Monday, May 12, 2014

No. 48: Florida's Pasco County School District and Its "Free" Life Insurance Plan Become Major News


In my post No. 43 published April 21, 2014, I discussed a "free" life insurance plan promoters are offering to Florida's Pasco County School District. My comments were based largely on an April 8 Tampa Bay Times article. On April 24, pursuant to Florida's public records law, I asked the district for all documents the promoters submitted about the plan. On April 30, I received more than 100 pages of documents relating to several school board meetings. On May 6, The Wall Street Journal carried an article by Leslie Scism entitled "Free Life-Insurance Offer Is Drawing Scrutiny." This follow-up posting is based largely on the documents I received.

Meeting on February 15, 2013
On February 15, 2013, Pollock Financial Group and Consolidated Insurance Group (CIG) made a presentation to the school board. The plan was entitled "TRiPeb's Trust-Owned Legacy Life Insurance Program." "TRiPeb" stands for "Trust-Owned Insurance for Post Employment Benefits." The presentation said the plan "adheres to all state insurance guidelines and regulations," and described the plan in these words:
A methodology, which is based on insurable interest between an employer and an employee or retiree, and utilizes trust-owned life insurance and premium financing to provide supplemental funding to aid local governments with their underfunded pension and health care liabilities.
The presentation included nine items. (1) "The Challenge Faced by the Nation and the District School Board of Pasco County" with data showing the financial problems of state and local governments in general and Pasco County in particular. (2) "How Have Corporations Addressed This Challenge?" showing logos of 27 large firms that use employer-owned or bank-owned life insurance. (3) "Key Features" of the plan, including (a) creation of a "funding trust" by the school board, (b) $250,000 of life insurance on each employee or retiree, (c) "premium financed" life insurance that requires no "out-of-pocket costs" for the school board or its employees, (d) borrowing by the trust to pay for the cost of insurance but with no liability for the school board or its employees, (e) half the $250,000 death benefit paid to the trust to cover financing costs, (f) $50,000 of the remaining death benefit paid to the employee's beneficiary, and (g) $75,000 paid to the school board toward underfunded liabilities and assistance with current and future benefit costs. (4) A projection, based on 5,000 covered employees, showing that the employees' beneficiaries will receive $250 million and the district will receive $375 million over the 55-year duration of the plan. (5) A chart of the plan's "Mechanics" showing the purchase of a $250,000 life insurance policy and a $125,000 annuity. (6) "The 5 Step Implementation Process." (7) "Members of the TRiPeb Team" consisting of Edward Netherland for overall strategy and firm execution, Mark G. Pollock and William Olive of Pollock Financial for sales and case management, Hutch Hutchison of CIG for firm oversight, structuring, and administration, Derek Siewert of ARX Insurance Advisors for carrier relations, William Kelly of VEBA Employee Benefits Advisors for enrollment, Wilmington Trust Company as trustee, and Thomas Weinberger of Stroock Stroock & Lavan for legal matters. (8) Descriptions of those firms and biographies of those individuals. (9) A one-page "Disclaimer."

Meeting on June 4, 2013
On June 4, 2013, Pollock Financial made a presentation with the same title used at the earlier meeting. There was a brief description of a board workshop that preceded the meeting. Guest speakers were Olive and Pollock. They presented information on the plan and described it as "an insurance product that has no cost or liability to the school board but has the potential to help fund shortfalls." The presentation at the meeting included documents similar to those presented at the earlier meeting, but there were four important differences. (1) The "TRiPeb Team" did not include Netherland. (2) There was a one-page discussion of "Insurable Interest." (3) The projection was based on $250,000 polices on each of 10,732 employees. (4) There was a four-page unsigned opinion letter dated June 3, 2013 from the Stroock firm addressed to the school board and Pollock Financial on the subject of "Life Insurance and Annuity Program." The letter described the plan and included a legal analysis of insurable interest. Here are two excerpts:
In connection with the program, the district will form a trust to acquire life insurance policies and annuities. The named insureds under the life insurance policies and the measuring lives for the related annuities would be the employees of the district. The trust will obtain financing from a third party to acquire the annuities and the income from the annuities will be used, in part, to pay the premiums due on the life insurance policies....
It is our opinion, based upon and subject to the factual descriptions, assumptions, qualifications, limitations and analysis in this opinion letter, if the question were properly presented and well argued, a court applying Florida law should find, under a proper interpretation of insurance law in Florida, that the trust has an insurable interest in the lives of the employees of the district.
The above opinion about insurable interest prompted me to look at Florida's insurable interest law (section 627.404). My impression is that promoters of exotic life insurance schemes have lobbied successfully to expand the definition of an acceptable insurable interest.

Meeting on September 17, 2013
On September 17, 2013, Pollock Financial made a presentation entitled "Legacy Trust Program: An Employee Benefits Funding Strategy." It contained documents similar to those presented at the two earlier meetings, but there were two important differences. (1) The projection was based on $350,000 life insurance policies on each of 8,962 employees. (2) The "Legacy Trust Program Team Members" did not include CIG or Wilmington Trust, but included Bermuda-based State House Trust as trustee, Alabama-based Regions Financial Corporation as trustee of another trust, and Germany-based Munich Re as a reinsurer.

Meeting on March 12, 2014
On March 12, 2014, Pollock Financial made a presentation entitled "Legacy Benefit Trust Program." It differed from the presentations at the three earlier meetings. It included "The Concept of Net Amount at Risk (NAAR)," "Three Funding Solutions," "Methodology for NAAR using third party funding," "Summary of How the Program Works," "Private Placement Variable Universal Life Insurance Overview" with a reference to coverage from "a highly rated insurance company," "Structural Overview," "Inception," "Distributions," "Illustrative Example—$100 Million Contribution" with examples of death benefit patterns, "Participants and Benefits," and a one-page "Disclosure." There was no mention of a "Team."

Meeting on April 15, 2014
On April 15, 2014, there was a board workshop followed by a board meeting. Four new items were presented. (1) A one-page memorandum to school board members from the school superintendent on the subject of "Legacy Trust Program." (2) A one-page "Statement of Intent" from Pollock Financial. (3) A one-page "Mitigation of Reputational Risk" describing what would happen if the funding of the plan should collapse or the insurance company should become insolvent. (4) A two-page sample letter to employees of the Pinellas County (Florida) Sheriff's Office; the letter said the office recently approved the TRiPeb plan, but it is my understanding that the office did not implement the plan.

The Florida Investigation
On April 21, 2014, Janice S. Davis, manager of market investigations in the Florida Office of Insurance Regulation (FLOIR), sent a two-page "official inquiry" to the district. She said the FLOIR is "seeking clarity" concerning the plan. She included a ten-point list of materials and asked the district to provide them by May 5. On May 1, the district sent the FLOIR a CD, which I have not yet reviewed.

General Observations
The documents I have seen contain many generalized comments but do not contain information of the type the school board needs to decide whether to implement the plan. For example, here are some of the matters on which the documents lack information:
  • Identity of the "highly rated" primary insurer that will issue privately placed variable universal life (PPVUL).
  • Identity of the securities licensee associated with the PPVUL. The Financial Industry Regulatory Authority's BrokerCheck lists Mark Gordon Pollock as not licensed.
  • Identity of the premium finance lenders.
  • Assumed premiums for the PPVUL.
  • Assumed mortality rates for the PPVUL.
  • Assumed interest rates for the PPVUL.
  • Assumed expense charges for the PPVUL.
  • Assumed premiums for the annuities.
  • Assumed payments from the annuities.
  • Assumed interest rates, origination fees, other costs, and loan terms for the funds borrowed from the premium finance lenders to pay the premiums.
  • Legal expenses for drafting the trust agreements and the other legal documents.
  • Sales commissions for the PPVUL.
  • Sales commissions for the annuities.
  • Trustee fees.
  • Administrative expenses, including the cost of tracking employees after they retire or otherwise end their employment by the district.
From the documents I have seen, it is impossible for the school board to know whether the plan can deliver the proposed benefits, or whether it is "too good to be true." For reasons explained in my post No. 43, I believe that the plan will collapse long before the end of its proposed 55-year duration, and that litigation over the plan is likely to occur. Therefore, I repeat the statement in my previous post: "My unsolicited advice to the district is to reject the plan."

I am offering a 14-page complimentary PDF consisting of the one-page "Disclaimer," the one-page discussion of "Insurable Interest," the four-page Stroock opinion letter, the one-page "Disclosure," the one-page memorandum to the school board from the school superintendent, the one-page "Statement of Intent" from Pollock Financial, the one-page "Mitigation of Reputational Risk," the two-page sample letter to employees of the Pinellas County Sheriff's Office, and the two-page letter to the district from the FLOIR. Send an e-mail to jmbelth@gmail.com and ask for the Pasco package.

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Monday, May 5, 2014

No. 47: Legal Expenses Incurred in 2013 by Ten Life Insurance Companies

In post No. 31 published February 17, 2014, I identified the law firms to which Phoenix Life Insurance Company paid large amounts in 2012. I was interested in Phoenix because of the huge amount of litigation in which the company has been involved relating to stranger-originated life insurance. In this follow-up, I show similar data for 2013 for ten large companies including Phoenix.

Schedule J
Legal expenses incurred by life insurance companies licensed to do business in New York are disclosed in detail in Schedule J of the New York Supplement to the statutory annual statement companies file with the New York Department of Financial Services (DFS). Schedule J for many years was part of the uniform annual statement blank the National Association of Insurance Commissioners (NAIC) promulgated each year. As discussed in my post No. 38, the NAIC eliminated the schedule from the blank several years ago. What is now DFS, however, retained the schedule as part of the New York Supplement to the NAIC blank.

Legal Expenses
By way of DFS's public portal, I obtained easy access to the Schedule Js for 2013 filed March 1, 2014. For ten large life insurance companies, I show here the name of each law firm or other payee that received at least $1 million from the company in 2013. For each insurance company, I list payees in descending order of amount received, and I also show the amount of Schedule J legal expenses paid to all others combined.

AXA Equitable Life Ins Co
Milbank Tweed Hadley & McCloy
6,495,265
DeBevoise & Plimpton
3,334,234
Mayer Brown
1,333,871
Epstein Becker & Green
1,027,128
Others
9,610,061
 
Guardian Life Ins Co of America 
Ogletree Deakins
1,285,530
McGuire Woods
1,069,017
Others
10,493,916
 
Massachusetts Mutual Life Ins Co 
Quinn Emanuel Urquhart & Sullivan
28,549,933
EPIQ Discovery Solutions
3,875,241
Perkins Coie
3,089,986
Sidley Austin
2,912,920
Bingham McCutchen
2,682,930
Skadden Arps Slate Meagher & Flom
2,390,738
Axiom Global
1,160,740
Alix Partners
1,003,654
Others
10,149,039
 
Metropolitan Life Ins Co 
Steptoe & Johnson
14,764,711
Skadden Arps Slate Meagher & Flom
7,217,245
CMS Cameron McKenna
2,979,988
Sidley Austin
2,837,920
Mayer Brown
2,705,394
Willkie Farr & Gallagher
2,388,804
DeBevoise & Plimpton
2,210,099
Sutherland Asbill & Brennan
2,043,426
Patton Boggs
2,041,108
Wachtel Lipton Rosen & Katz
2,000,000
Morgan Lewis & Bockius
1,836,011
Bradley Arant Boult Cummings
1,608,129
Kasowitz Benson Torres & Friedman
1,528,897
Barger & Wolen
1,493,375
Baker & McKenzie
1,492,722
Shutts & Bowen
1,423,614
Proskauer Rose
1,390,071
Others
27,730,483
 
New York Life Ins Co 
Sutherland Asbill & Brennan
1,579,274
Morgan Lewis & Bockius
1,534,219
Others
8,293,643
 
Northwestern Mutual Life Ins Co 
Bartlit Beck Herman Palenchar & Scott
3,271,007
Others
5,764,990
 
Phoenix Life Ins Co 
Edison McDowell & Hetherington
9,586,508
Carlton Fields Jorden Burt
6,982,328
Day Pitney
2,846,559
DeBevoise & Plimpton
1,425,158
Others
6,785,926
 
Principal Life Ins Co 
Sidley Austin
4,509,066
Analysis Group
1,169,345
Maynard Cooper & Gale
1,068,905
Morgan Lewis & Bockius
1,037,412
Others
7,500,973
 
Prudential Ins Co of America 
Seyfarth Shaw
6,514,446
Paul Weiss Rifkind Wharton & Garrison
5,530,234
DeBevoise & Plimpton
5,308,645
Sullivan & Cronwell
2,750,685
Goodwin Procter
2,726,099
O'Melveny & Myers
2,498,013
D'Arcambal Ousley & Cuyler Burk NJ
2,254,923
Alston & Bird
2,118,199
Clifford Chance
1,915,406
Sidley Austin
1,702,010
Nukk-Freeman & Cerra
1,657,198
Wilmer Hale
1,412,553
Mayer Brown
1,308,861
Meserve Mumper & Hughes
1,269,547
Drinker Biddle & Reath
1,100,966
McCarter & English
1,027,485
Others
22,084,429
 
Teachers Ins & Annuity Assn of America 
O'Melveny & Myers
4,300,060
DeBevoise & Plimpton
4,020,675
Others
5,879,238

General Observations
It would be interesting to see similar information for companies that are not licensed to do business in New York. That would have been possible if the NAIC had not removed Schedule J from the uniform annual statement blank.
 
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Monday, April 28, 2014

No. 46: Michigan's Department of Insurance Summarily Suspends an Agency and Two Agents

The Michigan Department of Insurance and Financial Services (DIFS) recently issued an order summarily suspending the licenses of Larson's Insurance Solution Agency, Inc. (Livonia, MI) and two members of the agency: Keith Larson, president, secretary, treasurer, and director of the agency; and Karen Larson. The agency was a licensed resident insurance producer agency and the two individuals were licensed resident insurance producers. The respondents were licensed in the lines of accident, health, property, casualty, life, and variable annuities.

The Order
On March 20, 2014, Chief Deputy Director Teri L. Morante of DIFS issued an "Order of Summary Suspension, Notice of Opportunity for Hearing, and Notice of Intent to Revoke." The order is directed at the Larson agency and the two Larsons.

In February 2014, after receiving a complaint alleging misconduct in the handling of customers' insurance transactions, DIFS began an investigation into the respondents' business activities. Here is one paragraph of the order:
DIFS' investigators found several transactions where Respondents submitted forged applications to a premium finance company using customers' information to obtain money for Respondents' personal and business use. Respondents have borrowed funds using customers' information for their own use and failed to repay the funds. Respondents have also exposed customers to liability for the borrowed funds, and have jeopardized the coverage provided under the customers' commercial liability policies.
An Illustrative Case
In November 2013, a Larson client had four policies scheduled to renew with Liberty Mutual Insurance Company. The account was set up to bill the client monthly for premiums to be paid by electronic funds transfer (EFT).

On November 27, 2013, an agent at the Larson agency completed and submitted a premium finance application to Prime Rate Premium Finance Corporation using the client's business and policy information. The client's signature was forged on the premium finance application. The agent asked for $18,411 to pay a portion of the premiums due on the client's policies. The client had no knowledge of the premium finance application. The client was making on-time payments to Liberty by EFT and did not need premium financing.

On December 5, 2013, Prime Rate, unaware of the forgery, sent the funds to the Larson agency's bank account, which was jointly owned and controlled by the two Larsons. Thereafter several withdrawals were made by the respondents to pay personal and business expenses. None of the money was used to pay premiums on the client's policies.

Other Cases
The order describes another case in December 2013 involving two premium finance applications to Prime Rate purportedly to pay a portion of the premiums due on a client's two commercial liability policies with Great American Insurance Company. In this case, a third premium finance application was submitted relating to a non-existent policy. Prime Rate sent $170,842 to the Larson agency's bank account, and the Larsons withdrew funds to pay personal and business expenses. None of the money was used to pay premiums on the clients' policies, on which the client already had paid the premiums.

The order describes a third case in December 2013 where Prime Rate sent $17,648 to the Larson agency's bank account purportedly to pay the premiums on a client's policies. In January 2014, the client received from the insurance company a Notice of Cancellation for Nonpayment. The Larson agency remitted only the minimum premium of $2,092 necessary to reinstate the coverage.

The order says Auto-Owners Insurance Company informed DIFS in March 2014 that the respondents submitted premium finance applications to PREMCO Financial Corporation Inc. requesting funding for Auto-Owners policies that do not exist. The order says the "investigation
also revealed that the Respondents habitually submitted premium finance applications to premium finance companies to obtain money for their own personal and business use." The order also says:
DIFS' staff continues to field calls and complaints from insurers, premium finance companies and insureds pertaining to Respondents' misconduct related to debt incurred, policy validity, policy effectiveness, premium payments, forged documents, false insurance policy information, and possible lapses in coverage.
General Observations
When I saw the order in the Larson case, I contacted DIFS. I said the activities described in the order appear to be felonies, and asked whether the case has been referred to criminal prosecutors. Deborah K. Canja, deputy general counsel, promptly replied: "We do not typically disclose whether we have or have not referred issues/persons/cases to criminal prosecutors." I think her response is appropriate.

Although the order mentions—in its title and its text—the possibility of license revocation, I also asked DIFS why the order is for summary suspension rather than summary revocation. Ms. Canja said: "Our statute and due process considerations do not allow us to summarily revoke." I think the opportunity for a hearing is adequate for due process purposes. As for the statute, I think it illustrates what one often hears about insurance laws being drafted primarily by and for the benefit of the insurance industry rather than for the benefit of the public.

I am offering the eight-page order as a complimentary PDF. Send an e-mail to jmbelth@gmail.com and ask for the Michigan order in the Larson case.

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Thursday, April 24, 2014

No. 45: STOLI and a Distressing Telephone Call

Recently I received an e-mail from a woman in Pennsylvania who saw one of my blog posts about stranger-originated life insurance (STOLI). She said her elderly mother in Florida was victimized in the same manner and by the same parties I mentioned in the blog post she saw. I invited her to call me. She did so, and the conversation was distressing.

The caller said her mother was approached in 2008 by an insurance agent who sold her mother on the idea of applying for a life insurance policy with a face amount of several million dollars. The agent said the policy would cost her mother nothing and she would receive more than $100,000 when the policy was sold into the secondary market two years later. Her mother took a physical examination and signed various documents. Her mother now has neither the policy nor copies of the documents. The policy is in the hands of the premium finance company, which is dunning her mother for money she does not have. Also, her mother is troubled by the big policy in force on her life.

I will speculate about what transpired, based on many STOLI cases I have seen. The mother probably signed an insurance policy application, trust documents, and loan documents. She probably signed all of them in blank without looking at them and without any understanding of what she was doing. She probably was given no copies of anything. The agent probably filled out the application and the agent's supplement with false statements about the mother's net worth, the mother's income, the financing of the premiums, the purpose of the insurance, and the intent to sell the policy in the secondary market. The purpose of the false information was to hoodwink the insurance company into issuing the policy. The company probably issued the policy without an adequate investigation and the agent pocketed a large commission. Deterioration of the secondary market probably made it impossible to sell the policy at the end of two years. Thus the policy fell into the hands of the premium finance company after the premium loan went into default. Now the mother is being dunned by the finance company, and a large policy remains in force on her life in the hands of a party that has no insurable interest and, indeed, has a strong financial interest in her early death.

During our telephone call, I mentioned the insurance regulators in Florida. The caller said she had already contacted the Florida insurance regulators, who had referred her to a Florida fraud agency. I made another suggestion to her, and asked her to keep me apprised of developments.

I asked the caller how her mother could be taken in by such a scam, and whether her mother had concluded that the proposition was too good to pass up. The caller said that is exactly what happened. Thus her mother was not aware that propositions too good to be true usually are false.

Insurance regulators, securities regulators, and law enforcement authorities try to prevent the public from being victimized by wrongdoers. However, these governmental agencies cannot shield everybody in a timely manner. In other words, it is impossible to protect all gullible consumers from all smooth-talking con artists. That is why I found the telephone conversation distressing.

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Tuesday, April 22, 2014

No. 44: Symetra Life's Reasons for Changing Its Domicile from Washington State to Iowa

Over the years many life insurance companies have redomesticated; that is, they have changed their states of domicile. For example, some companies redomesticated to Nebraska, and more recently some companies redomesticated to Iowa. I was not familiar with the reasons for those moves. Therefore, when I learned early this year that Symetra Financial Corporation (Symetra) is redomesticating its principal operating subsidiary, Symetra Life Insurance Company (Symetra Life), from Washington State to Iowa, I tried to find out the reasons for the move.

Symetra's 8-K Filing
On January 14, 2014, Symetra (NYSE:SYA) filed an 8-K (material event) report with the Securities and Exchange Commission (SEC) disclosing the plan to redomesticate Symetra Life. The 8-K said:
Symetra expects the redomestication to further its efforts to grow and diversify Symetra Life's product portfolio and risk profile by permitting Symetra Life to take advantage of state-of-the-art statutes and regulations governing the life insurance industry, including regulations relating to derivative transactions.
Symetra's Press Release
Attached to the 8-K was a press release. It quoted Tom Marra, president and chief executive officer of Symetra, as saying:
After much consideration, our decision to change Symetra Life's state of incorporation was driven by a complex, challenging and quickly changing regulatory environment. We believe that the redomestication will further our efforts to grow and diversify Symetra Life's product portfolio and risk profile by permitting Symetra Life to take advantage of the state-of-the-art statutes and regulations governing the life insurance industry in Iowa, where some of the industry's biggest players are domiciled.
My Public Records Request in Iowa
In an effort to learn more, I filed a public records request with the Iowa Insurance Division (Division) asking for copies of the redomestication application and attachments. In response, the Division sent me two letters that had been written by Symetra—one to the Iowa commissioner and one to a deputy commissioner—and said the remainder of the application is a confidential examination workpaper pursuant to Iowa Code section 507.14. Here is some of what Symetra said in the two letters:
We believe that the redomestication will further our efforts to grow and diversify Symetra Life's product portfolio and risk profile. We are mindful of the need for our companies to meet your statutory requirements for redomestication, which include the placement of jobs in the State of Iowa. To that end, we have formulated a proposed plan to hire 20 to 40 employees in Iowa within the next two to four years....
We understand that the Application and its contents will be treated as materials disclosed to the Division in the course of analysis of the financial condition or market conduct of the Applicant, and therefore will be treated as privileged and confidential pursuant to the authority set forth in Iowa Code section 507.14. In the event that the Division at any time receives a request for or a subpoena requiring production of all or any portion of the Application that does not fall within the exceptions set forth in Iowa Code section 507.14, subsection 3, we respectfully request that the Division immediately advise us of such request or subpoena in order that we may take the appropriate action to protect confidential information within the Application.
My Public Records Request in Washington
I also filed a public records request with the Washington Office of the Insurance Commissioner (OIC). On March 7, the OIC said:
The documents you have requested have been marked confidential by the company. While we do not have a statutory exemption to withhold the documents, it is necessary to give the company an opportunity to file a court order to prevent the OIC from releasing them. If we do not receive a court order by 5:00 p.m., April 4, 2014, I will be able to release the requested documents to you on April 7, 2014. Should the OIC be restrained from releasing these documents, you will be notified.
My Request to Symetra
I also wrote to David S. Goldstein, senior vice president, general counsel and secretary of Symetra. I indicated what documents I had seen and asked him to tell me the reasons for the redomestication in greater detail than shown in those documents. He said in part:
Symetra Life expects to benefit from a fairly substantial reduction in the amount of premium taxes that it is assessed on a retaliatory basis. We also believe that Symetra Life needs a level playing field to effectively compete with other life insurance companies, particularly with regard to current and emerging industry standards that deal with reserve financing, accounting and reinsurance rules. A handful of states, including Iowa, are leading the way in engaging life insurance companies on these complex regulations. Many of these jurisdictions have the resources to dedicate to the life insurance industry. Attention to these issues by the state legislature is equally important. We evaluated a number of states across several criteria and concluded that Iowa is most closely aligned with our objectives. Among other things, Iowa has state-of-the-art statutes and regulations governing the life insurance business and is the domicile of some of the biggest players in the industry.
Documents from the OIC
Symetra did not provide a court order, and the OIC sent me 978 pages on a CD. The cover letter from Symetra mentions the simultaneous redomestication application to Iowa, makes no claim of confidentiality for the documents, and includes this paragraph:
We believe that the redomestication will further our efforts to grow and to diversify Symetra Life's product portfolio and risk profile. Following the redomestication, Symetra will maintain its corporate headquarters in Bellevue, Washington, which includes nearly 900 employees in the home office. In this regard, please note that Symetra Life recently renewed its lease for its home office space in downtown Bellevue through July 2025.
A one-page document in the filing with the OIC is entitled "Narrative in Support of the Redomestication Application of Symetra Life Insurance Company." It says in part:
Symetra believes that redomestication of Symetra Life to Iowa will further its efforts to grow and to diversify its product portfolio and risk profile, as Symetra Life will benefit from the sophisticated and robust statutes and regulations governing the life insurance industry in Iowa. Specifically, Iowa supports the following initiatives, among others, that are relevant to the life insurance industry: the financing of certain statutory reserve amounts associated with universal life insurance products with secondary guarantees; the implementation of principles-based reserving; the enforcement of termination and netting provisions under qualified financial contracts entered into by life insurance companies; and the implementation of reinsurance collateral reform. In addition, Symetra Life's status as an Iowa-domiciled company will generate savings in retaliatory taxes which Symetra Life would otherwise pay on premiums written in other jurisdictions.
Also included on the CD are articles of incorporation; bylaws; amended articles of incorporation; amended bylaws; certificates of authority for states where Symetra Life operates; organizational documents; variable annuity prospectuses; the latest Symetra 10-Q quarterly report filed publicly with the SEC; biographical affidavits of officers, directors, and key employees; the latest Symetra Life quarterly financial statement filed publicly with state insurance regulators; and market conduct examination reports filed publicly by insurance regulators in Illinois, Nevada, Washington, Connecticut, California, and Oklahoma.

The Iowa Confidentiality Ruling
As mentioned earlier, the Division denied most of my request for documents relating to the redomestication. The Division cited Iowa Code section 507.14 and Symetra cited subdivision 3 of that section as the basis for the denial. Iowa Code section 507.14 is entitled "Confidential Documents—Exceptions." Subdivision 3 reads:
3. All work papers, notes, recorded information, documents, market conduct annual statements [sic], and copies thereof that are produced or obtained by or disclosed to the commissioner or any other person in the course of analysis by the commissioner of the financial condition or market conduct of an insurer are confidential records under chapter 22 and shall be privileged and confidential in any judicial or administrative proceeding except any of the following:....
b. An administrative proceeding brought by the insurance division under chapter 17A.
Although a redomestication application is not mentioned specifically as an exception in chapter 17A, I think the intent of the chapter is to exempt a redomestication application from confidential treatment. Thus I disagree with the denial. However, I did not appeal the denial because I received the entire file from the OIC.

General Observations
The redomestication of Symetra Life is a token move, with only 20 to 40 employees to be hired in Iowa in the next two to four years, and with 900 employees remaining in Washington. I am not familiar with Iowa's statutory requirements for redomestications, but the Iowa Economic Development Authority, which promotes business development in the state, and which describes the Division as "supportive," "fair," and "responsive," cannot be pleased with so few new jobs in Iowa.

Symetra mentions the "biggest players" being in Iowa as a reason for the move. That refers primarily to big players in indexed life insurance and indexed annuities.

Symetra mentions a "fairly substantial reduction" in retaliatory premium taxes. I do not understand that complex subject well enough to know whether Symetra Life will achieve a significant reduction in premium taxes as a result of the redomestication.

Symetra mentions "state-of-the-art statutes and regulations" as a reason for the move. That is a euphemism for weak reserve requirements, weak accounting rules, and weak reinsurance rules. Anyone interested in what it means to be domiciled in Iowa in terms of reserves, accounting, and reinsurance should examine section 1(A) in the "Notes to Financial Statements" in the 2013 statutory statement of Iowa-domiciled Transamerica Life Insurance Company. Its statutory surplus at the end of 2013 on the "Iowa basis" was $4.7 billion, compared to $488 million based on statutory accounting principles. One Iowa "prescribed practice," relating to "reserve credits with respect to secondary guarantee reinsurance treaties," added $3.5 billion to statutory surplus. Another Iowa "prescribed practice," relating to treatment of a "parental guarantee" as an "admissible asset," added $751 million to statutory surplus.

Iowa and Washington have not yet acted on the redomestication applications. I plan to report developments. Meanwhile, I am offering, as a complimentary one-page PDF, section 1(A) in the "Notes to Financial Statements" in Transamerica's 2013 statutory statement. Send an e-mail to jmbelth@gmail.com and ask for the Transamerica statement excerpt.

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Monday, April 21, 2014

No. 43: Florida's Pasco County School District Faces a Decision on a "Too Good To Be True" Life Insurance Plan

On April 8, 2014, the Tampa Bay Times carried an article by Jeffrey S. Solochek entitled "Pasco school district scrutinizes creative life insurance offer." The article discusses a "legacy life" plan the promoters are trying to sell to the district. Here is how the article describes the plan:
Four New York families would put $100 million each into a premium on life insurance policies for Pasco's 9,769 school workers. The district would create a trust through which the employees could be insured and their families be paid a $50,000 benefit after they die. The district also would get a $50,000 benefit when an employee dies. Neither the district nor the employees would pay anything.
The Solochek article refers to the plan as a "55-year program," and says the promoters project "about 13 deaths per year in the early stages." Meanwhile, the $400 million would be invested, although the promoters are not divulging how the funds would be invested. The article says broker Edward H. Netherland (Nashville, TN) is a consultant to Swiss Re and Pollock Financial Group. (Netherland was involved some years ago in "Life Insurance and Life Annuities Based Certificates," or LILACs. See, for example, "Charities Look to Benefit from a New Twist on Life Insurance" in the June 5, 2004 issue of The New York Times.)

According to the Solochek article, Netherland said a "team of lawyers" found the plan "perfectly legal," and actuarial tables—which the school district does not have—showed the plan is viable. Netherland seems to be a name dropper; the article says he created similar programs before, "working with investors including Warren Buffett."

I have not seen the details of the plan. Nor is it likely the school district will ever see the details. Promoters of such plans claim the details are proprietary and confidential. At the same time, they respond to criticism by saying the critics do not understand the plans.

As I said in the July/August 2004 and July 2012 issues of The Insurance Forum, such plans will end in disappointment. Here is how I explained the problem:
The fundamental flaw is that such a plan can perform as illustrated only when the life insurance company underprices the policies. For the death benefits to be sufficient to service the debt and provide funds for the charity, the present expected value of the death benefits when the policies are issued must exceed the present expected value of the premiums. However, for a life insurance company to survive, the present expected value of the premiums must exceed the present expected value of the death benefits.
According to the Solochek article, the school district is trying to figure out whether the plan is "too good to be true." I think it is, because the plan is sure to collapse. What is not known is when it will collapse and degenerate into a legal battle involving the district, the investors, the promoters, the life insurance companies, and other parties. My unsolicited advice to the district is to reject the plan.

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Friday, April 18, 2014

No. 42: Phoenix's Further Delayed Financial Statements

In my post No. 41 published April 14, I reported on the March 21 cease-and-desist order issued by the Securities and Exchange Commission (SEC) directed at The Phoenix Companies, Inc. (Phoenix) and PHL Variable Insurance Company (PHL), a wholly owned indirect subsidiary of Phoenix. The companies agreed to filing dates for their many delayed financial statements. I further reported that the first deadline in the SEC order required Phoenix to file its 10-K report for 2012 not later than Monday, March 31, and that Phoenix filed it Tuesday morning, April 1, before the market opened.

The next deadline in the SEC order was April 15, on which Phoenix was required to file its 10-Q report for the quarter ended September 30, 2012, and PHL was required to file its 10-K report for 2012. On April 15, the companies filed 8-K (material event) reports saying they expect to file the documents on or before April 25.

I asked the SEC Office of Public Affairs what happens next; a spokesperson declined to comment. I also asked Phoenix what happens next; a spokesperson declined to comment. Thus it remains to be seen what consequences, if any, will flow from Phoenix's latest failure to file financial statements in a timely manner. I plan to report further developments.
 
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