On September 21, 2018, Richard F. Burkhart and four other individuals filed a class action lawsuit against Genworth Financial, Inc. (Genworth) and four affiliates relating to long-term care (LTC) insurance. The plaintiffs filed the lawsuit in state court in Delaware, where Genworth and several of its affiliates were organized. On January 29, 2019, according to the docket, the plaintiffs filed a confidential, unredacted version of an amended complaint, which I have not seen. On February 5, 2019, the plaintiffs filed a redacted version of the amended complaint, which I discuss in this post. (See Burkhart v. Genworth, Court of Chancery, State of Delaware, Case No. 2018-0691.)
The Parties
Three plaintiffs are Massachusetts residents and two are Connecticut residents. Three of them bought LTC insurance policies during the 2002-2004 period from General Electric Capital Assurance Company, a predecessor of Genworth Life Insurance Company (GLIC). One bought an LTC insurance policy in 2013 from GLIC. One is an agent who sold LTC insurance policies and other policies issued by GLIC. The defendants are Genworth, GLIC, and three other Genworth affiliates.
The Amended Complaint
The amended complaint describes how Genworth and its affiliates allegedly reduced GLIC's capital to the detriment of policyholders and agents. Here is the first paragraph of the introduction (the amended complaint is in the complimentary package offered at the end of this post):
This action challenges a deliberate, long-term scheme by defendant Genworth, an insurance holding company, and by its affiliated defendants, to bleed capital from GLIC, a wholly-owned insurance subsidiary of Genworth upon which over a million policyholders depend for long-term care insurance benefits in the event that they become disabled. This conduct has profoundly harmed and will continue to harm GLIC policyholders and the agents through whom such policyholders purchased insurance. Absent injunctive and other equitable relief, defendants' conduct will leave the policyholders at critical risk at the point in their lives when they have greatest need for the benefits provided by the policies.
The amended complaint describes how Genworth allegedly used fraudulent transfers to remove assets and capital support from GLIC for the benefit of other Genworth companies, shareholders, bondholders, and management, to the detriment of GLIC, its policyholders, and its agents. Among the allegedly fraudulent transfers are substantial dividends, the termination of a reinsurance transaction, and the proposed merger with China Oceanwide. The amended complaint includes four counts: (1) Intentional Fraudulent Transfer—Payment of GLIC Dividends, (2) Constructive Fraudulent Transfer—Payment of GLIC Dividends, (3) Intentional Fraudulent Transfer—Reinsurance Termination, and (4) Constructive Fraudulent Transfer—Reinsurance Termination. The plaintiffs seek, among other things, an unwinding of the reinsurance termination, an unwinding of the GLIC dividends, attorney fees, and costs.
The Redactions
The redactions are three paragraphs (24 lines) in the amended complaint. Here are four paragraphs preceding and four paragraphs following the redactions:
60. There is substantial evidence that was not known or discoverable by Plaintiffs at the time the GLIC dividends were paid that demonstrates that Genworth knew full well that GLIC's DLR [disabled life/claim reserve] was inadequate long before it corrected the DLR in November 2014 and again in 2016, and rather than correct the inaccuracies in the Statutory Financial Statements filed with the [Delaware] Department, Genworth suppressed the adverse information.
61. In January 2014, Genworth hired James Boyle as the CEO of its U.S. Life Insurance Division ("Division"), which included the long-term care business of GLIC. Shortly thereafter, Lynne Patterson was hired as the Division's interim CFO. In May 2014, Patterson began a review and investigation of the underlying actuarial assumptions for long-term care reserves.
62. On information and belief, in early June 2014, following a series of meetings with the actuaries involved in developing the reserves, Patterson discovered that the assumptions the actuaries were using to develop the reserves had been "back-fitted" to meet the demands of senior management and were unreliable. Boyle and Patterson shared their concerns with Genworth's CFO, Martin Klein, on June 16, 2014.
63. On July 16, 2014, Boyle advised Genworth's Audit Committee: that John Nigh, the Division's chief actuary, and Loida Abraham, a supervising actuary, had attempted to manipulate actuarial assumptions to reduce long-term care claim reserves; that Genworth's chief actuary, Robert Vrolyk, on June 6, 2014, had admitted to Boyle that based on independent work Vrolyk had performed, there may have been an error in Genworth's long-term care claim reserve calculations of as much as 20%, or approximately $500-600 million; that three in-house actuaries overseen by Patterson to prepare a new "clean-slate" estimate of long-term care claim reserves using actual claims experience had arrived at a claim reserve that was $800 million higher than previously stated; that assumptions underlying the long-term care claim reserve announced in December 2013 had not been properly peer-reviewed, and that the documentation needed to support the claim reserve announced in December 2013 was incomplete or missing; and that Boyle and Patterson were being isolated and that efforts were being made to slow down a final conclusion regarding the claim reserve's adequacy and amount. Those efforts included directions to Milliman, an independent actuarial firm that Genworth had retained, to eliminate its validation of the proposed $800 million claim reserve adjustment.
64. Five lines redacted.
65. Seven lines redacted.
66. Five lines redacted.
67. Seven lines redacted.
68. On information and belief, in or around mid-July 2014, Boyle gave a "red alert" warning to Genworth's Board of Directors.
69. Less than two weeks later, on July 28, 2014, Boyle and Patterson resigned, about six months after joining the company. Genworth issued a press release stating that Thomas J. McInerney, Genworth's CEO, would also assume the duties of CEO of the Division effective immediately.
70. Immediately following the resignation of Boyle and Patterson, on a July 30, 2014 investor conference call, McInerney, who was now CEO of both Genworth and the Division, revealed that Genworth would be conducting a detailed review of its DLR assumptions, methodology and process, and that changes to the assumptions for the DLR could be required as a result.
71. On November 6, 2014, Genworth's management disclosed during an earnings call with investors that the DLR for its long-term care policies had been understated by $589 million in the Statutory Financial Statements filed with the [Delaware] Department, resulting in a reserve restatement in that amount (the "2014 DLR Restatement"). During that call, Klein, Genworth's CFO, stated that approximately half of this overall increase in the DLR was attributable to "updating" assumptions regarding claim termination rates, including adjusting the average length of claim assumption to reflect Genworth's actual experience between 2010 and 2013, the period during which the GLIC Dividends were paid.
The Motion to Dismiss
On March 13, 2019, Genworth filed a motion to dismiss. Here is the first paragraph of the summary (the full motion to dismiss is in the complimentary package offered at the end of this post):The named plaintiffs in this purported nationwide class action are long term care ("LTC") insurance policyholders of defendant Genworth Life Insurance Company ("GLIC") and agents who sold LTC policies for GLIC. The policyholder Plaintiffs have been insured continuously since they bought their policies. Not one alleges to have ever made an LTC policy claim, let alone that a claim has gone unpaid. The agent Plaintiffs are compensated through commissions paid each time an annual premium is paid on an LTC policy they sold; they also do not allege that GLIC has ever failed to pay them a commission they are owed. Plaintiffs nonetheless ask this Court to reverse GLIC's payment of $410 million in dividends between 2012 and 2015 to its corporate shareholder parent and to unwind a 2016 merger of subsidiaries because, at some unspecified point in the distant future, GLIC might have insufficient assets to pay their possible LTC claims and commissions. Plaintiffs assert that these were fraudulent transfers of GLIC's assets to other Genworth affiliates. This action should be dismissed in its entirety because Plaintiffs fail to allege an actual or imminent injury sufficient to confer standing in this Court.
The Opposition to the Motion to Dismiss
On April 26, 2019, the plaintiffs filed an opposition to the motion to dismiss. Here is the first paragraph (the full opposition is in the complimentary package offered at the end of this post):
In their Motion to Dismiss, Defendants posit a classic Catch-22. They argue first that Plaintiffs sued too soon, because Defendant Genworth Life Insurance Company ("GLIC") has not (yet) defaulted on the relevant insurance policies. At the same time, Defendants argue Plaintiffs sued too late, because the challenged transfers cannot be avoided more than four years after they were made. That is, Plaintiffs must wait decades until they are infirm and GLIC collapses, at which point they will be told it is too late to avoid the challenged transfers. Catch-22. [Emphasis in original.]
The Reply to the Opposition to the Motion to Dismiss
On June 14, 2019, Genworth filed a reply to the opposition to the motion to dismiss. Here, without citations, is the first paragraph of the summary (the full reply is in the complimentary package offered at the end of this post):
Plaintiffs assert repeatedly that Defendants' 2012-2015 dividend payments and purported "Reinsurance Termination" caused them "injury," but Plaintiffs do not plead facts demonstrating that any such injury is actual or imminent. Their Answering Brief admits that "GLIC has not yet defaulted" on any obligations to Plaintiffs. Their Amended Complaint can only conclusorily [sic] speculate that GLIC "will likely become unable to pay its policyholders and agents in full" at some indeterminate point in the far future. And Plaintiffs also admit that "the maturity date and scope of any particular policyholder's claim is unknowable."
General Observations
Oral argument on Genworth's motion to dismiss is scheduled for October 21, 2019. It will be interesting to see the judge's ruling on the motion to dismiss.
With regard to the redactions in the amended complaint, they probably reflect Milliman's findings, which Milliman probably submitted to Genworth on a confidential basis. I have been through this before.
In 2008, when Conseco transferred its LTC insurance company to a trust that would own Senior Health Insurance Company of Pennsylvania (SHIP), Conseco told the Pennsylvania Insurance Department that Milliman had prepared a report saying the assets transferred would be sufficient to run off all of SHIP's LTC insurance business. I tried to obtain the Milliman report, but Conseco and the Department said it was confidential. As I reported in No. 308 (April 11, 2019), SHIP's liabilities of $2.653 billion at the end of 2018 exceeded its assets of $2.206 billion, leaving the company insolvent by $447 million. The deficit was $481 million as of March 31, 2019, and $496 million as of June 30, 2019. Many years remain before all of SHIP's LTC insurance business runs off.
As a layman—I am not an attorney—I read the documents in this case. In my opinion, the arguments advanced by the plaintiffs are stronger than those advanced by the defendants, although others who read the documents may feel differently. If the lawsuit survives the motion to dismiss, the case should be followed closely. However, like other such lawsuits, the case is likely to be settled before trial. I plan to report further developments.
Available Material
I am offering a complimentary 227-page PDF consisting of the amended complaint (65 pages), the motion to dismiss the amended complaint (60 pages), the opposition to the motion to dismiss the amended complaint (64 pages), and the reply to the opposition to the motion to dismiss the amended complaint (38 pages). Email jmbelth@gmail.com and ask for the October 2019 package relating to Burkhart v. Genworth.
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Email: jmbelth@gmail.com
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