subject to financial stress from its other ’ risk exposures. (SAC ¶ 73). What is more, the general financial health (and creditworthiness) of a primary insurer is likely to be linked to that of its parent company, meaning that if a bank declines to renew a parent company’s- letter of
The NYDFS also found that life insurers have used shadow insurance transactions to manipulate their risk-based capital ratios — measures which, as noted above, are of critical importance to brokers,- agents, and informed consumers in. assessing the financial strength of an insurance company as part of life insurance purchase decisions. (NYDFS Report 8-9; SAC ¶ 83). Because a company’s risk-based capital ratio is generally calculated by- dividing an insurer’s total adjusted capital by the minimum capital an insurer is required to hold under a formula determined by its regulator, an insurer can improve its risk-based capital ratio by simply increasing its total adjusted capital — which, in turn, it can do by reducing its reserve liabilities. (SAC ¶¶ 82, 84-85). Because an insurer can reduce its reserve liabilities by obtaining reserve credits through reinsurance — but, in the case of shadow insurance transactions, is allegedly not actually reducing its risk— insurers use shadow insurance to make their risk-based capital ratios appear higher than would be warranted by their actual' financial strength. (Id. ¶¶ 84-86).
D. Plaintiffs’ Claims Against AXA
Plaintiffs Jonathan Ross and David Lev-in are New York residents who purchased AXA life insurance policies in -2009 and 2013, respectively, and whose policies remain in effect. (Id. ¶¶ 22-25). ■ Partially based on the NYDFS Report (according to Plaintiffs, AXA is the life insurer named in “Case 4” in the Report (id. ¶ 4)), Plaintiffs allege that annual disclosures filed by AXA as required by New York law were misleading because, they failed to disclose details of the shadow insurance transactions, thereby making AXA’s financial health appear stronger than it was. (Id. ¶¶ 90-117,. 122). In its 2011 annual statement, for example, AXA reported $1.9 billion in letters of credit securing the reinsurance obligations of its captive reinsurers; based on its reinsurance transactions with cap-, tive reinsurer AXA Bermuda, AXA reported on that same statement that it had obtained a -reserve credit totaling close to $11 billion. (Id. ¶¶ 93, 95). That reserve credit, however, was not obtained based on the financial strength of AXA" Bermuda alone; but rather through “undisclosed or inadequately disclosed guarantees and indemnifications from an affiliate” — that is, parental guarantees. (Id. ¶¶ 96-97). Accordingly, “[bjecause AXA used [letters of credit] backed by undisclosed or inadequately disclosed parental guarantees to lower its aggregate reserves for life [insurance] contracts, AXA’s existing assets ap-' péared to provide policyholders with greater protection against loss than was Actually the case.” (Id. ¶98). Further, because AXA was able to reduce its aggregate reserves and increase its total adjusted capital by virtue of these shadow insurance transactions, AXA’s risk-based capital ratio — which the NYDFS Report indicated had increased by 127% because of letters of credit backéd by “contractual parental guarantees” (NYDFS Report 11) — was “higher ... than was warranted,” again making AXA “appear more financially stable and well-capitalized.” (SAC ¶¶ 99-101). Plaintiffs allege that AXA máde similar representations on its annual statements for 2009, 2010, and 2012, and “has not restated or corrected any of these figures” in its reports for all four years. (Id. ¶¶ 102, 117; see also id. ¶¶ 103-16).
Notably, Plaintiffs do not allege in the Complaint that AXA’s undisclosed or inadequately disclosed shadow insurance transactions caused them financial harm by, for
PROCEDURAL HISTORY
This lawsuit was initially filed by Plaintiff Andrew Yale on April 23, 2014. (Docket No. 2). On June 16, 2014, AXA filed a motion to strike Plaintiffs class allegations pursuant to Rules 12(f), 23(c)(1)(A), and 23(d)(1)(D) of ,the Federal Rules of Civil Procedure and to dismiss the Complaint pursuant to Rule 12(b)(1), arguing that class actions cannot be maintained under Section 4226 and, in any event, cannot be brought on behalf of any out-of-state purchasers, thus destroying diversity for the purposes of this Court’s jurisdiction pursuant to the Class Action Fairness Act (“CAFA”), 28 U.S.C. § 1332(d)(2)(A). (Docket Nos. 34-35). The Court denied AXA’s motion at an initial pretrial conference held on November 13, 2014. (See Docket Nos. 44, 55). Thereafter, counsel for Plaintiff obtained leave of Court to substitute Ross and Levinas named Plaintiffs, and filed an amended complaint doing so on February 26, 2015. (Docket Nos. 69, 73). AXA moved for judgment on the pleadings on March 2,2015, and — after the Court granted Plaintiffs leave to amend to correct any deficiencies raised by AXA’s motion and Plaintiffs filed the Complaint— AXA filed the instant motion to dismiss on April 14, 2015. (Docket Nos. 75, 80, 105). Additionally, Plaintiffs moved for class certification oh April 1, 2015, a motion which became fully briefed on May 6, 2015. (Docket Nos. 87,124).
DISCUSSION
AXA moves to dismiss the Complaint and opposes Plaintiffs’ motion for class certification on multiple grounds, including lack of Article III standing. Because “[sjtanding is the threshold question in every federal case, determining the power of the court to entertain the suit,” Ross v. Bank of Am., N.A. (USA),
Article III of the United States Constitution restricts the “judicial Power” of the United States to “Cases” and “Controversies.” U.S. Const, art. Ill, § 2. The Supreme Court has interpreted this language to require that all suits filed in federal court be “cases and controversies of the sort traditionally amenable to, and resolved by, the judicial process.” Steel Co. v. Citizens for a Better Env’t,
The Supreme Court has, time and again, reaffirmed that the “irreducible constitutional minimum” of standing requires a plaintiff to establish three elements. Lujan v. Defenders of Wildlife,
The injury-in-fact requirement— which looms largest in this case — is meant to “ensure that the plaintiff has a personal stake in the outcome of the controversy.” Susan B. Anthony List,
B. Analysis
Applying the foregoing standards, the Court is compelled to conclude that Plaintiffs lack standing to pursue their claims. Plaintiffs’ primary argument to the contrary is that they have been “individually deprived of their statutory right, conferred by New York law, to truthful financial reporting from a New York domiciled life insurer to whom they have paid premiums for life insurance” and that “[t]his deprivation is an injury-in-fact sufficient to confer Article III standing.” (Pis.’ Mem. Law Opp’n Def.’s Mot. To Dismiss Second Am. Compl. (Docket No. 123) (“Pis.’ MTD Mem.”) 15). In so arguing, Plaintiffs rely on Supreme Court precedent holding that “Congress may enact statutes creating legal rights, the invasion of which creates standing, even though no injury would exist without the statute.” Linda R.S. v. Richard D.,
The long-term soundness of the precedent upon which Plaintiffs rely is open to question, as the Supreme Court recently granted certiorari to consider “[wjhether Congress may confer Article III standing upon a plaintiff who suffers no concrete harm, and who therefore could not otherwise invoke the jurisdiction of a federal court, by authorizing a private right of action based on a bare violation of a federal statute.” Robins v. Spokeo, Inc., No.
As one district court noted in addressing a similar argument:
It is one thing when Congress enacts a statute, the violation of which constitutes “injury” in the Art. Ill sense. Congress has, in that case, overridden the prudential limitations ■ and provided an injury which confers standing. It is quite another thing to suggest that the states have the same power to waive by statute the prudential, or more problematically, the constitutional limitations on standing in federal court and, by way of a state created right, confer injury in the Art. Ill sense where none would otherwise exist.
Mangini v. R.J. Reynolds Tobacco Co.,
Thus, it is insufficient for Plaintiffs to argue — as they do — that Section 4226 of New York Insurance Law, standing alone, confers upon them an “injury” sufficient to establish Article III standing. Instead, Plaintiffs, must establish that at least one. of them has otherwise suffered an injury sufficient to entitle him to sue in federal court — namely, the “invasion of a legally protected interest which is ... concrete and particularized” and “ ‘actual or imminent, not conjectural or hypothetical.’” Lujan,
The other theories of injury presented in Plaintiffs’ Complaint and memorandum of law are equally unavailing. First, their Complaint alleges that’ they “have paid premiums for life insurance policies that are less financially secure than AXA represented them tp be.” (SAC ¶ 145; see also id. ¶ 132 (“AXA’s failure to .disclose its shadow insurance practices (and, accordingly, its materially misleading representations, of its financial condition and reserve system) meant that AXA could offer life insurance with fewer reserves and less sound financial backing at a comparable price to other insurers that did not engage in such practices.”)). Significantly, however,- the Complaint does not allege that, as a result of having purchased or paid premiums for those-life insurance policies, Plain-: tiffs themselves were injured, financially or otherwise. , Plaintiffs do not allege, for example, that they paid higher premiums as a result of AXA’s misrepresentations (as they had in their first amended complaint). Accord Butler v. Obama,
In short, Plaintiffs received what they bargained for — life insurance — and do - not allege, let alone plausibly allege, that they were financially harmed by virtue of their purchases. Plaintiffs’ allegations are thus qualitatively, different than those made by consumers who allege the pur
Alternatively, Plaintiffs contend in their memorandum of law that they have been harmed because “New York’s reserve and capital requirements are designed to pre
In the final analysis, because Plaintiffs do not allege that they would not have purchased policies from AXA but for its nondisclosures, or that they suffer any past or current financial harm by virtue of its misrepresentations, any risk of harm that they face is a risk of harm in the future — namely, the risk that AXA, by virtue of its shadow insurance transactions, will be unable to pay Plaintiffs’ claims when they are eventually made. (See, e.g., SAC ¶¶ 77-78). But to the extent Plaintiffs allege such a theory of injury, that possibility is far too hypothetical, speculative, and uncertain to constitute an “imminently threatened injury” worthy of federal judicial intervention. Summers,
The Court’s conclusion is consistent with the conclusion reached in Taylor v. Bernanke, No. 13-CV-1013 (ARR),
CONCLUSION
For the reasons stated above, the Court concludes that Plaintiffs fail to demonstrate an injury sufficient to “satisfy the strictures of constitutional standing,” Cent. States,
The Court does-not arrive at its conclusion lightly. The pervasiveness of shadow insurance in New York — and AXA’s alleged failure to disclose details of those transactions — may well pose a threat to the stability and reliability of the state’s insurance system, as NYDFS suggested. Nevertheless, the Court cannot address the legality or propriety of AXA’s conduct without the constitutional authority to do
The Clerk of Court is directed to terminate Docket Nos. 87 and 105 and to close the case.
SO ORDERED.
Notes
. Even if Plaintiffs had alleged in the Complaint that they paid higher premiums, that may not have been sufficient to constitute an injury-in-fact. See Pittston Stevedoring Corp. v. Dellaventura,
. Even if Plaintiffs’ general allegations regarding the effect of AXA’s nondisclosures on the price of its products were somehow sufficient to establish an injury-in-fact as to either Plaintiff, they would lack Article III standing in any event. This is because Plaintiffs at no point allege, plausibly or otherwise, that any financial harm they have individually suffered from AXA’s pricing was fairly traceable to AXA's omissions or misrepresentations in its financial statements. See Ziemba v. Rell,
That is, as Plaintiffs themselves admit (see Pis.’ Mem. 30-35), they do not allege that their decision to purchase AXA insurance was specifically influenced by AXA’s alleged misrepresentations regarding its shadow insurance transactions or that their life insurance purchasing decisions would have been different but for those alleged misrepresentations. They do not assert, for example, that they specifically relied upon or even consulted AXA’s annual statements before purchasing policies through AXA. (Notably, despite their allegations regarding AXA’s past misstatements, both Plaintiffs have remained policyholders with AXA. (SAC ¶¶ 23, 25).) Accordingly, Plaintiffs fail to establish a causal connection between AXA’s challenged conduct and any economic harm suffered by virtue of their purchasing decisions. See, e.g., Sanders v. Apple Inc.,
. Some of the parties’ submissions in connection with the motion for class certification were filed publicly in redacted form. (See, e.g., Docket No. 94). In light of the fact that the Court did not need to consider those submissions, the right of public access does not call for disclosure- and the redactions are hereby approved. See, e.g., Lugosch v. Pyramid Co. of Onondaga,