Wednesday, April 27, 2016

No. 159: Unclaimed and Unpaid Death Benefits—"60 Minutes" Criticizes Life Insurance Companies

CBS's "60 Minutes," in its lead segment on April 17, 2016 ("the segment"), criticized life insurance companies for not paying billions of dollars in death benefits, and for systematically destroying the equity that many policyholders had built up in their policies. The segment was entitled "Not Paid," Rich Bonin was the producer, and Lesley Stahl was the on-air correspondent.

The subject of unclaimed and unpaid death benefits is complex, and has a long and tortuous history that dates to the beginning of life insurance in this country. My primary concern about the segment is that it is impossible to provide, in 14 minutes, the background necessary for viewers to understand the subject. Here is some of the background.

The Insuring Agreement
The insuring agreement is the heart of any insurance contract. In a life insurance policy, the insuring agreement says the insurance company will pay the death benefit to the beneficiary upon receipt of proof of the insured person's death; that is, upon receipt of a death claim normally accompanied by a death certificate. (Similarly, in a fire insurance policy, the property owner must file a claim for fire damage to the insured property.) The insuring agreement has been approved by state insurance regulators and has long been required by state insurance laws. The segment did not mention the insuring agreement.

State Unclaimed Property Laws
State unclaimed property laws, called "escheat" laws, require financial institutions, including life insurance companies, to turn over (escheat) to the state property that has been unclaimed by its owner for a period such as three years. Each state has an unclaimed property agency, which is under the auspices of the state treasurer or other state official. Usually the unclaimed property agency publishes in newspapers, once or twice a year, names of owners (but not amounts) of unclaimed property. The agencies also operate websites. Owners are urged to contact the agency and follow the steps necessary to retrieve the unclaimed property.

Most unclaimed property is never claimed and therefore is kept by the states in perpetuity. Thus states facing financial problems have an incentive to make sure all unclaimed property is turned over to them. The segment did not mention state unclaimed property agencies, despite the fact that some of the investigations to which the segment referred were initiated by those agencies. Major articles about unclaimed property were in the October 2010 and November 2010 issues of The Insurance Forum.

The Lost Policy Problem
The lost policy problem is as old as life insurance itself. A "lost policy," in this context, is a policy that a beneficiary "thinks" existed on the life of a deceased person, but the beneficiary does not know the name of the insurance company and has no significant information about the policy. The first article about lost policies in The Insurance Forum was in the August 1980 issue. The article mentioned a "lost policy search" service that had been operated for several years by the Institute of Life Insurance, a trade association, but the service was discontinued because of budget constraints and a low success rate.

Later a service was established by what is now the American Council of Life Insurers (ACLI), a life insurance company trade association. The ACLI service involved sending lists periodically (often once a month) to all ACLI member companies showing the information that purported beneficiaries had provided to the ACLI. When the ACLI service was mentioned in a popular consumer finance magazine, the ACLI was inundated with requests. ACLI's member companies protested because of the expense of the large number of searches and the small number of "matches." The ACLI eventually discontinued the service. The segment did not mention the lost policy problem.

Nonforfeiture Options
Nonforfeiture laws first came on the scene in the middle of the 19th century. Their purpose was to protect policyholders who discontinued their level-premium life insurance policies from forfeiting the equity built up in those policies. In the early days, the only nonforfeiture option was a reduced amount of paid-up life insurance. If premiums were not paid, the paid-up insurance eventually would become payable when the insured person died, or when the insured person reached the end of the mortality table on which the policy was based.

Cash values were added later, along with extended term insurance, as additional nonforfeiture options. In those policies, paid-up insurance was usually the automatic option. Therefore, if premiums were not paid, the paid-up insurance eventually would become payable.

In the 1940s, state insurance regulators instituted a significant change by making extended term insurance the automatic option. The change had the advantage that, if a premium was not paid, the full amount of life insurance (rather than a reduced amount) would remain in effect, but only for a limited period of time. Thus the change meant that the extended term insurance would expire without value at the end of the term period. Because of the change, it was possible for a company to assume that the insured person survived the term period, that no benefit was payable, and that the company would never have to turn over anything to state unclaimed property agencies. The segment did not mention nonforfeiture options.

Automatic Premium Loans
Around the middle of the 20th century, automatic premium loan (APL) provisions became what amounted to another nonforfeiture option. They were popular and widely used. When a life insurance policy has a cash value, and therefore a loan value, and when a premium is not paid, the company pays the premium automatically by lending the money to the policyholder under the loan clause. The idea is to prevent the policy from lapsing, on the theory that the policyholder's failure to pay the premium may have been inadvertent.

APL was usually inserted in a policy only at the request of the policyholder, and usually was requested in the policy application. Also, some APL provisions said the company would not pay more than one or a few consecutive premiums by APL. Today companies often pay premiums by APL continuously until the cash value is exhausted. The segment did not mention APL; indeed, the segment made it sound as though the companies were stealing money from their policyholders.

The Demutualization Phenomenon
During the late years of the 20th century and the early years of the 21st century, many mutual life insurance companies went through a process called "demutualization." In that process, a mutual company, which is owned by its policyholders, converts itself into a stock company, which is owned by its shareholders. State demutualization laws require the mutual company to obtain the permission of its policyholders (a majority of those voting). Also, to purchase the ownership interests of the mutual company's policyholders, the mutual company must pay them cash and/or give them shares of stock in the new stock company.

To obtain the permission of the policyholders to demutualize, and to pay them for their ownership interests, converting companies had to contact the policyholders by mail. When the companies sent the mail, huge numbers of mailings were returned by the postal service as undeliverable. In other words, the mutual companies had lost contact with millions of policyholders who had discontinued the payment of premiums.

In an interesting twist, the agencies who initially became most interested in the problem of lost policyholders were the state unclaimed property agencies rather than the state insurance regulators. Eventually, after publicity about the problem, state insurance regulators took an interest in the problem.

In the segment, one interviewee, when asked for names of insurance companies involved, mentioned John Hancock, Metropolitan Life, and Prudential as examples. Those three giant companies grew up in the so-called industrial life insurance business, which involved small policies and premiums collected weekly or monthly by agents going door to door. All three of those companies demtualized and found they had huge numbers of lost policyholders. John Hancock received a large amount of adverse publicity that caught the attention of the unclaimed property agency in John Hancock's home state of Massachusetts. The segment did not mention the connection between demutualization and lost policyholders.

The Investigations
Most of those interviewed in the segment have been investigating the practices of life insurance companies related to unclaimed and unpaid death benefits. The investigations have been and are being conducted on behalf of state unclaimed property agencies and state insurance regulators.

The first person interviewed in the segment was Kevin McCarty, the Florida insurance commissioner. He chaired the committee of the National Association of Insurance Commissioners (NAIC) that investigated unclaimed benefits. Also featured in the segment was Jeff Atwater, the Florida chief financial officer. He oversees the Florida unclaimed property agency and other state agencies. In the segment, both McCarty and Atwater criticized insurance companies who apparently knew some insured persons had died but had not paid the death benefits.

Verus Financial LLC (Waterbury, CT) is an auditing firm that has been retained by state unclaimed property agencies and the NAIC to investigate the practices of life insurance companies relating to unclaimed benefits. The segment featured two Verus investigators.

The Death Master File
The U.S. Social Security Administration maintains a Death Master File (DMF) that supposedly lists all deceased persons in the U.S. I have never seen the DMF and know little about it. However, life insurance companies apparently have been able to access it. I do not know the cost of access to the DMF or the terms to which a company must agree in order to use it. The segment mentioned the DMF prominently.

Life Annuities
A life annuity is a contract between a life insurance company and an annuitant under which the company promises to make periodic payments (usually monthly) to the annuitant for as long as the annuitant lives. Apparently some life insurance companies have long used the DMF in an effort to learn of deceased annuitants, so that the companies can stop sending payments to those annuitants. Companies undoubtedly were concerned that they were not being notified of annuitant deaths and that survivors were stealing annuity benefits. Indeed, criminal actions have been taken against some annuitant survivors.

Several years ago there was some embarrassing publicity about the fact that life insurance companies were using the DMF to stop life annuity payments, but were not using the DMF to find insured persons who had died and whose beneficiaries might have been eligible for life insurance benefits that had not been claimed. The inconsistent use of the DMF struck a raw nerve for many observers who viewed it as evidence of unfair and self-serving activity by life insurance companies. I think those revelations prompted state insurance regulators to start investigating the problem of unclaimed benefits several years after state unclaimed property agencies began investigating the problem. The segment mentioned annuities.

The Settlements
Several major life insurance companies have entered into settlement agreements with regulators. Under those settlements, the companies agree to use the DMF routinely to search for the deaths of insured persons whose beneficiaries have failed to file death claims and where death benefits consequently have not been paid. As a result of the agreements, some beneficiaries have been located, and some death benefits have been paid that otherwise would not have been paid. Several other companies remain under investigation and have not yet entered into settlements with the regulators. The segment mentioned the settlement agreements.

The Kemper Lawsuit
In No. 133 (posted December 16, 2015), I discussed three members of the Kemper group of insurance companies who filed a lawsuit in an Illinois state court against Verus Financial, the investigating firm, and against the Illinois state treasurer, who operates the Illinois unclaimed property agency. Two of the several allegations are that Kemper has no legal obligation to search the DMF for deceased policyholders, and that Verus and the state treasurer do not have the legal right to force Kemper to search the DMF. Kemper filed the complaint in October 2015. Thus far there have been no significant developments in the case.

The Industry's Response
I have not seen any response to the segment by any life insurance company. However, I have seen comments from the ACLI and the NAIC.

The segment said no life insurance companies contacted would make anyone available for an interview. However, the segment did not mention that the ACLI arranged for Mary Jo Hudson, former Ohio insurance commissioner and currently an ACLI consultant on unclaimed death benefits, to be interviewed. Stahl interviewed Hudson by telephone on February 12, but "60 Minutes" chose not to interview her on camera.

After the segment aired, I obtained from the ACLI a statement it released on February 23 on unclaimed benefits, and a statement it released on April 18 after the segment aired. The April 18 statement does not mention the segment. Here are excerpts from the April 18 statement:
The life insurance industry is proud of its long history of honoring its obligations to policyholders. In the past ten years alone, insurers have paid more than $600 billion to beneficiaries of life insurance policies....
In a small percentage of cases, life insurance benefits go unclaimed because family members are unaware that they are listed as beneficiaries in existing policies. Life insurers want everyone to receive the benefits to which they are entitled rather than paying unpaid benefits to state governments. That is why the American Council of Life Insurers has advocated since 2012 for state legislatures to adopt a national standard on the issue. Twenty states have enacted laws based on this standard that requires all life insurers to use new technologies to identify policyholders who have died but whose beneficiaries have yet to make a claim. ACLI is urging all states to adopt this standard no later than the end of 2017.... [Underlining in original.]
I also obtained a statement issued on April 20 by John M. Huff, president of the NAIC and Missouri director of insurance. It does not mention the segment. Here is an excerpt:
State insurance regulators are coordinating to address the issue of unclaimed life insurance policy benefits, ensuring beneficiaries receive the benefits to which they are entitled. Coordinated through the NAIC, these efforts have so far resulted in $7.5 billion in benefits returned to consumers, clearing a backlog of unclaimed policies. Regulators continue to work on setting an appropriate and consistent standard regarding the fair treatment of insurance policyholders and beneficiaries. Additionally, the NAIC is currently working on a national system to help consumers locate lost insurance policies....
General Observations
I think it was the Kemper lawsuit against Verus and the Illinois treasurer that brought the subject of unclaimed death benefits to the attention of "60 Minutes." It remains to be seen what happens in the case.

On the positive side, the segment provided a public service by calling attention to the problems of lost policies and unclaimed and unpaid death benefits. On the negative side, the segment was slanted to shine an undeservedly harsh light on life insurance companies.

I have seen no mention of the segment in any major media outlet or in the insurance trade press. Thus the segment's impact, if there will be any impact, remains to be seen.

A Personal Anecdote
My keen interest in the subject of lost policies dates back to the early 1950s, when I was a life insurance agent in Syracuse, New York. One day I was out making cold calls in farm country near Syracuse. I told one farmer who answered my knock on the door that I would like to speak with him about life insurance. He said he would never consider life insurance. When I asked why, he invited me in to explain. He said he had bought a $1,000 policy on the life of his son when the son was born. He paid the premiums for several years, until he encountered hard times and could no longer pay the premiums. Years later his son died, and the farmer said the insurance company did not pay him a dime. I asked if he had filed a claim. He said he had not, because obviously the policy was worthless. I asked him to show me the policy. He said he had long ago thrown it in the incinerator. I asked the name of the company. He did not remember, but he did recall there was a picture of a rock on it. I said it must have been Prudential, and he said that was right. I obtained the necessary information about names and dates, and I wrote to Prudential. The company located the policy. It was for $500, not $1,000. When the policy lapsed, it went on extended term. The term expired a few years before the farmer's son died. I was disappointed, because I had envisioned great publicity by handing the farmer a belated check, including interest from the date of death.

Available Material
I am making available a complimentary 23-page PDF containing the following: the articles in the August 1980, October 2010, and November 2010 issues of The Insurance Forum, the February 23 ACLI statement, a February 24 email to Bonin from an ACLI spokesman, a transcript of the April 17 segment, the April 18 ACLI statement, and the April 20 NAIC statement. Send an email to jmbelth@gmail.com and ask for the April 2016 package relating to the "60 Minutes" segment.

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Friday, April 22, 2016

No. 158: E. Sydney Jackson—A Memorial Tribute

E. Sydney Jackson
E. Sydney Jackson, retired chairman and chief executive officer of Manulife, died April 10, 2016, at age 93. Syd was born, raised, and educated in Regina, Saskatchewan. He served as an officer in the Canadian Army during World War II. He graduated in 1947 from the University of Manitoba, and joined Manulife's actuarial department in 1948.

I met Syd about 45 years ago during a trip to Toronto to visit Manulife's home office. At that time, as I recall, he was executive vice president of the company. I remember the meeting because of his friendliness and his willingness to discuss openly the issues of the day.

Syd and I kept in touch for many years, but I lost track of him after he retired from the company. His retirement occurred around the same time that I retired from active teaching at Indiana University. I was gratified to learn from the obituary in the Toronto Star that he remained victorious in competitive bridge and cribbage until his final weeks.

What impressed me most about Syd was his integrity and his sincerity. I regret that we did not remain in contact after his retirement.

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Wednesday, April 20, 2016

No. 157: Lincoln National Life's Cost-of-Insurance Charges and the Settlement of an Indiana State Court Lawsuit

On June 2, 2015, a three-judge panel of the Indiana Court of Appeals handed down a unanimous ruling against Lincoln National Life Insurance Company (Fort Wayne, IN) in a class action lawsuit relating to cost-of-insurance (COI) charges. I learned of the case only recently, after the trial court approved the final settlement of the case.

COI Charges
The amount of protection in any given month of a universal life policy is the death benefit minus the account value. The COI charge in any given month is the COI rate per $1,000 per month multiplied by the amount of protection in thousands of dollars. The policy specifies a guaranteed maximum COI rate for each age of the insured, and the company is free to use COI rates below the maximum rates. The lawsuits involving COI charges allege that the companies increased COI charges in a manner that violated the provisions of the policies.

The Lincoln Policy
From 1986 to 2008, Lincoln sold a variable universal life policy called the "Ensemble II." Peter S. Bezich bought such a policy in 1996. With regard to the charges assessed against the policy each month, the policy says:
The monthly deduction for a policy month shall be equal to (1) plus (2), where: (1) is the cost of insurance ... [and] (2) is a monthly administrative charge. This charge is equal to $6.00 per month in each policy year.
The Bezich Lawsuit
In June 2009, Bezich filed a class action lawsuit in state court alleging that Lincoln had imposed COI charges in excess of those permitted in the policy. In July 2009, Lincoln removed the case to federal court. Bezich sought to move the case back to state court. In June 2010, after a long dispute, the federal court moved the case back to state court.

In July 2012, after extensive discovery, Bezich filed an amended complaint. He alleged three counts of breach of contract: that Lincoln had (1) included non-mortality factors in determining the COI rate, (2) loaded administrative fees and expenses into the COI rate, and (3) failed to reduce the COI rate in response to improving mortality rates.

In August 2012, Lincoln filed a motion to dismiss the complaint. The trial court denied the motion as to all three counts.

In September 2013, Bezich filed a motion to certify a national class of Ensemble II policyholders. In February 2014, the trial court held a one-day evidentiary hearing on the motion. In June 2014, the trial court denied class certification on Counts One and Two, and granted class certification on Count Three. (See Bezich v. Lincoln, Allen County Circuit Court, State of Indiana, Case No. 02C01-0906-PL-73.)

The Indiana Court of Appeals
Lincoln appealed the class certification on Count Three, and Bezich cross-appealed the denial of certification on Counts One and Two. On June 2, 2015, a three-judge appellate panel ruled that class certification was proper for all three of Bezich's claims. Thus the panel reversed the trial court ruling on Counts One and Two, and affirmed the trial court ruling on Count Three. The panel sent the case back to the trial court for further proceedings. In its discussion of Count Three, the panel said:
Finally, we cannot help but comment upon the absurdity of Lincoln's own interpretation of the COI rate provision, which is that the Ensemble II allows Lincoln to unilaterally increase rates on customers to reflect a change in mortality factors but offers no parallel commitment to decrease rates despite an overwhelming improvement in mortality. We have grave doubts that any policyholder of average intelligence would read the COI rate provision to confer on Lincoln that sort of "heads we win, tails you lose" power. [Italics in original.]
The panel's decision was written by Judge Margret G. Robb. Judges L. Mark Bailey and Elaine B. Brown concurred. (See Lincoln v. Bezich, Indiana Court of Appeals, Cause No. 02A04-1407-P-319.)

The Indiana Supreme Court
In July 2014, Lincoln petitioned to transfer the appeal to the Indiana Supreme Court. In September 2015, the Indiana Supreme Court granted the petition to transfer. By that time, however, the parties had essentially completed their settlement negotiations.

The Settlement
After lengthy and intensive negotiations, including the participation of a mediator, Bezich and Lincoln entered into a settlement agreement that resolved the claims of a class of more than 78,000 policyholders. Lincoln agreed to provide level term life insurance coverage to each member of the class without cost and without underwriting.

The amount of term coverage for in-force policies ranged from 14.5 percent of the face amount of the original policy for insureds up to attained age 40 down to 11.75 percent for insureds over 65. The amount of term coverage for terminated policies ranged from 11 percent for insureds up to age 40 down to 9 percent for insureds over 65. The period of term coverage for in-force policies and terminated policies ranged from six years for insureds up to age 40 down to two years for insureds over 65.

The actuarial estimate of the value of the settlement was not less than $171.8 million. The estimated aggregate face amount of term coverage was $2.25 billion, with face amounts ranging from about $1,000 to $3.75 million, and an average face amount of $28,660.

On October 25, 2015, in the trial court, Bezich filed an unopposed motion for class certification and for preliminary approval of the settlement. On November 15, the trial court granted preliminary approval and ordered the parties to disseminate the class notice.

On February 4, 2016, after the settlement hearing, and after the filing of a motion for final approval, the trial court issued an order granting final approval of the settlement. The order included a finding that the requested plaintiffs' attorney fees of $24 million plus expenses of about $419,000 were "fair and reasonable." The trial court entered final judgment and dismissed the case with prejudice (permanently).

General Observations
The Bezich class action lawsuit ended in a long, hard-fought partial victory for the policyholders. Although the lawsuit did not go to trial, I think Lincoln saw the handwriting on the wall and decided to settle the case after the Indiana Appellate Court panel's unanimous ruling on the class certification issue.

Nonetheless, it should be recognized that the case depended heavily on the wording of the policy's COI clause. Life insurance companies have learned the hard way that the wording of the clause is critical. Thus the companies have rewritten COI clauses in more recently issued policies to provide the companies with maximum flexibility on the imposition of COI charges, while at the same time trying to minimize the likelihood of a successful legal challenge.

Available Material
I am making available a complimentary 26-page PDF containing the Indiana Court of Appeals decision. Email jmbelth@gmail.com and ask for the June 2015 appellate decision in the case of Bezich v. Lincoln.

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Friday, April 15, 2016

No. 156: Life Partners—Trustee Moran, Unsecured Creditors, and Class Action Plaintiffs File Joint Motion to Settle Bankruptcy Case

Life Partners Holdings Inc. (LPHI) and its subsidiaries Life Partners Inc. (LPI) and LPI Financial Services Inc. (LPIFS) participated for years in the secondary market for life insurance. On January 20, 2015, LPHI filed for protection under Chapter 11 of the federal bankruptcy law. On January 30, the U.S. Trustee appointed an Official Committee of Unsecured Creditors (committee) to represent investors in fractional interests in life settlements that LPI had sold. (See In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, Case No. 15-40289.)

Other Developments Early in 2015
On March 13, the U.S. Trustee appointed H. Thomas Moran II as Chapter 11 Trustee. On March 19, the bankruptcy court judge approved Moran's appointment. On April 7, the judge allowed Moran to expand the bankruptcy filing to include LPI and LPIFS. On May 20, Moran filed a declaration containing a preliminary report of his investigation of the alleged fraudulent activities of the debtors (LPHI, LPI, and LPIFS) and their top officers that preceded the bankruptcy filing.

Recent Developments
On November 28, 2015, Moran and the committee filed a Plan of Reorganization. On January 19, 2016, they filed an Amended Plan of Reorganization. On March 24, they filed a Second Amended Plan of Reorganization.

The Joint Motion
On April 1, 2016, Moran, the committee, and the plaintiffs in a recently consolidated class action lawsuit filed a 44-page "Joint Motion to Compromise Class Action Controversies, to Approve Plan Support Agreement, and for Related Relief." The joint motion, which grew in part out of the previously mentioned Second Amended Plan of Reorganization, is a proposal to settle the bankruptcy case. (For the recent class action lawsuit, see Garner v. LPI, U.S. Bankruptcy Court, Northern District of Texas, Case No. 15-04061.)

The parties to the joint motion say "the proposed settlement is fair and equitable," is "in the best interests of the estates of the Debtors," resolves "pending disputes," and provides "meaningful compensation and recovery to approximately 22,000 investors ... who have been so grievously damaged by the Debtors' pre-petition activities." The parties to the joint motion also believe that the proposed settlement enables the unsecured creditors to "recover more than they are likely to recover under any realistic alternative scenario."

The joint motion describes the bankruptcy case, the class action lawsuits that were instituted before and after the bankruptcy filing, a recently consolidated class action lawsuit, and the "ownership issue." In the bankruptcy case, Moran had taken the position that LPI (and therefore Moran) owned the life insurance policies underlying the life settlements. In the consolidated class action lawsuit, however, the plaintiffs had taken the position that the class members owned the policies. The proposed settlement sidesteps and thereby resolves the ownership issue.

The joint motion also describes "complex and protracted discussions" that preceded the filing of the joint motion. Also, in a section entitled "The Proposed Settlement Is Truly the Product of Arm's-Length Bargaining and Not of Fraud or Collusion," the joint motion says:
It would be an understatement to suggest the Settlement Agreement was the product of anything other than hard fought and contentious negotiations. Through months of extensive good-faith and arm's-length bargaining, including two days of mediation with retired [federal] bankruptcy Judge Richard Schmidt, the Parties have reached a resolution they believe minimizes the potential damage and risk to all parties and maximizes value for the Settlement Class Members and the Debtors' estates and their creditors.
Attorneys' Fees
The joint motion describes the agreed-upon attorneys' fees (agreed fee) and calls the agreed fee "fair and reasonable." The parties say they negotiated the agreed fee "only after the parties reached agreement on the essential terms of the settlement." The agreed fee is $33 million, which will be paid over many years. The estimated present value of the agreed fee is about $5.2 million, depending on certain assumptions. Also, the agreed fee is 2.57 percent of the "common fund" of about $1.28 billion that was calculated in a lawsuit heard earlier by the Texas Supreme Court.

The Settlement Agreement
The 60-page settlement agreement itself is an appendix to the joint motion. It provides for the unsecured creditors to be divided into classes and subclasses that have differing options from which to choose. The settlement agreement discusses, among other things, the court approval process, a stipulation to class certification, equitable relief, and the release of claims.

The parties to the joint motion plan to file soon a motion seeking the bankruptcy court judge's preliminary approval of the settlement agreement. If the judge grants the motion, the parties would send the unsecured creditors a class notice of the proposed settlement.

An Alternative Settlement Proposal
To my knowledge, only one other proposal has been filed as an alternative to the settlement proposal in the joint motion. On April 5, 2016, Vida Capital (Austin, TX) filed an alternative plan. Vida, which was founded in 2009, describes itself as
an institutional asset manager focused exclusively on providing longevity-contingent investment solutions to institutions and individual investors. Vida specializes in the structuring, servicing, financing and management of life settlements, synthetic products, annuities, notes, and structured settlements.
In 2010, Vida acquired Magna Life Settlements, a life settlement provider. Magna, which has been in the life settlement business since 2004, is licensed in 37 states and the District of Columbia.

ASM Capital's Offer
ASM Capital (Woodbury, NY) is a firm that invests in obligations of companies in bankruptcy. As I reported in No. 138 (posted January 11, 2016), ASM sent a letter on December 22, 2015 to LPI fractional interest investors who have a "matured fund interest." That expression refers to a fractional interest in a policy on the life of an insured person who has died. ASM offered to pay 75 percent of the matured fund interest promptly in cash to each investor who would transfer to ASM the rights to the matured fund interest. Some LPI investors have accepted the offer. For example, a document filed with the bankruptcy court on April 7, 2016 lists 72 transfers of ownership to ASM.

General Observations
The settlement proposal presented in the joint motion is complex. I have attempted here to describe a few key elements of the proposal. It represents a difficult "compromise," a word that appears in the title of the joint motion, especially with regard to the important ownership issue relating to the fractional interests.

I think the parties to the joint motion have forged a satisfactory settlement. Further, I think the settlement would bring closure to the bankruptcy case in a relatively short time, thereby avoiding long delays and the huge expenses associated with dragged-out legal proceedings.

It remains to be seen how the bankruptcy court judge will rule on the upcoming motion for preliminary approval of the settlement. Also, it will be interesting to see whether the parties are able to provide, as part of the class notice, a reasonably brief and understandable explanation of the complex settlement proposal. Finally, it remains to be seen whether Vida's alternative proposal gains traction.

Available Material
I am making available a complimentary 44-page PDF containing the joint motion. Email jmbelth@gmail.com and ask for the April 2016 joint settlement motion in the Life Partners bankruptcy case.

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Wednesday, April 13, 2016

No. 155: Genworth's Long-Term Care Insurance—Correction of an Error in the Preceding Post

On April 7, 2016, I posted No. 154 entitled "Genworth's Long-Term Care Insurance and the Company's Destacking Plan." When I sent the item to Genworth that day, President and Chief Executive Officer Thomas J. McInerney brought an error to my attention.

In the section entitled "The Reinsurance Repatriation," I mentioned Brookfield Life and Annuity Insurance Company (BLAIC), Genworth's primary Bermuda domiciled captive reinsurance subsidiary. I said that half the long-term care insurance business of Genworth Life Insurance Company (GLIC) has been ceded to BLAIC, and I said incorrectly that the reinsurance involves $1 billion of reserve liabilities. The correct figure is $10 billion.

I took the incorrect figure from Schedule S, Part 3, Section 1, on page 43.2 of GLIC's 2015 statutory financial statement. The correct figure is in Schedule S, Part 4, on page 45. Also, a discussion of the matter is in the "Notes to the Financial Statements" on pages 19.31 and 19.32. The discussion says that the $10 billion of reserve liabilities ceded to BLAIC relate to long-term care insurance, and that the $1 billion figure relates to fixed deferred annuities.

I regret the error. So that readers can see the statement pages to which I refer in this correction, I am making available a complimentary four-page PDF containing pages 19.31, 19.32, 43.2, and 45 of GLIC's 2015 statutory statement. Email jmbelth@gmail.com and ask for the four pages from GLIC's 2015 statutory statement.
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Thursday, April 7, 2016

No. 154: Genworth's Long-Term Care Insurance and the Company's Destacking Plan

In No. 144 (posted February 16, 2016), I discussed a news release issued by Genworth Financial, Inc. (NYSE:GNW) that mentioned a "strategic update." The release, filed as an exhibit to an 8-K (material event) report filed with the Securities and Exchange Commission (SEC) on February 4, said the company's planned actions are "aimed at separating and isolating its LTC [long-term care insurance] business."

The announcement triggered significant reductions in the financial strength ratings of Genworth's life insurance subsidiaries, mostly into the vulnerable (or below-investment-grade) range. The announcement also caused a sharp decline in the company's share prices. Here I discuss the "destacking" plan at the heart of the company's strategic update.

The Current Situation
Genworth's life insurance business consists of three operating subsidiaries: Genworth Life Insurance Company (GLIC), domiciled in Delaware; Genworth Life and Annuity Insurance Company (GLAIC), domiciled in Virginia; and Genworth Life Insurance Company of New York (GLICNY), domiciled in New York. The two subsidiaries most affected by the destacking plan are GLIC, primarily a long-term care insurance company; and GLAIC, primarily a life insurance and annuity company.

The long-term care insurance business of GLIC is financially troubled, while the life insurance and annuity business of GLAIC is financially sound. At present, Genworth, GLIC, and GLAIC are "stacked." That means Genworth is the parent of GLIC, and GLIC is the parent of GLAIC. Thus GLAIC is an asset of GLIC.

As of December 31, 2015, the statutory net worth of GLAIC is $1.7 billion, and the statutory net worth of GLIC is $2.7 billion. Because GLAIC represents more than 60 percent of GLIC's net worth ($1.7 divided by $2.7), GLAIC provides significant value and protection to GLIC and its long-term care insurance policyholders.

The Destacking Plan
Under the proposed "destacking" plan, GLAIC would be moved from GLIC to Genworth. In other words, GLIC and GLAIC would become sister subsidiaries of Genworth, and GLAIC, with its $1.7 billion of net worth, would no longer be an asset of GLIC. Under the proposed plan, Genworth would contribute $200 million to the net worth of GLIC. A major question is whether that amount is adequate compensation for GLIC and its long-term care insurance policyholders for the loss of GLAIC's $1.7 billion of net worth.

Genworth says the proposed destacking plan is subject to the approval of various state insurance regulators. An important question is whether the insurance commissioner in Delaware, where GLIC is domiciled, will approve the removal of a $1.7 billion asset from GLIC in exchange for a contribution of $200 million.

Genworth has not yet formally submitted the destacking plan to Delaware for approval. It remains to be seen whether the proposal will be available to the public when Genworth submits it, and whether the commissioner will conduct a public hearing on it.

The Note Indentures
Another dimension of the destacking plan relates to Genworth's eight issues of outstanding notes with principal amounts totaling $3.8 billion. The maturity dates of the notes range from 2018 to 2066. The note indentures provide that the "disposition" of a "significant subsidiary" might constitute an "event of default," thereby causing the notes to become due and payable immediately.

On March 4, Genworth asked the noteholders to consent to changes in the indentures to eliminate certain subsidiaries, including GLIC, from the definition of "significant subsidiary." To compensate noteholders for consenting to the changes in the indentures, Genworth offered consent fees ranging from $6.25 per $1,000 of principal amount for the short duration notes to $15 per $1,000 of principal amount for the long duration notes. The aggregate amount of the consent fees was $44 million, provided all the noteholders consented.

On March 22, Genworth announced it had received the required number of consents in order to effectuate the changes in the note indentures. The changes mean that the "disposition" of GLIC, through a sale or even an insolvency, would not be an "event of default" under the note indentures. The changes in the indentures remove a major potential obstacle to the implementation of the destacking plan.

The Reinsurance Repatriation
Brookfield Life and Annuity Insurance Company Limited (BLAIC) is Genworth's primary Bermuda domiciled captive reinsurance subsidiary. Half of GLIC's long-term care insurance business, involving about $1 billion of reserve liabilities, has been ceded to BLAIC. As part of the strategic update, and subject to regulatory approvals, Genworth plans to "repatriate" ("unwind") all the reinsurance its insurance subsidiaries have ceded to BLAIC. After the repatriation, which is expected to occur in 2016, Genworth plans to dissolve BLAIC.

Genworth's 2015 10-K report discloses that the company has been using various accounting practices that are permitted by Delaware and Vermont insurance regulators but that deviate from accounting practices permitted by the National Association of Insurance Commissioners. For more on such practices, see No. 153 (posted March 31, 2016).

General Observations
My initial reaction to the destacking plan was that Genworth might be considering the sale of GLIC. However, the questions that naturally follow such a reaction are "To whom?" and "At what price?" I think no reputable company would want to take over GLIC's large and troubled block of long-term care insurance policies at any price.

GLIC has been asking state insurance regulators to approve substantial premium increases on long-term care insurance policies. The company calls them "actuarially justified" premium increases, but the words "actuarially justified" are not necessary. I think GLIC or any other reputable company would refrain from seeking premium increases that are not actuarially justified.

The requests for premium increases create a dilemma for state insurance regulators. Disapproving the requests might force GLIC into insolvency. Approving the requests, on the other hand, increases the financial burdens faced by elderly long-term care insurance policyholders. Although policyholders may be offered the opportunity to avoid the premium increases by accepting reduced benefits, or to pay no further premiums by accepting even lower "paid-up" benefits, the financial burdens on those vulnerable policyholders remain.

I think the survival of GLIC is open to question. In the event of its insolvency, the changes in the note indentures protect Genworth's noteholders, Genworth's shareholders, and Genworth itself. However, the changes do not protect GLIC's long-term care insurance policyholders. Nor do they protect state guaranty associations or insurance companies that would be subjected to assessments. The Delaware commissioner and the other regulators who will be asked to approve the destacking plan are the only ones who can protect policyholders, state guaranty associations, and insurance companies that would be assessed.

Available Material
I am making available a complimentary 16-page PDF ("April 2016 Genworth package") consisting of selected pages from Genworth's filings with the SEC about the strategic update, the destacking plan, the consent solicitation, the results of the consent solicitation, and the repatriation of the Bermuda reinsurance. Also, the complimentary 31-page PDF ("February 2016 Genworth package") offered in No. 144 remains available. Email jmbelth@gmail.com and ask for the April 2016 Genworth package and/or the February 2016 Genworth package.

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