No. 324: LEAP Revisited

In No. 322 (July 12, 2019), I discussed Pamela Yellen's "Bank-on-Yourself" system. In response I received many comments from readers. Some mentioned other "Be Your Own Banker" systems, some mentioned the A. L. Williams (now Primerica) organization, and some mentioned the "Lifetime Economic Acceleration Process" (LEAP). One reader shared with me a 2016 order from the Ohio Department of Insurance revoking the license of an Ohio agent who had used the LEAP system. When I looked into it, I discovered that Guardian Life Insurance Company of America had filed a lawsuit against the same Ohio agent. Here I discuss the Ohio order, the Guardian lawsuit, and my previous writings about LEAP.

The Ohio Order
On April 28, 2016, Mary Taylor, director of the Ohio Department of Insurance at the time, issued an order revoking the insurance agent's license of Brian S. Willms. Here, with citations omitted, are three of the 19 findings:

6. The Respondent [Willms] is an advocate of the whole life sales strategy known as Life Economic Acceleration Process (commonly referred to as "LEAP"). The first step in the LEAP process is to determine the "appropriate" amount of whole life insurance the customer needs so they are protected to full economic value of their life. LEAP is not accepted as a mainstream life insurance concept in the industry.

7. LEAP opposes maintaining a growing equity in real estate, opposes 529 Plan investments, rejects the value of compound interest, recommends stopping of payments into 401(k), and over time cashing out ("paying down") all brokerage accounts and other investments.

8. Respondent testified that LEAP requires a number of assumptions and calculations and financial analysis. Respondent testified "whatever we do has to increase wealth, reduce risk, create no additional out-of-pocket outlay for the client. It has to protect the client better, and if we can't prove it using math and science, we don't do it, period."

Willms appealed the order to a state court in Ohio. On October 5, 2018, Judge Stephen L. McIntosh affirmed the order. Here, with citations omitted, are the two concluding paragraphs:

The State of Ohio has a right to ensure that insurance agents are properly engaged in the business of insurance. The business of insurance is one of public interest, and therefore the State has an interest in regulating the industry. Hence, statutes designed to regulate the business of insurance should be liberally construed to effect the purpose to be served and to prevent and correct evils growing out of the conduct of such business. The purpose of R.C. 3905.14(B) is to grant the Ohio Department of Insurance the ability to suspend or revoke the licenses of those who are not properly engaged in the business of insurance.

Having considered the record ... the Court finds that the Order ... revoking [Willms'] resident insurance agent license, is supported by reliable, probative, and substantial evidence and is in accordance with law. The Order is therefore AFFIRMED.

Those interested should read the order and the affirmation. They are in the complimentary package offered at the end of this post.

The Guardian Lawsuit
On January 22, 2015, Guardian filed a lawsuit in federal court against Willms Financial Network, LLC (WFN) and Willms. The case was assigned to U.S. District Judge John G. Koeltl and Magistrate Judge James L. Cott. On April 8, 2015, Guardian filed an amended complaint, which is in the complimentary package offered at the end of this post.

Guardian said that, from February 2002 and continuing until January 2005, Willms was career development manager in Guardian's central Ohio agency in Columbus. From February 2005 until October 2010, WFN was corporate general agent and Willms was general agent in the central Ohio agency. From October 2010, Willms was agency supervisor in the central Ohio agency.

Over the years, the defendants entered into interest-bearing promissory notes and personal notes with Guardian. In October 2010 Guardian terminated its relationship with the defendants. By December 2014 the defendants' interest-bearing indebtedness to Guardian was about $445,000. Guardian asked the court to enter judgment against the defendants in that amount, plus post-judgment interest and costs.

In February 2017 Willms filed a petition for Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the Southern District of Ohio. In June 2017 WFN filed a petition for Chapter 7 bankruptcy. In December 2017 the Guardian lawsuit was stayed. In April 2018 the bankruptcy court closed the Chapter 7 proceedings. On April 24, 2018, Judge Koeltl issued an order dismissing with prejudice (permanently) Guardian's claims against Willms on consent of the parties, and referred Guardian's claims against WFN to Magistrate Judge Cott to conduct an inquest into damages.

On May 21, 2018, Guardian filed a statement of damages, and on September 21, 2018 filed a modified statement of damages. In the latter, Guardian sought damages of about $568,000 for loan debt and about $1.4 million for amounts paid by Guardian to settle eight customer complaints, for a total of about $1.99 million.

On December 19, 2018, Magistrate Judge Cott recommended that Guardian be awarded damages of about $568,000 for loan debt, and that Guardian receive no damages for the settlement of customer complaints. At the end of a discussion of the customer settlements, here, with citations omitted, is a summary of why Magistrate Judge Cott denied damages for the settlement of customer complaints:

In sum, the Court lacks confidence in Guardian's submissions in light of these unsupported and unexplained requests for damages. The Court has already provided an additional opportunity for Guardian to supplement its inquest submission, and explicitly requested additional evidence, authorities, and legal arguments. Nonetheless, Guardian has still failed to substantiate its damages with reasonable certainty. Accordingly, on this record the Court should not award any damages for the customer complaint settlement debt.

On January 22, 2019, Judge Koeltl adopted Magistrate Judge Cott's recommendations, entered judgment for Guardian in the amount of $568,000, and closed the case. The next day Judge Koeltl entered a default judgment in favor of Guardian and against WFN in the amount of $568,000. Magistrate Judge Cott's recommendations are in the complimentary package offered at the end of this post. (See Guardian v. WFN, U.S. District Court, Southern District of New York, Case No. 1:15-cv-461.)

On July 14, 2019, I wrote to Guardian asking whether LEAP is currently affiliated with Guardian, and if so, for information about the relationship. I received no reply.

LEAP and the Forum
I published The Insurance Forum for 40 years, from January 1974 through December 2013. Articles about LEAP appeared in the August 2001, October 2001, December 2001, April 2002, June 2002, July 2002, August 2002, October 2002, November 2002, January 2003, and March 2003 issues. Those issues are available for purchase on our website at theinsuranceforum.com.

Among the topics in the Forum articles are descriptions of LEAP, my perceptions of LEAP's shortcomings, the "maximization" technique under which the LEAP agent tries to sell the maximum amount of whole life the insurance company will issue on the life of the client, the LEAP "moves" involving liquidation or pledging of all the client's other assets, LEAP's comments on my articles, my unsuccessful efforts to obtain information directly from LEAP, LEAP and the Insurance Marketplace Standards Association, LEAP and Guardian Life, LEAP and John Hancock, LEAP and New York Life, LEAP and Northwestern Mutual, LEAP and Professor Solomon S. Huebner, LEAP and the Wharton School, and "From the Mailbag" comments from LEAP supporters and critics.

In the December 2001 issue, I offered a package containing my correspondence with LEAP. The package is not available because I discarded it some time ago, along with my other LEAP material. I had thought the March 2003 article was my last about LEAP.

LEAP and Penn Mutual

Several years ago I learned that LEAP had become an affiliate of Penn Mutual Life Insurance Company. I did not report that development. On July 15, 2019, I wrote to Penn Mutual asking whether LEAP is still an affiliate, and if so, for information about the relationship. I received no reply.

General Observations

The LEAP and Yellen systems have similarities. Both involve heavy use of whole life insurance policies. Both disparage all other methods of wealth accumulation. Both use assumptions of questionable validity. Both obscure the details about how the systems are supposed to work.

The recent developments regarding LEAP caught me by surprise and prompted me to prepare this blog post. The developments are a reminder of the long-term nature of the life insurance business and the long-term consequences of questionable activities in the business.

Available Material

I am offering a complimentary 74-page PDF consisting of the Ohio order (7 pages), the Ohio affirmation (26 pages), the Guardian amended complaint (19 pages), and the Cott recommendations (22 pages). Email jmbelth@gmail.com and ask for the July 2019 LEAP package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 323: Kennedy and Trump: Their Inaugural Addresses

In No. 221 (June 8, 2017), I discussed what I called a "sparkling gem" of a 167-page book by David McCullough, one of my favorite authors. The book is entitled The American Spirit: Who We Are and What We Stand For. The book is a collection of 15 of his many speeches at historic events and at college commencements. He does not mention President Donald Trump in his book, but there can be no doubt about what prompted him to assemble the book. As examples, in the introduction he mentions "this time of uncertainty and contention" and "such troubled uncertain times."

In my earlier discussion of McCullough's book, I said I was especially moved by his speech at the bicentennial of what is now the White House. In the speech he discussed a statement by President John Adams in a handwritten letter to his wife Abigail the morning after he moved into and became the first resident of the house. The statement, now carved in marble on a mantelpiece in the State Dining Room, reads:

I pray to heaven to bestow the best of blessings on this house, and all that shall hereafter inhabit it. May none but honest and wise men ever rule under this roof.

Recently I decided to reread McCullough's book. This time I was especially moved by his speech in Dallas on the 50th anniversary of the assassination of President John Kennedy. In that speech McCullough quoted extensively from Kennedy's "ask not" inaugural address delivered in January 1961. That prompted me to read the entirety of Kennedy's address, as well as the entirety of Trump's "American carnage" inaugural address delivered in January 2017. The difference in tone is astounding.

I am offering a complimentary 7-page PDF consisting of Kennedy's inaugural address (2 pages) and Trump's inaugural address (5 pages). Email jmbelth@gmail.com and ask for the July 2019 inaugural package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 322: Pamela Yellen—Her Unbelievable "Bank-on-Yourself" Wealth-Building Strategy

Pamela Yellen was born in Buffalo, New York, on November 16, 1952. She graduated in 1974 from the University of San Francisco with a Bachelor of Arts degree, with emphasis in psychology. From 1984 to 1987 she was employed by a publication serving the camping and recreational vehicle industry. Later she became a consultant to more than 400,000 financial advisors across the U.S. and Canada. She is now a proponent of her "Bank-on-Yourself" system, which she calls a "safe wealth-building strategy." She is the author of two books: Bank on Yourself (2009) and The Bank on Yourself Revolution (2016). She donates 10 percent of her royalties to charities such as The Smile Train and The Nature Conservancy. She now lives with her husband outside Santa Fe, New Mexico. This post is based for the most part on her 2016 book.

The Endorsements

The subtitle of Yellen's 2016 book is "Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future." The first eight pages (before the title page and the other front matter in the book) contain 26 endorsements. Here are the first three:

"Even if you aren't ready to actually fire your banker, you need all the helpful information you can find in these uncertain economic times. Pamela Yellen once again is 'right on the money' when it comes to financial security."—Harvey Mackay, Author of the New York Times #1 bestseller Swim With the Sharks Without Being Eaten Alive, www.harveymackay.com

Pamela Yellen should definitely win a Nobel Prize. With her guidance, you can grow a nest egg into a small fortune without the risks of conventional investments and political uncertainty. I urge you ... no, I beg you ... to get The Bank on Yourself Revolution. It's an investment in yourself and a book that will make a major difference in your life."—Joseph Sugarman, Entrepreneur, Author, and BluBlocker Corporation Founder, www.BluBlocker.com

"The Bank on Yourself Revolution provides a pathway to building your wealth and puts the traditional bank, stock and real estate markets firmly in the back seat. If you are searching for an alternative path to a secure retirement, this is a must read to grow your money safely and predictably ever[sic] year—even when the markets are crashing."—Kristi Frank, Star of Season One of Donald Trump's The Apprentice, well known for helping entrepreneurs start and grow their businesses, www.KristiFrank.com

The Dedication

Yellen dedicated her book to those she calls "Bank on Yourself revolutionaries." Here is the full dedication:

This book is dedicated to all the Bank on Yourself revolutionaries, the people who had the courage to question today's conventional financial wisdom, buck the system, and set out on a path less traveled. In doing so, you created true financial security for yourselves and your families. You are my heroes and my inspiration.

Harsh Criticism of Alternatives

Most of Yellen's book is devoted to harsh criticism of financial alternatives to her Bank on Yourself system. She says on page 7 that over the years she has investigated "more than 450 different financial products, strategies, and vehicles, and only a few passed my due diligence tests." Here are some but not all the alternatives she criticizes (with page numbers shown in parentheses): synthetic collateralized debt obligations (7), adjustable-rate mortgages (9), mutual funds (19), 401(k) plans (29), certificates of deposit (31), real estate investments (33), gold and other precious metals (35), savings accounts (41), traditional whole life policies (44), buy term life insurance and invest the difference (60), equity indexed universal life policies (66), individual retirement accounts (104), paying off home mortgages (162), 529 college plans (174), uniform gifts and transfers to minors (176), student loans (177), and annuities (227).

The Bank on Yourself Plan

As I went through the book, I kept looking for a description of the Bank on Yourself plan. Sprinkled throughout are brief descriptions hinting that the plan is based on some form of life insurance. Not until near the end of the book (pages 255-257) did I find anything close to a detailed description. It begins with this paragraph:

Out of approximately 1,000 life insurance companies, we've found only a handful that offer policies that meet all four requirements needed to maximize the power of the Bank on Yourself concept. When your plan is designed by one of the 200 Bank on Yourself Authorized Advisors, they recommend companies that have the following features and advantages:

The first feature is that the company must offer dividend-paying whole life policies. Also, the company must have paid dividends to policyholders every year for at least the last 100 years. It is not clear how anyone can verify the payment of dividends for at least a century.

The second feature is that the company must not use direct recognition. That means the company pays the same dividends whether the policyholder has or has not taken out a policy loan.

The third feature is that the company must offer a paid-up additions rider (PUAR). Yellen says the authorized advisor's commission "is typically 50-70 percent lower than with a traditionally designed policy." She also says: "At least 50 percent of your premium will typically be directed into this [PUAR] rider." I think commissions on amounts deposited into PUARs are substantially smaller than commissions on premiums for whole life, especially in the first policy year. Therefore the total commission would be smaller than the commission that would have been paid if the entire premium had gone into the whole life base policy.

The fourth feature is that the company must be among the financially strongest in the country. That determination must be made based on financial strength ratings assigned to the company by several independent rating agencies. I will have more to say on this subject later.

Yellen's plan seems to contemplate frequent and large policy loans to make major purchases. For that reason, it is strange that she says nothing about the policy loan clause. Thus she does not say whether the policy loan interest rate should be fixed or variable, what the rate should be if it is a fixed rate, or, if it is a variable rate, how the rate should be determined and what the maximum rate should be.

Accessing Yellen's System

Yellen does not publish a list of life insurance companies that meet her criteria. She says she is an educator, not a financial advisor, and therefore is prohibited from naming specific companies. She does not say whether she is a licensed insurance agent. She says developing a plan for the client is the job of an "Authorized Bank on Yourself Advisor." In other words, only an authorized advisor, who presumably is trained by her, is allowed to design a customized plan for the client.

Nor does Yellen publish a list of Bank on Yourself authorized advisors. In other words, the only way a client may access the Bank on Yourself plan is to contact Yellen, who will refer an authorized advisor to the client. Thus Yellen is operating what amounts to a closed system for accessing the Bank on Yourself plan.

The Lafayette Life Connection

Allan S. Roth is a certified financial planner and a certified public accountant. He has worked as a public accountant with KPMG, and has been with McKinsey & Company, Kaiser Permanente, and Wellpoint. Recently I saw an article by Roth entitled "Bestselling book's financial promises don't add up." On December 11, 2012, CBS News posted Roth's article, which was about Yellen's first book. Roth said in his article that he had met with a Yellen authorized advisor, who had made a presentation. Roth further said in his article that he had tried hard but had not been able to make sense of the numbers in the presentation. Roth said in his article that the authorized advisor's presentation had been based on a policy offered by The Lafayette Life Insurance Company, and that he (Roth) had been in touch with Lafayette Life about the presentation.

Mutual Holding Companies

Lafayette Life, which was established in 1905, is now part of Cincinnati-based Western & Southern Financial Group, a mutual holding company organization. I have written extensively about mutual holding companies. My first article on the subject, entitled "General American and the Mutual Holding Company Concept," was in the March 1997 issue of The Insurance Forum, the monthly newsletter I published from January 1974 through December 2013. Another article on the subject, entitled "Democracy at Provident Mutual—A Case Study in the Suppression of Communication among Policyowners," was in the May 1998 issue of the Forum. Both articles are in the complimentary package offered at the end of this post.

My Correspondence with Lafayette Life

On June 21, 2019, I sent a letter by regular mail to Bryan Chalmer Dunn, the president and chief executive officer of Lafayette Life. I asked several questions about the relationship between Yellen and Lafayette Life. I asked for a response by the close of business on June 28.

On June 27, I received a telephone call from Diane E. Planck, senior media relations specialist at Western & Southern, acknowledging receipt of the letter and asking for an extension. We agreed to extend the response date to the close of business on July 2. She graciously responded by email at the promised time. My letter and her email are shown later in this post.

Planck did not number her answers to correspond to my numbered questions. She did not answer the first question; I think the answer is yes, based on the previously mentioned Roth article. She answered the other questions directly or indirectly.

Planck's discussion of policy loan interest rates was helpful. She said the policy loan interest rate is variable, and is the larger of 5 percent or the "monthly average of the composite yield on seasoned corporate bonds" published by Moody's. I checked Moody's website and found that the averages were 4.08 percent for May 2019 and 3.89 percent for June 2019. Thus it appears that Lafayette Life's variable policy loan interest rate in those months was 5 percent.

Financial Strength

Lafayette Life's financial strength ratings as of September 18, 2018 were A+ (superior) from A. M. Best, AA– (very strong) from Standard & Poor's, and AA (very strong) from Fitch. For many years I published special ratings issues of the Forum. In the final years of the Forum, I deployed a system I had developed for using the ratings assigned by the major rating firms to classify life-health insurance companies, from the standpoint of financial strength, as suitable for "extremely conservative consumers" (category 1), for "very conservative consumers" (categories 1 and 2 combined), and for "conservative consumers" (categories 1, 2, and 3 combined). In the last of the special ratings issues—the September 2013 issue—I listed 19 companies for "extremely conservative consumers," 38 companies for "very conservative consumers," and 157 companies for "conservative consumers." Lafayette Life and two other Western & Southern companies were among the 38 companies for "very conservative consumers." Five pages of the 32-page September 2013 special ratings issue, including a description of the system and the names of the companies in each of the three categories, are in the complimentary package offered at the end of this post.

Text of June 21 Letter from Belth to Dunn

By way of introduction, I am professor emeritus of insurance in the Kelley School of Business at Indiana University (Bloomington). I am also a blogger at josephmbelth.com. For further information, please click "Bio" on the home page of my blog site.

Pamela Yellen wrote a 2016 book entitled The Bank on Yourself Revolution. She also wrote a 2009 book entitled Bank on Yourself. This letter relates to the 2016 book.

Ms. Yellen says on page 255 that there are only a handful of life insurance companies that meet the requirements needed to maximize the power of her Bank on Yourself concept. She does not identify the companies, but I saw an article on CBS News indicating that Lafayette Life is one of the companies. I am working on a blog post about her system, and have a few questions for you.

1. Are you familiar with Ms. Yellen's book?
2. Ms. Yellen says on pages 255-257 that the recommended companies issue a participating whole life policy with a paid-up additions rider and do not use direct recognition. Do you offer such a policy?
3. Ms. Yellen does not mention the nature of the policy loan clause. What is your policy loan interest rate, and is it a fixed rate or a variable rate? If it is a variable rate, what is the maximum rate?
4. Ms. Yellen says the recommended companies must have high ratings from several independent rating agencies. What are your current ratings by A. M. Best, Standard & Poor's, Moody's Investors Service, and Fitch?
5. Ms. Yellen says on page 250 that there are about 200 authorized advisors across the U.S. and Canada. She does not identify them, but a person interested in her system may contact her, and she will refer an authorized advisor to that person. Are you aware of any of your agents who are authorized advisors for her system? If so, how many are you aware of?
6. If your answer to the first part of (5) is yes, do you approve of their use of Ms. Yellen's system?

I need your reply to this letter by the close of business on Friday, June 28. Please send your reply by email to [my personal email address]. If you would like to speak with me, my direct telephone number is 000-000-0000, and I am on Eastern time. Thank you for your assistance.

Text of July 2 Email from Planck to Belth

Thank you again for contacting Lafayette Life concerning your upcoming blog. We share your passion for the life insurance industry and the important role insurance carriers have in providing products that help people with their financial security.

Information on our most current financial strength ratings (Lafayette is not rated by Moody's) and products (and if they are dividend paying) is available in detail at Lafayette Life's website.

The Lafayette Life Insurance Company is committed to offering people in the markets we serve a wide range of life insurance and annuity products to help meet their growing and increasingly diverse set of financial needs. Our product offerings include a dividend-paying whole life policy with a paid-up additions rider. All dividend-paying whole life policies from Lafayette Life are non-direct recognition, which means the dividend credited to the policy will be the same whether there is a loan or not. The loan interest we charge is the greater of 5% or the monthly average of the composite yield on seasoned corporate bonds as published by Moody's Investors Service, Inc., or any successor to that service.

Lafayette Life's products are sold through independent agents and independent marketing organizations. Our role is limited to providing life insurance policies and annuity contracts. We do not endorse or sponsor any selling system nor do we develop, advertise or promote the marketing content or materials for any selling system. We do not inquire about, attempt to determine, or identify in our systems whether any independent agents appointed to sell our products are users of any specific selling system.

Please be assured that Lafayette Life makes it clear through our contracts with those selling our products and disclosures to our customers that our life insurance policies and annuity contracts are insurance products.

I believe this addresses the questions you raised. Please let me know if you need anything else.

General Observations

Lafayette Life appears to take no interest in or responsibility for the methods used by the independent agents who sell its policies. Further, I think the same can be said about many if not all other companies that sell their policies through independent agents. In my opinion, this is a matter of serious concern, for two reasons. First, sales methods may be deceptive, misleading, or otherwise unfair to consumers. Second, companies and state insurance regulators may find it difficult to police the sales methods used in the field by independent agents.

I was not able to find anywhere in Yellen's book a detailed description of her Bank on Yourself system. I think, but cannot be certain, that she recommends clients purchase automobiles and make other major expenditures by taking out loans against life insurance policies and later repaying the policy loans. I think she is saying the procedure will build the client's wealth far more rapidly and safely than any other conceivable system. I do not believe it. Until such time as she illustrates the numbers in detail, I will continue refusing to believe it.

Available Material

I am offering a complimentary 19-page PDF consisting of an article in the March 1997 issue of the Forum (6 pages), an article in the May 1998 issue (8 pages), and an excerpt from the September 2013 issue (5 pages). Email jmbelth@gmail.com and ask for the July 2019 package about the Yellen system.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 321: TIAA Is Exiting the Life Insurance Business

On June 26, 2019, Investment News carried an article by reporter Greg Iacurci disclosing that Teachers Insurance and Annuity Association of America (TIAA) is exiting the life insurance business at the end of 2019. The article quotes an industry observer as saying: "Part of the reason they're getting out is because they're not selling enough." Here I discuss this important development.

TIAA's Comments

The Iacurci article alludes to a June 25 memorandum from Dennis Rupp, TIAA's director of insurance wholesaling. I asked the TIAA media office for the Rupp memorandum, but did not receive it. Instead, I received a June 28 letter from Todd Sagmoe, TIAA's vice president of product management. He said:

Thank you for your inquiry into the recent TIAA decision to stop issuing new life insurance contracts. I can confirm that TIAA will no longer underwrite and issue new life insurance contracts. Here is the public response that TIAA has prepared: "While life insurance is a key component of our holistic approach to financial wellness, we have decided to stop underwriting new life insurance policies. To enhance our operational efficiency, we will offer a variety of solutions from other carefully selected providers to meet our customers' life insurance needs. We will maintain and continue to service existing policies to ensure a high-quality customer experience."

The Examination Reports

TIAA and its subsidiary, TIAA-CREF Life Insurance Company, are domiciled in New York. The most recent examination reports of the two companies by the New York State Department of Financial Services are as of December 31, 2013, and are dated June 10, 2015. The TIAA report says it "ceased issuing life insurance policies in 2005." However, I think TIAA-CREF Life continued issuing life insurance policies. Selected pages of the two examination reports are in the complimentary package offered at the end of this post.

The Life Insurance Price Issue

Long-time readers know that I conducted many studies of the price of life insurance protection from the viewpoint of the policyholder, and that I recommended a system for disclosing the information to consumers. Because of strong opposition from the life insurance business, my recommended disclosure system was not adopted. I described the system in an article entitled "Information Disclosure to the Life Insurance Consumer" in the December 1975 issue of the Drake Law Review. The article is in the complimentary package offered at the end of this post.

In the course of my research in the 1960s and 1970s, I became aware of a "lifetime" (whole life) policy issued by TIAA in 1965 to a man aged 35. The policy included the usual premium provision, fractional premium options, grace period and reinstatement clauses, a table of cash values, reduced paid-up insurance and extended term insurance, a loan clause with a fixed annual interest rate of 5 percent, an automatic premium loan clause, an ownership clause, an entire contract clause, two-year incontestability and suicide clauses, a reserve provision based on the 1958 C.S.O. mortality table and 2.5 percent interest, beneficiary provisions, settlement options, and a waiver-of-premium clause. The policy was "non-participating," but TIAA mailed to the policyholder each year a check representing a "voluntary dividend." No dividend options were available other than the cash option.

When I examined the price structure of the policy, I found that the price of the life insurance protection from the viewpoint of the policyholder, including the effect of the "voluntary dividends," was well below the price of the life insurance protection in any other policy I had seen. One explanation may have been that TIAA employed no agents, and instead sold directly to its narrow constituency—the faculty and senior administrative staff of colleges and universities. Another explanation may have been TIAA's reportedly stringent underwriting practices.

The LTC Insurance Incident

In November 2003, TIAA notified its then 46,000 long-term care (LTC) insurance policyholders that it was exiting the LTC insurance business and transferring its LTC insurance policyholders to Metropolitan Life Insurance Company. Because both companies were domiciled in New York, the transfer was subject to the approval of the person who is now the superintendent of financial services. On February 3, 2004, I submitted to the superintendent a "Statement of Joseph M. Belth on TIAA Transfer to MetLife" showing, among other things, five matters that should be conditions for approval of the transfer.

The LTC insurance incident led to three major articles in The Insurance Forum, my monthly newsletter. The first article, which was in the March/April 2004 issue, was entitled "TIAA's Surprising Exit from the Long-Term Care Insurance Business." The article included my statement to the superintendent, and is in the complimentary package offered at the end of this post.

General Observations
When TIAA exited the LTC insurance business in 2003 and sought to transfer its obligations to another insurance company, I had been writing since 1989 about the widespread practice of insurance companies seeking to shed their obligations to their policyholders.  I had deep respect for TIAA, and was disappointed to see it engage in that anti-policyholder activity.  Many of my academic colleagues felt the same way.

I interpret the Sagmoe letter as saying TIAA will not attempt to transfer its life insurance obligations to another company. Instead, I think TIAA will honor its obligations to its life insurance policyholders, and will run off its existing life insurance policies over many years. If my interpretation is incorrect, and TIAA moves to transfer its life insurance obligations to another company, I will report developments.

Available Material

I am offering a complimentary 51-page PDF consisting of selected pages from the latest TIAA and TIAA-CREF Life examination reports (21 pages), the 1975 Drake Law Review article (26 pages), and the March/April 2004 Forum article (4 pages). Email jmbelth@gmail.com and ask for the July 2019 package about TIAA.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 320: Greg Lindberg—The North Carolina Department of Insurance Places Four of His Companies in Rehabilitation

On Thursday, June 27, 2019, four documents relating to Greg Lindberg's insurance companies were filed in a state court in North Carolina. The documents, which are in the complimentary package offered at the end of this post, were filed between 1:17 and 1:48 that afternoon. At 2:48, reporters Leslie Scism and Mark Maremont of The Wall Street Journal posted an article entitled "North Carolina Regulators Seize Control of Life Insurers Owned by Greg Lindberg." They posted an updated version at 6:17. Here I discuss the developments and mention briefly what is happening in a related federal criminal case.

The Verified Petition

One state court document is a "Verified Petition for an Order of Rehabilitation, and Order Appointing Receiver, and Injunctive Relief." The petitioner is Mike Causey, the North Carolina commissioner of insurance. The respondents are Southland National Insurance Corporation, Southland National Reinsurance Corporation, Bankers Life Insurance Company, and Colorado Bankers Life Insurance Company. The respondents are licensed in North Carolina, their principal place of business is in Durham, North Carolina, and Lindberg is the controlling shareholder.

The petition says the commissioner was concerned about the respondents' liquidity. On October 18, 2018, the commissioner and the respondents entered into a consent order for administrative supervision for 120 days. On February 5, 2019, they entered into an amended consent order for administrative supervision for an additional 120 days. On April 4, 2019, they entered into a second amended consent order for administrative supervision, and agreed that appointment of a receiver was necessary for the protection of the respondents' policyholders. The commissioner asked the court to enter an order of rehabilitation naming him the rehabilitator.

The Rehabilitation Order

Another state court document is an "Order of Rehabilitation, Order Appointing Receiver, and Order Granting Injunctive Relief." Senior Resident Wake County Court Judge Paul Ridgeway appointed the commissioner as the rehabilitator and the receiver, issued an injunction against interference with the rehabilitation, and required the rehabilitator to provide quarterly reports to the court.

The Moratorium Motion

Another state court document is a "Motion for Moratorium on Policy Surrenders and Other Relief." The North Carolina attorney general's office asked the court to issue an order granting a moratorium on cash surrenders, annuitizations, and policy loans, and ordering development of a plan for policyholders with legitimate hardship claims.

The Moratorium Order

Another state court document is an "Order Granting Motion for Moratorium on Policy Surrenders and Other Relief." Judge Ridgeway granted the motion and ordered the rehabilitator to adopt a moratorium and implement a policy for legitimate hardship claims.

Secrecy of the Consent Orders

When I asked the North Carolina Department of Insurance for the state court documents, a spokesperson provided them promptly. When I saw them, I requested the three consent orders referred to in the verified petition. The spokesperson said the consent orders are confidential pursuant to Section 58-30-70 of the North Carolina General Statutes. That section reads:

Confidentiality of hearings. In all proceedings and judicial reviews thereof under G.S. 58-30-60 and G.S. 58-30-65, all records of the insurer, other documents, and all Department files and Court records and papers, insofar as they pertain to or are part of the records of the proceedings, shall be and remain confidential except as necessary to obtain compliance therewith, unless the Court, after hearing arguments from the parties in chambers, orders otherwise; or unless the insurer requests that the matter be made public. Until such Court order, all papers filed with the clerk of the Court shall be held by him in a confidential file.

The section does not mention consent orders, and I do not recall any consent order being deemed confidential. I do not plan to appeal the denial. However, I would welcome comments from readers with legal experience in freedom-of-information matters.

The Federal Criminal Case

In No. 309 (April 17, 2019), I posted an item about a federal grand jury indictment of Greg Lindberg and three others for criminal wrongdoing. On April 2, the court unsealed the indictment. On April 3, a docket call was set for July 1. On May 2, the docket call was reset to July 15. Initially the case was assigned to District Judge Max O. Cogburn, Jr. On June 17, the case was reassigned to District Judge Kenneth D. Bell. On June 27, the case was reassigned back to Judge Cogburn and the docket call was reset to September 16. (See U.S.A. v. Lindberg, U.S. District Court, Western District of North Carolina, Case No. 5-19-cr-22.)

General Observations

I plan to follow developments in the rehabilitation proceedings related to Lindberg's insurance companies, and in the proceedings related to the federal criminal case against Lindberg and three others. I anticipate that the proceedings will be lengthy.

Available Material

I am offering a complimentary 46-page PDF consisting of the verified petition (25 pages), the rehabilitation order (9 pages), the moratorium motion (7 pages), and the moratorium order (5 pages). Email jmbelth@gmail.com and ask for the July 2019 Lindberg package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com