Monday, June 25, 2018

No. 273: Trump and His Latest Atrocity

For almost 60 years I have focused in my writings on matters of concern to persons with a professional or consumer interest in insurance. I have deviated occasionally, such as a blog post on President Donald Trump's executive order imposing the original travel ban, and in a later blog post on his executive order requiring that two regulations be withdrawn for each new regulation adopted. Now it is time for another deviation in view of his zero-tolerance policy relating to refugees seeking asylum in our country from life-threatening conditions in Central America.

Recently I have seen numerous comments on the situation written by persons more qualified and skilled than I am. Two examples stand out.

One was written by Stephen R. Leimberg. He is a professional fine art, portrait, and wildlife photographer in Amelia Island, Florida. He previously taught law at Temple and Villanova University Schools of Law in their Tax Masters programs. In the interest of full disclosure, he is a long-time close friend of mine.

The other was written by Robert Weissman. He is president of Public Citizen, a nonprofit consumer advocacy organization founded in 1971 that champions the public interest in the halls of power. In the interest of full disclosure, the Public Citizen Litigation Group has represented me pro bono on several occasions, and I am a regular donor to the organization.

My usual practice is to offer complimentary packages to readers and invite them to request the packages by email. In this instance I am offering the two statements, which I have edited slightly, as a part of this blog post.

Unconscionable!
by Stephen R. Leimberg

"Insane." "Close to Obscene." "Pure evil." These are not my words. They are the words of Father James Martin with reference to Jeff Sessions' citing of the New Testament to justify tearing children from the arms of their parents. He rightfully called Sessions' shameful statement "cherry picking," i.e., taking words out of context, and added, "It is wantonly cruel and targets the most vulnerable."

Ask yourself how you would feel as a parent—or as a child—if, after fleeing for your life and enduring a gut-wrenching months-long journey, you were suddenly ripped apart from your loved ones. What would you think if those who administered such unspeakable acts did not even keep track of where those children or parents were incarcerated—so that you could be reunited quickly at some point—even if such horrendous, heinous, morally barren actions were somehow necessary or appropriate? Yet these "follow orders from the top" "public servants" did not have the foresight or competence to establish a means or mechanism to put parent and child back together—or even allow them to keep in touch. How would you feel if—for weeks or even months—you had no idea where your child was taken—or what your child's physical or emotional condition is? More importantly for the long run, what should we think of the character and competence of those who engineered and carried out such atrocities—in our country?

Now you may be saying to yourself, "I was told that these rapist, drug dealing, foreigner migrants will infest our country, and that we cannot let these pests pour in!" Raise your hand if you have no relatives who immigrated to this country to gain religious freedom, escape tyranny, and literally save their lives, or who came to our shores with the hope of a better life for themselves and their families. But wait, you say, "Mine were different from these people. And that was a different time!" Really?

Were they Irish? Fleeing from famine and starvation, "these poor and disease-ridden folks"—according to newspapers of the time—"threaten to take away jobs from Americans and strain welfare budgets, practice an alien religion, pledge allegiance to a foreign leader, and bring crime with them." Yes, at one time America feared and despised the Irish!

Italian? In the late 1800s, it was written of Italian immigrants: "Those sneaking and cowardly Sicilians, the descendants of bandits and assassins, who have transported to this country the lawless passions, the cut-throat practices, and the oath-bound societies of their native country, are a pest without mitigation. Our own rattlesnakes are as good citizens as they are." Read your history. Italians were lynched in this country!

Polish? German? Jewish? Chinese? Japanese? Indian? Pakistani? Go to Google and type in: "your nationality's American Experience." Our country, unfortunately, has always had fearmongers willing to promote and perpetuate a legacy of lies, discrimination, and stereotyping designed to further their own agendas. What is different now is that it has seldom been the nation's highest elected leaders opening the Pandora's box of hate.

We have been awakened by the beyond-callous sheer barbarism of this governmental child snatching. But this mean-spirited morally corrupt action—the utter unraveling of decency—is just the tip of a (melting) iceberg of inexcusable ugliness. And it is not happening behind our backs. It is being thumbed at our very noses. And we have made a deal with a devil to hear or see no evil in return for false promises or lowered taxes for the ultra-wealthy (with trillions of dollars of debt passed on to our children) or the opportunity to make the already more than rich even richer.

Here is a short list of what you and your children are giving up. As you read the list, ask yourself what you are getting—really getting—in return, and give yourself an honest answer. Is it worth it? Is the bargain worth the loss of our country's soul?

Federal funding for science is being cut back. Federal agencies are being directed to ignore science-based evidence. The EPA is a cruel joke. Rules or funding for programs protecting us against harmful water and air pollutants such as car emissions are being emasculated. Threatened species of animals are losing their protections. Weather disasters are increasing. Seas are rising (yes, the seas and waters surrounding Amelia Island), yet FEMA does not seem to care. Offshore drilling is being allowed to expand—risking Florida's pristine beaches. Americans are continually massacred by bullets shot from AR-15/AK-47s and from pistols that can be purchased by those not subject to a universal background check—but no one in our government seems to care, or have the will or fortitude to do something about it. Workers' rights and basic human rights are being rolled back. The internet will be more expensive. Consumer protections are being weakened. Big banks are again being allowed to do some of the same things that triggered the great recession and economic collapse. Health care and food for our most needy in our country are being stripped away.

These are not "right or left," Republican or Democrat, issues. We can live our American dream under either party's normal push and pull. But what is happening now is very different. It is our moral compass that is deviating—and it is pointing south! We are at a crossroad. Wake up! It is ALL of us who are in this—together! What harms your neighbor harms you. We cannot allow our highest elected officials to deliberately and consciously misinform, distort, misrepresent, and mislead—or to turn us against each other. We need to decide who and what we want to be as individuals and as a country—and do what needs to be done to restore integrity and character and decency.

Cruel and Heartless!
by Robert Weissman

Thanks to growing public outrage, President Donald Trump has ended his cruel and heartless policy of ripping children of immigrant families away from their parents. But he proposes to replace family separation with family detention, leaving children in prison camps for an undetermined period of time. Now is the time when we have to intensify our pressure and deliver a roaring message about what we insist America should—and should not—be.

Public Citizen is joining with dozens of other organizations in sponsoring "Families Belong Together" demonstrations in Washington, D.C., and around the country on Saturday, June 30. Find a demonstration near you. This is how we speak out and make a difference.

Like you, over the past couple of weeks, I have been sickened and horrified by stories and images of children from families arriving at the U.S.-Mexican border being taken away from their parents. I've lost track of the number of conversations I've had with people asking: What's wrong with the people inside the Trump administration? Isn't this too much even for them? These are not rhetorical questions. We all are struggling to grapple with how this could happen and why.

This is my best explanation. While the people making policy in the Trump administration surely love their own children, they are utterly without compassion or concern for the children of people they don't know, especially for children of the immigrant families they have rhetorically dehumanized. On an individual level, that lack of compassion is a terrible character flaw. But at a policy level, lacking compassion and a readiness to treat groups of people as less than human can lead to truly grotesque outcomes. It is that combination that has underlaid many of the most horrible events in human history.

The good news in this story is that the American people have made clear they don't want to be complicit in policies that tear children from families. The intensifying disgust and fury has made a difference. Fueled by news coverage, the public engagement has kept the news media focused on the issue. Even in the alternative universe of Fox News and Rush Limbaugh, doubts have started to be raised. Trump saw his base of support eroding.

Then, on the very same day he said there was no alternative to taking children from their parents, Trump announced an end to the policy. Except, unsurprisingly, he proposed to replace it with yet more cruelty. Now Trump aims to keep children who are newly arriving immigrants with their parents—but in detention facilities—for undefined and potentially limitless periods. And the new Trump policy does nothing to reunite the 2,300 children already separated from their families. Here is what a group of the world's leading human rights experts said about this approach in December 2016, long before Trump's latest announcement: "Immigration detention is a clear child rights violation and States must prohibit it by law and cease the practice immediately....Let us be clear: immigration detention is never in the best interests of the child."

So we have not yet succeeded in ending the administrations's sadistic policy toward newly arrived immigrants. But we have shown that pressure can move Trump. Indeed, if you have ever doubted that protests and civic engagement make a difference—amid a torrent of Trump lies and his administration's appalling policies—be sure: They do.

So now it is time for us to turn up the pressure. Come to Washington or join a demonstration near you on June 30. Protest for children, and protest for our country. In just a few days, plans have come together for a demonstration at the White House and at least 450 other sites around the country. Hundreds of thousands of people have pledged to join, and the numbers are rising every hour. Together, we are going to force a modicum of humanity and decency on the Trump administration.

We can end family separation and family detention. We can end the administration's other barbarous anti-immigrant policies, including the separation of families that have been in the United States for more than a decade. Taking children away from their parents—or proposing to lock them up together indefinitely in cage-and-cement detention centers—are just the immediate, visible manifestations of an administration that has made cruelty a centerpiece of its agenda. It is up to us to reject this. We get to define what America is.

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Thursday, June 21, 2018

No. 272: Accordia, Athene, the California Department of Insurance, and the Victimization of Life Insurance Policyholders

On June 12, 2018, the California Department of Insurance (CDI) issued a press release announcing an extraordinary action against Accordia Life and Annuity Company and Athene Annuity and Life Company (Respondents). The announcement by Insurance Commissioner Dave Jones refers to an "Order to Show Cause and Accusation" against the Respondents "for failing to service over 50,000 policies issued to California consumers and imperiling the benefits to which they are entitled." The key document accompanying the press release describes one of the strongest state insurance regulatory actions I have ever seen.

Introduction in the Key Document
The key document consists of an "Order to Show Cause" (including a hearing notice and a statement of charges), an "Accusation," and "Relief Requested" (including a cease and desist order, monetary penalties, a request for a declaration of unfair methods, acts, or practices, and a suspension of certificate of authority). Here is a lightly edited version of the five-paragraph introduction in the key document:
  1. In 2013, Accordia, a relatively new entrant into the life insurance market, acquired a $10 billion book of life insurance business—consisting of approximately 500,000 policies nationwide, approximately 50,000 of which were issued to Californians—from Aviva USA through a complex, multi-step transaction involving other parties and the creation of numerous captive reinsurers. Instead of purchasing the business directly from Aviva USA, Accordia acquired the life business through an assumption reinsurance agreement with another company, Athene, who had bought both the life insurance and annuity business of Aviva USA. Pursuant to the terms of the agreement, Athene requested its policyholders to consent to the transfer of their policies from Athene to Accordia.
  2. In late 2014, Accordia sent a notice of transfer to the policyholders, apprising them of the acquisition and requesting their consent to the transfer of their policies from Athene to Accordia. Those policies for which the policyholders either affirmatively consented or consented by silence were transferred from Athene to Accordia. For those policyholders who rejected the transfer, their policies remained insured with Athene, but are administered by Accordia under a third-party administrator agreement between the two entities.
  3. From the very start of administering the policies, Accordia faced numerous substantial difficulties. In 2013, Accordia had transitioned the administration of its life policies to a third-party administrator, Alliance-One Services. Due to compatibility issues between Alliance-One's policy management system and the policies to be converted, in late 2015, the vast majority of the policies were "restricted," such that they could not be converted to the system and could only be administered on a manual basis. As a result, policyholders did not receive their statutorily-mandated annual statements, nor could they receive bills, pay premiums, or access any of the benefits of their policies. Over two years have passed since the conversion issues first surfaced and policies still remain restricted.
  4. Even after a policy gets "unrestricted" and is being electronically administered, problems continue for policyholders, raising questions as to whether their policies are being serviced properly. For instance, policyholders still are not receiving their up-to-date annual statements. Some face risk of lapse because premiums were not billed or collected while their policies were restricted, which created unpaid past premium obligations amounting to thousands of dollars in some cases. Without the benefit of their annual statements, these policyholders cannot make a fully-informed decision as to whether to pay the back premiums and keep their policies in force. Other policyholders have suffered accounting issues, with premium payments being improperly applied or not at all. Others have expressed concerns that they feel stuck with their policies due to advanced age.
  5. CDI, therefore, seeks an order that the Respondents cease and desist from engaging in the conduct set forth below, an order suspending Respondents' certificates of authority, and requests that Respondents be fined under California Insurance Code section 790.035.
Remainder of the Key Document
The background section of the key document describes "Accordia's Corporate History," which includes references to Goldman Sachs, Global Atlantic, Aviva USA, Aviva plc, and Presidential Life. It also describes "Accordia's Multi-Step Purchase of the Life Policies." The latter subsection describes how Accordia was able to purchase Aviva USA's life business with the help of a "permitted practice" and "limited purpose subsidiaries" (LPSs) based in Iowa, Delaware, and Vermont.

The statement of charges section describes how the "Respondents 'Restrict' the Policies, Causing Them to Be Frozen in Time." It also describes how the "Respondents Fail to Provide Timely Annual Reports" and how the "Respondents Fail to Administer the Policies in Good Faith."

The order to show cause and notice of hearing sections describe the relevant California code sections. The remainder of the key document describes the accusation and the relief requested.

Attached to the key document is an exhibit listing 109 complaints received by CDI. Each entry shows the consumer's first name, the initial of the consumer's last name, in some instances the alleged violations of California law, and a brief description of the violations. Also attached to the key document is a notice of defense, a statement to respondent, and the texts of the relevant California statutes.

General Observations
In recent years I received emails from several Accordia/Athene policyholders telling me about their problems. I had not written squarely on the subject, and I was not able to help them. By coincidence, I saw the CDI announcement while I was working on a generalized post about servicing problems faced by universal life policyholders. I stopped working on that post in order to work on the CDI regulatory action taken against Accordia and Athene.

Regular readers of my blog are aware of my longstanding efforts to obtain information about the use of LPSs, especially those based in Iowa. Until I saw the CDI action, I was not aware of the connection between those LPSs and the situation involving Accordia and Athene. Among the entities about which I have written are Cape Verity I, Cape Verity II, Cape Verity III, and Tapioca View, LLC.

Another aspect I found interesting was the transfer of policies from Athene to Accordia. I wrote many articles in The Insurance Forum about policy transfers, and devoted Chapter 23 of my 2015 book, The Insurance Forum: A Memoir, to that subject.

I sympathize with those who purchased policies from companies such as Aviva USA, AmerUs Life, Athene, and Accordia. Those persons paid premiums in good faith. However, they are now in limbo with no information about the status of their policies, no way to learn what premiums they need to pay, and no way to access the benefits of their policies.

The sort of administrative problems that prompted the CDI action may be extremely difficult or even impossible to solve. Yet those types of problems are to be expected when private equity firms are allowed to acquire the long-term obligations of insurance companies in an effort to earn short-term profits for the benefit of their investors. I think state insurance regulators are aware of insurance company acquisitions by private equity firms. In my opinion, however, state insurance statutes have been drafted by the insurance industry in such a way as to force regulators to approve such acquisitions.

Available Material
I wrote about the regulatory situation in Iowa in numerous blog posts. Five of them are available at the following links: No. 44 (April 22, 2014), No. 71 (November 6, 2014), No. 72 (November 12, 2014), No. 73 (November 19, 2014), and No. 109 (July 13, 2015). I offered complimentary packages of material in each of those posts, and the packages are still available.

Now I offer a complimentary 27-page PDF consisting of the CDI press release (1 page) and the entire key document (26 pages). Email jmbelth@gmail.com and ask for the June 2018 package about the California/Accordia/Athene case.

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Monday, June 18, 2018

No. 271: A Nationwide Cost-of-Insurance Lawsuit Ends in a Confidential Settlement

In No. 202 (posted February 6, 2017 and available here), I discussed a lawsuit filed against Nationwide Life Insurance Company relating to cost-of-insurance (COI) increases on variable universal life insurance policies. Here I provide an update about the confidential settlement of the case. (See Palumbo v. Nationwide, U.S. District Court, District of Connecticut, Case No. 3:16-cv-1143.)

Background on the Case
In July 2016 two plaintiffs filed a lawsuit against Nationwide about COI increases on variable universal life insurance policies. The lawsuit has an extra dimension that transformed the case into a strange one.

One plaintiff is Laura L. Palumbo, a Connecticut resident. She is the trustee of an irrevocable insurance trust created in 1994. The other plaintiff is William J. Palumbo. He is the grantor of the trust, the insured in the two policies the trust owns, and Laura's father.

Both policies are variable universal life, each with a $500,000 death benefit. They were issued in 1994 and 1996 by Provident Mutual Life Insurance Company. William was aged 57 when Provident issued the first policy. The initial planned annual premium for the first policy was $9,800. In 2002 Provident demutualized under the sponsorship of Nationwide, and the policies became Nationwide policies.

The plaintiffs said they obtained updated illustrations in September 2014 and were shocked to learn the account values of the policies had declined sharply. They said they were also shocked to learn that in the first policy, for example, the new planned annual premium—about $29,000 compared to the $9,800 initial planned annual premium—made the policies unaffordable. The plaintiffs said that, when Laura wrote to Nationwide asking how the monthly mortality charges were calculated, the company's compliance office said it was "unable to get that question answered."

The Extra Dimension
Laura had long been a registered representative authorized to sell securities such as variable life insurance policies, and she was involved in the sale of the policies to the trust. In April 2015 she wrote to Nationwide alleging the company had made misrepresentations and omissions relating to the COI charges.

In May 2015 Nationwide filed a U5 (the termination notice used in the securities industry) with the Financial Industry Regulatory Authority (FINRA) saying a complaint had been made against Laura by the Palumbo Trust alleging misrepresentations and omissions in the sale of variable life insurance. Laura contacted FINRA disputing the U5. In January 2017, when I looked at the BrokerCheck report about Laura on FINRA's website, I found no mention of the U5 or any other "disclosure event." I therefore concluded that the U5 had been deleted.

The Allegations
The plaintiffs alleged Nationwide made misrepresentations and omissions of material facts to the plaintiffs regarding the COI charges in the two policies. Among the first seven of the ten allegations in the original complaint were breach of contract and violations of certain Connecticut statutes. The other three allegations related to Laura and the U5.

In August 2016 Nationwide filed a motion to dismiss the first seven claims. In that filing Nationwide said the parties were discussing the possibility of an amicable resolution of the final three claims.

In December 2016 the judge ordered the plaintiffs to file an amended complaint adding FINRA as a nominal defendant. The plaintiffs thereupon filed the amended complaint adding FINRA as a nominal defendant. In the amended complaint the plaintiffs made clear FINRA was not accused of wrongdoing and was added as a nominal defendant only to facilitate relief with respect to the final three claims. In February 2017 the parties filed stipulations dismissing the final three claims.

The Settlement
On March 20, 2018, the judge stayed all case deadlines in anticipation of settlement.  On May 10 he said the parties reported the case has settled, and he dismissed the case.  He directed the clerk "to administratively close the file without prejudice to re-opening on or before 6/10/18." He said the parties may file a stipulation of dismissal prior to that date if they wish to do so.  On June 8 the parties filed a joint motion for a one-month extension until July 10.  They said: "Good cause exists for this request because the parties are still working together to effectuate the terms of the settlement reached between the parties before filing a Stipulation of Dismissal."  On June 14 the judge granted the motion.  The court file contains no information about the terms of the settlement.

General Observations
Usually the focus in a COI case is on the question of whether the mortality charges imposed upon the policyholders are implemented in a manner consistent with the precise language of the policy. In this case I was not able to deduce the answer to that question.

In its motion to dismiss the first seven claims, Nationwide attached not only the policies but also a few of the quarterly statements sent to Laura in her capacity as trustee of the trust. The statements show beginning account values and ending account values. If the plaintiffs had reviewed the statements, it should have come as no surprise that the account values had declined significantly.

An important question is whether Nationwide should have routinely provided each year, without a request from Laura, updated illustrations showing the future planned annual premiums needed to prevent substantial erosion of the account values. A company may say it has no contractual or other legal obligation to provide updated illustrations. However, I think a company should provide updated illustrations at least once a year to reduce the likelihood of policyholder disappointment.

As indicated at the outset, the "extra dimension" made this a strange case and was the primary reason for my decision to report on the case. I had never heard of a case in which a U5 was filed against a person who submitted a complaint to the company.

In No. 202 I predicted the case would be settled quietly. I say "quietly" because this was not a class action lawsuit, and the terms of settlements in individual lawsuits usually remain confidential.

Available Material
In No. 202 I offered a complimentary 10-page PDF containing a few case documents. The package is still available. Email jmbelth@gmail.com and ask for the February 2017 package about the Palumbo/Nationwide case.

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Tuesday, June 12, 2018

No. 270: Company Division Laws—A Major Defeat and a Minor Victory for Insurance Policyholders

In No. 220 (June 1, 2017) I discussed the enactment of a Connecticut law allowing a Connecticut-domiciled insurance company to divide itself into two or more insurance companies. I explained why I think the law violates the constitutional rights of insurance policyholders. In No. 262 (April 16, 2018) I discussed the Georgia legislature's adoption of similar legislation. To access those two posts, click on the links in this paragraph. Here I provide updates on recent developments in both states.

Connecticut Developments
On April 17, 2018, in a Form A filing, Hopmeadow Acquisition and several related entities sought the approval of Connecticut Insurance Commissioner Katherine L. Wade for the proposed acquisition of control of Hartford Life Insurance Company and three affiliated companies. On May 17, Timothy Curry, who Commissioner Wade appointed as hearing officer, held a public hearing on the proposal. On May 24, Curry concluded in a 19-page proposed final decision that the "Proposed Acquisition is not likely to be hazardous or prejudicial to those buying insurance," and he recommended that Commissioner Wade issue an order approving the proposed acquisition. On the same day, Commissioner Wade issued a two-page order approving the proposed acquisition.

Georgia Developments
In April 2018 a reader sent me a news story that reported on the Georgia legislature's approval of House Bill 754, which is similar to the Connecticut legislation. Here is one sentence of the news story:
Georgia legislation that lets insurers divide and opens a path for run-off transactions involving legacy books of business will become law by 1 July, even if Governor Nathan Deal fails to sign the measure.
In May 2018, through an alert from the Federation of Regulatory Counsel, I was surprised to learn that Governor Deal vetoed HB 754. Here is his veto message:
House Bill 754 would allow insurers domiciled in Georgia to divide into two or more insurers. Any plan of division must be submitted to and approved by the Commissioner of Insurance, giving the Commissioner broad discretion to decide on a case by case basis if the company meets the requirements to divide. If a company was deemed acceptable by the Commissioner to divide and one of the resulting insurers stopped turning a profit, issues could arise as to how to distribute the liability. I am unaware of the need for the division process provided for in HB 754 and am unconvinced that the appropriate safeguards are provided for in the proposed legislation. For the foregoing reasons, I VETO HB 754.
Commissioner Hudgens
Prior to posting No. 262, I wrote to Georgia Insurance Commissioner Ralph T. Hudgens. I sent him No. 220 about the Connecticut division law, said I was planning to post an item about HB 754, and asked for a statement from him to be included in the item. An insurance department spokesman said it was not an insurance department bill. He also said the department did not oppose the bill. However, I did not receive a statement from Commissioner Hudgens.

After learning of Governor Deal's veto of HB 754, I tried again to obtain a statement from Commissioner Hudgens. The department spokesman said there will be no such statement.

The Sponsors
In No. 262 I said two lead sponsors of HB 754 were Representative Jason Shaw (R-Lakeland) and Senator P. K. Martin IV (R-Lawrenceville). Shaw is a member of the House insurance committee and owns an insurance agency. Martin is a member of the Senate insurance and labor committee and is an insurance agent. They were quoted in the news story from which I first learned of HB 754, and I showed the quotes. Shaw and Martin did not return my calls.

After learning of Governor Deal's veto of HB 754, I tried again to reach Shaw and Martin, but they did not return my calls. My primary reason for trying to reach them was to learn the identity of the insurance company or companies behind HB 754.

General Observations
In Nos. 220 and 262 I explained in some detail my objections to company division laws. In a nutshell, I have two major objections. First, such laws allow insurance companies to transfer their obligations to other insurance companies without the consent of the affected policyholders, and therefore the laws violate the constitutional rights of those policyholders. Second, the laws place on the insurance commissioner the burden of proving that the plan adversely affects policyholders, and requires the commissioner to approve the plan if he or she is unable to meet that burden of proof. At the very least, I think the burden should be on the companies to prove that the plan does not adversely affect the policyholders.

I think Connecticut Insurance Commissioner Wade's approval of the transfer of Hartford's policyholders—without their consent—to a private equity firm is a major defeat for those policyholders. I also think Georgia Governor Deal's veto of HB 754 is a minor victory for the policyholders of whatever company was responsible for the introduction and legislative passage of the bill.

Available Material
The packages I offered in Nos. 220 and 262 are still available. Now I offer a complimentary 21-page PDF consisting of the Connecticut insurance commissioner's order approving the Hopmeadow-Hartford proposal (2 pages) and the Connecticut hearing officer's recommendation that the proposal be approved (19 pages). Email jmbelth@gmail.com and ask for the June 2018 package about company division laws.

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Wednesday, June 6, 2018

No. 269: The Age 100 Problem—An Update on a Lawsuit and Comments on My Upcoming Survey

I first wrote about "the age 100 problem" in cash-value life insurance 17 years ago, in the January 2001 and May 2001 issues of The Insurance Forum. More recently, on my blog, I posted three items: No. 141 (February 1, 2016), No. 226 (July 20, 2017), and No. 241 (November 17, 2017), each of which may be found by clicking on the post number. In each of those posts I offered complimentary packages that included my 2001 articles and other documents relevant to the subject.

In this post I provide an update on a federal court lawsuit filed in 2017 by Gary Lebbin, an elderly insured, against Transamerica Life Insurance Company. I also describe a company survey I am planning.

Background on the Lebbin Case
Lebbin was born in September 1917 in Germany, came to the U.S. in 1938 to escape Nazi persecution, and married in 1944. His wife died in 2015 at age 97. He has two children, four grandchildren, and seven great-grandchildren. In 1990 he created a trust that purchased two second-to-die universal life policies from Transamerica with a total face amount of $3.2 million. When his wife died, the policies became single-life universal life policies. His two children are the trustees of the trust.

On July 20, 2017, two months before Lebbin reached the policies' terminal age of 100, he and the trust filed a lawsuit against Transamerica. They alleged the company had falsely represented the policies as "permanent insurance" for his "whole life," the company had refused his request to extend the policies beyond their terminal age, and he was facing a potentially serious income tax problem. (See Lebbin v. Transamerica, U.S. District Court, District of Maryland, Case No. 8:17-cv-1870.)

The case was assigned to U.S. District Judge Theodore D. Chuang. President Obama nominated him in September 2013, and the Senate confirmed him in May 2014.

In September 2017 Lebbin reached the policies' terminal age. On October 2, 2017, Transamerica filed a motion to transfer the case from the federal court in Maryland, where the trust and one of the trustees are located, to a federal court in Florida, where the policies were originally sold, one of the trustees is located, and other potential witnesses are located. The motion to transfer was fully briefed by early November 2017.

Recent Developments in the Lebbin Case
On April 30, 2018, Judge Chuang issued a memorandum opinion and a brief order. He granted Transamerica's motion and transferred the case to Florida. (See Lebbin v. Transamerica, U.S. District Court, Southern District of Florida, Case No. 9:18-cv-80558.)

In Florida the case was assigned to U.S. District Judge Donald M. Middlebrooks. President Clinton nominated him in January 1997, and the Senate confirmed him in May 1997. U.S. Magistrate Judge Dave Lee Brannon was also assigned to the case.

On May 22, Judge Middlebrooks issued an order setting a trial date of January 22, 2019, referring the case to Magistrate Judge Brannon, and alluding to the possibility of mediation and settlement. On May 23, Magistrate Judge Brannon issued a detailed scheduling order indicating, among other things, that all discovery is to be completed by October 29.

General Observations on the Lebbin Case
I think the Lebbin case will end with a confidential settlement before the trial. I say "confidential" because the lawsuit is not a class action, and there is no requirement for the settlement terms to be made public. The last thing Transamerica wants is publicity about this type of case.

General Observations on the Age 100 Problem
In my writings about the age 100 problem, I have said the bedrock principles of life insurance marketing are the income-tax-deferred inside interest and the income-tax-exempt death benefit. Yet there is no guidance on how policyholders who reach the terminal age of 96 (in whole life policies based on the American Experience mortality table) or the terminal age of 100 (in whole life policies based on the 1941 CSO, 1958 CSO, or 1980 CSO mortality tables) can avoid a serious income tax problem.

Some insurance companies offer elderly policyholders an opportunity to postpone payment of the death benefit beyond the terminal age. However, the policyholder who accepts such an offer could be deemed as having constructive receipt of the death benefit at the terminal age.

Companies who offer elderly policyholders an opportunity to postpone payment of the death benefit beyond the terminal age tell their policyholders to "consult your tax advisor" before accepting the offer. However, in the absence of guidance, there is no way for a tax advisor to assist the policyholder in deciding whether to accept the offer.

My Upcoming Survey
After this item is posted, I will send it to some life insurance companies. I will set up a hypothetical case involving a traditional dividend-paying whole life insurance policy based on the 1958 CSO mortality table with its terminal age of 100. I will ask the company to explain how it would respond to an elderly policyholder who seeks the company's help in dealing with the potentially serious income tax problem should the insured survive to the terminal age. I plan to publish a blog post describing the survey results.

An Interesting Idea
Harold D. Skipper, Professor Emeritus of Risk Management and Insurance at Georgia State Universiy and a longtime reader of my blog, recently presented an interesting idea. He suggested that, some years prior to the terminal age, the company offer the policyholder a 1035 exchange to a policy based on the most recent mortality table, which has a terminal age of 121. In my survey I will ask the companies what they think of the idea.

Available Material
In my three previous posts about the age 100 problem (see the links at the beginning of this post), I offered complimentary packages that are still available. In No. 141 I offered a January 2016 package, in No. 226 a July 2017 package, and in No. 241 a November 2017 package.

Now I offer a complimentary 26-page PDF consisting of Judge Chuang's memorandum opinion (12 pages), his order (1 page), Judge Middlebrooks' order (3 pages), and Magistrate Judge Brannon's order (10 pages). Email jmbelth@gmail.com and ask for the June 2018 package about the age 100 problem.

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Wednesday, May 30, 2018

No. 268: Bitcoin and Other Cryptocurrencies—A Report from the Texas State Securities Board

In No. 34 (March 3, 2014) found here, I discussed Bitcoin, the most prominent example of virtual currencies, or cryptocurrencies. In the final sentence of the post I said I would not touch Bitcoin or any other virtual currency with a ten-foot pole.

On April 10, 2018, the Texas State Securities Board (TSSB) announced publication of an enforcement report entitled "Widespread Fraud Found in Cryptocurrency Offerings." Examples of other cryptocurrencies, besides Bitcoin, are Ethereum, Litecoin, and Ripple. Because the 14-page report is copyrighted, I asked TSSB for permission to offer it without charge to my readers. A spokesman expressed a preference for me to provide a link. The report may be found here.

A Few Findings
Over four weeks beginning December 18, 2017, the enforcement division of TSSB began 32 investigations. Here are some findings:
  • No promoters were registered to sell securities in Texas, a violation of the Texas Securities Act;
  • 30 promoters were broadly using websites, social media, and online advertising to market to Texans;
  • Seven promoters were offering securities tied to a new cryptocurrency;
  • At least five promoters all but ignored investing risks by guaranteeing returns, some as high as 40% per month;
  • Only 11 promoters provided potential investors with a physical address;
  • At least six promoters were actively recruiting sales agents without verifying they were registered with the Securities Commissioner; and
  • Six of the offerings involved payment of a commission to investors who recruited new investors into the scheme.
Two Emergency Actions
On May 8, 2018, TSSB announced actions taken against two cryptocurrency firms. TSSB said the orders bring to nine the number of actions taken since the beginning of the investigation.

One of the recent actions is an emergency cease and desist order directed at Bitcoin Trading & Cloud Mining Ltd. (BTCRUSH) and four principals. BTCRUSH and three principals are based in London, England, and the other principal is based in Panama City, Panama.

The other recent action is an emergency cease and desist order directed at Forex EA & Bitcoin Investment LLC (Forex) and two principals. Forex and its principals are based in New York City.

The Reaction from BTCRUSH
On May 11 TSSB reported a development immediately following the cease and desist order directed at BTCRUSH. TSSB said the firm amended the terms of service on its website to say that "use of its current Platform by U.S. citizens and permanent residents is strictly prohibited."

A Third Emergency Action
On May 15 TSSB announced an emergency cease and desist order directed at Wind Wide Coin Inc. and three principals. Wind Wide and its principals are based in Houston, Texas and Lake City, Florida.

Available Material
I urge readers to familiarize themselves with the TSSB report, to which I have provided a link above. I am also offering a complimentary 22-page PDF consisting of the emergency cease and desist order directed at BTCRUSH (8 pages), the emergency cease and desist order directed at Forex (6 pages), and the emergency cease and desist order directed at Wind Wide (8 pages). Email jmbelth@gmail.com and ask for the May 2018 package about the TSSB cryptocurrency investigation.
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Wednesday, May 23, 2018

No. 267: Long-Term Care Insurance—A New and Different Type of Cost-of-Insurance Lawsuit

On May 9, 2018, Carlton F. Gunn filed a long-term care (LTC) cost-of-insurance (COI) class action lawsuit against CNA Financial Corp. (CNA) in federal court in Illinois. He is a California resident but filed the complaint in Illinois, CNA's principal place of business and state of domicile for regulatory purposes. (See Gunn v. CNA, U.S. District Court, Northern District of Illinois, Case No. 1:18-cv-3314.)

The case has been assigned to U.S. Senior District Court Judge Charles P. Kocoras. President Carter nominated him in June 1980, and the Senate confirmed him in September 1980. He served as chief judge from 2002 to 2006 and assumed senior status in June 2006. Magistrate Judge Sheila M. Finnegan has also been assigned to the case.

The Unusual Nature of the Lawsuit
On December 1, 1999, CNA issued an LTC insurance group policy to the Federal Judiciary Group Long Term Care Insurance Trust (Washington, DC). Gunn's certificate of coverage became effective on January 1, 2000. At that time he was an attorney in the federal public defender's office in Tacoma, Washington. According to the complaint, the policy and the certificate contain this language:
We cannot change the Insured's premiums because of age or health. We can, however, change the Insured's premiums based on his or her premium class, but only if We change the premiums for all other Insureds in the same premium class.
The policy and the certificate are not attached to the complaint. According to the complaint, however, the policy contains no additional definition of "premium class."

At the point of sale, CNA also provided a promotional brochure about the coverage. The brochure is not attached to the complaint. According to the complaint, however, the brochure contains this statement about premium changes:
Premiums may change. But for premiums to change, CNA would have to change premiums for everyone in your age category who has the kind of coverage plan that you do.
The Notification Letter
Gunn's policy originally carried an annual premium of $737.52. In a letter dated November 9, 2017, according to the complaint, CNA notified him that his premium would increase by 25 percent, to $921.90, at the beginning of 2018. CNA also said it intends to implement increases of 25 percent in each of the next two years, amounting to a cumulative premium increase of 95.3 percent, to $1,440.38. The letter mentioned options for reducing benefits rather than accepting the premium increases. The notification letter is not attached to the complaint.

According to the complaint, CNA acknowledged in the notification letter that the premium increases may differ by state. The comments are under a heading entitled "Will the premium rate increase be effective for everyone?" The comments allude to Continental Casualty Company (CCC), the CNA subsidiary that wrote the coverage. Here are the comments:
Since CCC must receive approval or authorization from certain states prior to implementing an increase, it is possible that these states will not approve or authorize the same percentage increase or authorize an increase at the same time. It is also possible some states may deny CCC's request for an increase, or require it be reduced or spread over multiple years. In addition, impacted certificate holders have different premium due dates and have different premium billing mechanisms. Premium increases will be staggered in accordance with the timing of regulatory approvals or authorizations and method of premium payment.
The Nature of the Complaint
The nature of the complaint is described in the first two paragraphs of the "Nature of the Case" section of Gunn's complaint. They read:
1. Plaintiff purchased a certificate for LTC insurance offered to those covered by the Federal Judiciary's LTC group policy. LTC insurance covers the costs of assistance with the activities of daily life due to disability or old age, costs not generally covered by health insurance. Insurers selling coverage tout the benefits of purchasing this coverage before reaching old age to guarantee the lowest possible premiums. When an insurance company markets and sells coverage for LTC, it must honor promises made in the policy documents about future premium increases and not misrepresent how premiums will be increased. When marketing materials and the policy state that premiums will not be increased unless they are changed for everyone in the same age group, an insurance company must not increase premiums at different times, and in different amounts, for insureds within the same age group. Similarly, an insurer must not promise that it will change premiums only by age group or premium class when it knows that it will vary future premium increases state-to-state. LTC coverage buyers are buying long-term financial security, and they count on their insurer to accurately describe the process and the commitments it makes and to honor its promises made in touting the policy and in the contract language.
2. CNA has broken these rules. While its marketing materials and policy promise that insureds will never be singled out for a rate increase, and that premiums will not change unless they change for all insureds in the same age category, CNA has done the opposite. CNA has imposed rate increases at different times and in different amounts from one state to the next. As a result, insureds within the same age group find themselves paying completely different premiums from one another, even though they are members of the same age group, premium class, and risk pool. CNA's decisions to seek and implement rate increases that vary from one state to the next blatantly violate its promises of uniform premium increases across the Class. Further, CNA knew its promises of uniform rate increases were false because state regulatory requirements vary. Plaintiff's rates will increase by 95% over three years, an increase far greater than rates charged insureds in other states.
The Allegations
Gunn alleges six causes of action: breach of contract, breach of the implied covenant of good faith and fair dealing, violation of the District of Columbia's Consumer Protection Procedures Act, fraud, fraudulent concealment, and declaratory and injunctive relief. Gunn seeks, among other things, class certification, appointment as class representative, rescission and return of all premiums paid, disgorgement of ill-gotten gains, declaratory and injunctive relief, compensatory and punitive damages, and attorney fees and costs.

General Observations
I have seen many lawsuits involving COI increases for LTC insurance policies. The policies are "guaranteed renewable," meaning the company may not single out policyholders for premium increases. However, the company is allowed to increase premiums on a "class" basis. The crucial question is how "class" is defined.

I think a "class" consists of policies issued by a company to persons of the same age, gender, health, occupation, and state. Gunn alleges in his complaint that CNA does not have the right to increase premiums on a state basis. This is important because there are wide differences in the timing and amounts of state insurance department approvals of company requests for LTC insurance premium increases.

A possibility in the Gunn case is that CNA made errors in drafting the policy, the certificate, and the promotional brochure. Another possibility is that I have an erroneous understanding of the meaning of the word "class" in the context of guaranteed renewable LTC insurance policies. Either way, I plan to follow developments in the case.

Available Material
I am offering a complimentary PDF containing Gunn's 26-page complaint. Email jmbelth@gmail.com and ask for the May 2018 complaint in the case of Gunn v. CNA.

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Wednesday, May 16, 2018

No. 266: Phoenix's Cost-of-Insurance Increases—A Pair of New Lawsuits

Phoenix Companies, Inc. (Phoenix) was a publicly owned company with shares traded on the New York Stock Exchange. In June 2016 Nassau Reinsurance Group Holdings, L.P. (Nassau), a private equity firm based in New York City, acquired Phoenix, which became a privately owned company. PHL Variable Life Insurance Company (PHL) and Phoenix Life Insurance Company (PLIC) are Phoenix subsidiaries.

Over the years Phoenix and its subsidiaries were defendants in many lawsuits relating to cost-of-insurance (COI) increases on Phoenix Accumulator Universal Life (PAUL) policies. They were large policies often used in stranger-originated life insurance (STOLI) arrangements. All the lawsuits were settled.

For further background on Phoenix's litigation relating to COI increases, I suggest readers review my article in the November 2013 issue of The Insurance Forum (offered in the complimentary package mentioned at the end of this post). I also suggest readers review my No. 26 (January 29, 2014) found here, and my No. 103 (June 15, 2015) found here.

The Fan Lawsuit
On February 13. 2018, Derek Fan and Robert Putz filed a class action lawsuit against PLIC, Nassau, and PHL. On May 1 the plaintiffs filed an amended complaint. Here are four paragraphs (lightly edited) from the "Nature of the Action" section of the amended complaint:
2. This case arises from Defendants' breach of express and implied contractual obligations contained in Phoenix's universal life insurance policies and whole life policies.
4. Plaintiff Fan and the other universal life policyholders in the proposed class purchased these universal life policies so that they and their families would be protected in the event that the policyholder died. However, beginning in 2017, Defendants PHL and Nassau suddenly and unilaterally began increasing the cost of insurance charged to universal life policyholders and began withdrawing those costs from the cash value of the universal life policies of Plaintiff Fan and the Class, falsely stating the increases were permitted by the terms of the policies.
8. As described in detail below, Defendants' conduct is unlawful. While the universal life policies permit PHL and Nassau to adjust the COI rates periodically, they allow PHL and Nassau to do so based only on certain specified factors and they prevent those Defendants from changing the rates to recoup prior losses. As numerous courts have recognized, insurers are legally prohibited from basing COI increases on anything other than the factors specified in the policies.
9. Despite their representations to policyholders, Defendants' true reasons for imposing the drastic increases were to: (a) subsidize PLIC's cost of meeting its interest rate guarantees under the policies; (b) recoup past losses in violation of the terms of the policies; (c) induce policy terminations by policyholders; and (d) allow Defendant Nassau to recoup its costs for its 2016 acquisition of PLIC and PHL (and other Phoenix-related businesses) and the capital contributions that Nassau made to strengthen the financial condition of the Phoenix-related businesses.
The Advance Trust Lawsuit
On April 19, 2018, Advance Trust & Life Escrow Services (Waco, TX) filed a class action lawsuit against PHL. Advance Trust is suing in its capacity as nominee of the Life Partners Position Holder Trust, which owns eleven PAUL policies with a combined face amount of $43 million. Here are the first four paragraphs (lightly edited) from the "Nature of the Action" section of the complaint:
1. This is a class action brought on behalf of Plaintiff and similarly situated owners of life insurance policies issued by PHL. Plaintiff seeks to represent a class of PHL policyholders who are being subjected to an unlawful and excessive COI increase by PHL in violation of their insurance policies.
2. This COI increase represents the newest attempt by PHL to financially abuse its policyholders and induce lapses. PHL and its New York sister company PLIC first implemented a COI increase in 2010 on a subset of PAUL policies. The New York Department of Financial Services, California Department of Insurance, and Office of the Commissioner of Insurance of Wisconsin concluded that the 2010 increase was illegal.
3. Undeterred, PHL and PLIC then announced a second COI increase in 2011, also on a subset of PAUL policies. A class action lawsuit was filed by plaintiffs represented by the undersigned law firm, after which PHL and PLIC ultimately settled for more than $130 million in monetary and non-monetary benefits. Among the prospective relief agreed to by PHL and PLIC was a COI rate increase freeze, in which PHL and PLIC agreed not to increase the COI rate schedule any further on class members through and including December 31, 2020. The release in that settlement specifically carved out and "does not include any future COI rate adjustments assessed by" PHL.
4. In June 2016, PHL and PLIC were sold to a private equity firm, Nassau, with the immediate priority of "improving the company's profitability." Fourteen months later, in August 2017, PHL and PLIC sent cryptic letters to policyholders notifying them of a new, third COI rate increase on "certain PAUL and Phoenix Estate Legacy policies," including the prior settlement class. The amount of the new COI rate increase and the actuarial justification for it were not disclosed. PHL disclosed only that "There will be an overall increase to cost of insurance rates, as well as progressive increases to cost of insurance rates beginning when an insured reaches age 71 thorough age 85." [Blogger's note: The August 21, 2017 notification letter is in the complimentary package offered at the end of this post.]
The Judge
The Fan and Advance Trust cases are related, and both have been assigned to Senior U.S. District Judge Paul A. Crotty. President George W. Bush nominated him in February 2005, and the Senate confirmed him in April 2005. He assumed senior status in August 2015. (See Fan v. PLIC and Advance Trust v. PHL, U.S. District Court, Southern District of New York, Case Nos. 1:18-cv-1288 and 1:18-cv-3444.)

The Life Partners Connection
Life Partners, Inc. (Waco, TX) was for many years an intermediary in the secondary market for life insurance policies and the primary operating subsidiary of Life Partners Holdings, Inc. (LPHI). Although LPHI shares traded publicly on NASDAQ, the company was totally controlled by Brian D. Pardo, its chief executive officer, because he owned a majority of the outstanding shares. The company's main business was acquiring policies in the secondary market and reselling to investors fractional interests in those policies.

In January 2012 the Securities and Exchange Commission (SEC) filed a civil lawsuit in federal court against LPHI, Pardo, and two other officers alleging civil violations of federal securities laws and regulations. The SEC later dismissed the charges against one of the two other officers.

In January 2014 the case went to trial. The jury found LPHI, Pardo, and one other officer guilty of some and not guilty of other civil violations of federal securities laws and regulations.

In December 2014 the federal district court judge issued an order imposing huge civil monetary penalties against LPHI, Pardo, and one other officer. The penalty imposed against LPHI was more than twice the company's total assets, prompting me to refer to the penalty as a "death sentence" for the company.

In January 2015 LPHI filed for protection under Chapter 11 of the federal bankruptcy law. Following complex and lengthy proceedings in federal bankruptcy court, arrangements were made for the handling of LPHI's assets to protect those who had invested in fractional interests in the life insurance policies that had been acquired originally by LPHI. The plaintiff in the Advance Trust case now owns some policies that once were owned by LPHI.

For further background on Life Partners, I suggest readers review my article in the April 2012 issue of the Forum (offered in the complimentary package mentioned at the end of this post). I also suggest readers review my No. 29 (February 10, 2014) found here, and my No. 84 (February 26, 2015) found here.

General Observations
The Fan and Advance Trust cases have a long way to go, but I think they will be settled eventually. Earlier cases about Phoenix's COI increases on large universal life policies survived motions to dismiss and then bogged down into long battles before settling. The Fleisher case, for example, was settled almost literally on the courthouse steps. The parties to these cases usually decide it is simply too expensive to continue through a trial and the inevitable appeals process.

Available Material
I am offering a complimentary 74-page package consisting of the amended complaint in the Fan case (39 pages), the complaint in the Advance Trust case (28 pages), the August 2017 Phoenix notification letter (2 pages), and my articles in the April 2012 and November 2013 issues of the Forum (5 pages). Email jmbelth@gmail.com and ask for the May 2018 package about Phoenix's recent COI increase.

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Tuesday, May 8, 2018

No. 265: Long-Term Care Insurance—A Review of Policyholder Complaints in Indiana in 2015-2018

In recent years, in response to my several blog posts about long-term care (LTC) insurance, I received many emails from policyholders disgruntled with their LTC insurance companies. Most of the emails related to claim problems or premium increases. In April 2018, to learn more about the subject, I contacted the insurance department in Indiana, my home state. I asked for information about LTC complaints filed with the department in 2015, 2016, 2017, and thus far in 2018. In response, the department sent me a list of 132 complaints: 44 in 2015, 39 in 2016, 38 in 2017, and 11 thus far in 2018. Here I comment on the information the department provided.

Structure of the List
The list has six columns. The first column is "type." All but one of the complaints related to "LTC." The odd complaint related to "Medi." The second column is "category." All the complaints are categorized as "claim handling," "policyholder service," or "underwriting." I believe that there were complaints about "premium increases," and that such complaints are in the "policyholder service" category. The third column is "respondent," and shows the name of the insurance company.

The fourth column is "complaint confirmed." Each complaint is shown as "Y" or "N." In answer to my inquiry, a department spokesperson said a complaint is confirmed as "Y" (or "Yes") if the department determines that the company violated a statute, violated a policy provision, or made an error. The fifth column shows the date the complaint was filed. The sixth column shows a complaint identification number.

Distribution by Company
The list identifies 31 companies. Those with five or more complaints filed against them during the multiyear period (the number of complaints filed against each company is shown in parentheses) are Bankers Life & Casualty (20), Genworth (15), John Hancock (14), Senior Health Insurance Company of Pennsylvania (14), Continental Casualty (10), Transamerica (10), Pyramid Life (7), and Constitution Life (5).

An Extrapolation
I have written extensively about Senior Health Insurance Company of Pennsylvania (SHIP). My blog posts have dealt with SHIP's worsening financial condition and litigation over claim practices. I decided to extrapolate from the number of complaints against SHIP filed in Indiana to the number of complaints filed against SHIP nationally. I selected SHIP for two reasons: it was near the top of the list above, and it is running off only LTC business.

According to Schedule T on page 49 in SHIP's statutory statement for the year ended December 31, 2017, SHIP's 2017 national premium volume, including premiums waived, was $99.48 million. SHIP's 2017 Indiana premium volume was $2.36 million. Thus the national figure was 42 times the Indiana figure, and the extrapolation suggests that about 588 complaints may have been filed nationally against SHIP during the multiyear period.

General Observations
No tabulation of complaints filed with state insurance departments can scratch the surface of the dissatisfaction level among consumers. In the first place, many individuals do not know an insurance department exists in every state, and many individuals who know about insurance departments do not know the departments accept complaints. In the second place, it requires considerable effort to prepare a formal written complaint and assemble the relevant documents that should accompany the complaint. To add to the problem, it is rare for a consumer to receive satisfaction as a result of filing the complaint. About all a consumer can reasonably expect from the filing of a complaint is a more detailed explanation of the position taken by the company. In short, if there were indeed almost 600 complaints filed nationally against SHIP alone in the past few years, I think it demonstrates a high level of dissatisfaction among consumers regarding LTC insurance.

Available Material
I am offering a complimentary 7-page PDF consisting of the tabulation that the Indiana insurance department provided to me (6 pages) and Schedule T in SHIP's statutory financial statement for 2017 (1 page). Email jmbelth@gmail.com and ask for the May 2018 package about LTC complaints.

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Monday, April 30, 2018

No. 264: Halali and Others in a Federal Criminal Case Involving Phony Life Insurance Policies—A Third Update

In No. 149 (March 14, 2016) I discussed a criminal case against five defendants involving issuance of phony life insurance policies. I provided updates in Nos. 210 (March 27, 2017) and 251 (February 5, 2018). Here I provide a third update. (See U.S.A. v. Halali, U.S. District Court, Northern District of California, Case No. 3:14-cr-627.)

Background
In December 2014 the U.S. Attorney in San Francisco filed an indictment against Karen Gagarin, Behnam Halali, Kraig Jilge, Ernesto Magat, and Alomkone Soundara. They had worked for several years as independent contractors selling life insurance for American Income Life Insurance Company.

The indictment alleged that the defendants engaged in wrongdoing that caused the company to pay more than $2.5 million in commissions and bonuses. Specifically the indictment alleged that the defendants paid recruiters to find individuals willing to take a medical examination in exchange for about $100, took personal information and submitted applications for life insurance in many cases without the individual's knowledge, in some cases created fraudulent drivers' licenses, opened hundreds of bank accounts from which to pay premiums, typically paid one to four months of premiums before allowing the policies to lapse, returned verification calls to the company purporting to be the applicants, used phony addresses on many applications in an effort to avoid detection, and fabricated the names of policy beneficiaries.

The indictment charged each defendant with one count of conspiracy to commit wire fraud, 14 counts of wire fraud, and one count of aggravated identity theft. The indictment also charged three of the defendants with money laundering: three counts against Magat, two counts against Jilge, and one count against Halali. In February 2016 U.S. Senior District Judge Susan Illston denied a motion to dismiss. In December 2016 Soundara pleaded guilty and agreed to testify for the government. In January 2017 Jilge pleaded guilty to most of the charges against him but did not plead guilty to the two money laundering charges against him.

Trial and Sentencing
On February 15, 2017, the trial of Halali, Magat, and Gagarin began. It consisted of 14 trial days and ended on March 13. The jury found them guilty on the conspiracy charge, the 14 wire fraud charges, and one money laundering charge.

On January 5, 2018, Judge Illston sentenced Halali, Magat, and Gagarin. On February 16 she sentenced Jilge. On March 23 she sentenced Soundara. Here is a brief summary of the sentences:
  • Halali: 60 months in prison followed by three years of supervised release, special assessment of $1,600, restitution of $2,837,791.93 (joint and several with the co-defendants), no fine, self surrender on March 30, 2018.
  • Magat: 48 months in prison followed by three years of supervised release, special assessment of $1,600, restitution of $2,837,791.93 (joint and several with the co-defendants), no fine, self surrender on March 30, 2018.
  • Gagarin: 36 months in prison followed by three years of supervised release, special assessment of $1,600, restitution of $2,837,791.93 (joint and several with the co-defendants), no fine, self surrender on March 30, 2018.
  • Jilge: 12 months and 2 days in prison followed by three years of supervised release, special assessment of $1,600, restitution of $2,837,791.93 (joint and several with the co-defendants), no fine, self surrender on May 15, 2018.
  • Soundara: Time served, three years of supervised release, special assessment of $1,600, restitution of $2,837,791.93 (joint and several with the co-defendants), no fine.
Gagarin's Appeal
On January 22, 2018, in the district court, Gagarin filed a notice of appeal. The next day the appellate court docketed the case. Two assistant federal public defenders in San Francisco represent Gagarin. Five assistant U.S. attorneys in San Francisco represent the government. Gagarin's brief was due May 23, but has been rescheduled for July 9 because the district court reporter needed additional time to prepare the transcripts that are to be used in the appeal. The government's answering brief is due August 8, and Gagarin's optional reply brief is due 21 days after the filing of the government's answering brief. The three-judge appellate court panel has not yet been assigned. (See U.S.A. v. Gagarin, U.S. Court of Appeals, Ninth Circuit, Case No. 18-10026.)

General Observations
Life insurance performs important social functions, not the least of which is to provide financial protection for the insured's loved ones. Yet, as often said, life insurance is sold, not bought. Thus it is necessary to pay commissions to agents who perform the many functions associated with the sale of life insurance including, most importantly, what I call the "antiprocrastination function."

It is disgraceful when agents engage in criminal behavior to increase their commissions. This case involved atrocious activity by the defendants. The evidence was so overwhelming that I thought the case would not go to trial, and that all five defendants would plead guilty. I was wrong; two pleaded guilty and the other three went to trial. I was not surprised by the jury findings or the judgments imposed on the defendants.

I plan to provide another update after the appellate court panel hands down its decision on the Gagarin appeal. However, I may provide an earlier update if I find Gagarin's appellate brief interesting.

Available Material
In Nos. 149, 210, and 251 I offered complimentary PDFs containing some important case documents. Those three packages are still available.

Now I offer a new complimentary 20-page PDF consisting of the judgment against Jilge (8 pages), the judgment against Soundara (8 pages), and the docket in the Gagarin appellate case (4 pages). Email jmbelth@gmail.com and ask for the April 2018 package about the Halali case.

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Monday, April 23, 2018

No. 263: Long-Term Care Insurance—More on the Financial Condition of Senior Health Insurance Company of Pennsylvania

In No. 260 (posted April 2, 2018) I wrote about the worsening financial condition of Senior Health Insurance Company of Pennsylvania (SHIP), which is running off the long-term care (LTC) insurance business of the former Conseco Senior Health Insurance Company. My comments there were based primarily on SHIP's statutory financial statement for the year ended December 31, 2017. A reader later shared with me SHIP's "2017 Management's Discussion and Analysis" (MD&A), which contains information that I think warrants this follow-up.

The Runoff Rate
The MD&A provides information about SHIP's policies and the rate at which they are running off. Here is an excerpt:
The Company's business consists exclusively of closed blocks of long-term care policies including more than 70 distinct policy forms with many state variations for each form. The policy forms include home health care, nursing home, and comprehensive plans. The Company discontinued selling policies in 2003 [when it was Conseco Senior Health]. As of December 31, 2017, approximately 65 percent of all active policies are comprehensive plans that include benefits for both home health care and nursing facilities. There are 61,410 members under these policies at year-end, compared to 69,620 at the previous year-end, a decline of 11.8 percent. At the expected runoff rate, in 10 years the number of members is anticipated to decline to approximately 14,000.
Outsourcing
SHIP outsources many of its services. Here is how the MD&A describes those services and the related expenses:
The Company operates from its offices in Carmel, Indiana and utilizes third-party providers for key functions. These providers include a third-party administrator for policy and claim administration, asset managers for investment portfolio management and accounting, and actuarial professionals for pricing and valuation. This outsource approach provides for scalability of services and related expenses.
Effective March 1, 2014, the Company transferred its employees and physical assets to affiliate Fuzion Analytics, Inc. ("Fuzion"), and executed a management services agreement under which Fuzion provides comprehensive management services to the Company. Fuzion, a wholly-owned subsidiary of the Oversight Trust, was founded in 2012 and provides long-term care management services to the Company. Management fees paid by the Company to Fuzion are subject to annual decreases based on policyholder counts and paid claims in the Company's business.
Risk-Based Capital
In No. 260 I discussed SHIP's risk-based capital (RBC) ratios, where the numerators are total adjusted capital and the denominators are company action level RBC. The MD&A says this:
The decline in Total Adjusted Capital in 2017 and 2016 was $19.4 million and $33.5 million, respectively. Favorable underwriting losses and investment gains recognized in the current year compared to prior year was partially mitigated by a reserve credit deficit recognized in current year from a coinsurance agreement that was entered as of July 1, 2016. In 2017, the Company received a dividend from the parent, Oversight Trust, of $4.0 million....
[T]he Company's projections indicate a need for future rate increases to support an RBC ratio above statutory action levels throughout the runoff of the business. The age of these policies and the effect of fixed rate compound inflation has inflated benefits beyond actuarial projections and produced an anti-selection impact that would not have been considered in pricing projections. Accordingly, in 2016, the Company began filing for rate increases....
Investments in Offerings of Platinum Partners
In No. 260 I mentioned SHIP's investments in offerings of Platinum Partners, a hedge fund in serious financial and legal trouble. The MD&A discusses Platinum, although it does not identify Platinum by name. In No. 260 I underestimated the amounts of such investments, because the figures I showed involved only those investments with the word "Platinum" in them. Here is the MD&A's discussion of the situation:
Historically, the Company placed approximately ten percent of its portfolio with other asset managers for investments in alternative asset classes. During 2016, investment principals and investment funds with which these asset managers had connections, came under investigation by the Securities and Exchange Commission for alleged violation of securities laws and criminal activities. In response to this, in 2016 the Company revoked all investment authorization from these asset managers, and directly assumed the ongoing management of these portfolios. As of year-end, the Company's holdings in these portfolios was $184.5 million. The Company recorded losses of $5.2 million in 2017 and $27.8 million in 2016 on assets in these portfolios believed to be other than temporarily impaired. Because of the long-term nature of the Company's liabilities and sufficient liquidity in core assets, the Company determined that a "fire-sale" of assets was not necessary or appropriate. The Company will continue efforts to maximize value as an exit strategy in these portfolios which may take multiple years to fully liquidate.
Reinsurance with Roebling Re
In No. 260 I mentioned that SHIP took credit in 2017 for $1.13 billion of reserve liabilities ceded to Roebling Re (Barbados). I said Roebling Re is not authorized, is a non-U S. reinsurer, and is not affiliated with SHIP. I also said I do not know the name of the owner, the names of its senior officers, or anything about its financial condition. The MD&A discusses Roebling Re, but does not identify the company by name. Here is the MD&A's discussion of SHIP's relationship with Roebling Re:
Effective July 1, 2016, the Company entered a coinsurance with funds withheld agreement, under which the Company ceded 49 percent of the major blocks of its long-term care business. The counterparty to this agreement is a non-profit-motivated reinsurer established exclusively to support insurance companies with long duration liabilities. The reinsurer was to generate capital through investment in long-dated, high-quality investment strategies, and the corresponding issuance of investment-grade bonds; however, the reinsurer was not able to participate in the investment strategies as designed and was not able to meet the obligations under the agreement in 2017.
The coinsurance agreement includes an experience refund provision under which the Company is entitled to 90 percent of profits earned by the reinsurer (this provision does not apply to losses incurred by the reinsurer). Reserves on the ceded business are established by the Company and these reserves are fully supported by assets controlled and managed by the Company in a funds withheld account. In 2016, the Company received a $10 million ceding commission. In 2016 and 2017, the Company recorded loss reimbursements under the agreement of $16.7 million and $23.2 million, respectively. As a result of the reinsurer not meeting its obligations under the reinsurance contract, the Company recognized a $12.6 million reduction in surplus due to a reserve credit deficiency in 2017. The Company will terminate the reinsurance agreement in 2018.
General Observations
I have shown in this follow-up a few excerpts from SHIP's 2017 MD&A that I found interesting. I think the two most important are the discussions of SHIP's investments in the offerings of Platinum Partners and SHIP's relationship with Roebling Re. When I wrote No. 260 I had no idea of the problems with that relationship, or that SHIP will terminate the reinsurance agreement in 2018. I do not know why SHIP decided not to identify Platinum Partners or Roebling Re in the MD&A.

Available Material
I am offering a complimentary PDF containing SHIP's 11-page 2017 MD&A. Email jmbelth@gmail.com and ask for SHIP's 2017 MD&A.

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Monday, April 16, 2018

No. 262: Georgia Moves Toward Enactment of a Law in Violation of the Constitutional Rights of Insurance Policyholders

In No. 220 (posted June 1, 2017) I discussed the enactment of a Connecticut law allowing a Connecticut-domiciled insurance company to divide itself into two or more insurance companies. I explained why I think the law violates the constitutional rights of insurance policyholders. Recently the Georgia legislature approved similar legislation that will become effective July 1, 2018 even if the governor does not sign it. Here I discuss the new Georgia legislation. As background, I urge readers to review No. 220 here.

The Baldo Article
On March 30, 2018, an article by Anthony Baldo appeared in The Insurance Insider. A reader brought the article to my attention. The lead sentence of the article reads:
Georgia legislation that lets insurers divide and opens a path for run-off transactions involving legacy books of business will become law by 1 July, even if Governor Nathan Deal fails to sign the measure.
The Creditor-Debtor Relationship
An insurance contract creates a creditor-debtor relationship between the policyholder (the creditor) and the insurance company (the debtor). A debtor cannot be relieved of his, her, or its obligations to a creditor without the consent of the creditor. Therefore, an insurance company cannot be relieved of its obligations to a policyholder without the consent of the policyholder. If the policyholder consents, the transaction would be a "novation," in which a different insurance company is substituted for the original insurance company.

The two major types of consent to a novation are affirmative (positive) consent and implied (negative) consent. Affirmative consent occurs when the creditor signs a form granting permission to complete the novation. Implied consent occurs when the creditor does nothing and is deemed to have consented to the novation. I strongly favor the use of affirmative consent.

My Writings on the Subject
My first two of many articles about what I call "insurance policy transfers" were in the October 1989 and December 1989 issues of The Insurance Forum. Three extraordinary cases, all of which came to my attention around the same time, prompted the two articles. I addressed the constitutionality question later, in the August 1992 issue of the Forum. Also, chapter 23 of my 2015 book entitled The Insurance Forum: A Memoir addresses insurance policy transfers.

The Georgia Division Law
Two lead sponsors of Georgia House Bill 754 (HB 754) were Representative Jason Shaw (R-Lakeland) and Senator P. K. Martin IV (R-Lawrenceville). Representative Shaw is a member of the House insurance committee and owns an insurance agency. Senator Martin is a member of the Senate insurance and labor committee and is an insurance agent. The Baldo article quotes both of them:
It quotes Representative Shaw as saying: "It just makes sense." He explained that, if a company has a plan of division, they can sell off an unwanted book "and not disrupt the whole operation."
It quotes Senator Martin as saying: "This bill would allow insurers more decision-making power when it comes to the split of a company, if they so choose, while protecting consumers through the approving authority of the insurance commissioner."
I wrote to Georgia Insurance Commissioner Ralph T. Hudgens. I sent him No. 220 about the Connecticut division law, said I was planning to post an item about HB 754, and asked for a statement to be included in the item. I have not yet received a statement from him. However, an insurance department spokesman said he was working on it. Meanwhile, the spokesman said this preliminarily:
What I can tell you now is that it was not an Insurance Department bill, and we did not oppose it. Also, the bill has not been signed by the Governor.
General Observations
As mentioned earlier, HB 754 will become law on July 1 if the governor does not sign it. Also, I hope the statement from Commissioner Hudgens will explain why the department did not oppose the bill. When this item is posted, I will send it to him and request that he urge the governor to veto the bill.

HB 754 allows a Georgia-domiciled insurance company to transfer its policyholder obligations to another company without obtaining the consent of the policyholders. Thus the bill allows the company to violate the constitutional rights of its policyholders. Further, there is no doubt that prime targets of such laws are legacy blocks of long-term care insurance policies, which have become major headaches for many companies.

With regard to the matter of commissioner approval, the language in HB 754 is important. The bill says:
The Commissioner shall approve a plan of division unless the Commissioner finds that the interest of any policyholder or shareholder will not be adequately protected, or the proposed division constitutes a fraudulent transfer under Article 4 of Chapter 2 of Title 18.  [Blogger's note: Several sections and subsections of Article 4 are interesting.]
Thus the insurance commissioner rather than the insurance company being divided has the burden of proving that the policyholders are adequately protected and that the transfer is not fraudulent. If the commissioner cannot meet the burden of proof, he must approve the plan. I think attorneys in the insurance industry drafted HB 754.

Available Material
I am offering a complimentary 24-page PDF consisting of HB 754 (10 pages) and articles in the October 1989, December 1989, and August 1992 issues of the Forum (14 pages). Email jmbelth@gmail.com and ask for the April 2018 package about the Georgia division law.

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Tuesday, April 10, 2018

No. 261: Long-Term Care Insurance—More on the Kansas Insurance Department's Bailout of General Electric

In No. 258 (posted March 19, 2018) I reported on the Kansas Insurance Department's use of a "permitted accounting practice" to spread over several years the impact of a huge charge taken by General Electric Company (GE) relating to an old run-off block of long-term care (LTC) insurance policies. Readers immediately informed me of other dimensions of the subject, which I discuss in this follow-up.

Here I also discuss two incidents, one in 1990 regarding Life Assurance Company of Pennsylvania (LACOP) and the other in 1993 regarding The Prudential Insurance Company of America. In both incidents major differences occurred between an accounting practice used by a domiciliary state and an accounting practice used by another state.

A Serious Disclosure Issue
Employers Reassurance Corporation (ERAC) is one of the Kansas-domiciled GE subsidiaries that reinsured the old block of GE's LTC insurance policies. ERAC asked the Kansas department for a "permitted accounting practice to spread and delay over seven years" the full recognition of the $15 billion increase in reserves that otherwise would have been required under statutory accounting principles promulgated by the National Association of Insurance Commissioners.

Yet GE, in documents filed with the Securities and Exchange Commission (SEC), did not disclose the name of the reinsurer. Instead GE said the reinsurer is "North American Life and Health." There is no such company. The nondisclosure is serious because the only detailed description of the "permitted practice" appears in a note in the 2017 statutory financial statement ERAC filed in Kansas and other states.

In response to my inquiry, the Kansas department said GE has two Kansas-domiciled life-health subsidiaries, ERAC and Union Fidelity Life Insurance Company (UFLIC). The department said "North American Life and Health" is a term used by GE to discuss the results of its run-off insurance operations including both ERAC and UFLIC. The department said that, while UFLIC increased reserves, the company did so in the usual way and therefore did not request a permitted accounting practice. In other words, while the department approved a permitted accounting practice for ERAC, there was no need for UFLIC to request or for the department to approve a permitted accounting practice for UFLIC.

After No. 258 was posted, a reader sent me a transcript of GE's "insurance update call" held January 16, 2018. That was the day GE disclosed, in a filing with the SEC, the shocking news of the need for $15 billion of additional reserves for the old LTC block. In the call GE officials mentioned "North America Life & Health" eight times, but did not mention ERAC. Note that the second word of the company name used in the update call was "America," but in the SEC filing was "American."

Another Serious Disclosure Issue
When I asked the Kansas department some questions about ERAC, the department said that ERAC requested the "permitted accounting practice" on December 29, 2017, and that the department approved it on January 11, 2018. After No. 258 was posted, a reader (not the one who sent me the transcript of the update call) pointed out something I had missed. January 16, 2018 was the date on which GE first disclosed the need for the $15 billion increase in reserves. Yet ERAC requested the permitted practice on December 29, 2017.

I asked the Kansas department whether GE knew of the need for the $15 billion of additional reserves on December 29. I said I was asking the question because GE did not publicly disclose the $15 billion figure until January 16. In response, the department mentioned the confidentiality of such matters under Kansas law and suggested I contact GE.

The LACOP Incident
Pennsylvania-domiciled LACOP reinsured a substantial amount of business with Oklahoma-domiciled American Standard Life and Accident Insurance Company (ASLAIC). In 1988 the Oklahoma insurance commissioner placed ASLAIC under state supervision. LACOP at the time was licensed in 37 states, including California. In April 1990 the California insurance commissioner disallowed the credit LACOP had taken for the reinsurance with ASLAIC, declared LACOP insolvent, and barred LACOP from selling new business in California.

In October 1990, about two weeks after LACOP terminated all its agents and stopped selling new business altogether, the Pennsylvania insurance commissioner issued an order barring LACOP from selling new business anywhere. In November 1990 the Pennsylvania commissioner filed a court petition seeking approval to liquidate LACOP. In short, there was a period of about six months during which LACOP was barred from selling new business in California but was allowed to sell new business in other states, including its domiciliary state of Pennsylvania.

The Prudential Incident
In 1993 New Jersey-domiciled Prudential issued $300 million of surplus notes, thereby launching what I call the "surplus note revolution." Prior to that time, only small amounts of surplus notes had been issued by small mutual insurance companies that were in serious financial trouble. Prudential, which was not in financial trouble, issued the surplus notes for income tax reasons. The action set off a stampede of a total of more than $3 billion of surplus notes issued in 1993 and 1994 by many major mutual insurance companies.

State surplus note laws require the prior permission of the domiciliary regulator before interest or principal payments may be made. The New Jersey insurance commissioner deviated from that requirement by merely requiring the company to meet certain financial tests. The New York superintendent of insurance objected to that weakening of the rules and required Prudential to include the $300 million of surplus notes as a liability rather than as surplus in the company's statutory financial statement filed in New York. The New York action was not widely known, because it was reflected only in the New York version of the financial statement. The official New Jersey version of the statement was circulated to other states, to rating firms, and to other interested parties.

General Observations
In No. 258 I expressed skepticism about the Kansas department's explanation for GE's failure to mention ERAC in its January 16 SEC filing. Now, after seeing the transcript of the update call, it is my opinion that GE omitted ERAC's name to avoid calling attention to the first note in the "Notes to Financial Statements" in ERAC's 2017 statutory financial statement. That note, to my knowledge, is the only public disclosure of the details of the permitted accounting practice to spread and delay over seven years the $15 billion of additional reserves for the old LTC block.

With regard to the timing of the disclosure of the $15 billion reserve shortfall, I do not understand why GE delayed for at least 18 days the disclosure of the size of the shortfall. I plan to contact GE about the matter after this item is posted.

Available Material
I am offering a 28-page complimentary package consisting of the transcript of GE's January 16 insurance update call (11 pages), selected pages from ERAC's 2017 statutory financial statement (11 pages), The Insurance Forum article about the 1990 LACOP incident (4 pages), and the Forum article about the 1993 Prudential incident (2 pages). Email jmbelth@gmail.com and ask for the April 2018 package about GE's old LTC insurance block.

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