Wednesday, January 29, 2014

No. 26: The Unsealing of Court Documents Relating to Phoenix's Cost-of-Insurance Increases

A federal judge recently ordered the unsealing of many court documents in several lawsuits over cost-of-insurance (COI) increases imposed on certain policyholders by Phoenix Life Insurance Company and its affiliate, PHL Variable Insurance Company (collectively, "Phoenix"). I have been trying for a long time, with little success, to obtain various documents under state open records laws. Now, at last, many of the documents are in the public domain.

Background
In 2010, Phoenix significantly increased COI charges on universal life policies of the type used in stranger-originated life insurance (STOLI) arrangements. To accomplish the increase, Phoenix created a separate class consisting of policies with face amounts of $1 million and up issued to insureds aged 68 and up. STOLI investors invariably pay as little premium as possible. Consequently, the policies do not develop any accumulation value. In 2011, after an investigation that arose from complaints by STOLI investors, what is now the New York Department of Financial Services directed Phoenix to rescind the 2010 increases on policies issued in New York, credit the refunds to the policies with interest, and refrain in the future from basing COI charges on the ratio of accumulation value to face amount (the "funding ratio"). Phoenix did as directed, and then instituted fresh increases (the "2011 increases") on New York policies using a different methodology. Phoenix maintained the 2010 increases on policies issued in other states.

STOLI investors filed several lawsuits in federal courts. Also, in addition to the New York investigation, regulators in Wisconsin and California initiated investigations after receiving complaints from STOLI investors. I obtained some documents from Wisconsin pursuant to its open records law. However, I was frustrated by sealed documents in the lawsuits, a denial of my open records request to California, and what is now a 17-month delay on my August 2012 open records request to New York. I wrote about Phoenix's COI increases in the October 2012, December 2012, and November 2013 issues of The Insurance Forum, and in blog post No. 9.

The Unsealing Order
U.S. District Judge Colleen McMahon of the Southern District of New York is handling four of the lawsuits. Until recently, the parties filed many documents under seal pursuant to protective orders. The cases are Fleisher v. Phoenix Life (11-cv-8405), Tiger Capital v. PHL (12-cv-2939), and two U.S. Bank N.A. v. PHL cases (12-cv-6811 and 13-cv-1580).

On January 15, 2014, Judge McMahon ordered that one category of material and one exhibit should remain under seal. She also said:
All other material filed in support of or in opposition to the pending motions for summary judgment must be publicly filed. Defendant's [Phoenix's] argument for why these materials—which consist almost entirely of outdated business information from more than five years ago—should be filed under seal is utterly unpersuasive.
Appropriate filings shall be made within three business days. The Clerk of the Court shall remove ALL pending motions (whether noticed motions or letter motions) seeking permission to file materials under seal from the court's list of outstanding motions. This constitutes the decision and order of the court.
The Unsealed Documents
A few of the newly unsealed documents are discussed here. They are listed chronologically. I edited some direct quotes for spelling, grammar, consistency, and readability. Brackets denote my comments.

New York Letter to Phoenix
On September 6, 2011, Michael Maffei, chief of the life bureau in the New York department, wrote a three-page letter to Kathleen A. McGah, vice president and counsel at Phoenix. He directed the company to rescind the 2010 increases, credit the refunds to the policies with interest, and refrain in the future from basing COI charges on the funding ratio. I obtained this letter earlier, and discussed it in blog post No. 9.

Phoenix Letter to New York
On November 15, 2011, McGah wrote an 11-page "inadmissible, confidential settlement communication" to Maffei in response to his September 6 letter. She explained why Phoenix believes that the 2010 increases did not violate New York law and were permitted by the policies. "However, to avoid the costs and uncertainty of administrative or adjudicatory action," Phoenix offered to "undo" the 2010 increases, credit the refunds to the policies with interest, and implement the 2011 increases as described in an October 21, 2011 letter. I have not seen the October 21 letter, but I saw an earlier letter saying the 2011 increases would be "applied as a level percentage to the current COI rate."

Another New York Letter to Phoenix
On November 16, 2011, Maffei wrote a one-page letter to McGah. He acknowledged that Phoenix does not agree with the department's September 6 determination. "Without prejudice to the Department's position," he said the department accepts the plan described in McGah's November 15 letter, and "we are closing our file."

Phoenix "Talking Points"
Phoenix prepared a five-page "Talking Points and Q&A" dated November 18, 2011 and effective January 1, 2012. Here are some of the talking points:
  • Phoenix resolved the 2010 increases on a small number of policies and is moving forward with a different methodology that the New York Department finds acceptable. 
  • Phoenix is reversing the 2010 increases for certain New York policies and applying different increases beginning January 1, 2012. [I call the "different increases" the "2011 increases" because Phoenix sent notification letters to policyholders in September 2011.] 
  • Phoenix continues to believe that the original methodology for the 2010 increases is consistent with the policy provisions, actuarially sound, fair and equitable, and in compliance with state laws and regulations. [Phoenix's position differs totally from that of insurance regulators in New York, Wisconsin, and California.] 
  • The change applies only to policies issued by Phoenix Life (sold in New York). It does not apply to policies issued by PHL (sold in other states). 
  • The 2011 increases will not vary based on the ratio of accumulation value to face amount but rather will apply as a level percentage to all policies subject to increases. [Prior to the recent unsealing of documents, I had not seen any reference to the methodology for the 2011 increases.]
Phoenix Letter to Wisconsin
On August 1, 2012, McGah wrote an eight-page letter to Janelle V. Dvorak, an insurance examiner in the Wisconsin Office of the Commissioner of Insurance. The letter was in response to a July 9, 2012 letter from Dvorak to Robert P. Mallick, second vice president and counsel at Phoenix.

I have not seen the Dvorak letter. However, the McGah letter describes the Dvorak letter, provides background and analysis, lists six questions Dvorak asked, and answers the questions. I think this sentence in the McGah letter warrants close attention:
PHL's use of the relationship between accumulation value and face amount (i.e., the net amount at risk) under a policy was in accordance with policy terms, as policy form 05PAUL identified "Net Amount at Risk" as a factor in determining the COI rates. ["05PAUL" is the "Phoenix Accumulator Universal Life" policy form that was introduced in 2005.]
The net amount at risk is the face amount minus the accumulation value, and the COI charge is the net amount at risk multiplied by the COI rate. However, that "relationship" is not the one Phoenix used in the 2010 increases. Rather, Phoenix based the 2010 increases on the ratio of the accumulation value to the face amount.

Wisconsin Letter to Phoenix
On December 4, 2012, Robin Jacobs, an attorney in the Wisconsin commissioner's office, wrote a three-page letter to McGah explaining why the 2010 increases are "inconsistent with Wisconsin insurance statutes and regulations, as both the policy and the advertising materials fail to sufficiently inform the consumer that actual premiums paid will impact PHL's charge for COI." Jacobs "requests" that Phoenix rescind the COI increase, credit the refunds to the policies, and refrain from imposing future increases that are inconsistent with Wisconsin insurance laws. Jacobs does not use the word "demands," and the word "requests" in the letter is underlined by hand, presumably by someone at Phoenix. As I reported in the November 2013 issue of The Insurance Forum, Phoenix denied the allegations and did not rescind the increases on Wisconsin policies. Wisconsin began an administrative proceeding. The administrative law judge ordered all pleadings to be filed by November 11, 2013, and scheduled a two-day hearing for March 24-25, 2014.

California Letter to Phoenix
On June 21, 2013, Fernando De La Merced, a senior insurance compliance officer in the California Department of Insurance, wrote a two-page letter to Mallick. De La Merced said a complaint the department had received "is justified because the COI rate increase is unfairly discriminatory in violation of California Insurance Code section 790.03f" and "the rate increase violates the express terms of the 05PAUL policy." De La Merced said Phoenix should rescind the increases and refrain from using the funding ratio in determining COI charges. Phoenix disagreed with the findings and did not rescind the increases on California policies. The department took no further action.

The Stern Report
On September 16, 2013, Larry N. Stern, FSA, MAAA, who was retained by the plaintiffs, submitted an 82-page "Expert Report." Here are two excerpts from the "Conclusions" section:
The methods used to determine the group of policies subjected to the COI rate increases, the basis for the need for the COI rate increases, and the methodology for imposing those COI rate increases were not "actuarially sound and fair"--words often used by Phoenix in communications internally and externally to regulators and policyholders. Since the entire block of PAUL policies exhibited different premium patterns from what Phoenix claimed was anticipated in original pricing, Phoenix should not have singled out the policies it subjected to the COI rate increases....
The COI rate increases were discriminatory and not applied uniformly for all insureds in the same class. The definition of "class" was not dependent on factors at issue but rather based on funding characteristics of policyholder behavior after issue. For the 2010 COI rate increases an individual policyholder could avoid being subjected to the COI rate increase by paying more premium. Thus at one point the individual was a member of the "class" and the next moment was not a member of the "class." The 2011 COI rate increases were targeted at those policyholders that were minimally funding, even though the policies had been designed for, and designed to be profitable in, the minimally-funding market and all policyholders had been granted the freedom under the policy to fund minimally. The use of the threshold method to determine which policy would experience a COI rate increase was discriminatory because the COI rate increase was not applied in a uniform manner to all insureds in the same class....
The Stern Rebuttal Report
On October 23, 2013, Stern submitted an eight-page "Rebuttal Expert Report" in response to an expert report by Douglas A. French, FSA, MAAA. I have not seen the report by French, who presumably was retained by the defendants.

Conclusion
Recently unsealed documents show that, for several years prior to the 2010 increases, Phoenix became increasingly concerned about the lack of profitability on universal life policies of $1 million and up issued to insureds aged 68 and up. STOLI investors invariably pay the minimum premiums necessary to cover mortality and expense charges. The policies therefore develop no accumulation value and have a zero funding ratio. That approach is called "ART funding" because universal life policies are thereby transformed into annual renewable term policies.

In 2010, Phoenix split the class of universal life policies, created a separate class of large policies issued on elderly insureds, and increased the COI charges substantially on the policies in the separate class. In 2011, in response to a demand by the New York department, Phoenix rescinded the increases for policies issued in New York, obtained the department's approval of 2011 increases using a different methodology, and maintained the 2010 increases on policies in other states despite findings by California and Wisconsin regulators that the 2010 increases were improper.

I am not surprised that regulators in New York, Wisconsin, and California found the 2010 increases improper. However, I am surprised that the New York department approved the 2011 increases. In my opinion, the 2010 increases and the 2011 increases are improper, because a company should not be allowed to split a class for pricing purposes years after the class is established.

It remains to be seen how Judge McMahon will rule on the parties' motions for summary judgment and what appeals arise from her rulings. I think the cases are far from resolution.

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Monday, January 27, 2014

No. 25: Recent Developments in the Neasham Case

I devoted the entire eight-page June 2012 issue of The Insurance Forum to the case of Glenn Neasham, a California agent who sold an Allianz annuity to an elderly woman in February 2008. An important issue in the case was whether the woman was suffering from dementia at the time of the sale.

The Conviction
In October 2011, after a ten-day trial in Lake County Superior Court, the jury found Neasham guilty of felony theft with respect to the property of an elder and dependent adult. The judge sentenced Neasham to 90 days in the county jail, and stayed the sentence pending appeal.

The Appeal
On October 8, 2013, a three-judge panel of the California Court of Appeal reversed the conviction. The ruling was prominently marked "Certified for Publication." In blog post No. 6, I identified one point on which I agreed with the panel, six points on which I disagreed, and three lessons to be learned from the case. In No. 8, I discussed three points raised by a reader.

The California Supreme Court
On November 14, 2013, the California Attorney General's office petitioned the California Supreme Court to review the appellate court ruling. On December 16, Neasham answered the petition. On December 24, the Attorney General's office replied to the answer.

On January 15, 2014, Chief Justice Tani Cantil-Sakauye of the California Supreme Court denied the petition for review and depublished the appellate ruling. Here is the full text:
The petition for review is denied. The Reporter of Decisions is directed not to publish in the Official Appellate Reports the opinion in the above entitled appeal filed October 8, 2013, which appears at 220 Cal. App. 4th 375. (Cal. Const., art. VI, section 14; rule 8.1125(c)(1), Cal. Rules of Court.)
An unpublished ruling is not usually cited as precedent in future cases. I think depublication of a ruling certified for publication by an appellate court is not common. I do not know the reason for depublication in this case.

General Observations
Contrary to reports in the insurance trade press, the California Supreme Court did not "uphold" the reversal of Neasham's conviction. Rather, it chose not to review the case. Furthermore, it took the intriguing step of depublishing the appellate court's ruling.

Neasham's agent license reportedly has been reinstated, and he can now try to rebuild his insurance business. I suspect he learned a great deal from his five-year harrowing and expensive experience. Further, I think his case serves as an important warning to agents that they must be diligent when selling life insurance and annuities to elderly prospects who may be suffering from dementia.

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Thursday, January 23, 2014

No. 24: Phoenix's Detailed January 2014 Filing with the SEC

On January 17, 2014, three days after Moody's Investors Service withdrew its ratings of The Phoenix Companies, Inc. (NYSE:PNX) and two operating subsidiaries (see my blog post No. 21), Phoenix filed a lengthy 8-K (material event) report with the Securities and Exchange Commission (SEC). The company reported on the restatement that caused the company to fall far behind in the filing of the parent's GAAP (generally accepted accounting principles) statements with the SEC and the subsidiaries' audited statutory statements. On the same day, the company issued a less detailed press release. The company announced
an unaudited estimated pre-tax decrease of $250 million to total stockholders' equity reported at June 30, 2012 as a result of its previously announced GAAP restatement. The decrease was primarily driven by a GAAP accounting requirement that the company record additional universal life reserves over the restatement period to cover expected losses that otherwise would have been recorded in future periods.
Phoenix said it expects to file its 10-K for 2012 with the SEC by March 31, 2014 and become a "timely SEC filer" with the filing of its 10-Q for the second quarter of 2014. The company said it is assessing its disclosure controls and procedures and internal control over financial reporting. The company said that, in its 10-K for 2012, it expects to report multiple material weaknesses in its internal controls.

Phoenix described its efforts to avoid having the New York Stock Exchange delist the company's stock. The company also described its efforts to obtain bondholder consents following violations of debt covenants caused by the delayed filings with the SEC.
 
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Monday, January 20, 2014

No. 23: The Nasty War over Governance at the NAIC

The late Robert E. Dineen was born in Syracuse, New York (where I was born), received his law degree at Syracuse University (my alma mater), and practiced in a Syracuse law firm. Later he served as Superintendent of the New York State Department of Insurance for seven years. He became a vice president of Northwestern Mutual in 1950, and its president in 1965. When he retired in 1968, he became a consultant to the National Association of Insurance Commissioners (NAIC). He created the first central office of the NAIC, in Milwaukee. After his departure, the central office began a huge expansion, and later moved to Kansas City, Missouri. Dineen was a giant in the history of insurance in the U.S., and I think he would have been appalled by the nasty governance war now engulfing the NAIC.

A Little History
State regulation of insurance in the U.S. is the result of an historical accident. Elizur Wright lived in Boston. Therefore, when he began his push for an insurance regulatory agency, he did so in Massachusetts. Once Massachusetts created an agency, New York State followed suit, and state regulation of insurance was off and running.

Each state created its own financial statement blanks for insurance companies to complete, and the differences among the statements were a headache for companies operating nationally. They pushed for federal regulation, but lost the battle in 1868 when the U.S. Supreme Court handed down its famously absurd decision in Paul v. Virginia that insurance was not commerce. The companies then pushed for creation of the National Convention of Insurance Commissioners (NCIC) to develop uniform statement blanks. The NCIC began operations in 1871, and the blanks it developed were called "convention blanks." In 1939 the NCIC changed its name to the NAIC. The Paul decision was finally reversed in 1944, in U.S. v. Southeastern Underwriters. The latter decision promptly led to the 1945 passage of the McCarran-Ferguson Act, which preserved state regulation.

Problems with the NAIC
To say that the post-Dineen NAIC has had major problems is a serious understatement. Here I mention four in which I was involved.

In 1978, the NAIC created an advisory committee on manipulation (I call it "actuarial manipulation" or "actuarial hanky panky"). The committee was created because of articles I wrote, but I was not invited to serve on the committee. Later, at my insistence, the committee was reconstituted and I became a member. The committee was dominated by its industry members, and nothing significant was accomplished. See the January 1985 issue of The Insurance Forum.

In 1980, the life insurance cost disclosure task force of the NAIC released a proposed new life insurance cost disclosure model regulation. The proposal and accompanying report were excellent. However, the industry attacked the proposal viciously, arranged for the two authors of the proposal to be fired by the NAIC, arranged for the commissioner who chaired the task force to be fired by his governor, and arranged for the report to be shelved. See the January 1981 issue of The Insurance Forum.

In 1985, I began a long struggle to obtain access to the secret results of the NAIC's Insurance Regulatory Information System (IRIS). It required several lawsuits, but eventually I obtained access to the data. Part of IRIS thereafter became available to the public. See the December 1987 issue of The Insurance Forum.

In 2002, the NAIC took action to end free and unrestricted public access to the financial statements of insurance companies. Prior to that time, the public always had access to the statements in the state insurance departments. The NAIC asked the states to allow it to take over the handling of the statements. Most states, led to believe that the NAIC would continue to make the statements freely available to the public, agreed to the change. Now I cannot get the statements without agreeing to restrictions imposed by the NAIC on use of the data. Because I refuse to sign any such agreement, I must obtain statements I need from confidential sources. See the October 2003 issue of The Insurance Forum.

The Leonardi Letter
On December 11, 2013, Connecticut Insurance Commissioner Thomas B. Leonardi wrote a blistering three-page letter to his fellow commissioners about NAIC governance issues. Here is the first paragraph:
"We have met the enemy and he is us!" This famous line from the comic strip Pogo aptly describes the current state of governance at the National Association of Insurance Commissioners. And it comes at a time when our national state-based system of regulation is under perhaps its most critical set of threats and challenges at home (with the ascent of the Federal Insurance Office and the growing regulatory authority of the Federal Reserve) and abroad (at the International Association of Insurance Supervisors and the Financial Stability Board). The recent decision by some of our leadership to decline an invitation to meet with the President of the United States on critical insurance matters was bad enough. But to immediately provide a copy to the national press of a misguided and irresponsible letter criticizing the decision to accept President Obama's invitation makes clear that, in spite of these external threats, the biggest challenge we face is the dysfunction in our own organization. To quote Commissioner Chaney [Mississippi]: "I am shocked and appalled to put it mildly at the reaction" and Commissioner Kreidler [Washington State]: "I am appalled and embarrassed for the NAIC. This could be so bad that it might be the pivotal point we later recognize that doomed state based regulation. Talk about a self inflicted wound!" If we cannot fix these governance issues, then others, including industry and the Federal Government, would be right to question whether we are up to the task of regulating the largest insurance market in the world.
Commissioner Leonardi discussed seven examples of the governance issues. They are under these subtitles: (1) the cult of the "imperial presidency," (2) the myth of the "officers' leadership" role, (3) elections, (4) leadership, (5) ultra vires actions, (6) cronyism, and (7) the lack of understanding of the role and responsibilities of a fiduciary.

A few days later, at a meeting of the NAIC's executive committee during the NAIC's December meeting, Commissioner Leonardi made a motion to hire an outside consulting firm to conduct a governance review of the NAIC. The executive committee rejected the motion and shut down debate on the issue. Many commissioners believe that a review is needed, but think the idea should first be considered by the NAIC's governance committee. To put it mildly, the NAIC is facing a mess.

General Observations
I think the NAIC does not have a governance problem. Rather, I think the NAIC lacks competent leadership. As partial evidence, consider the stupidity of rejecting an invitation to meet with the President of the United States. That action ranks up there with the decision to engage in political retaliation by creating massive traffic jams with a four-day closure of two traffic lanes at the New Jersey approach to the George Washington Bridge, the world's busiest bridge.

I am making Commissioner Leonardi's letter available as a complimentary PDF. Send an e-mail to jmbelth@gmail.com and ask for the Leonardi letter.
 
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Thursday, January 16, 2014

No. 22: A Devastating Setback for Life Partners

Life Partners, Inc. (Waco, TX) is an intermediary in the secondary market for life insurance policies and the operating subsidiary of Life Partners Holdings, Inc. (NASDAQ:LPHI). In January 2012, the Securities and Exchange Commission (SEC) filed a civil complaint against LPHI and others. The jury trial is set for January 27, 2014, before Senior U.S. District Judge James R. Nowlin. (SEC v. LPHI, U.S. District Court, Western District of Texas, Case No. 1:12-cv-33.)

In November 2013, an important development occurred when Judge Nowlin issued an Order denying LPHI's motion for partial summary judgment. Incorporated in the Order is a ruling that is devastating for LPHI and its officers.

Judge Nowlin's Order
On September 23, 2013, in the current SEC lawsuit against LPHI, the company filed a motion for partial summary judgment. Among other points, and in support of its argument that the court lacks jurisdiction in the case, LPHI asserted that its life settlements are not "securities" under federal securities laws. LPHI cited the infamous 1996 decision of the U.S. Court of Appeals for the D.C. Circuit in the case of SEC v. Life Partners. In that old ruling, a two-to-one decision by a three-judge panel, the D.C. Circuit held that LPHI's life settlements displayed most but not all the characteristics necessary for the life settlements to be deemed securities. The dissenting judge said the life settlements displayed all the necessary characteristics. On November 19, 2013, Judge Nowlin issued an Order denying LPHI's motion for partial summary judgment. He ruled, among other points, that LPHI's life settlements are securities. Here are excerpts:
Viatical Settlements are securities, and even if they are not, there is more than enough evidence to support Plaintiff's claim that Defendants made misleading statements to shareholders and the public that were material.
Defendants next argue that life settlements are not securities under federal securities laws. In support of this position, Defendants cite a single case from the D.C. Circuit. Although the 5th Circuit [encompassing Texas] has not yet directly addressed the question of whether viatical settlements are securities as defined by federal law, the holdings of the Court of Appeals for the D.C. Circuit are not binding upon this Court. Additionally, the thrust of persuasive authority cuts against the D.C. Circuit's 1996 opinion in SEC v. Life Partners....
While Defendants only cite to the D.C. Circuit's opinion in Life Partners, Defendants did not manage to cozen the Court into thinking that Life Partners is the only case on point. Indeed, since the D.C. Circuit handed down Life Partners, several other federal courts have subsequently examined the same question and declined to adopt the D.C. Circuit's position....
[Blogger's notes: Judge Nowlin cited the 2005 decision of the 11th Circuit in SEC v. Mutual Benefits and the 2004 decision of the Northern District of Ohio in Wuliger v. Christie. According to the 2003 edition of Merriam-Webster's Collegiate Dictionary, "cozen" means "to deceive, win over, or induce to do something by artful coaxing and wheedling or shrewd trickery."]
On November 21, 2013, LPHI filed a motion for reconsideration, again asserting that life settlements are not securities, and again citing the D.C. Circuit's 1996 decision. On December 3, 2013, when he denied the motion for reconsideration, Judge Nowlin again ruled that life settlements are securities, and again rejected the 1996 decision.

Delayed Disclosure
LPHI did not file an 8-K report to disclose Judge Nowlin's ruling. I follow LPHI's SEC filings, but did not become aware of the ruling until late December while reviewing recent documents in the current SEC lawsuit against LPHI. LPHI finally disclosed the ruling on January 14, 2014, in a discussion of the SEC lawsuit against LPHI in the "Legal Proceedings" section on page 26 of the 30-page 10-Q report for the quarter ended November 30, 2013. Here is the key sentence:
In denying defendants' motion for partial summary judgment, the court held that the life settlements facilitated by Life Partners, Inc. were securities under Federal Law, despite the fact that (i) Life Partners, Inc. is not a defendant in the case, (ii) the SEC did not allege or argue that the life settlements were securities, and (iii) the offer and sale of our stock is not at issue in the case.
LPHI should have stopped with the words "Federal Law," because the three points that follow are nonsense. First, LPHI and Life Partners are indistinguishable. Second, LPHI argued that its life settlements are not securities. Third, although it is not the major thrust of the case, possible insider trading of LPHI stock is an issue.

A similar recent incident illustrates, in LPHI's words, the significance of a ruling that life settlements are securities. On August 28, 2013, as reported in the November 2013 and December 2013 issues of The Insurance Forum, a Texas state appellate court ruled that "the viatical settlements sold by Life Partners are investment contracts, as a matter of law, under the Texas Security Act and meet the definition of 'security.'" LPHI disclosed that ruling more than two weeks later in an 8-K report filed on September 13, 2013. In that report, LPHI said it would appeal the decision, and also said:
Should the decision ever become final, it would result in a material adverse effect on our operations and require substantial changes in our business model.
I think Judge Nowlin's Order is even more significant than the state appellate court's ruling, because it opens up the possibility that LPHI and its officers could be charged with violations of federal securities laws. That is why I think Judge Nowlin's Order is devastating for LPHI and its officers.

LPHI's delayed disclosure of Judge Nowlin's Order is not only surprising but also ironic. In my blog post No. 15, I discussed a legal victory for LPHI, which the company disclosed immediately in an 8-K report. That is how I learned about it and was able to report on it quickly. LPHI apparently discloses good news immediately and delays disclosure of bad news.

Warnings about the Future
In the recent 10-Q report, LPHI sounded warnings about the significance of the SEC lawsuit against the firm and about a life settlements trust that is in default. These two items are in the "Risk Factors" section on page 27 and are followed by detailed explanations:
The SEC enforcement proceeding has profoundly affected our operations and caused substantial losses, which has adversely affected our working capital and liquidity. It is important that the proceeding is timely resolved in our favor.
We have invested in a life settlements trust, whose secured loan is in default. The resolution of the default could cause the loss of our investment and in possible claims against us.
The Dividend Situation
According to LPHI's June 2013 proxy statement, Brian D. Pardo, LPHI's chief executive officer and a defendant in the current SEC lawsuit against LPHI, beneficially owns slightly over half the outstanding shares (9.4 million out of 18.6 million). Other officers and directors together own 376,000 shares. Pardo Family Holdings Ltd. (PFH) owns all but 14,000 of Pardo's shares. The proxy statement says PFH is located in Waco, Texas. However, according to an August 2009 Form 4 (the most recent Statement of Changes in Beneficial Ownership) filed with the SEC, PFH is located in Gibraltar, a British overseas territory.

Although LPHI incurred net losses in nine of the last eleven quarters, and despite the company's precarious financial condition, the company has continued to pay dividends. Here are the details:

Quarter
Ended 		Net Income
(000)		 Dividend
(cents)
 
05/31/11 $ –874 20
08/31/11 –323 20
11/30/11 –1,083 20
02/29/12 –843 10
05/31/12 1,037 10
08/31/12 –1,849 10
11/30/12 –754 10
02/28/13 –1,311 10
05/31/13 1,677 5
08/31/13 –1,793 5
11/30/13 –939 5

For the eleven quarters combined, Pardo received dividends of about $11.75 million (9.4 million shares multiplied by $1.25 per share). That dwarfs the compensation he received for his services. According to the June 2013 proxy statement, he received total compensation of about $571,000 for the fiscal year ended February 28, 2013, $526,000 for 2012, and $1,080,000 for 2011.

As mentioned, LPHI's 10-Q report showing financial results for the quarter ended November 30, 2013 was filed on January 14, 2014. Nonetheless, in an 8-K report filed on December 17, 2013, LPHI announced a dividend of five cents per share (about $470,000 for Pardo) for that quarter.

My Recent Articles About Life Partners
My only previous article about the SEC's current lawsuit against LPHI is in the April 2012 issue of The Insurance Forum. Other recent articles about Life Partners are in the November 2012, December 2012, November 2013, and December 2013 issues.

Availability of Judge Nowlin's Order
Given the significance of Judge Nowlin's 21-page Order, I am making it available as a complimentary PDF. Send an e-mail to jmbelth@gmail.com and ask for Judge Nowlin's Order.

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Wednesday, January 15, 2014

No. 21: Moody's Withdraws Its Ratings of Phoenix

On January 14, 2014, Moody's Investors Service said it has withdrawn all the ratings it had assigned to The Phoenix Companies, Inc. (NYSE:PNX): the Caa1 senior unsecured debt rating of Phoenix, the Ba2 insurance financial strength ratings of Phoenix Life Insurance Company and PHL Variable Insurance Company, and the B1 debt rating of Phoenix Life's surplus notes. The ratings had been placed under review for possible downgrade on June 17, 2010. Moody's said:
Moody's has withdrawn the ratings because it believes it has insufficient or otherwise inadequate information to support the maintenance of the ratings.... Phoenix has been unable to file GAAP statements since the second quarter of 2012 due to a need to restate its GAAP financial statements for the years ended 2011, 2010, and 2009 and quarterly statements during 2011 and the first and second quarters of 2012.
Phoenix Life and PHL Variable hold A. M. Best financial strength ratings of B with a stable outlook (assigned August 28, 2013). They also hold Standard & Poor's financial strength ratings of BB– with a negative outlook (assigned February 12, 2013).

In 2009, Phoenix stopped providing Fitch Ratings with nonpublic information and ceased paying annual rating fees. Fitch continued to rate Phoenix based on public information until July 2013, when it withdrew all its ratings.

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Monday, January 13, 2014

No. 20: An Interesting Letter from a Reader

When I announced early in October 2013 that I was ending publication of The Insurance Forum, I offered subscribers back issues of their choice to meet my obligation for undelivered issues. I owed three issues to Robert H. Harmon, CLU, ChFC (Salt Lake City), a long-time subscriber and friend. He asked me to select the issues, which I did. I knew he had seen them when they were published a decade ago, but I also knew he would want to reread them. In response he sent this letter:
Thank you for the issues you sent. I thoroughly reread them. I admit, however, that rereading "Conseco's Assault on Universal Life Policyholders" in your December 2003 issue was like ripping off the scab of a previously healed wound! Your brilliant and thoroughly researched description of what Conseco did to its policyholders by eliminating the previously undisclosed "R-factor" brought back unhappy memories of what happened to many of my family members and cherished clients.
I thought I had done a remarkable job by selling more than 300 of those policies, which originally were issued by Massachusetts General and later were acquired by Conseco. In addition to meeting with fellow agents around the country, I had visited the Mass General home office, met with several members of top management, and was convinced I would be providing a great service by selling those policies to everyone I knew. It turned out to be the most heart wrenching experience of my business life. I eventually realized I had been betrayed in the worst possible way. I learned a lot from the experience, and since then I have been happy selling policies issued by reputable companies.
I began my life insurance sales career in 1956 after receiving an MBA from UCLA. Except for those unhappy years with Mass General and Conseco, this has been a great business. I am delighted to still be a part of it.
You have had a positive and strong influence on my business life. I am deeply grateful for the unique way in which you have been on the cutting edge of bringing news about what is really going on in our great industry.

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