No. 149: Phony Life Insurance Policies Cause Federal Criminal Charges against Five Defendants

On December 16, 2014, the U.S. Attorney in the Northern District of California (San Francisco) filed under seal a grand jury indictment against five individuals in a case involving phony life insurance policies. The indictment was unsealed the next day, after arrest warrants had been executed. The case was assigned to U.S. Senior District Judge Susan Illston, a 1995 Clinton appointee who acquired senior status in 2013. (See U.S. v. Halali, U.S. District Court, Northern District of California, Case No. 3:14-cr-627.)

The Indictment
The defendants are Behnam Halali, Ernesto Magat, Kraig Jilge, Karen Gagarin, and Alomkone (also known as Alex) Soundara. Each defendant was charged with one count of conspiracy to commit wire fraud, 14 counts of wire fraud, and one count of aggravated identity theft. Three of the defendants were also charged with money laundering: three counts against Magat, two counts against Jilge, and one count against Halali. The indictment also mentions unnamed co-conspirators.

The defendants worked for several years as independent contractors selling life insurance for Texas-based American Income Life Insurance Company (AIL). They resigned or were fired in 2012.

The indictment alleges that the defendants and their co-conspirators engaged in wrongdoing that caused AIL to pay more than $2.5 million in commissions and bonuses. The indictment includes a forfeiture allegation that would require the defendants, upon conviction, to forfeit property derived from their wrongdoing. The following list is a paraphrase of the allegations against the defendants and their co-conspirators:

• Paid recruiters to find individuals willing to take a medical examination in exchange for about $100.
• Took personal information and submitted applications for life insurance, in many cases without the individual's knowledge.
• Paid individuals to participate in a fictitious survey of a medical examination company, and then took the personal information and submitted applications for life insurance, in many cases without the individual's knowledge.
• Solicited family and friends to submit applications for life insurance, and told them they would receive free life insurance for several months, after which the policies would be canceled.
• In some cases created fraudulent drivers' licenses so they could take medical examinations purporting to be the individuals in the applications.
• Opened hundreds of bank accounts from which to pay premiums, and typically paid one to four months of premiums before allowing the policies to lapse.
• Purchased prepaid telephones and Google Voice telephone numbers that were listed on the applications.
• Returned verification calls to AIL purporting to be the applicants, and confirmed the information in the applications.
• Listed addresses of gas stations and apartment complexes on many applications in an effort to avoid detection, and fabricated the names of beneficiaries of the policies.
• Exchanged emails in which they tracked telephone numbers and bank accounts associated with the policies.

Other Developments
The defendants are free on bond. Halali, Magat, Jilge, and Soundara are represented by four different private attorneys. Gagarin is represented by a federal pubic defender.

On December 21, 2015, Magat filed a "motion to dismiss counts of the indictment for insufficiency." On February 18, 2016, Gagarin, Halali, and Jilge filed motions for joinder in Magat's motion.

On February 19, Judge Illston issued an order denying Magat's motion. On February 22, she issued an order scheduling a jury trial for January 30, 2017.

General Observations
Life insurance performs important social functions, not the least of which is providing financial protection for widows and orphans. Yet, as it is often said, life insurance is sold rather than bought. For that reason, it is necessary to pay commissions to agents who perform the many functions associated with the sale of life insurance, including what I have called the antiprocrastination function. It is regrettable when agents, motivated by the lure of those commissions, engage in unacceptable and even allegedly criminal behavior in an effort to enhance their sales results.

I believe that the Halali case will not go to trial, and that the defendants will enter into plea agreements with the federal prosecutors. Nonetheless, I think it is appropriate to discuss the case because of the brazen nature of the defendants' alleged criminal behavior.

Available Material
I am offering a complimentary 27-page PDF containing the indictment and Judge Illston's order denying Magat's motion. Email jmbelth@gmail.com and ask for the package relating to the Halali case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 148: AIG's War against Coventry First and the Buerger Family Ends with a Confidential Peace Treaty

In No. 67 (posted September 16, 2014), I wrote about a lawsuit that Lavastone Capital, an affiliate of American International Group (AIG), filed on September 5, 2014, against Coventry First, an intermediary in the secondary market for life insurance. The complaint consisted of a 151-page text and an 89-page appendix. Among the defendants were Coventry; several affiliates of Coventry; Alan Buerger, chief executive officer of Coventry; and several members of Buerger's family. I expressed the belief that the lawsuit was an effort to destroy Coventry and the Buerger family. (Lavastone v. Coventry, U.S. District Court, Southern District of New York, Case No. 1:14-cv-7139.)

The Trial
In No. 114 (posted August 31, 2015), I reported that a bench (non-jury) trial began on August 27, 2015 before U.S. District Judge Jed S. Rakoff. The 23-day trial ended on October 26.

The Settlement
On February 29, 2016, before Judge Rakoff handed down his decision, AIG and Coventry jointly filed in court a one-sentence "stipulation of dismissal with prejudice" concerning the settlement. The stipulation, on which Judge Rakoff immediately signed off, reads:

IT IS HEREBY STIPULATED AND AGREED, between and among the undersigned parties to this action, pursuant to Federal Rule of Civil Procedure 41(a)(1)(A)(ii), by and through their respective counsel, that this action, and all claims and counterclaims asserted therein, shall be dismissed with prejudice [permanently] pursuant to the terms of the parties' confidential settlement agreement.

The Joint Statement
On the same day, AIG and Coventry issued a three-sentence joint statement entitled "AIG and Coventry First Settle Dispute." It reads:

Lavastone Capital LLC, an affiliate of American International Group, Inc. (NYSE:AIG), and Coventry First LLC today announced that they have entered into an agreement to resolve their disputes. Among the terms of the confidential agreement, Lavastone will be able to transfer Coventry's servicing of AIG's life settlements portfolio to another party, and Lavastone will be able to freely market or sell policies that were originated by Coventry. Lavastone and Coventry are pleased to have achieved a satisfactory resolution of their dispute.

Media Coverage
On the same day, a 577-word article by reporter Leslie Scism appeared online in The Wall Street Journal, but the article did not appear in the print version of the newspaper. The headline reads: "AIG Says It Settled Legal Dispute Over 'Life Settlements'; End of Coventry First Dispute May Pave Way for Insurer to Sell $3.6 Billion Portfolio." The opening sentence reads: "American International Group Inc. said it has resolved a legal dispute with a firm that helped it amass a large investment portfolio of 'life settlements' in the 2000s."

I found nothing about the settlement in The New York Times. However, Reuters carried short articles, and the settlement was mentioned widely in the insurance trade press.

General Observations
The case had not been going well for Coventry. Judge Rakoff had denied Coventry's motion to dismiss the case. He had also dismissed a few of AIG's charges, but had left many to be resolved at trial. He had also ruled against Coventry on AIG's breach-of-contract charge, but had left the amount of damages to be determined at trial.

I expressed the opinion that the case was one of the most important in the history of the secondary market for life insurance. I think Coventry was under intense pressure to reach a settlement, because the amount it stood to lose could have been staggering and could have forced Coventry into bankruptcy. Because of the confidential nature of the agreement, we may never know the financial dimensions of the settlement.

Available Material
I am not offering any additional material. However, persons interested in details of the case may still obtain the complimentary packages offered in Nos. 67 and 114, which are mentioned at the beginning of this post.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 147: Medical Education of Resident Physicians—A Shocking Scandal Relating to a Pair of Clinical Trials

Public Citizen is a public interest organization that Ralph Nader and Dr. Sidney Wolfe founded in 1971. For many years, Dr. Wolfe headed Health Research Group (HRG), a unit of Public Citizen. I have long admired the important service HRG renders to the public.

HRG Press Release

On November 19, 2015, HRG issued a 19-paragraph press release entitled "Unethical Trials Force Hundreds of Resident Doctors Nationwide to Work Dangerously Long Shifts, Placing Them and Their Patients at Risk of Serious Harm," and subtitled "Public Citizen and American Medical Student Association [AMSA] Call on Federal Regulators to Investigate and Immediately Stop Research, Urge Accrediting Body to Reinstate Work-Hour Limits for All Resident Doctors." The fifth paragraph of the press release reads:

The primary goal of the two trials is to determine whether the rates of death and serious complications for the patients unwittingly enrolled in the trials at the hospitals where first-year residents are forced to work significantly longer work shifts (28 or more hours) than permitted under current ACGME [Accreditation Council for Graduate Medical Education] rules (the experimental group) are higher than the rates of death and serious complications in patients enrolled at hospitals where residents' work shifts comply with the ACGME limit of 16 consecutive hours (the control group). The investigators have not obtained the voluntary informed consent of the medical residents or their patients.

HRG/AMSA Letter to ACGME

On the same day, HRG and AMSA sent a four-page letter to ACGME. They sent copies of the letter to senior officials in the U.S. Department of Health and Human Services (DHHS).  They also sent the DHHS officials lengthy letters elaborating on the concerns. HRG and AMSA strongly urged ACGME "to immediately rescind the organization's waivers of most of its 2011 duty-hour standards for internal medicine and general surgery training programs randomly assigned to the experimental groups" in one ongoing trial and one recently completed trial. The final substantive paragraph of the HRG/AMSA letter reads:

In closing, it is imperative that the ACGME immediately rescind the waivers of most of its 2011 duty-hour standards for the internal medicine and general surgery residency training programs randomly assigned to the experimental groups in the [two trials]. Furthermore, in light of all the concerns highlighted above and in our letters to [DHHS], an independent body needs to investigate the process that allowed these inappropriate waivers to be granted in the first place, in the face of the strong evidence of resident and patient harm that caused ACGME to issue the duty-hour standards in 2011.

ACGME Letter to HRG/AMSA

On December 7, 2015, ACGME sent a nine-paragraph letter to HRG and AMSA. The first two and last two paragraphs of the letter read:

This letter is in response to your November 19, 2015 correspondence regarding the [two] trials. The [ACGME] is committed to ongoing assessments of our requirements based on the most up-to-date evidence to foster a safe learning environment serving the best interests of patients, residents, and fellows.

The ACGME's support of the two large, multicenter clinical trials to investigate the impact of duty hour standards on patient safety and resident education will be elements of the ACGME's scheduled five-year review of whether the Institutional and Program Requirements are achieving their intended goals to foster a safe learning environment.

——————————

The ACGME was not involved in the design and implementation of the [two] trials beyond the waiver requirements, and will not be involved in the interpretation of their results. Nevertheless, the ACGME understands that both duty hour study protocols were reviewed by the Institutional Review Board (IRB) of the institution affiliated with each principal investigator. The ACGME also understands that the [second] trial was funded by the National Institutes of Health (NIH).

The ACGME is committed to the highest quality of patient care and resident/fellow learning. Wherever possible, the ACGME will continue to support and facilitate well designed, IRB-reviewed, multicenter educational trials with aims to scientifically test elements of the educational process that have the potential to enhance the quality and effectiveness of graduate medical education programs, and the safety and quality of care rendered to our patients today, and tomorrow.

HRG/AMSA Follow-up Letter to DHHS

On February 11, 2016, HRG and AMSA sent a ten-page follow-up letter to DHHS. The final substantive paragraph of the letter reads:

Finally, we are troubled by [the DHHS] failure so far to take these requested actions. It has now been 12 weeks since our initial complaint letter was submitted to your office. Resident and unwitting patient subjects continue to be forced to participate in greater-than-minimal-risk research without their voluntary informed consent. Your continued inaction makes [DHHS] a culpable party in this unethical research.

General Observations

A combination of three aspects of the scandal prompted me to write about it. First, it is outrageous that residents and patients included in the trials are not given an opportunity to provide voluntary informed consent to their inclusion in the trials. Carrying out such trials without the voluntary informed consent of the residents and patients violates fundamental rules governing the use of human subjects in research.

Second, what purported to be a response from ACGME was not a response. ACGME merely brushed off the serious concerns expressed by HRG and AMSA.

Third, the absence of major media coverage of the scandal is disappointing. The story warrants prominent coverage by outlets such as The New York Times, The Wall Street Journal, The Washington Post, Bloomberg News, and the major television networks.

Available Material

I am making available a complimentary 20-page PDF consisting of the HRG press release (it contains links providing access to other documents, such as the lengthy HRG/AMSA letters to DHHS officials and the lists of the many hospitals engaged in the trials), the HRG/AMSA letter to ACGME, the ACGME purported response to HRG/AMSA, and the HRG/AMSA follow-up letter to DHHS officials. Email jmbelth@gmail.com and ask for the HRG/AMSA March 2016 package.

Blogger's Notes

Readers of this blog and my other writings may think this post is outside my areas of interest. They are right. However, I was so outraged by the scandal HRG has exposed that I decided to write about it anyway.

Also, in the interest of full disclosure, I am deeply indebted to Public Citizen Litigation Group (PCLG), another unit of Public Citizen. PCLG represented me on a pro bono basis several times over the years. Three important examples of PCLG's work on my behalf are discussed in chapters 5, 7, and 23 of my 2015 book, The Insurance Forum: A Memoir. The book is available from Amazon. It is also available from us; ordering instructions are on our website at www.theinsuranceforum.com, and I will autograph it upon request.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 146: Eugene R. Anderson—A Memorial Tribute

Eugene R. Anderson

The late Eugene R. Anderson is often referred to as the "Dean of Policyholders' Attorneys." Gene was a longtime close friend of mine. Shortly after he died on July 30, 2010 at age 82, I dedicated the October 2010 issue of The Insurance Forum to his memory. A recent newsletter distributed by his firm brought memories of Gene flooding back, and I decided to expand a bit on my 2010 tribute to that great man.

Background

According to an obituary by Mary Williams Walsh in the August 2, 2010 issue of The New York Times, Gene was born in 1927 in Oregon and grew up in poverty during the Great Depression. He worked his way through college, eventually graduating from the University of California at Los Angeles. While hitchhiking across the country, he got a ride from an attorney who later helped Gene get admitted to the Harvard Law School. 

Gene served for a time as an Assistant U.S. Attorney in the office of Robert M. Morgenthau, the U.S. Attorney for the Southern District of New York. In 1969 he cofounded a law firm that is now Anderson Kill P.C.

The Keene Case

Gene was heavily involved in a famous liability insurance lawsuit involving Keene Corporation, a manufacturer of building materials that contained asbestos, and several major insurance companies that had sold comprehensive general liability policies to Keene at various times. Each company took the position that its insurance did not apply because it was not in effect when the injury occurred. An important appellate decision in the case was handed down in 1981. (See Keene Corp. v. Insurance Company of North America, U.S. Court of Appeals, District of Columbia Circuit, 667 F.2d 1034.)

Gene argued that all the companies were correct—about the others' policies—as to the coverage trigger. Gene was credited with developing what became known as the "triple trigger" theory—that coverage was triggered when the victim inhaled asbestos fibers, or when the illness manifested itself, or when the victim sought compensation. The beginning of the lengthy appellate ruling describes the nature of the case:

This case arises out of the growing volume of litigation centering upon manufacturers' liability for disease caused by asbestos products. In this action, Keene Corporation seeks a declaratory judgment of the rights and obligations of the parties under the comprehensive general liability policies that the defendants issued to Keene or its predecessors from 1961 to 1980. Specifically, Keene seeks a determination of the extent to which each policy covers its liability for asbestos-related diseases.

Between the years 1948 and 1972, Keene manufactured thermal insulation products that contained asbestos. As a result, Keene has been named as a codefendant with several other companies in over 6,000 lawsuits alleging injury caused by exposure to Keene's asbestos products. Those cases typically involve insulation installers or their survivors alleging personal injury, or wrongful death, as a result of inhaling asbestos fibers over the course of many years. The plaintiffs in the underlying suits allege that they contracted asbestosis, mesothelioma, and/or lung cancer as a result of such inhalation.

From 1961 to the present, Insurance Company of North America, Liberty Mutual Insurance Company, Aetna Casualty and Surety Company, and Hartford Accident and Indemnity Company issued comprehensive general liability insurance policies to Keene. From December 31, 1961 through August 23, 1967, INA insured Keene; from August 23, 1967 through August 23, 1968, Liberty insured Keene; from August 23, 1968 through August 23, 1971, Aetna insured Keene; from August 23, 1971 through October 1, 1974, Hartford insured Keene; and from October 1, 1974 through October 1, 1980, Liberty insured Keene. The policies that these companies issued to Keene were identical in all relevant respects....

The Recent Newsletter

Anderson Kill publishes Policyholder Advisor, a bimonthly newsletter. The lead article in the January/February 2016 issue is entitled "Your Insurance Company's Duty to Settle." The two authors are members of the firm: Robert M. Horkovich cochairs the insurance recovery group, and Anna M. Piazza specializes in insurance recovery and commercial litigation.

The article deals with the situation where the policyholder's liability has become fairly clear, the policyholder wants to settle within the policy's upper limit, and the policyholder's liability insurance company decides to "roll the dice" by going to trial. Should the verdict exceed the policy limit, the insurance company might be held liable for the full verdict even though it exceeds the policy limit.

General Observations

Seeing the recent article was reminiscent of the type of work in which Gene engaged throughout his distinguished legal career. The article shows that Gene's firm still engages in the work Gene loved—pressing insurance companies to honor their obligations to their policyholders.

Gene and I met face-to-face only once, for an enjoyable private lunch near his office in New York. However, we spoke frequently by telephone. Some of those calls were originated by Gene, and some by me. Gene was a mind reader, because he seemed to know exactly what matters would be of interest to me. He was squarely on target every time. I sorely miss him personally and professionally, and I cherish his memory.

Available Material

I am offering, with Anderson Kill's permission, a four-page complimentary PDF containing the recent newsletter. Send an email to jmbelth@gmail.com and ask for the January/February 2016 issue of the Anderson Kill newsletter.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 145: Cost-of-Insurance Charges and an Unusual Type of Lawsuit against John Hancock

On December 22, 2015, a policyholder filed an unusual type of cost-of-insurance (COI) class action lawsuit against John Hancock Life Insurance Company USA. The case is unusual because, rather than alleging unlawful increases in COI charges, it alleges an unlawful failure to decrease COI charges in response to decreasing mortality rates. It also alleges unlawful charges for a certain rider. (See 37 Besen Parkway v. John Hancock, U.S. District Court, Southern District of New York, Case No. 1:15-cv-9924.)

The Policy
The plaintiff owns a survivorship universal life policy on the lives of a husband and wife. John Hancock issued the policy on June 1, 2000. The husband was 70 at the time, and the wife was 65. One spouse is now deceased, but the policy remains in force on the life of the other. The current face amount is $1.445 million. The plaintiff says there have been no COI decreases despite the company's improving mortality experience.

The COI Decrease Class
The plaintiff seeks to represent two classes of policyholders, one of which is the "COI Decrease Class." It consists of policyholders who allegedly paid "unlawful and excessive" COI charges. The allegations are based on this policy provision relating to "Applied Monthly Rates," which are used to calculate monthly COI charges:

The Applied Monthly Rates will be based on our expectations of future mortality experience. They will be reviewed at least once every 5 Policy Years. Any change in Applied Monthly Rates will be made on a uniform basis for Insureds of the same sex, Issue Age, and Premium Class, including tobacco user status, and whose policies have been in force for the same length of time.

The COI Decrease Class includes owners of survivorship universal life and other survivorship policies. It also includes owners of individual universal life, variable life, and variable universal life policies.

The plaintiff alleges that John Hancock did not reduce COI charges despite improvement in the company's mortality experience. In its initial answer, filed January 13, 2016, the company says that "nationwide mortality rates as a whole have generally decreased over the last several decades." However, the company denies that the case "can properly be pursued or maintained as a class action," that "the Plaintiff is a qualified class representative," or that "class relief is available from John Hancock."

The Rider Overcharge Class
The other class is the "Rider Overcharge Class," which consists of policyholders who allegedly were charged "unlawful and excessive premiums" for the "Age 100 Waiver of Charges Rider." The rider provides that the company will waive certain charges, including COI charges, after the younger insured attains or would have attained age 100.

The policy attached to the complaint as an exhibit contains what may be a drafting error that prompted this aspect of the lawsuit. The rider includes a "Table of Monthly Rates per thousand of Net Amount at Risk." The table has two columns: "Age," which refers to the age of the younger insured, and "Age 100 Waiver Monthly Rate," which is multiplied by the net amount at risk to determine the monthly COI charge for the rider. The "Age" column runs only from 1 to 32. The "Age 100 Waiver Monthly Rate" column shows 0.0000 for each age from 1 through 5, and 0.0533 for each age from 6 through 32. Paragraph 13 of the complaint reads:

Notwithstanding the plain language of the policy, John Hancock charged plaintiff additional premiums for the Age 100 Rider even though the insureds were older than 32 years old. This action therefore seeks monetary relief for these impermissible additional premiums charged by John Hancock and paid by plaintiff and other similarly situated policyholders.

In its initial answer, John Hancock does not address the matter directly. Here is the answer to paragraph 13 of the complaint:

John Hancock refers to the Plaintiff's policy and to the individual policies of each purported class member for their respective true, complete and accurate terms. John Hancock denies the remaining allegations in paragraph 13.

Later in its initial answer, John Hancock asserts that the copy of the policy attached to the complaint as an exhibit "is not a full, accurate, and complete copy" of the policy. The answer provides no explanation for that assertion. It remains to be seen whether "a full, accurate, and complete copy" will be filed later in the proceedings.

General Observations
The policy language focusing solely on mortality experience as a basis for changing COI rates is unusual. It is more common for a policy to allow changes in COI rates for any reason, including changes in investment experience, expense experience, or mortality experience. I have seen cases where plaintiffs had success with the "mortality experience only" language, but awards to those plaintiffs were refunds after COI charges were increased without adverse mortality experience. I have never before seen a case involving a claim for failure to decrease COI charges after improvement in mortality experience. This case warrants close attention.

Available Material
I am making available a complimentary 66-page PDF consisting of the 19-page complaint, the 33-page policy attached to the complaint as an exhibit, and the company's 14-page initial answer to the complaint. Email jmbelth@gmail.com and ask for the February 2016 COI/John Hancock package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 144: Genworth's Life Insurance Companies Experience a Significant Reduction in Their Financial Strength Ratings

On February 4, 2016, Genworth Financial, Inc. (NYSE:GNW) issued a lengthy press release entitled "Genworth Financial Announces Fourth Quarter 2015 Results." The subtitle was "Net Operating Loss Of $0.17 Per Share And Net Loss Per Share Of $0.59 Driven By Annual Assumption Updates In Life Insurance; Loss On Sale From Previously Announced Business Divestitures Also Impacted Net Loss." Genworth attached the press release as an exhibit to an 8-K (material event) report filed with the Securities and Exchange Commission.

A. M. Best Company, Fitch Ratings, Moody's Investors Service, and Standard & Poor's (S&P) are the major firms that assign financial strength ratings to insurance companies. Within a few days after Genworth's recent press release, all four firms significantly reduced the ratings of Genworth's life insurance companies: Genworth Life Insurance Company, Genworth Life and Annuity Insurance Company, and Genworth Life Insurance Company of New York.

Genworth's Strategic Update
Genworth's recent press release includes a section entitled "Strategic Update." Here are a few excerpts from that section:

• In 2016, the company plans to initiate a series of internal restructuring actions aimed at separating and isolating its LTC [long-term care insurance] business, subject to regulatory and other potential third-party approvals. These actions are focused on addressing LTC legacy block issues that continue to pressure ratings across the organization.
• Also, the company has elected to suspend all sales of traditional life insurance and fixed annuity products in the first quarter of 2016 given the continued impact of ratings and recent sales levels of these products....
• In January 2016, the company completed the sale of certain blocks of term life insurance to Protective Life Insurance Company....
• In December 2015, the company completed the sale of its lifestyle protection insurance business to AXA....

Secure Versus Vulnerable Ratings
"Secure" financial strength ratings are often called "investment-grade ratings." "Vulnerable" financial strength ratings are often called "below-investment-grade ratings" or, pejoratively, "junk ratings." The table here shows the secure and vulnerable ratings assigned by the four rating firms.

Rating Categories	Best	Fitch	Moody's	S&P
Secure Ratings	A++	AAA	Aaa	AAA
	A+	AA+	Aa1	AA+
	A	AA	Aa2	AA
	A–	AA–	Aa3	AA–
	B++	A+	A1	A+
	B+	A	A2	A
		A–	A3	A–
		BBB+	Baa1	BBB+
		BBB	Baa2	BBB
		BBB–	Baa3	BBB–
Vulnerable Ratings	B	BB+	Ba1	BB+
	B–	BB	Ba2	BB
	C++	BB–	Ba3	BB–
	C+	B	B1	B
	C	CCC	B2	CCC
	C–	CC	B3	CC
	D	C	Caa1	R
	E		Caa2
	F		Caa3
			Ca
			C

Ratings as of August 2, 2013
The final special ratings issue of The Insurance Forum was the September 2013 issue, which listed ratings as of August 2, 2013. At that time, the ratings assigned to Genworth's life insurance companies were not high enough to place the companies among those I suggested for consumers who were conservative regarding financial strength, but all the ratings were in the secure range. The table here shows the ratings at that time.

Ratings as of 8/2/13	Best	Fitch	Moody's	S&P
Genworth Life	A	A–	A3	A–
Genworth Life & Annuity	A	A–	A3	A–
Genworth Life of NY	A	A–	A3	A–

Ratings as of February 1, 2016
During the 30 months prior to Genworth's recent press release, the ratings of Genworth's life insurance companies declined somewhat. However, all the ratings remained in the secure range. The table here shows the ratings just before the recent press release.

Ratings as of 2/1/16	Best	Fitch	Moody's	S&P
Genworth Life	A–	BBB	Baa1	BBB–
Genworth Life & Annuity	A–	BBB	Baa1	BBB–
Genworth Life of NY	A–	BBB	Baa1	BBB–

Ratings as of February 10, 2016
As indicated earlier, all four rating firms reduced the ratings of Genworth's life insurance companies within a few days after Genworth's recent press release. Best's ratings remained in the secure range, Fitch's ratings declined into the vulnerable range, two of Moody's ratings declined into the vulnerable range, and S&P's ratings declined into the vulnerable range. The table here shows the current ratings.

Ratings as of 2/10/16	Best	Fitch	Moody's	S&P
Genworth Life	B++	BB+	Ba1	BB
Genworth Life & Annuity	B++	BB+	Baa2	BB
Genworth Life of NY	B++	BB+	Ba1	BB

In my 2013 special ratings issue, I showed a watch list of life-health insurance companies which had or might be developing financial problems. I suggested that consumers should exercise caution in dealing with companies on the list. One criterion for inclusion on the list was a rating in the vulnerable range from at least one of the four rating firms. I no longer construct a watch list.  If I did, Genworth's life insurance companies, each of which has multiple vulnerable ratings, would now be on it.

Share Prices
On February 4, Genworth's shares closed at $2.79. On February 5, the shares declined sharply to $2.18 on heavy trading volume. The shares declined further to $1.86 on February 8 and $1.67 on February 9. The shares closed at $1.73 on February 10, $1.61 on February 11, and $1.70 on February 12.

Earnings Conference Call
Genworth held a one-hour earnings conference call on February 5. A replay is available through February 19 at (888) 203-1112. The telephone number for those outside the U.S. is (719) 457-0820. The conference ID number is 858342. I listened to the replay and found it interesting.

My First Contact with Genworth
My first article about Genworth was in the May 1997 issue of The Insurance Forum. I had seen a long-term care insurance promotional letter distributed by Genworth's predecessor, General Electric Capital Assurance Company. The letter included this sentence, with the indicated underlining: "Your premiums will never increase because of your age or any changes to your health." I wrote the company expressing the opinion that, although the sentence may have been technically correct, it was nonetheless deceptive because the company had the contractual right to increase premiums on a class basis. I said the promotional letter should have mentioned explicitly the company's right to increase premiums on a class basis.

A company officer responded that he understood my concern, because some companies had increased premiums, but he gave three reasons why the sentence was not deceptive. First, he said the company had never increased premiums and had an "internal commitment to rate stability." Second, he said the letter was an "invitation to inquire" rather than a "direct sales piece." Third, he said the company's representatives are trained to review a sales brochure that mentions the right to increase premiums. The incident was ironic in view of Genworth's substantial premium increases in recent years and the increases yet to come.

Later I saw a promotional letter that was virtually identical except that the company had removed the sentence about which I had expressed concern. I reported the change in the February 1998 issue of The Insurance Forum.

General Observations
I believe that the problems at Genworth may be traced, at least in part, to the company's heavy involvement in long-term care insurance. The company was one of the earliest in the long-term care insurance business, and has long been one of the most prominent in that business. It is interesting that the company now appears to be placing even greater emphasis on long-term care insurance, while exiting lines of business in which the company's relatively low financial strength ratings place it at a competitive disadvantage.

There is no doubt that the need for long-term care can be financially devastating for individuals and their families. However, I believe that the long-term care exposure cannot be handled effectively through the mechanism of private insurance. I first discussed the problem briefly in the August 1991 issue of The Insurance Forum, and I elaborated on the problem in the July 2008 issue. In the latter article I identified and discussed several important insurance principles that the long-term care exposure violates, thereby causing private insurance to be unsuitable for addressing the long-term care exposure.

Available Material
I am making available a complimentary 31-page PDF consisting of Genworth's recent press release and my articles in the August 1991, May 1997, February 1998, and July 2008 issues of The Insurance Forum. Email jmbelth@gmail.com and ask for the February 2016 Genworth package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 143: Cost-of-Insurance Charges and a Lawsuit against AXA Equitable for Alleged Inequitable Treatment of Policyholders

On February 1, 2016, a policyholder filed a cost-of-insurance (COI) class action lawsuit against AXA Equitable Life Insurance Company alleging inequitable treatment of certain policyholders. The case resembles lawsuits filed several years ago against operating subsidiaries of Phoenix Companies, Inc., relating to stranger-originated life insurance (STOLI) transactions. The current case focuses on AXA Equitable's singling out of certain policyholders for substantial COI increases and alleges breach of contract. (See Brach Family Foundation v. AXA Equitable, U.S. District Court, Southern District of New York, Case No. 1:16-cv-740.)

The Policy

According to the complaint, the plaintiff is a family foundation and not-for-profit corporation. The plaintiff owns a flexible premium universal life insurance policy on the life of a woman who was 81 when AXA Equitable issued the policy on May 21, 2007. The policy remains in force. The face amount is $20 million. The policy, including the application for the policy, is attached to the complaint as an exhibit.

The rating class was standard non-tobacco user. The minimum initial premium payment, due on or before delivery of the policy, was about $145,000. The planned periodic annual premium was about $930,000. The surrender charge at the beginning of the first policy year was about the same as the first-year planned annual premium. The surrender charges, which decline steadily, will be zero after 15 policy years.

The Application for the Policy

Part 1 of the application for the policy had personal information redacted (blacked out). Part 2, the paramedical or medical examination, was redacted in its entirety.

The unredacted portion of Part 1 showed the application was dated April 30, 2007, in Brooklyn, New York. Joel Berger of JB Brokerage Corp. was the "licensed financial professional/insurance broker" who signed the application. The owner of the policy was shown as the primary beneficiary and there was no contingent beneficiary. The owner's name and street address were redacted, but it was located in Brooklyn. The owner was described as a trust under a trust agreement dated April 1, 2007, although, as mentioned earlier, the complaint described the owner as a family foundation and not-for-profit corporation. The application showed the insured as having annual earned income of $80,000 and annual rental income of $2 million. The application said the face amount was determined by the family and its legal advisers. No cash accompanied the application, but the application said the premium was to be paid in cash and there was no intent to "finance any of the premium required to pay for this policy through a financing or loan agreement." An important item in the application—"Please state the reason you are purchasing this policy (e.g., estate planning, business insurance, etc.)"—was not answered.

The Allegation

The plaintiff alleges in the complaint that certain policyholders will be subjected to "unlawful and excessive" COI increases that the company announced in October 2015 to take effect in March 2016. The plaintiff seeks to represent a class of policyholders who own policies that allow policyholders to pay the minimum premiums needed to keep the policies in force by covering the COI charges and certain other expenses. Any premiums paid above those minimum premiums are added to the account values of the policies.

The plaintiff alleges that AXA Equitable is increasing COI charges on almost 1,700 policies selected in part for the pattern of premium payments. The allegation is based on press reports. Thus the plaintiff alleges that the company is targeting policyholders who minimize their premiums to keep account values as small as possible, despite the fact that the policies expressly allow policyholders to do so. The policy paragraph entitled "Changes in Policy Cost Factors" reads:

Changes in policy cost factors (interest rates we credit, cost of insurance deductions and expense charges) will be on a basis that is equitable to all policyholders of a given class, and will be determined based on reasonable assumptions as to expenses, mortality, policy and contract claims, taxes, investment income, and lapses. Any change in policy cost factors will never result in an interest crediting rate that is lower than that guaranteed in the policy, or policy charges that exceed the maximum policy charges guaranteed in the policy. Any change in policy cost factors will be determined in accordance with procedures and standards on file, if required, with the insurance supervisory official of the jurisdiction in which this policy is delivered.

General Observations

This case presents a crucial unanswered question. What precisely is the meaning of the word "class" that appears in the policy provision quoted above? That question was at the heart of years of legal proceedings in the Phoenix COI cases, and I think it is at the heart of this case also.

The question can be asked in another way. Is it fair and equitable to treat those paying minimum premiums—to keep flexible premium universal life policies in force—as a separate class for pricing purposes, or should policies be classified in the traditional manner by such variables as age, gender, occupation, and health status? The question was not answered in the Phoenix cases, because the cases were settled and not adjudicated.

On a separate matter, and for various reasons, I think the policy owned by the plaintiff in this case may be viewed as the result of a STOLI transaction, despite the fact that there is no mention of the policy having been resold in the secondary market. The nature of the insurable interest of the owner/beneficiary/applicant (the trust or family foundation) in the life of the insured is unclear, as is the relationship between the amount of insurance and the financial status of the insured. The application did not explain how the amount of insurance was determined and did not indicate the purpose of the insurance, although it is possible that the broker provided that information to the company in a separate communication. The policy was issued in 2007, during the STOLI heyday before most life insurance companies tightened their underwriting practices.

Available Material

I am making available a 49-page PDF consisting of the 18-page complaint and the 31-page exhibit containing the policy and the application. Email jmbelth@gmail.com and ask for the February 2016 Brach/AXA Equitable package.

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Email: jmbelth@gmail.com 

Blog: www.josephmbelth.com