Monday, December 10, 2018

No. 298: Long-Term Care Insurance—More on General Electric's Massive Legacy Problem

In No. 257 (3/12/18), No. 258 (3/19/18), and No. 261 (4/10/18), I posted items about the massive legacy problem faced by General Electric Company (GE) with regard to long-term care (LTC) insurance. Several class action lawsuits were filed against GE in late 2017 and early 2018. They were later consolidated. The two lead plaintiffs in the current consolidated case are Sjunde AP-Fonden and The Cleveland Bakers and Teamsters Pension Fund. U.S. District Judge Jesse M. Furman is handling the case. (See Sjunde AP-Fonden v. GE, U.S. District Court, Southern District of New York, Case No. 1:17-cv-8457.)

The Consolidated Complaints
When I posted the three items mentioned above in March and April 2018, several related lawsuits already had been consolidated, and I anticipated the filing of a consolidated complaint. In the complimentary package offered in No. 257, I included the original 33-page complaint in one of the cases. When I posted No. 261, I was not aware that, on March 20, the plaintiffs had filed a 289-page amended consolidated complaint. On April 10 they filed a 284-page second amended consolidated complaint. On July 25 they filed a 191-page third amended consolidated complaint. On October 17 they filed a 190-page fourth amended consolidated complaint. Also, in the complimentary package offered at the end of this post, I am including, from the fourth amended consolidated complaint, introductory material, a discussion of GE's alleged LTC insurance fraud, and concluding material.

Nature of the Complaint
The nature of the fourth amended consolidated complaint is described in its first two paragraphs. Here are those paragraphs, which I have edited lightly:
Court-appointed Lead Plaintiff Sjunde-AP Fonden, along with additional plaintiff The Cleveland Bakers and Teamsters Pension Fund, by and through their undersigned counsel, bring this federal securities class action on behalf of themselves and a Class consisting of all persons and entities that purchased or otherwise acquired the common stock of General Electric Company ("GE") from February 27, 2013, through January 23, 2018, inclusive. Plaintiffs assert claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and the rules and regulations promulgated thereunder, including United States Securities and Exchange Commission ("SEC") Rule 10b-5, against Defendants GE, Jeffrey R. Immelt, Jeffrey S. Bornstein, Jamie S. Miller, Keith S. Sherin, Jan R. Hauser, and Richard A. Laxer.
As set forth herein, Plaintiffs and members of the Class purchased GE common stock at artificially inflated prices created and/or maintained by Defendants' materially false or misleading statements and omissions throughout the Class Period. When the truth concerning the Company was belatedly revealed to the market, Plaintiffs and Class members suffered massive monetary damages. Except as to allegations specifically pertaining to Plaintiffs, all allegations herein are based upon the investigation undertaken by Plaintiffs' counsel, which included, but was not limited to, the review and analysis of: public filings made by GE with the SEC; press releases and other public statements issued by Defendants; research reports purchased from securities and financial analysts; media and news reports related to GE; transcripts of GE's earnings and other investor conference calls; publicly available presentations, press releases, and interviews by GE and its employees; economic analyses of the movement and pricing of GE publicly traded common stock; consultations with relevant consultants and experts; media reports and other publicly available information concerning Defendants; and interviews of former employees of GE, several of whom, on information and belief, are known to GE and have been provided counsel by GE. Plaintiffs believe that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery.
The Alleged LTC Insurance Fraud
A section of the fourth amended consolidated complaint is devoted to a discussion of GE's alleged LTC insurance fraud. The "overview" subsection of that discussion includes this paragraph:
In the years prior to the start of the Class Period, LTC insurers began to learn that the major pricing assumptions that fueled the expansion of the LTC market in the 1970s and 1980s were woefully inaccurate. Specifically, insurers had greatly overestimated lapse rates and interest rates, and had dramatically underestimated the number of policyholders that would file claims and the length of time such claimants would require benefits.
The discussion includes a description of GE's spin-off of some LTC insurance business through the Genworth IPO in 2004. The discussion points out that GE retained the insurance and reinsurance operations of GE Insurance Solutions and its subsidiary, Employers Reassurance Corporation (ERAC). It also points out that ERAC reinsured LTC policies originally issued by Allianz, American United, Berkshire Life, Jackson National Life, John Alden, Lincoln Benefit Life, Massachusetts Mutual, State Life, Transamerica, and others. Also, Union Fidelity Life Insurance Company (UFLIC), another GE subsidiary, reinsured LTC policies originally issued by Travelers and reinsured by Genworth.

Prominent in the discussion are the views of several former GE employees (FE-1, FE-2, and so forth, and "defined using masculine pronouns to protect their anonymity.") The thrust of the comments by the former employees is that GE was aware of the LTC problems long before the public disclosure in January 2018.

The fourth amended consolidated complaint notes that "FE-6 has been removed from the complaint at his request." Here are some comments attributed to FE-6 in the second amended consolidated complaint:
FE-6 was an executive at GE Capital from 2014-2015. According to FE-6, an audit team conducted a simple audit on GE Capital's insurance business during his tenure (in 2014-2015) and the audit team had a risk based audit plan going into 2016. According to FE-6, there were quarterly conference calls led by Ronald Peters and the ERAC executive team with individuals from GE Capital's risk team. FE-6 said that during those quarterly calls ERAC would discuss the review process which included discussion of assumptions such as mortality and morbidity.
According to FE-6, the audit team began with a simple audit of ERAC to get people exposed to doing audits of that business. This was likely in the first four months of 2015. According to FE-6, concerns about assumptions, loss recognition testing, and model validation were not covered in that audit; they "came later" when KPMG delved more into those areas. According to FE-6, audit plans for the 2015 simple audit and the planned deeper dive into ERAC's assumptions, model validation, and other risk factors were submitted to Joseph Pizzuto, GE Capital's Chief Audit Executive, and ultimately, GE's Audit Committee which had the final approval authority for the audit plans.
FE-6 stated that the internal consensus amongst senior management, especially Dan Janki ("Janki"), Treasurer of GE, was that there was risk related to the legacy LTC portfolios. FE-6 explained that policies in the legacy LTC blocks were not being written any longer because of how risky they were.
FE-6 advised that GE held onto certain LTC policies that did not get spun off with Genworth because GE "refused to sell them at such a huge discount." FE-6 recalled that Janki had said that "his one big mistake was not selling off all the insurance policies and taking the hit at that time."
The Motion to Dismiss
On September 12 the defendants filed a motion to dismiss the third amended consolidated complaint and a 43-page memorandum of law in support of the motion. The table of contents in the memorandum of law is in the complimentary package offered at the end of this post.

On October 12 the plaintiffs filed a 63-page memorandum of law in opposition to the motion to dismiss the third amended consolidated complaint. The table of contents in the memorandum of law is in the complimentary package offered at the end of this post. On the same day, Judge Furman ordered the plaintiffs to file a fourth amended consolidated complaint removing the allegations attributed to FE-6.

On October 17 the plaintiffs filed the fourth amended consolidated complaint. On October 29 the defendants filed a 20-page memorandum of law in support of the motion to dismiss the third and fourth amended consolidated complaints. The table of contents in the memorandum of law is in the complimentary package offered at the end of this post. As of December 5 Judge Furman has not acted on the motion to dismiss the third and fourth amended consolidated complaints.

The Counts and the Prayer for Relief
The fourth amended consolidated complaint includes two counts: violation of Section 10(b) of the Exchange Act and Rule 10b-5 against all the defendants, and violation of Section 20(a) of the Exchange Act against the individual defendants. The plaintiffs seek compensatory damages against all the defendants, jointly and severally, for all damages sustained as a result of the defendants' wrongdoing, including interest; extraordinary, equitable, and/or injunctive relief, including, but not limited to, rescission; plaintiffs' costs and expenses, including reasonable counsel and expert fees; and such other relief as may be just and proper.

General Observations
When GE dropped its $15 billion bombshell on January 16, 2018, I thought the company had simply overlooked the unfolding disaster in its legacy LTC insurance business. However, the plaintiffs' amended consolidated complaints, including the views of former employees as described in those complaints, make it appear that company officials had been aware of the problem for years, and had failed to disclose it. In short, I think the amended consolidated complaints are a powerful indictment of GE's failure to keep shareholders and prospective shareholders informed of the company's legacy problem relating to its LTC insurance business.

It remains to be seen whether the fourth amended complaint will survive—in whole or in part—the defendants' motion to dismiss. I plan to follow the case and report major developments.

Available Material
I am offering a 95-page complimentary package consisting of introductory material in the fourth amended consolidated complaint (26 pages), material in that complaint describing GE's alleged LTC insurance fraud (50 pages), concluding material in that complaint (12 pages), and the tables of contents in three legal memoranda (7 pages). Email jmbelth@gmail.com and ask for the December 2018 package relating to GE's LTC insurance.

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Monday, December 3, 2018

No. 297: Jim Baker's Sidelining at the FBI Has Not Worked Out Well for the Trump Administration

Jim Baker is a Visiting Fellow at the Lawfare Institute, a Visiting Fellow in Governance Studies at the Brookings Institution, and a Lecturer on Law at Harvard Law School. He was General Counsel of the Federal Bureau of Investigation (FBI). James Comey, former director of the FBI, identified him as one of those in whom Comey confided after Comey's private meetings with President Donald Trump. The Trump administration later moved Baker to a lesser position, and still later Baker left the Department of Justice.

Lawfare is a highly regarded blog dedicated to national security issues. It is published by the Lawfare Institute in cooperation with the Brookings Institution. It was founded in September 2010, and is based in Washington, DC.

The Baker-Grant Article
Baker and Sarah Grant co-authored an article entitled "What the Watergate 'Road Map' Reveals about Improper Contact between the White House and the Justice Department." Grant is a student at Harvard Law School, and previously spent five years on active duty in the Marine Corps. She holds an MPhil in International Relations from the University of Cambridge and a BS in International Relations from the United States Naval Academy.

The lengthy Baker/Grant article (shown here in full) was posted on the Lawfare blog on November 19, 2018. (I published a blog post about the "Road Map" in No. 295 on November 9, 2018.) Here are the opening sentences of the Baker/Grant article, a section in the middle of the article, and the closing sentences:
In a conversation between the president of the United States and senior Justice Department officials, the officials informed the president that two of his senior White House staff were under investigation. One of the officials later testified: "He said he couldn't believe it. You know, just these are fine outstanding guys. Just couldn't be, you know." He impressed on the president, "We are here to alert you. We think we've got something. We could be wrong, but we are telling you it's time for you to move to protect yourself and the presidency." And he urged the president to "get rid" of the staffers in question; the president responded, "Yeah, and I don't think I should. I've got to think about this and that and a thousand other things." This happened in 1973.
* * * * * * * * * * * * 
[T]he road map's references to President Nixon's interactions with [Henry E.] Petersen [assistant attorney general for the Justice Department's Criminal Division and the official quoted above regarding the interaction with President Nixon]—the person who was heading the investigation—take on a different and more nefarious meaning. Those interactions must be understood within the larger context of the president's knowledge of the facts regarding Watergate at the time that he was in contact with Petersen. In other words, when the president sought information from Petersen, provided his views to Petersen on the various matters that they discussed, and discussed Petersen's future, he was not merely exercising his powers under Article II of the Constitution to supervise the executive branch and trying to get the facts necessary to do so; the president of the United States was also acting as a criminal co-conspirator trying to obstruct lawful investigation activities of the Justice Department.
* * * * * * * * * * * *
How was all of this presidential contact with the Justice Department understood in the context of Watergate? Pretty harshly. For example, Article II, paragraph 5, of the House Judiciary Committee's July 27, 1974, Articles of Impeachment states in part that President Nixon: "In disregard of the rule of law, ... knowingly misused the executive power by interfering with agencies of the executive branch, including the Federal Bureau of Investigation, the Criminal Division, and the Office of Watergate Special Prosecution Force, of the Department of Justice, and the Central Intelligence Agency, in violation of his duty to take care that the laws be faithfully executed." President Nixon resigned on Aug. 9, 1974, and was pardoned by President Gerald Ford on Sept. 8, 1974.
General Observations
The parallels between the Nixon case and the current Trump case, including the appointment of Matthew Whitaker as Acting Attorney General of the United States, are mind-boggling. Those parallels are described in detail in the Baker/Grant article. I think the article, to which a link is provided above, should be read carefully by persons interested in the welfare of our nation.

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Monday, November 26, 2018

No. 296: The Age 100 Problem—My Unproductive Project

For almost 20 years I have written extensively about "the age 100 problem" in life insurance. I wrote articles about the problem in the January 2001 and May 2001 issues of The Insurance Forum. Later, on my blog, I posted six items about the problem: No. 141 (February 1, 2016), No. 226 (July 20, 2017), No. 241 (November 17, 2017), No. 269 (June 6, 2018), No. 277 (July 17, 2018), and No. 289 (October 15, 2018).

In No. 289 I described my personal dilemma concerning the age 100 problem. I said my wife and I, in our 80s, have nine old traditional participating whole life policies issued many years ago by four life insurance companies (A, B, C, and D). Six are on my life and three are on my wife's life. Given the lack of adequate responses to the problem by life insurance companies, I decided as a last resort to write to the policyholder service departments of the four companies about our policies. I hoped the companies would respond thoroughly, but planned to seek assistance from state insurance regulators if the companies did not respond adequately. In No. 289 I described the preliminary results, and here I discuss the final results of the unproductive project.

The Regulators
The policyholder service departments of the four insurance companies did not respond fully. I then sought assistance from regulators in the states where the policies were originally issued. As a result of my requests to regulators, the companies provided additional information, but still did not provide everything I needed.

Company A
Company A has a small paid-up policy on my wife. We inquired about the current cash value and the amount of taxable gain that would be reported on a 1099 if she surrenders the policy in 2019. We also asked for a sample of the letter the company will send as she nears the terminal age of 100 without having surrendered the policy. The company provided the cash value figure and the amount of the taxable gain if she surrenders the policy in 2019, but declined to provide the sample letter.

We still do not know precisely what will happen if my wife survives to the terminal age. Although the taxable gain if she now surrenders the policy would be modest, we have decided not to pay the tax. Instead we have decided to keep the policy in its paid-up status for the time being. The only action we are taking now is to change the dividend option from cash to paid-up insurance to avoid the need to deposit the small dividend check each year.

Company B
Company B has two small policies on my life. The company indicated the cash values that would be paid if I surrender the policies in 2019. However, the company said neither policy meets the company's guidelines for tax reporting to the Internal Revenue Service (IRS), and therefore declined to provide the amounts of taxable gains. Furthermore, the company said it is my responsibility to determine "how, if, and what" to report to the IRS. Because I strive to report accurately to the IRS, because I know the premiums and the current cash values, and because I need dividend information to calculate the amounts of taxable gains, I asked for the historical dividend figures for every policy year. In response the company said:
The [dividend] history provided is for the last five years. Should you need additional historical information, a convenience fee will be charged as follows: for requests beyond five years up to and including ten years a fee of $25.00 is applicable and for requests beyond ten years a fee of $50.00 is applicable.
I have dividend figures for the past 30 years, but I do not have dividend figures going back for a total of about 70 years. I have decided not to spend $50 (or perhaps $100 for the two policies) for the information I need to calculate the amounts of the taxable gains accurately. I have also decided not to surrender the policies at this time, but rather to continue paying premiums for now.

Company C
Company C has three fairly large policies on my life and one small policy on my wife's life. We asked for a sample of the letter that would be sent to us if we should maintain the policies and approach the terminal age. We also asked for the cash values and the amounts of taxable gains if we surrender the policies in 2019. The company indicated the cash values but ignored our request for the sample letter and the amounts of taxable gains.

We asked again for the sample letter and the amounts of taxable gains. The company again provided the cash values, but again ignored our request for the sample letter and the amounts of taxable gains.

We sought assistance from the regulator. The company then provided the amounts of taxable gains. However, instead of providing the sample letter, the company provided copies of the policies and said they "do not have a stated maturity date," "do not mature or terminate at age 100," and "are not affected by the insured reaching age 100."

Although the policies do not have a stated maturity date, they are based on mortality tables with a terminal age of 100. We do not know what will happen if we reach the terminal age; that is, we do not know whether the face amount will grow, whether premiums will continue to be charged, whether the cash values will continue to grow, or whether dividends will continue to be paid. The amounts of life insurance protection (face amounts minus cash values) in the policies are small, and the amounts of taxable gains if we surrender the policies are large. We have decided not to surrender the policies at this time and incur the large taxes, but rather to continue paying premiums for now.

Company D
Company D has one fairly large policy on my life and one fairly large policy on my wife's life. We asked for a sample of the letter the company will send us if we should maintain the policies and approach the terminal age. We also asked for the cash values and the amounts of the taxable gains should we surrender the policies in 2019.

Having received no reply, we sought regulatory assistance. We then received a thorough reply from an officer who is a fellow of the Society of Actuaries. The actuary said the company had mailed responses to our original letter, we must not have received them, and the company was now addressing our questions. Here is the actuary's response:
You asked what will happen when the Insured reaches age 100. Your contracts do not specifically identify a maturity provision when the Insured reaches age 100. You can choose to leave the policies in force until death when the proceeds would be paid to your beneficiaries. Please note that under these contracts you would not receive any dividends beyond age 100 nor would any premiums be due. Alternatively, you could choose to access the cash surrender value via the options stated in your policy. It is not possible to accurately predict what the tax rules will be on your policy anniversary [many years from now]. [We] do not offer tax advice. You may want to consult your personal tax advisor regarding your particular situation.
The actuary indicated the cash values in 2019 and the amounts of taxable gains. For each policy, the amount of the taxable gain would be identical to the cash value. When we inquired about that point, the actuary provided this explanation:
The general rule is that an amount received is included in gross income to the extent it exceeds the investment in the contract calculated as of the date of distribution. For both of your contracts, the dividends you received in total exceeded the total premiums paid (cost basis) into that contract many years ago. As a result, were you to surrender the contracts today, the entire surrender value would become taxable gain. Should you pay additional premiums ... prior to [the policies'] 2019 anniversaries, those payments would then become cost basis, which would be credited against income at surrender. Our projections assumed you would not [pay additional premiums], so that the projected surrender values exactly equaled the estimated taxable gains.
The actuary's explanation reminded me that for many years we have been receiving 1099s from the company for a substantial portion of each dividend paid on the policies. The actuary went on to discuss extended term insurance and reduced paid-up insurance as possible options for us.

We have decided not to surrender the policies and incur the large taxable gains. Instead we have decided to continue paying premiums for now.

The Lebbin Case
In three of the six posts identified in the first paragraph of this post (Nos. 226, 241, and 269), I discussed a lawsuit filed by Gary Lebbin. who is now past the terminal age of 100. The trial is tentatively scheduled to begin on January 22, 2019. However, I think the case will not go to trial. I consider it likely that the parties will reach a settlement and, because it is an individual lawsuit rather than a class action, the settlement terms will be confidential. (See Lebbin v. Transamerica, U.S. District Court, Southern District of Florida, Case No. 9:18-cv-80558).

General Observations
When we purchased life insurance many years ago, it did not occur to us that we would encounter income tax problems if we were fortunate enough to live long lives. We bought most of the policies after I became intensely interested in life insurance in the late 1950s, and I am embarrassed to admit I did not become aware of the age 100 problem until 2001. I can try to dodge responsibility by observing that neither life insurance companies nor regulators have ever deemed the problem worthy of being disclosed to unsuspecting life insurance buyers. However, I should have detected the problem many years earlier.

We have decided not to surrender or modify any of our policies at the present time. Although they provide us with only a small amount of unneeded life insurance protection, we are not willing to pay the income taxes associated with surrendering the policies issued by companies A, C, and D. As for company B, we are unable to calculate accurately the income taxes associated with surrendering the two policies, we are not willing to pay for the necessary information, and we refuse to evade payment of income taxes that would be payable. In short, we have decided to retain all the policies in their present form for the time being.

I express appreciation to the many readers who commented on No. 289. One even offered to help by contacting the companies on our behalf, but I declined the gracious offer.

Available Material
I offered complimentary packages in four posts mentioned at the beginning of this post: No. 141, No. 226, No. 241, and No. 269. They contain a substantial amount of information about the age 100 problem, and remain available. If you would like any or all of them, send an email to jmbelth@gmail.com and ask for them.

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Friday, November 9, 2018

No. 295: Watergate and the 1974 Road Map

Blogger's Note: Although this post is outside my usual focus on insurance matters, I think you will find it interesting, especially in view of President Donald Trump's November 7 firing of U.S. Attorney General Jeff Sessions and the related developments. The similarities between Watergate and the current situation continue to proliferate.

The Petition
On September 14, 2018, Benjamin Wittes, Jack Goldsmith, and Stephen Bates filed in federal court a petition for an order directing release of the "Road Map" transmitted by the Watergate Grand Jury to the Judiciary Committee of the House of Representatives in 1974. Attached to the petition is a legal memorandum in support of the petition, and declarations in support of the petition by Wittes, Goldsmith, Bates, Richard Ben-Veniste, John W. Dean III, and Philip Allen Lacovara. (See In Re Petition for Order Directing Release of the "Road Map" Transmitted by the Watergate Grand Jury to the House Judiciary Committee in 1974, U.S. District Court, District of Columbia, Case No 1:18-mc-125.)

The Judge
The case was assigned to Chief Judge Beryl A. Howell of the U.S. District Court for the District of Columbia. President Obama nominated her in July 2010, the Senate confirmed her in December 2010, and she became Chief Judge in March 2016.

On October 11, 2018, Chief Judge Howell issued an order allowing release of the Watergate Road Map. On October 31, the U.S. Department of Justice filed a notice of compliance. It contains a link to a large amount of material, which includes a link to another large amount of material. The latter batch of material includes a link to the Road Map.

The Petition
The petition contains a brief but excellent explanation of the significance of the Road Map. Here are two excerpts, without citations:
The 55-page Road Map identified the evidence relevant to President Nixon's alleged involvement in a criminal conspiracy, without explicit accusation, accompanied by a package of 800 pages of documents and thirteen tape recordings comprising the evidence itself... As Special Prosecutor Jaworski stated, "There were no comments, no interpretations, and not a word or phrase of accusatory nature. The 'road map' was simply that—a series of guideposts if the House Judiciary Committee wished to follow them."
The Road Map is one of the last major elements of the Watergate story that remains under seal, though its contents were publicly disclosed through a variety of sources over the years. And it has particular resonance now, at a time when Special Counsel Robert Mueller is investigating potential unlawful conduct by President Donald Trump and is reportedly considering writing a report on obstruction. This petition seeks the release of the Road Map only, without the underlying grand jury material that accompanied it.
The Road Map
The first two pages of the Road Map contain a "Report and Recommendation" from the foreman of the June 5, 1972 Grand Jury. A handwritten note near the top of the first page reads: "Filed under seal March 1, 1974." At the top of the first page is a printed note about Chief Judge Howell's unsealing of the material on October 11, 2018. Here is the first paragraph of the Report and Recommendation:
The June 5, 1972 Grand Jury has heard evidence that has led it to return the indictment being submitted herewith. It has also heard evidence that it regards as having a material bearing on matters that are within the primary jurisdiction of the House of Representatives Committee on the Judiciary in its present investigation to determine whether sufficient grounds exist for the House of Representatives to exercise its constitutional power to impeach Richard M. Nixon, President of the United States. It is the belief of the Grand Jury that it should presently defer to the House of Representatives and allow the House to determine what action may be warranted at this time by this evidence.
Contents of the Road Map
The Road Map consists of four parts: (1) material bearing on a $75,000 payment to E. Howard Hunt and related events, (2) material bearing on the President's "investigation," (3) material bearing on events up to and including March 17, 1973, and (4) the President's public statements and material before the grand jury related thereto. The first part consists of 13 items (a 14th item remains under seal). Here are the 13 items, without the footnotes identifying the evidence:
  1. On or about March 16, 1973, E. Howard Hunt had a meeting with Paul O'Brien during which Hunt demanded approximately $120,000 and asked O'Brien to tell John Dean that Hunt had done some "seamy things" for the White House and for John Ehrlichman and that, if Hunt were not paid soon, Hunt would have to "review his options."
  2. On or about March 19, 1973, Paul O'Brien had a conversation with John Dean during which O'Brien related Hunt's message to Dean.
  3. On or about March 19, 1973, John Dean had a conversation with John Ehrlichman in which Dean told Ehrlichman of Hunt's message and in which Ehrlichman asked Dean to relay the message to John Mitchell.
  4. On or about March 20, John Dean had a conversation with John Mitchell concerning Hunt's message.
  5. From approximately 10:15 a.m. to approximately noon on March 21, 1973, the President had a meeting with John Dean, the latter part of which was also attended by H. R. Haldeman, during which there was discussion of (a) the involvement and possible involvement of Haldeman, Dean, John Ehrlichman, John Mitchell, Jeb Magruder, Gordon Strachan, Fred LaRue, Herbert Porter, Egil Krogh, Herbert Kalmbach, and others in obstruction of justice and perjury, (b) the fact that E. Howard Hunt was demanding $120,000 and might disclose the "seamy things" Hunt had done for Ehrlichman, as well as other matters, (c) the amount of money that would ultimately be required to keep Hunt and the other Watergate defendants silent, how delivery of such money could be accomplished, and by whom, (d) the fact that Hunt and others expected help with respect to the length of time they would spend in jail, (e) the likelihood that facts respecting the involvement of those listed above and others might become publicly known, (f) whether to pay Hunt in order to "buy time," and (g) possible courses of action that might be taken with respect to all of the above matters.
  6. At or about 12:30 p.m. on March 21, 1973, H. R. Haldeman had a telephone conversation with John Mitchell.
  7. In or about the early afternoon of March 21, 1973, John Mitchell had a telephone conversation with Fred LaRue during which Mitchell authorized LaRue to pay approximately $75,000 to E. Howard Hunt.
  8. At or about 3:45 p.m. on March 21, 1973, H. R. Haldeman met with John Ehrlichman and John Dean, during which meeting there was a discussion of the possible courses of action to be taken with respect to the matters discussed by the President, Haldeman, and Dean that morning.
  9. From approximately 5:20 p.m. to approximately 6:00 p.m. on March 21, 1973, the President met with John Dean, H. R. Haldeman, and John Ehrlichman, at the outset of which meeting several possible courses of action, i.e., testimony before a new Grand Jury or before an independent panel established to investigate all the facts, were rejected and during which meeting there was further discussion of Hunt's demand and of the possible remaining courses of action open that might be taken with respect to the matters discussed that morning by the President, Haldeman, and Dean.
  10. On the late evening of March 21, 1973, Fred LaRue caused $75,000 in cash funds for E. Howard Hunt to be placed in the mailbox at the residence of Hunt's attorney, William O. Bittman.
  11. On the morning of March 22, 1973, John Mitchell attended a meeting with H. R. Haldeman, John D. Ehrlichman, and John Dean, during which Mitchell stated that Hunt was no longer a problem.
  12. On the afternoon of March 22, 1973, the President met with John Mitchell, H. R. Haldeman, John Ehrlichman, and John Dean during which meeting there was discussion of a possible course of action that might be taken with respect to the matters discussed on the morning of March 21, 1973, namely, preparation by Dean of a written "report"—stating that high White House officials were not involved in the Watergate break-in—on which the President could at a later time "rely," if necessary.
  13. On or about the afternoon of March 22, 1973, John Ehrlichman had a conversation with Egil Krogh in which Ehrlichman stated that Krogh should "hang tough" and that Hunt was "more stable" and would not "disclose all."
General Observations
In the midterm elections this week, despite Democratic losses in the Senate, wins in the House of Representatives may allow Democrats to push forward with their legislative and investigative agendas. At this writing (November 7, 2018), it is not known what course of action Special Counsel Mueller, the U.S. Department of Justice, and Congress will take with regard to his ongoing investigation. I believe, however, that the Watergate Road Map provides a course of action that is worthy of serious consideration.

Available Material
I am offering a complimentary 68-page PDF consisting of the petition (5 pages), the notice of compliance (1 page), and the Road Map (62 pages). Email jmbelth@gmail.com and ask for the November 2018 package about the Watergate Road Map.

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Thursday, November 8, 2018

No. 294: Universal Life Policies—a Disaster for Life Insurance Companies and Their Policyholders

I have long been concerned that the development of universal life insurance policies might lead to serious problems for life insurance companies and their policyholders. Recent developments have heightened my concerns. Here I provide historical context and offer suggestions that might prevent universal life from damaging the life insurance business.

Historical Background
My first significant exposure to life insurance occurred in the 1950s, when market interest rates were very low. For example, savings accounts often earned interest rates well below 2 percent. By the 1970s market interest rates had risen significantly, and by the 1980s had reached double-digit levels. In the past decade market interest rates declined sharply and have remained at low levels.

Investment-Year Dividends
In April 1975 I wrote to what is now the New York State Department of Financial Services (NYDFS) asking whether it had ever approved the use of an investment-year method in calculating dividends on individual life insurance policies. (The method had been used earlier in the pension business.) In response, a senior department official said no company had made such a request, and that it would be a "monstrous and costly task even with a new generation computer."

In the January 1, 1976 issue of Probe, the late Halsey Josephson's sprightly newsletter, he said a company had just announced the use of an investment-year method, but he did not identify the company. In response to my inquiry, he said it was The Equitable Life Assurance Society of the United States.

The Insurance Forum, my monthly periodical, began its 40-year run with the January 1974 issue. Based on hindsight, one of my most important early articles appeared in the April 1976 issue and was entitled "Great News—Except for Equitable's Old Policyholders." I said the company's use of an investment-year method meant substantial dividend increases for new and recently issued Equitable policies and no dividend increases for old Equitable policies.

Pursuant to the New York State Freedom of Information Law, I asked the department for its approval file. The department denied my request on trade secret grounds. The denial led to a lengthy legal struggle. In that lawsuit I won a partial victory. I reported in detail on the results of the case in an article entitled "The New York Cover-Up Continues To Unravel" in the October 1978 issue of the Forum.

Operation of Universal Life
When the policyholder pays a premium for a universal life policy, that amount is added to the policy's cash value, which is more commonly called the "account value." Also, interest for the preceding year is added to the account value. Then a mortality charge is deducted from the account value. The mortality charge is calculated by multiplying the net amount at risk in thousands of dollars by the cost-of-insurance (COI) rate. The net amount at risk is the death benefit minus the account value. The policy contains a schedule of maximum COI rates that increase with age, although companies typically use COI rates (called "current" COI rates) that are below the maximum COI rates. Certain expenses are also deducted from the account value. The result of the interest added, the mortality charge deducted, and the expenses deducted determines the new account value.

My first extensive writing on universal life was in the November 1981 and December 1981 issues of the Forum. Those articles are in the package offered at the end of this post.

Detailed discussions of the history and operation of universal life may be found in college-level insurance textbooks. See, for example, pages 70-76 in the 15th edition of Life Insurance, by Kenneth Black Jr., Harold D. Skipper, and Kenneth Black III.

The Transparency Feature
For many years prior to the introduction of universal life, I strongly recommended adoption of a system of rigorous disclosure to consumers of the prices of the protection component and the rates of return on the savings component in traditional cash-value life insurance policies. The protection component is the death benefit minus the cash value. When the death benefit is level, the protection component steadily declines as the savings component steadily increases. An important aspect of my proposed disclosure system required that the policy be divided into its protection and savings components.

Life insurance companies strongly objected to dividing the policy into its protection and savings components. Therefore the companies strongly objected to my proposed disclosure system, and they were successful in preventing its adoption.

One feature of universal life is transparency, because such a policy is divided into its protection and savings components. When universal life burst on the scene in the late 1970s, an official of one of the pioneering companies wrote me and said: "Joe, I hope you're satisfied." Unfortunately, transparency did not lead to adequate disclosure of prices and rates of return, but rather introduced a new family of deceptive sales practices into the life insurance market.

The Flexibility Feature
Another feature of universal life is flexibility, because policyholders, within limits, can change premiums and death benefits. Some universal life policies were called "adjustable life" or "flexible-premium life."

I wrote about universal life and expressed concerns. However, I did not foresee the full extent of the problems that would arise from the transparency and flexibility of universal life. Some life insurance companies foresaw the problems and initially held back from offering universal life. Those companies later ended their opposition.

The Interest Rate Problem
As mentioned, universal life was introduced when market interest rates were rising. It became common for companies and agents to refer to a high interest rate in their marketing of universal life. A classic example, which I wrote about in an article entitled "How Not to Advertise Universal Life," appeared in the May 1984 issue of the Forum. I reproduced in the article a newspaper advertisement headlined "Life Insurance Paying 12% Interest? Unbelievable!" The company was crediting a 12 percent new-money interest rate on universal life. The problem was that, when market interest rates declined, which they inevitably did, the company had to lower the credited interest rates, leaving policyholders feeling they were victims of a "bait and switch" scheme.

The Inadequate Premium Problem
When a person buys a universal life policy, he or she, usually in consultation with an insurance agent, selects the amount of the death benefit and the "initial planned annual premium." The problem with the planned annual premium is that it may be inadequate to keep the policy in force for the desired length of time, whether that is the insured's lifetime or some shorter period. This situation can occur when the selected premium is too low from the outset to sustain the policy for the desired duration. It also can occur when credited interest rates decline, when COI rates increase, or when the policyholder elects to reduce or skip entirely the payment of the planned annual premium.

The Annual Report Problem
Each year the company sends an annual report to the policyholder to keep him or her informed of the status of the policy. Some of the annual reports I have seen are complex, and the policyholder may not examine it. Even if he or she looks at it closely, he or she may not understand it. The agent, who normally receives a copy of the report, may or may not look closely at it, and may or may not review it with the policyholder.

The Problem of Increasing Premiums
Over the years, two major problems have afflicted universal life. First, as credited interest rates declined, it became necessary for policyholders to pay larger and larger premiums to maintain their policies. By "maintain," I refer not only to keeping the life insurance in effect, but also assuring the policy will remain in effect for the desired period.

To compound the problem, universal life policies normally include a guaranteed minimum interest rate that will be credited to the account value. If market interest rates decline below the guaranteed minimum, the company may elect to increase COI rates to maintain the policy, and that would force the policyholder to pay larger and larger premiums to maintain the policy for the desired period.

Universal life policies invariably allow companies to increase their COI rates (up to the maximum COI rates) and many companies have been increasing COI rates to compensate for the interest shortfall. In recent years there have been many lawsuits prompted by large increases in COI rates. The lawsuits usually involve disputes over whether the COI rate increases are allowed under the precise language of the policies.

To my knowledge, no such lawsuit has ever been fully adjudicated. In other words, I believe that no such lawsuit has ever been decided by a judge or jury, and therefore that no such lawsuit has had a chance to survive an appeal. I believe that all such cases have been dropped or settled, that the terms of the settlements in class action lawsuits have been made public, and that the terms of the settlements in individual lawsuits have been kept confidential.

The Administrative Problem
The introduction of universal life made it necessary for companies to develop elaborate systems for administering the policies, especially in light of the flexible premium characteristic of the policies. To compound the problem, companies engaged in a race to develop new versions of universal life in an effort to help their agents in the marketplace. Each new version required the development of a new administrative system. I believe that some companies invested so many resources in development of new policy forms that they failed to develop adequate systems for administering those new policies. Inadequate administrative systems, in turn, led to the companies being unable to service the policies adequately. For example, companies sometimes were not able to respond adequately to policyholder and agent requests for policy information, and companies sometimes were not able to provide meaningful annual reports to policyholders and agents.

Three Suggestions
The first suggestion is that state insurance regulators significantly expand the requirements they impose prior to approval of universal life policies. As examples, companies should be required to submit for approval not only the policy forms but also the annual reports the companies will provide to policyholders and agents explaining the policies, illustrating the policies, and describing the current status of the policies. An important reason for such requirements is to force the companies to show they have developed the systems necessary to administer the policies.

The second suggestion is that state insurance regulators require prior approval of COI increases, just as they require prior approval of increases in the premiums for long-term care insurance policies. I recognize that this suggestion may necessitate formal rule making or even legislation, but I think such a requirement is essential.

The third suggestion, a corollary of the second suggestion, is that state insurance regulators require companies to notify the regulators prior to imposing COI increases. Some states already have adopted such a requirement. See, for example, Regulation 210, which NYDFS adopted on September 5, 2017, and which took effect on March 19, 2018.

Available Material
I am offering a complimentary 25-page PDF consisting of the five Forum articles mentioned in this post (15 pages) and NYDFS Regulation 210 (10 pages). Email jmbelth@gmail.com and ask for the November 2018 package about universal life.

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Thursday, November 1, 2018

No. 293: MetLife and a Tragic Theft of Structured Settlement Annuity Payments

Nicole Herivaux, now 38, was born August 1, 1980 in a hospital operated by New York City. The amended complaint referred to later says: "She suffered a serious physical injury during the birth process, resulting in an Erbs palsy to her arm, rendering same permanently undeveloped and useless." According to the American Academy of Orthopaedic Surgeons:
Erb's palsy is a form of brachial plexus palsy. It is named for one of the doctors who first described the condition, Wilhelm Erb. The brachial plexus is a network of nerves near the neck that give rise to all the nerves of the arm. These nerves provide movement and feeling to the shoulder, arm, hand, and fingers. Palsy means weakness, and brachial plexus birth palsy causes arm weakness and loss of motion. One or two of every 1,000 babies have this condition. It is often caused when an infant's neck is stretched to the side during a difficult delivery.
The Medical Malpractice Lawsuit
Marie Herivaux, Nicole's mother and natural guardian, filed a medical malpractice lawsuit against New York City. The case ended in a settlement on February 25, 1983. It provided that Marie, who was not injured, was to receive a one-time payment of $25,000.

The settlement also provided that Nicole was to receive $50,000 immediately; $2,200 per month for life; $100,000 on August 1, 1998 (her 18th birthday); $200,000 on August 1, 2005 (her 25th birthday); $200,000 on August 1, 2015 (her 35th birthday); and $200,000 on August 1, 2025 (her 45th birthday). The money for Nicole, until she turned 18, was to be paid jointly to Marie, who was Nicole's mother and natural guardian, and a bank officer. The money for Nicole was to be kept for her benefit in certain savings accounts. The money thereafter was to be paid to Nicole.

The Structured Settlement Annuity
To assure that Nicole's benefits would be paid, New York City purchased a structured settlement annuity from Alpine Life Insurance Company. The company made the payments properly until 1995, when Nicole was 15.

Metropolitan Life Insurance Company (MetLife) acquired the structured settlement annuity from Alpine on January 1, 1995 as part of a block of business. MetLife mistakenly made Nicole's benefits payable to "Marie Herivaux" rather than to "Marie Herivaux as guardian of Nicole." Over the years, Marie received checks in her own name and MetLife paid Nicole nothing.

Nicole's Lawsuit against MetLife
On February 13, 2017, when Nicole was 36, she filed a lawsuit against MetLife in state court in New York. She filed an amended complaint on October 9, 2017. (See Nicole Herivaux v. MetLife, Supreme Court of the State of New York, County of New York, Index No. 650783/2017.) How Nicole learned that Marie had been stealing money from her is described in a memorandum of law Nicole's attorneys filed in opposition to MetLife's motion to dismiss her original complaint. The words shown here in brackets were in a footnote.
From time to time Marie would give Nicole some money, advising Nicole that the monies were from her settled case, but Nicole was never provided any details about the settlement, and Nicole relied on what her mother told her. For instance, Marie gave Nicole $100,000 on August 1, 1998, her 18th birthday; another $100,000 on August 1, 2005, her 25th birthday; and a small amount on August 1, 2015, her 35th birthday. [According to the court order, Nicole should have received $100,000 on August 1, 1998; a full $200,000 on August 1, 2005; and a full $200,000 on August 1, 2015.]
More recently, Marie stopped giving plaintiff money altogether, and Nicole, who is now 37 years old, grew curious as to why the payments had stopped. While at her mother's house in Florida, Nicole came across an old check from MetLife showing a payment of $2,200 dated September 1, 2012—when Nicole was already 32 years old and no longer an infant. Nicole noticed that the MetLife check was made out to Marie, without any "for the benefit of" language.
When she discovered the payment, Nicole called MetLife to inquire whether she was owed any money and was told that MetLife had no record of Nicole being the beneficiary of any annuity or funds. Nicole then located Attorney Michael D. Wolin, whom she knew her mother had dealt with. Mr. Wolin advised that he had not been with the Julien Schlesinger & Finz firm for thirty years, that he did not have a file concerning the settlement, nor did he have any specific recollection of the settlement terms, although he remembered the case.
Mr. Wolin further advised that the court order should be on file at the courthouse. Nicole had someone obtain a copy of the order from the courthouse. Nicole then contacted Mr. Wolin, who wrote to MetLife to inquire as to why Nicole was not receiving the proceeds of the settlement she was entitled to. A brazen stonewalling response was received from MetLife stating that it had no record of any annuity for Nicole at all and that she was not listed as an annuitant on its records.
The Factoring Transaction
In the course of Nicole's lawsuit against MetLife, her attorneys learned to their amazement that in 2009 Marie had sold half the $200,000 August 1, 2015 payment to Novation Capital LLC, a factoring company. In her affidavit in connection with the transaction, Marie said this under oath: "I am currently divorced and have one dependent, Emily Seymour, a daughter, born on 6/14/2002." As if the failure to mention Nicole was not enough, Marie also made these brazen lies, also under oath:
I am entitled to the settlement payments set forth in the Transfer Agreement. The structured settlement payments arose as a result of a medical malpractice claim. The cause of action associated with the aforementioned lawsuit has been resolved. Pursuant to a Settlement Agreement, I was entitled to receive certain periodic payments, to wit: a lump sum payment of $200,000 due on 8/1/2015, a lump sum payment of $200,000 due on 8/1/2025, and monthly payments of $2,200 for life, thereby creating a structured settlement.
Nicole's attorneys also learned that the Miami attorney who handled the factoring transaction—Jose M. Camacho, Jr.—was disbarred for forging signatures relating to structured annuities. Several documents relating to the factoring transaction are among the appendixes to Nicole's amended complaint and are in the package offered at the end of this post.

The Consent Order
On September 11, 2018, after the parties (but not Marie) had reached a settlement, the judge issued a consent order. He entered a default judgment against Marie, who had failed to respond to the amended complaint or otherwise appear. MetLife demanded, and Nicole agreed, to assign the default judgment to MetLife. Nicole also agreed not to try to collect on the default judgment. I do not know whether MetLife will attempt to collect on the default judgment.

MetLife agreed to pay Nicole for life the suspended and future monthly payments beginning with the payment that was due April 1, 2017, including 9 percent interest on the suspended payments. MetLife also agreed to pay Nicole the $200,000 due in 2025. The parties agreed to bear their own costs and attorney fees.

The consent order is silent on the $100,000 payment due in 1998, which Nicole received; the $200,000 payment due in 2005, half of which Marie apparently stole; and the $200,000 payment due in 2015, half of which Marie sold to the factoring company in 2009, and the other half of which, except for a "small amount," Marie apparently stole. The judge dismissed the case with prejudice (permanently).

The Article in The Wall Street Journal
On February 21, 2018, The Wall Street Journal carried an article entitled "Lawsuit Alleges MetLife Helped a Woman Keep Settlement Money From Her Daughter." The reporter was Leslie Scism, who interviewed Nicole. Aside from comments that "Nicole lives in a cheap apartment in Detroit, has $30,000 in student debt and sometimes relies on free-food pantries," Nicole said: "I could have done so many different things with my life" had she received the full proceeds, she had sometimes borrowed from her mother, and "The ironic thing was I was paying back myself."

General Observations
I think Nicole's attorneys—Wolin, David Jaroslawicz, and others—did excellent work on the case. The attorneys for MetLife are associated with the firm of Drinker Biddle & Reath LLP. I sympathize with them, because I think they were on the wrong side in this tragic case.

On February 9, 2018, Christina M. White, an attorney for New York City, submitted a statement in opposition to a MetLife motion to dismiss the amended complaint. I was impressed by her statement. She assembled a substantial amount of background information on the case despite the lack of many documents that were not available because of the document retention (document destruction) policy of several of the organizations involved in the case.

This is one of the most shocking cases I have ever seen. It is inconceivable to me that a mother would steal money month after month and year after year from her permanently disabled daughter.

Available Material
I am offering a complimentary 104-page PDF consisting of Nicole's amended complaint (15 pages), exhibits to the amended complaint (40 pages), the memorandum of law in opposition to MetLife's motion to dismiss the amended complaint (26 pages), Christina White's statement (19 pages), and the consent order (4 pages). Email jmbelth@gmail.com and ask for the November 2018 package about the case of Herivaux v. MetLife.

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Friday, October 26, 2018

No. 292: The Time To Vote Is Now

Blogger's note: Jay Kayne and Stephan R. Leimberg said they were submitting the material below to their local newspaper. However, they invited me to circulate it to my readers, with or without their names. I have not edited the material in any way. Please vote!

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WHAT WE BELIEVE

The mid-term election is much more than a contest among individuals seeking office.  It is nothing less than a referendum on what America represents.  As with any decision, personal choices are influenced by one’s priorities and value system.

We do not represent and therefore cannot speak for any political party. However, we do have a strong feeling about what makes the United States exceptional and a model for other nations.

We ask you to think carefully about what you want! That is why, we the undersigned, felt it was important to share why, regardless of past party affiliation, we are voting for Democrats this year.

WE BELIEVE:
Access to affordable health care for all Americans is a human right.  And while the Affordable Care Act can be improved upon, it should not be repealed without a viable alternative which provides similar benefits and guarantees rights such as coverage for pre-existing conditions.
Climate change and human contribution to it are real and only immediate national and international cooperation and action can slow or reverse this catastrophic trend.
Neither our federal nor state government should be the arbiter of a woman’s reproductive rights.
Rather than being “the enemy of people,” a free press is a cornerstone of and essential to American democracy.
Accepting the word of an autocrat or dictator over that of the U.S. intelligence community is an affront to the dedicated men and women who keep us safe and protect our homeland.
We should distance ourselves from governments that torture and murder its own or citizens of any country and that the benefits of breaking ties with or sanctioning such countries far out-weigh any possible profits to be gained from any military weapons sale or other economic trade.
It is wrong to provide huge tax cuts for the wealthiest one percent of our population at the cost of significantly increased federal deficits and deep reductions in our social safety network and educational system.
In cases of sexual abuse or harassment, both the accused and accuser should have the right to a thorough, independent, and unbiased investigation of the charges.
The speed, pricing, or access to the internet should not be controlled by a relatively few giant media corporations.
America is large and strong enough to be a refuge for reasonable numbers of individuals who are politically persecuted or are subject to violence within their native countries.
It is both constitutional and reasonable to demand that all gun buyers qualify to purchase through a universal federal background check and that non-police civilians be denied access to military level assault weapons.
Every American, regardless of sexual orientation or national origin, should be welcomed to serve their country as a member of the armed services.
Americans of any color or sexual orientation or national origin have a right (and as we all do, a responsibility) to vote and the facilities and mechanisms to encourage and enable everyone’s vote should be protected and expanded.
The American public has a right to review the tax returns of candidates for senior national offices due to the potential for financial conflicts of interests affecting both foreign and domestic policy decisions.
Our elected government officials should be role-models of integrity, dignity, character, compassion and tolerance.
If you share these beliefs, now through November 6 you have the opportunity to take America in a more fair and compassionate direction by exercising your right to vote.

Thank you!

Jay Kayne
Stephan R. Leimberg

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Thursday, October 25, 2018

No. 291: Phoenix Life's Plunging Dividends

Background
In 1992 Phoenix Mutual Life Insurance Company merged with Home Life Insurance Company and became Phoenix Home Life Mutual Insurance Company. In 2001 Phoenix Home Life demutualized and became The Phoenix Companies, Inc. (Phoenix). Phoenix subsidiaries include Phoenix Life Insurance Company and PHL Variable Insurance Company.

Immediately before the demutualization, Phoenix Home Life Mutual had a financial strength rating of A (Excellent) from the A. M. Best Company. From 2001 to 2008, the ratings of Phoenix Life and PHL Variable were A (Excellent). In 2009 the ratings were B++ (Good). From 2010 to 2013 the ratings were B+ (Good). Since then the ratings have been B (Fair).

Although the policy discussed later in this post is a participating second-to-die whole life policy, the declining ratings stemmed at least in part from Phoenix's ill-fated venture into the sale of huge amounts of universal life on elderly insureds. Many of the policies were stranger-originated life insurance policies destined for sale into the secondary market. When Phoenix began to increase the cost-of-insurance (COI) charges in many of the policies, especially large policies on the lives of elderly insureds, the companies became embroiled in many class action lawsuits. The situation became unsustainable.

The Nassau Re Acquisition
On June 20, 2016, Nassau Reinsurance Group Holdings L.P., a private equity firm, announced its acquisition of Phoenix, which became a wholly-owned subsidiary of Nassau. Nassau, as a private firm, does not file financial statements with the Securities and Exchange Commission (SEC). Also, all SEC filings made over the years by Phoenix since the demutualization have been removed from the SEC website.

According to its website, Nassau was founded in 2015. However, its comments suggest that in 2016 it acquired the 165-year history of Phoenix Mutual. Nassau's website mentions, among other things, the 1851 founding of American Temperance Life, the 1860 founding of Home Life, the 1865 insuring of Abraham Lincoln and two other top government officials with premiums "tendered to them as a gratuity," the 1906 launching of the first agent training course, the 1912 introduction of direct mail marketing, the 1955 introduction of reduced premium rates for women, and the 1967 introduction of discounts for nonsmokers.

Policyholder Dividends
I wrote extensively in The Insurance Forum about litigation involving COI increases by Phoenix Life and PHL Variable. As examples, major articles appeared in the October 2012 and December 2012 issues. Those articles are in the package offered at the end of this post.

I also have written extensively about Phoenix on this blog. As examples, see No. 103 (June 15, 2015), No. 266 (May 16, 2018), and No. 274 (June 28, 2018). No. 266 involved, among other matters, a class action lawsuit over COI increases imposed by Phoenix Life and PHL Variable subsequent to the acquisition of Phoenix by Nassau. The complimentary packages offered in those posts are still available.

The Plunging Dividends
In recent months, probably because of my blog posts about COI increases by Phoenix Life and PHL Variable, I received comments out of the blue from several individuals about the plunging dividends on their policies. Here I discuss one such policy. I describe the situation in such a way as to mask the identity of the policyholders.

Several years ago, prior to the 2001 demutualization, Mr. and Mrs. X purchased a participating second-to-die life insurance policy from Phoenix Home Life. The face amount is about $500,000, and the policy includes a term insurance rider. The plan was to pay for the cost of the rider from the dividends, with the excess used to buy paid-up additions.

Each year the policyholders received a letter from the company. In recent years the letters have been from Phoenix Life. Each annual letter shows such figures as the face amount, the annual premium, the current death benefit including the paid-up additions, and the amount of the dividend for the current year. Here are the approximate amounts of the dividends for some recent years:

2010
$8,000
2015
5,000
2016
3,500
2017
2,500
2018
300

The annual letters contain neither an apology nor an explanation for the plunging dividends. The dividends in recent years have not been large enough to pay for the cost of the term rider. Therefore the cost of the rider has been paid in part by surrendering some of the paid-up additions.

Mr. and Mrs. X recently filed a complaint with the state insurance department where they live. They have received an acknowledgment, but the department is awaiting word from the company before providing a substantive response  They also filed a complaint with the state insurance department where the company is domiciled for regulatory purposes; they have not yet received an acknowledgment of that complaint.

General Observations
I do not recall ever seeing such a precipitous decline in the dividends on a participating policy. I can think of only two possible reasons for it. First, it may be an effort to recoup the costs associated with the acquisition of Phoenix. Second, it may be an effort to increase the value of Phoenix in anticipation of a sale of Phoenix to another private equity firm. It will be interesting to see what Phoenix Life says to the state insurance regulators and what the regulators say in response.

Phoenix Mutual is one of a group of grand old companies in the life insurance business whose disappearance caused anguish among old timers in the business. Some of the other members of that distinguished group were Connecticut Mutual, Fidelity Mutual, Mutual Benefit Life, New England Mutual, Provident Mutual, State Mutual, and Union Mutual.

Available Material
I am offering a complimentary 10-page PDF consisting of the articles from the October 2012 and December 2012 issues of the Forum. Email jmbelth@gmail.com and ask for the October 2018 package about the Phoenix dividends.

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Thursday, October 18, 2018

No. 290: Transamerica Moves to Settle a Class Action Lawsuit Relating to Cost-of-Insurance Increases

In February 2016 California resident Gordon Feller and several others who had purchased universal life insurance policies from Transamerica Life Insurance Company filed a class action lawsuit against the company in a federal court in California. The case relates to large cost-of-insurance (COI) increases Transamerica imposed on owners of universal life policies. The case was assigned to Senior U.S. District Judge Christina A. Snyder. (See Feller v. Transamerica, U.S. District Court, Central District of California, Case No. 2:16-cv-1378.)

I wrote about the Feller case in No. 239 (October 23, 2017). Recently the plaintiffs filed a motion for preliminary approval of a proposed settlement of the case. Here I discuss the proposed settlement.

The Parties' Views
In No. 239, to provide a brief description of the plaintiffs' views, I showed four paragraphs from their second amended complaint. To provide a brief description of Transamerica's views, I showed nine paragraphs from the company's motion to transfer the case to the Northern District of Iowa, where the company is based. I also showed four paragraphs from Judge Snyder's denial of the motion.

Class Certification
In May 2016 the plaintiffs filed a motion for class certification. During discovery, Transamerica filed many documents under seal pursuant to protective orders. In December 2017 Judge Snyder granted the plaintiffs' motion for class certification. In March 2018 the Ninth Circuit granted Transamerica permission to appeal Judge Snyder's grant of the plaintiffs' motion for class certification. (See Feller v. Transamerica, U.S. Court of Appeals, Ninth Circuit, Case No. 18-55408.) In April 2018 the parties entered into mediation.

The Proposed Settlement
On October 4, 2018, the plaintiffs filed a motion for preliminary approval of a proposed settlement of the case, and a memorandum in support of the motion. The proposed settlement defines the class as "All persons or entities who own or owned a Policy encompassed by the MDR Increases during the Class Period," with certain exclusions. ("MDR" stands for "Monthly Deduction Rate.") The proposed settlement grew out of mediation overseen by David Geronemus of JAMS. (Originally JAMS stood for Judicial Arbitration and Mediation Services, Inc., but the firm now is JAMS Mediation, Arbitration and ADR Services.) Here are the key benefits to class members, as shown in the memorandum:
  • The creation of a $195 million Settlement Common Fund benefiting both In-Force Policies and Terminated Policies owned by the Class Members, plus payment by Transamerica of the first $10 million in attorneys' fees approved and awarded by the Court.
  • Transamerica's agreement that it will not impose any additional MDR increase(s) on any Class Policy within five (5) years of the Execution Date, unless ordered to do so by a state regulatory body (a development that is considered highly unlikely).
  •  Transamerica's agreement that any future MDR increase(s) on the Class Policies after the five-year freeze will be based only on the collective effect of the cost factors assumed when the Policies were originally priced and will not increase the expected future profitability of Policies within the same plan to a higher level than projected based on original policy pricing assumptions, which is intended to ensure that Transamerica does not recover past losses.
  • Transamerica's agreement not to seek to void, rescind, cancel, have declared void, or otherwise deny coverage on death claims submitted by Settlement Class Members based on any alleged lack of insurable interest or misrepresentations made in connection with the original application process.
The plaintiffs also filed the proposed notice to be sent to class members. It includes a few other aspects of the proposed settlement.
  • Subject to applicable regulations, Transamerica has agreed to provide Settlement Class Members, upon request and at no cost to the Settlement Class Member, an illustration depicting the impact of the Settlement Relief on the anticipated future performance of their respective in-force Class Policies. Settlement Class Members may make such a request by contacting the Settlement Administrator.
  • Settlement Class Members with in-force Settlement Class Policies will be paid their share of the Settlement Common Fund by deposit made by Transamerica directly into the accumulation value of each Policy.
  • Settlement Class Members with a Terminated Policy will be paid their share of the Settlement Common Fund by check.
  • No Settlement Class Member will receive a payment less than $100.
  • Plaintiffs' Counsel will seek an award for Plaintiffs' attorneys' fees of up to 25% of the value of the Settlement Common Fund (after any reduction for the amount of Settlement benefits that would have been paid to policyholders who exclude their Policies from the Settlement). Plaintiffs' counsel will also seek reimbursement of the litigation expenses they have advanced on behalf of the Settlement Class over the course of the litigation not to exceed $__________, to be paid out of the Settlement Common Fund. However as an additional important Settlement benefit, Transamerica has agreed to pay Plaintiffs' Counsel the first $10 million of the attorneys' fees and expenses awarded by the Court, separate and apart from the Settlement Common Fund.
General Observations
Feller and other COI cases with which I am familiar have led me to believe that universal life insurance policies are fundamentally defective unless they are managed with extreme care. The annual reports companies send to policyholders are so complex that the average policyholder—or even a sophisticated policyholder—will find it difficult to perform the management function adequately. A skilled and highly professional agent may be able to perform that function, but many policyholders do not have access to the services of such agents. I plan to write further on this in the near future. Meanwhile, I plan to continue following developments in the Feller case.

Available Material
I am offering a complimentary 58-page PDF consisting of the memorandum in support of the motion for preliminary approval of the proposed settlement (39 pages) and the proposed notice to be sent to class members (19 pages). Email jmbelth@gmail.com and ask for the October 2018 package relating to Feller v. Transamerica.

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Monday, October 15, 2018

No. 289: The Age 100 Problem—Our Personal Dilemma

In 2000 I received a letter out of the blue from an individual who owned two traditional participating whole life policies in different companies with a combined face amount of more than $5 million. He was in his 80s and in good health. He wanted his beneficiaries to receive the face amount after his death, but feared he would incur a large income tax obligation if he survived to the policies' terminal age of 100 and received the face amount himself. He wrote the companies asking how to avoid the potential income tax problem. He did not receive straight answers.

I wrote to the chief executive officers of 20 life insurance companies inquiring about the problem. I received responses from only three companies, and those three did not provide straight answers. I became convinced that life insurance companies did not want to discuss the subject. I wrote articles in the January 2001 and May 2001 issues of The Insurance Forum about what I called "the age 100 problem." Later, on my blog, I wrote five posts about the problem: No. 141 (February 1, 2016), No. 226 (July 20, 2017), No. 241 (November 17, 2017), No. 269 (June 6, 2018), and No. 277 (July 17, 2018).

Recent Developments
In June 2018 I conducted another survey by writing to the chief executive officers of 22 life insurance companies. I received responses from nine companies, but none responded to the heart of the survey. It involved a request from a hypothetical 93-year-old policyholder named Jones, who had purchased a $100,000 traditional participating whole life policy in 1975 at age 50. He had paid all annual premiums and had taken all dividends in cash. He had written to the company recently asking for assistance with a potential income tax problem should he survive to the policy's terminal age of 100. None of the responding companies provided information about the Jones policy. The survey and its results are described in No. 277 mentioned above.

Our Personal Policies
My wife and I have nine old traditional participating whole life policies issued many years ago by four life insurance companies. We have paid all premiums annually, have taken all dividends in cash, and, although we borrowed on the policies from time to time many years ago, we now have no policy loans outstanding. We are in our 80s. The cash values are getting close to the face amounts. Therefore, because the protection component of each policy (the face amount minus the cash value) is small, we now have little protection. We no longer need the protection, but we need to plan for the disposition of the policies. We do not identify the companies here because that is our private information.

Given the lack of adequate responses to the 2000 and 2018 surveys, I decided as a last resort to write to the four companies about our own policies. We knew they would have to respond, and we could complain to state insurance regulators if they did not. Our letters went out on July 9, 2018. Here I report on the progress thus far.

Company A
Company A has a small paid-up policy on my wife. We inquired about the current cash value and the amount of taxable gain that will be reported on a 1099 if she surrenders the policy in 2019. We also asked for a sample of the letter the company will send her as she nears the terminal age of 100 if she has not surrendered the policy. We think the letter will offer an option to keep the policy beyond the terminal age. The company provided the cash value figure and the amount of taxable gain, but declined to provide the sample letter.

On August 20 we filed a regulatory complaint. To date we have not received a reply from the insurance department or the company. At present we plan to surrender the policy in 2019 and pay the tax on the gain.

Company B
Company B has two small policies on my life. We inquired about the current cash values and the amounts of taxable gains if the policies are surrendered in 2019. We also asked for the sample letter.

Initially the company provided the current cash values, but did not indicate the taxable gains. Also, the company did not provide the sample letter. In response to our follow-up, the company still did not provide the sample letter. Also, instead of indicating the taxable gains on surrender in 2019, the company said this about each policy and the Internal Revenue Service (IRS):
The values in this policy do not meet [the company's] guidelines for tax reporting at this time, if the policy is surrendered for its cash value. The IRS does not require life insurance companies to calculate taxable amounts on policies that meet certain guidelines. This contract falls within those guidelines and [the company] will not send a tax notification to you or the IRS. Details of this transaction will be shown on your annual report, which you should receive after your next policy anniversary. If any changes are made to the policy between the calculation date and the transaction processing date, the values could change. If you should have additional questions regarding tax regulations, please contact your Tax Advisor.
We asked again for the sample letter, and requested the IRS guidelines. In response, the company again ignored our request for a sample letter, but provided these guidelines:
  1. Policy must be a nonqualified plan.
  2. Issue date must be before August 13, 1982.
  3. Gross cash value must be less than or equal to $5,000. Gross cash value equals the policy cash value including loans. Dividends are not factored into the equation.
  4. The rule only applies to surrenders and maturities.
The company cited "Treas.Reg.Sec.35.3405-1." I found that section, but do not fully understand it. The company again suggested contacting our tax advisor, and made this surprising comment:
It is the responsibility of the policy owner to determine "what," "if," and "how" to report the transaction to the IRS as part of their returns. We can only advise that the contract falls under the guidelines, which do not require us to review or report the transaction.
At present we plan to surrender the policies in 2019. We will follow our tax advisor's recommendation on how to report the transactions in our 2019 tax return.

Company C
Company C has three fairly large policies on my life and one small policy on my wife's life. We asked for a sample of the letter that would be sent to us if we should maintain the policies and approach the terminal age of 100. We also asked for estimates of the surrender values and estimates of the taxable gains that would be shown on the 1099s if we surrender the policies in 2019. On July 19 the company provided the surrender values but ignored our request for the sample letter and the estimates of the taxable gains.

On August 20 we asked again for the sample letter and the estimates of the taxable gains. On August 31 the company provided the face amounts and the surrender values, but again ignored our request for the sample letter and the estimates of the taxable gains.

On September 4 we filed a regulatory complaint. On September 10 the company provided the estimates of the taxable gains. Instead of providing the sample letter, the company provided copies of all four policies in their entirety and made these comments:
Please note that the policies in question do not have a stated maturity date; therefore, these contracts do not mature or terminate at age 100. These policies are not affected by the insured reaching age 100, and we don't have a sample letter to share with you.
Although the policies may not have a stated maturity date, they are based on mortality tables with a terminal age of 100. At this moment we do not know what will happen if we reach the terminal age; that is, we do not know whether the face amount will grow, whether premiums will continue to be charged, whether cash values will continue to grow, or whether dividends will continue to be paid. We do know that at present the amounts of life insurance protection in the policies are small, and the estimated taxable gains if we surrender the policies are substantial. At present we plan to surrender the small policy in 2019, but we do not know what to do with the three large policies.

Company D
Company D has one fairly large policy on my life and one fairly large policy on my wife's life. We asked for a sample of the letter that would be sent to us if we should maintain the policies and approach the terminal age of 100. We also asked for estimates of the surrender values and estimates of the taxable gains that would be shown on the 1099s if we surrender the policies in 2019. We received no reply.

On August 27 we filed a regulatory complaint. We received replies dated September 20 from the company and from the department. The company told the department and us that responses to our July 9 letter had been mailed to us on July 17, that we must not have received them, and that the company was now sending a more detailed response. The company's September 20 letter is signed by an officer who is a fellow of the Society of Actuaries. Here is the bulk of the letter:
You asked what will happen when the Insured reaches age 100. Your contracts do not specifically identify a maturity provision when the Insured reaches age 100. You can choose to leave the policies in force until death when the proceeds would be paid to your beneficiaries. Please note that under these contracts you would not receive any dividends beyond age 100 nor would any premiums be due. Alternatively, you could choose to access the cash surrender value via the options stated in your policy. It is not possible to accurately predict what the tax rules will be on your policy anniversary in 2034. [We] do not offer tax advice. You may want to consult your personal tax advisor regarding your particular situation.
The actuary's letter goes on to provide the projected surrender value in 2019 for each policy, along with the estimated taxable gain for each policy. We were astounded that, for each policy, the projected surrender value in 2019 and the estimated taxable gain in 2019 are identical.

On October 8 we asked the actuary how the company determined that the surrender values and the estimated taxable gains are identical. We also asked for confirmation of our understanding that, if we survive to the terminal age and leave the funds with the company, we would receive no interest on those funds. We also asked for the July 17 letters we did not receive. At present we do not know what to do with the two policies.

General Observations
When we purchased life insurance many years ago, it did not occur to us that we would encounter income tax problems if we were fortunate enough to survive into our 80s. Now that we are there, we have decided to surrender the four small policies and pay the taxes. We have not yet figured out what to do with the other five policies. Many of our readers are life insurance experts, and we would welcome any thoughts they might have on how we should dispose of the five policies.

Available Material
I offered complimentary packages in each of the five posts identified in the second paragraph of this post. The packages remain available. If you want to receive any of them, email jmbelth@gmail.com and ask for the ones you want using the language we used at the end of each post to describe the packages.
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