No. 183: The Surplus Note at Senior Health Insurance Company of Pennsylvania—Further Information and a Correction

Senior Health Insurance Company of Pennsylvania (SHIP) is a long-term care insurance company in runoff. On February 19, 2015, SHIP issued a $50 million five-year surplus note to Beechwood Re, a Cayman Islands-based reinsurance company. The interest rate is 6 percent. SHIP used the $50 million as an urgently needed surplus infusion. The infusion was shown in SHIP's December 31, 2014 financial statement, which was filed with the Pennsylvania insurance department on March 1, 2015. I wrote about the SHIP/Beechwood surplus note in Nos. 123 (10/27/15), 125 (11/6/15), 174 (8/11/16), 180 (9/19/16), and 182 (10/7/16). Here I provide further information and correct a statement I made in No. 182.

The Bizarre Nature of a Surplus Note
A surplus note is a bizarre financial instrument. The money received by the company issuing the note increases the company's surplus. That happens because state surplus note laws say the company issuing the note does not have to establish a liability. A surplus note is subordinate to all the company's obligations. A surplus note can be issued only with the prior approval of the insurance commissioner in the issuing company's state of domicile. Interest and principal payments on a surplus note can be made only with the prior approval of the commissioner.

The Unpaid Interest
In No. 182, I said SHIP missed three $1.5 million semiannual interest payments on the surplus note (in August 2015, February 2016, and August 2016) for a total of $4.5 million. A SHIP spokesman confirmed that the company has not made interest payments. I asked him whether SHIP asked the Pennsylvania commissioner for permission to pay interest and was denied permission, or whether SHIP did not ask for permission. He said SHIP did not ask for permission to pay interest.

In No. 182, I also said the failure to pay interest means the surplus note is in default. One of my readers said the failure to pay interest on a surplus note is not a default. His comment prompted me to look closely at the wording of SHIP's surplus note. I asked SHIP for a copy of the surplus note, but the spokesman said SHIP would not provide it.

Therefore I reviewed the offering circulars for surplus notes issued by several large mutual life insurance companies in the 1990s. Through the review, I learned that my reference to default was incorrect, and that my reader was correct. Here is some language in one of the circulars:

• Each payment of interest on and the payment of principal of the Notes may be made only out of [the Company's] surplus and with the prior approval of the Insurance Commissioner of [the Company's state of domicile] if, in the judgment of the Commissioner, the financial condition of [the Company] warrants the making of such payments.
• The Notes will constitute debt obligations of the type generally referred to as "surplus notes." The net proceeds of the issuance of the Notes will be recorded by [the Company] as additional admitted assets. For statutory accounting purposes, however, the Notes are not part of the legal liabilities of [the Company]. Accordingly, [the Company's] surplus will be increased by the net proceeds from the sale of the Notes.
• Any such payment [of interest or principal] will reduce [the Company's] surplus.
• If the Commissioner does not approve a payment of interest on or principal of the Notes, the applicable interest payment date or the maturity date, as the case may be, will be extended until such time, if any, as such approval is obtained. Interest will continue to accrue on any unpaid principal amount of the Notes (but not on unpaid interest the payment of which has not been approved) during the period of such extension.
• The Notes will be expressly subordinate in right of payment to all existing and future Senior Indebtedness and Policy Claims of [the Company], including all future indebtedness issued, incurred or guaranteed by [the Company], other than any future surplus notes or similar obligations of [the Company].
• To the extent authorized by [the Company's] Board of Directors, [the Company] may continue to declare policyholder dividends and to make dividend payments on its participating policies regardless of the effect any such declaration or payment may have on the Commissioner's decision regarding the payment of interest on or principal of the Notes. [Note: I believe that SHIP does not offer participating policies, but I included this point to help readers gain a further understanding of surplus notes.]

In short, if interest or principal payments are not made, the due dates of the payments would be extended indefinitely. Thus the party that purchases a surplus note would have no recourse if the company that issued the surplus note misses interest or principal payments.

The Invention of Surplus Notes
Surplus notes were invented more than a century ago as a vehicle through which a mutual insurance company in financial trouble can obtain a surplus infusion. A mutual company has no shareholders who can provide a surplus infusion. Also, a company cannot obtain a surplus infusion by borrowing the money through an ordinary loan, because the asset (cash) received would be offset by a liability and there would be no increase in surplus. The early state surplus note laws allowed only mutual companies to issue surplus notes, but the laws were later amended to allow stock companies to issue them.

The Income Tax Issue
A question arose concerning federal income taxation of the interest an insurance company pays on a surplus note. Insurance companies argued that the interest is deductible because it is interest on debt. The Internal Revenue Service (IRS) argued that the interest is not deductible because it is in the nature of a dividend on stock. The insurance companies won the argument, but it made little difference at the time because surplus notes were issued only in small amounts by companies in financial trouble.

The Revolution of 1993
Then came the revolution of 1993, which I discussed in the February 1994 issue of The Insurance Forum. Prudential Insurance Company of America, a mutual company at the time, was not in financial trouble. Yet the company issued $300 million of surplus notes in a private offering. The company used the net proceeds to prefund a voluntary employee benefit association (VEBA) providing certain post-retirement benefits for certain employees. The company used surplus notes solely for one reason: the interest was deductible. Goldman, Sachs & Co., Prudential's adviser on the surplus note offering, put it succinctly: 62 percent of the contribution to the VEBA came from Prudential and the other 38 percent came from the IRS. The transaction also could be viewed as increasing our annual deficit, increasing our national debt, and burdening other taxpayers.

At the end of 1981, small life insurance companies in financial trouble had about $400 million of surplus notes outstanding. Prudential's 1993 action touched off an avalanche of surplus note offerings by major insurance companies that were not in financial trouble. By the end of 2012 (based on the final tabulation I published in the August 2013 issue of the Forum), life insurance companies had $28 billion of surplus notes outstanding, and property insurance companies had $14 billion outstanding.

For many years the only holdouts among major life insurance companies were Northwestern Mutual Life Insurance Company and Teachers Insurance and Annuity Association of America. When they succumbed to the temptation to issue surplus notes, I wrote about their actions in the August 2010 issue of the Forum.

The surplus note activity that began in 1993 stemmed from the deductibility of the interest paid on surplus notes. I think the IRS was correct. A surplus note is not a "debt obligation" (despite what offering circulars say), and the interest paid on a surplus note is not interest on debt. I think the interest is in the nature of a shareholder dividend, which is not deductible.

An Interesting Coincidence
In SHIP's annual statement for the year ended December 31, 2015, Schedule BA - Part 2 shows "other long-term invested assets acquired." The schedule says SHIP, on February 19, 2015, acquired an "other long-term invested asset" from "Beechwood Re Investments" for $50,168,039. SHIP made the acquisition on the very day SHIP issued the surplus note to Beechwood Re, and the cost of the acquisition was almost identical to the amount of the surplus note. In other words, on that day SHIP received a $50 million surplus infusion from Beechwood pursuant to the surplus note, and SHIP handed over about $50 million to Beechwood.

General Observations
In No. 182, I expressed the belief that the SHIP/Beechwood surplus note was not an arm's-length transaction, because an interest rate of 6 percent did not compensate Beechwood for the risk involved in lending money to SHIP, a company which was at the time and still is in fragile financial condition. I also expressed the belief that the $50 million surplus infusion was a gift from Beechwood in exchange for SHIP's investing money with Beechwood. The schedule in SHIP's 2015 statement supports my beliefs.

The "other long-term investments" schedule in SHIP's 2015 statement shows some SHIP investments in Platinum Partners, a hedge fund, near the end of 2015. The SHIP spokesman said SHIP was deceived, because in early 2015 Beechwood did not tell SHIP about Beechwood's close ties to Platinum, and because Beechwood transferred the invested funds to Platinum without SHIP's knowledge or consent. Those SHIP allegations resemble the allegations in CNO Financial Group's lawsuit against Platinum/Beechwood officials. I discussed the lawsuit in No. 182.

Available Material
I am offering a 15-page complimentary PDF consisting of excerpts from the February 1994, August 2010, and August 2013 issues of The Insurance Forum. Email jmbelth@gmail.com and ask for the October 2016 surplus note package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 182: Long-Term Care Insurance Liabilities Return to the Forefront at CNO Financial (Formerly Conseco)

On September 29, 2016, two developments brought long-term care insurance reserve liabilities back to the forefront at CNO Financial Group, Inc. (CNO), which formerly was Conseco, Inc. First, CNO filed an 8-K (significant event) report with the Securities and Exchange Commission. Second, two CNO subsidiaries, New York-domiciled Bankers Conseco Life Insurance Company and Indiana-domiciled Washington National Insurance Company, filed a federal court lawsuit (referred to here as "CNO's complaint") against three individuals associated with Beechwood Re, a Cayman Islands-based reinsurance company, and Platinum Partners, a New York-based hedge fund. On the same day, Reuters posted an article by reporter Lawrence Delevingne about CNO's 8-K report and CNO's complaint.

Background

In No. 180 (posted September 19, 2016), I described how CNO (then Conseco) separated itself in 2008 from a financially troubled long-term care insurance subsidiary that was in runoff. With the approval of the Pennsylvania insurance commissioner, CNO transferred the subsidiary, Pennsylvania-domiciled Conseco Senior Health Insurance Company, to an independent trust and renamed it Senior Health Insurance Company of Pennsylvania (SHIP).

In the same post I explained how SHIP enhanced its surplus by borrowing money, through a surplus note, from Beechwood, which has close ties to Platinum. I indicated that SHIP invested a significant amount of assets in Platinum offerings, but was trying to divest itself of those investments. I also described SHIP's fragile financial condition, with total adjusted capital at the end of 2015 (including the surplus infusion from Beechwood) below company action level risk-based capital.

CNO's 8-K Report

Bankers Conseco Life and Washington National transferred their long-term care insurance reserve liabilities to Beechwood through reinsurance agreements that required Beechwood to maintain quality assets in trust to meet its obligations under those agreements. CNO's 8-K report explains how CNO and its regulators, through examinations, learned that Beechwood and Platinum were tied closely together, that Beechwood had invested its reinsurance trust assets in Platinum's offerings, that those offerings were not in compliance with state laws and regulations governing reinsurance trust assets, and that the transfers of liabilities from the CNO subsidiaries to Beechwood therefore were not valid.

The text of CNO's 8-K report describes the problems. The report also contains three exhibits: a regulatory demand letter from the New York Department of Financial Services to Bankers Conseco Life, a regulatory demand letter from the Indiana Department of Insurance to Washington National, and a CNO press release. The demand letters assert that the assets held in trust by Beechwood under the reinsurance agreements do not comply with state laws and regulations, and threaten disciplinary action unless the problems are resolved promptly.

CNO's Complaint

CNO's complaint describes the close ties between Beechwood and Platinum. It alleges, for example, that Beechwood officials are also Platinum officials. The defendants are Moshe Feuer, Scott Taylor, and David Levy. (See Bankers Conseco Life v. Feuer, U.S. District Court, Southern District of New York, Case No. 16-cv-7646.)

The complaint describes how the reinsurance agreements came about, and how the defendants allegedly misled the plaintiffs into entering into the agreements. The complaint mentions SHIP's investments in Platinum's offerings, but does not mention SHIP's surplus note relationship with Beechwood. I discuss that relationship below. The complaint lists 12 counts of alleged wrongdoing, including three counts of violations of the federal Racketeer Influenced and Corrupt Organizations (RICO) Act:

1. Breach of Fiduciary Duty
2. Aiding and Abetting a Breach of Fiduciary Duty
3. Fraudulent Misrepresentation/Fraudulent Concealment
4. Aiding and Abetting a Fraud
5. Violation of RICO—18 U.S.C. §1962(c)
6. Violation of RICO—18 U.S.C. §1962(a)
7. RICO Conspiracy—18 U.S.C. §1962(d)
8. Civil Conspiracy to Commit Fraud
9. In the Alternative, Negligent Misrepresentation
10. In the Alternative, Negligence
11. In the Alternative, Gross Negligence
12. In the Alternative, Unjust Enrichment

CNO's complaint was assigned to U.S. District Court Judge Edgardo Ramos, a 2011 Obama nominee. U.S. Magistrate Judge Barbara C. Moses was also assigned to the case.

The SHIP/Beechwood Surplus Note

A surplus note is a debt instrument that increases the surplus of the borrowing company because the company is not required to establish a liability for the amount borrowed. A surplus note is subordinate to the borrowing company's other obligations, and can be issued only with the insurance commissioner's prior approval. Also, interest and principal payments can be made only with the commissioner's prior approval.

On February 19, 2015, SHIP borrowed $50 million from Beechwood by issuing a five-year surplus note with the permission of the Pennsylvania insurance commissioner. The interest rate is 6 percent. The surplus infusion was reflected in SHIP's December 31, 2014 financial statement, which was filed March 1, 2015.

Questions for SHIP
After the September 29 developments described above, I wrote to Brian Wegner, president and chief executive officer of SHIP. I asked:

1. Have you paid any interest on the surplus note? If your answer is yes, please indicate dates and amounts, and please send me the letter(s) you received from the Pennsylvania commissioner approving the payment(s). If your answer is no, please explain whether this means the surplus note is in default.


2. Did Beechwood agree to lend you the $50 million in exchange for your investment in Platinum's offerings? If your answer is yes, please indicate the date on which you began investing in Platinum's offerings. If your answer is no, please explain what prompted you to borrow from Beechwood (rather than someone else) and what prompted you to invest in Platinum's offerings.

I asked for answers "on the record" and indicated a response date. I did not receive a response directly from SHIP. Instead I received a telephone call on behalf of SHIP from a media relations person in New York. He said he would try to obtain detailed answers to my questions by the response date, but he was not able to do so. I plan to prepare a follow-up post when and if SHIP provides detailed answers.

General Observations
As mentioned in No. 180, exhibits of "other long-term invested assets" in recent SHIP statements show that the company had significant investments in Platinum's offerings. On September 15, 2016, Reuters posted an article entitled "Long-term care insurer SHIP works to dump Platinum cargo." According to the article, SHIP, as of June 30, 2016, had at least $100 million of Platinum's offerings (3.6 percent of SHIP's assets). The article quoted SHIP's Brian Wegner as saying that "the company is in the process of reviewing and shedding all Platinum-related investments—now down to about $50 million—and would be done by the end of 2016," and that "SHIP has experienced no losses and fully anticipates that will be the case as the remainder is divested."

Normally interest on surplus notes is payable semiannually. With regard to the 6 percent surplus note through which SHIP borrowed $50 million from Beechwood to increase SHIP's surplus, I think SHIP has missed three semiannual interest payments of $1.5 million each, for a total of $4.5 million. Therefore, I think SHIP is in default on the surplus note. However, I am not aware of any action taken against SHIP by Beechwood or by the Pennsylvania insurance commissioner.

I think the SHIP/Beechwood surplus note was not an arm's-length transaction, because an interest rate of 6 percent does not compensate Beechwood for the risk involved in lending money to SHIP, which was in fragile financial condition at the time of the loan, and still is. I believe that the $50 million was a gift from Beechwood to SHIP in exchange for SHIP making investments in Platinum's offerings.

Available Material
I am offering a 71-page complimentary PDF consisting of CNO's 14-page 8-K report (including the three exhibits) and CNO's 57-page complaint against three individuals associated with Beechwood and Platinum. Email jmbelth@gmail.com and ask for the October 2016 CNO/Beechwood package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 181: State Farm Insurance—Class Certification in a Lawsuit in Federal Court Alleging that the Company Subverted the Illinois Court System

On September 16, 2016, U.S. District Court Judge David R. Herndon issued a "Memorandum and Order" (Order) in an extraordinary case. He ruled that "the Court finds the class certification is proper and grants the motion for class certification."

Judge Herndon, a 1998 Clinton nominee, is in the Southern District of Illinois and is a former chief judge there. His Order grew out of a complaint filed in May 2012 and an amended complaint filed in November 2014 that describe, in significant detail, an allegation that State Farm Mutual Automobile Insurance Company (Bloomington, Illinois) subverted the Illinois state court system for the benefit of the company. (See Hale v. State Farm, U.S. District Court, Southern District of Illinois, Case No. 12-cv-660.)

The Avery Case
The underlying case—Avery v. State Farm—was a class action lawsuit filed in an Illinois state court in 1997. The plaintiffs were State Farm policyholders whose automobiles were repaired with parts that were not factory authorized or were not original-equipment-manufacturer parts, or who received compensation based on the cost of those parts. After a trial, the jury awarded the plaintiffs $456 million in breach-of-contract damages. The state court judge who presided over the trial added $130 million of disgorgement damages and $600 million of punitive damages, for a total award of $1.186 billion.

State Farm appealed the trial court ruling. In April 2001 the Illinois Appellate Court threw out the $130 million of disgorgement damages as duplicative, but affirmed the remaining $1.056 billion of the award.

In October 2002 the Illinois Supreme Court agreed to hear State Farm's appeal of the Illinois Appellate Court ruling. The case was fully briefed and argued by May 2003, but the decision was delayed more than two years. In August 2005 the Illinois Supreme Court, in a split decision, overturned the $1.056 billion judgment of the Illinois Appellate Court.

The Hale Case
Judges who serve on the Illinois Supreme Court are elected to their positions. In January 2005 the Avery plaintiffs allegedly received reliable information that State Farm had used financial and political influence to accomplish the election of Lloyd Karmeier, an Illinois trial court judge, to a vacant seat on the Illinois Supreme Court. Judge Karmeier won the election in November 2004 over Gordon Maag, an Illinois Appellate Court judge.

The Avery plaintiffs filed a motion to disqualify Judge Karmeier from participating in State Farm's appeal of the Avery ruling in the Illinois Appellate Court. State Farm's response to the motion allegedly misrepresented and concealed the magnitude of the company's involvement in the election of Judge Karmeier. The Illinois Supreme Court denied a motion by the Avery plaintiffs to disqualify Judge Karmeier. In August 2005 Judge Karmeier cast an important vote in favor of State Farm in the previously mentioned split decision that overturned the $1.056 billion judgment.

In December 2010 attorneys for the Avery plaintiffs began an investigation into State Farm's involvement in the election of Judge Karmeier. The investigation followed a U.S. Supreme Court decision overturning a West Virginia Supreme Court ruling in a case involving a party's financial and political influence to elect a judge whose vote it sought for an appeal. A retired special agent of the Federal Bureau of Investigation led the probe. It allegedly found evidence that State Farm had recruited Judge Karmeier, directed his election campaign, funneled as much as $4 million to the campaign ($4 million was the bulk of the campaign's funds), and concealed this information from the Illinois Supreme Court while the appeal was pending. The investigation also allegedly found evidence that State Farm had worked through Edward Murnane, president of the Illinois Civil Justice League, and William G. Shepherd, a State Farm employee who headed Citizens for Karmeier.

In May 2012 the plaintiffs filed the initial complaint in the Hale case alleging two counts of violations of the Racketeer Influenced and Corrupt Organizations (RICO) Act. In November 2014 the plaintiffs filed an amended complaint that alleged the same two RICO counts. The defendants are State Farm, Murnane, and Shepherd. The thrust of the allegations is that State Farm used financial and political influence to accomplish Judge Karmeier's election to the Illinois Supreme Court.

State Farm's Comment
I asked State Farm for comment on Judge Herndon's Order. A spokesman for the company provided this statement:

We are disappointed in the Court's decision on the class certification question, and respectfully disagree with it. We intend to ask the appellate court to review this ruling in the very near future. Plaintiffs have unsuccessfully asserted and reasserted these allegations for many years and should not be permitted to do so any longer.

General Observations
Readers of The Insurance Forum, my 2015 book entitled The Insurance Forum: A Memoir, and this blog are aware that I have reported over the years on many troubling cases. The Hale case, however, is one of the most troubling I have ever seen. Judge Herndon included, near the beginning of his Order and before his discussion of the class certification issues, a verbatim excerpt from the first six pages of the amended complaint in the Hale case.

The Hale case and its predecessor, the Avery case, have been around for almost two decades. Whether the end is near remains to be seen. If State Farm files an appeal of Judge Herndon's Order, presumably the company would do so in the U.S. Court of Appeals for the Seventh Circuit. However, Hale has the feel of a case that eventually may reach the U.S. Supreme Court. I plan to follow further developments in the Hale case and report on them.

Available Material
I am offering a complimentary 29-page PDF containing Judge Herndon's Order, which includes a lengthy verbatim excerpt from the amended complaint in the Hale case. Send an email to jmbelth@gmail.com and ask for the Herndon/State Farm Order dated September 16, 2016.

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Blog: www.josephmbelth.com

No. 180: Long-Term Care Insurance—An Update on Senior Health Insurance Company of Pennsylvania

Senior Health Insurance Company of Pennsylvania (SHIP), formerly Conseco Senior Health Insurance Company (CSHI), is a long-term care (LTC) insurance company in runoff; that is, SHIP is not issuing new policies. In 2008 Indiana-based Conseco, Inc. (now CNO Financial Corp.) announced a plan to separate itself from Pennsylvania-based CSHI, a financially troubled LTC insurance subsidiary. Over 11 years, Conseco had poured $915 million into CSHI to keep the company solvent.

I wrote about Conseco's separation from CSHI in the November 2008, January 2009, and June 2009 issues of The Insurance Forum. I also wrote about SHIP in Nos. 123 (October 27, 2015), 125 (November 6, 2015), 174 (August 11, 2016), and 175 (August 18, 2016). This update is based on SHIP's recent financial statements and other developments.

The Plan of Separation
The plan of separation provided for Conseco to create an independent trust in Pennsylvania, transfer ownership of CSHI to the trust, and rename the company SHIP. The Pennsylvania insurance commissioner approved the plan, and Conseco implemented it. The commissioner testified later in another matter that he approved the plan because Conseco said it would otherwise allow CSHI to become insolvent.

SHIP still has a relationship with CNO. According to a reinsurance exhibit in SHIP's 2015 financial statement, SHIP reduced its reserve liabilities by about $1 million through reinsurance ceded to Washington National Insurance Company, a subsidiary of CNO.

SHIP's Backdated Surplus Infusion
In this post I refer to "surplus" and "total adjusted capital" interchangeably because they are similar. On March 1, 2015, SHIP filed its financial statement for the year ended December 31, 2014. According to the statement, SHIP borrowed $50 million on February 19, 2015, to obtain a surplus infusion. SHIP backdated the infusion seven weeks by including it on the December 31, 2014 balance sheet. SHIP borrowed the money by issuing a five-year surplus note with an annual interest rate of 6 percent. The lender (the buyer of the surplus note) was Beechwood Re, a Bermuda-based company with which CNO has a reinsurance relationship.

A surplus note is a debt instrument that increases the surplus of the borrowing company because the company is not required to establish a liability for the amount borrowed. A surplus note is subordinate to the borrowing company's other obligations, and can be issued only with the insurance commissioner's prior approval. Also, interest and principal payments can be made only with the commissioner's prior approval.

SHIP's Situation at the End of 2014
At the end of 2014, without the $50 million backdated surplus infusion discussed above, SHIP would have had total adjusted capital of $68 million. That would have been below regulatory action level RBC (risk-based capital) of $82 million, and the commissioner would have been required to conduct a confidential investigation. With the surplus infusion, however, SHIP's total adjusted capital was $118 million ($68 million plus $50 million), which was well above regulatory action level RBC of $82 million and slightly above company action level RBC of $109 million.

SHIP's Situation at the End of 2015
On March 1, 2016, SHIP filed its financial statement for the year ended December 31, 2015. The statement shows that the company has not paid any interest on the surplus note. I do not know whether the commissioner denied the company's request for permission to pay interest, or whether the company did not request permission.

At the end of 2015, including the $50 million surplus infusion discussed above, SHIP had total adjusted capital of $94 million. That was below company action level RBC of $117 million, and the company was required to file a confidential RBC report with the commissioner indicating how the company proposed to deal with the problem. I do not know whether the company filed the report, and if so, how the company proposed to deal with the problem.

Platinum Partners
Norman Seabrook is a former official of New York City's Correction Officers Benevolent Association (COBA). Murray Huberfeld is a founder of Platinum Partners, a hedge fund.

On July 7, 2016, U.S. Attorney Preet Bharara of the Southern District of New York filed a grand jury indictment charging Seabrook and Huberfeld with one count of conspiracy to commit honest services wire fraud and one count of honest services wire fraud. The indictment alleges that a "kickback scheme" deprived COBA members of Seabrook's "honest services" when COBA's annuity fund and COBA's general fund invested in Platinum offerings. (See U.S.A. v. Seabrook and Huberfeld, U.S. District Court, Southern District of New York, Case No. 16-cr-467.)

On July 26, 2016, The Wall Street Journal ran a front-page article about Platinum. Beechwood was mentioned because of ties to Platinum.

Exhibits of "other long-term invested assets" in recent SHIP statements show that the company has significant holdings of Platinum-related investments. On September 15, 2016, Reuters posted an article entitled "Long-term care insurer SHIP works to dump Platinum cargo," by reporter Lawrence Delevingne. The article says that, as of June 30, 2016, SHIP "had at least $100 million of its assets [3.6 percent of its $2.8 billion of assets and 106 percent of its $94 million of total adjusted capital at the end of 2015] invested in Platinum's funds or companies backed by Platinum." The Reuters article quotes Brian Wegner, SHIP's president and chief executive officer, as saying that "the company is in the process of reviewing and shedding all Platinum-related investments—now down to about $50 million—and would be done by the end of 2016," and that "SHIP has experienced no losses and fully anticipates that will be the case as the remainder is divested."

SHIP's 2015 Premium Volume
SHIP's statement for the year ended December 31, 2015 shows the company received $105 million of LTC insurance premiums in 2015. The ten leading states (in millions) were Texas ($9.9), Florida ($9.5), California ($9.5), Pennsylvania ($8.9), Illinois ($6.9), Ohio ($5.3), North Carolina ($3.8), Indiana ($3.2), Maryland ($3.0), and Michigan ($3.0).

General Observations
What will happen to SHIP remains to be seen. The company's recent net losses were $56 million in 2014, $9 million in 2015, $3 million in the first quarter of 2016, and $20 million in the second quarter of 2016. As discussed above, SHIP's total adjusted capital at the end of 2015 was below company action level RBC. It is unclear how a company in runoff and with inadequate total adjusted capital can afford to pay the interest on a surplus note, let alone repay the principal.

As I mentioned in No. 174 (August 11, 2016), Penn Treaty Network America Insurance Company, another Pennsylvania-based LTC insurance company in runoff, has been in rehabilitation for several years. The Pennsylvania insurance commissioner is the court-appointed rehabilitator. The state court judge overseeing the case is expected to rule soon on the commissioner's petition to liquidate Penn Treaty. If the judge grants the petition, state guaranty associations would become involved in the case, and other insurance companies would be required to pay assessments.

Available Material
I am offering a complimentary 20-page PDF consisting of the articles in the November 2008, January 2009, and June 2009 issues of The Insurance Forum (9 pages), and the indictment filed against Seabrook and Huberfeld (11 pages). Email jmbelth@gmail.com and ask for the LTC/SHIP package dated September 19, 2016.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 179: Annuities, Pensions, and the Theft of Benefit Payments—Another Recent Example

In No. 177 (posted August 31, 2016) I reported on the practice of life insurance companies using the Social Security Death Master File in their efforts to deal with the theft of annuity benefits. I said survivors of deceased life annuitants sometimes pretend the annuitant is still alive and thereby steal annuity benefits that should have stopped when the annuitant died. I said the same problem applies to pensioners receiving benefits from pension plans and recipients of Social Security benefits.

I included a recent example of the problem. An individual was charged with grand larceny for allegedly stealing over $100,000 of pension benefits intended for his mother, who had died more than 11 years earlier. After posting that item I learned of another recent example involving an extra dimension.

The New Example
On September 1, 2016, in a joint press release, New York State Attorney General Eric Schneiderman and Comptroller Thomas DiNapoli announced the unsealing of an indictment charging Robert J. Schusteritsch, a 71-year-old Florida resident, with grand larceny in the second degree, a class C felony, and criminal impersonation in the second degree, a class A misdemeanor. He allegedly stole over $180,000 in benefits from a New York State pension plan. The benefits were intended for his brother, Martin Petschauer, who retired in 1986 and died in 2008. The indictment was filed in the state court in Albany County. Here is an excerpt from the press release:

According to documents filed with the court today, Petschauer was a New York State pensioner who retired as Chief of the Pooling and Audit Review Section of the New York Metro Milk Marketing Area in approximately 1986. He passed away on July 9, 2008. At the time of Petschauer's death, his pension benefits were being direct deposited into a bank account held in a trust for the benefit of Petschauer; Schusteritsch was the sole trustee for his brother and had exclusive access to the bank account.

When Petschauer died, Schusteritsch concealed his brother's death from the bank and the Retirement System and kept the trust account open to maintain the direct deposits. He then routinely accessed the pension deposits and spent the money for his own benefit. All told, prosecutors allege Schusteritsch stole over $180,000 in pension benefits until the Retirement System discovered Petschauer's death in October 2015.

The prosecution also alleges that when the Retirement System learned of Petschauer's death and stopped paying benefits into the trust account, Schusteritsch called the customer help line on November 2, 2015, pretended he was Petschauer, and asserted that he was not actually dead, in an effort to maintain eligibility for the pension benefits.

Schusteritsch was arrested in Florida and brought to Albany. At his arraignment, he pleaded not guilty. Bail was set at $10,000 cash or bond, and he was remanded in lieu of posting. If convicted, he faces "up to five to fifteen years" in state prison.

General Observations
In No. 177, I said I have seen examples of legal actions against persons who allegedly stole annuity or pension benefits, but have not seen discussions of the magnitude of the problem. I expressed the belief that there are large numbers of such incidents, but many thefts may not be large enough to warrant criminal charges.

Longtime readers of The Insurance Forum know I dislike life annuities. One reason is that the cost of the "protection against living too long" cannot be readily ascertained, and I dislike buying something whose cost is unknown. Another reason is that benefits stop at the death of the annuitant, at the end of a "period certain," or, in the case of a joint and survivor life annuity, at the death of a second annuitant.

My preference is for systematic (usually monthly) withdrawals, allowing the annuitant's family to receive the funds remaining after the annuitant's death. The annuitant runs the risk of living so long that the funds are exhausted before the annuitant's death. However, the risk is small if the annuitant sets the withdrawals each year at the required minimum distribution (RMD) level, even where RMDs do not apply. I explained and illustrated the procedure in the August 1998, November 1998, August 2012, and November 2012 issues of the Forum.

Available Material
I am offering a complimentary 13-page PDF consisting of the 2-page September 1 press release issued by the New York State attorney general and the comptroller, the 1-page article in the August 1998 issue of the Forum, the 4-page article in the November 1998 issue, the 3-page article in the August 2012 issue, and the 3-page article in the November 2012 issue. Email jmbelth@gmail.com and ask for the September 2016 package relating to the theft of annuity benefits and systematic withdrawals.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 178: Iowa's Accounting Rules and a Petition Seeking Access to Documents

In November 2014 I posted three items about Iowa's accounting rules (Nos. 71, 72, and 73). Later I posted several other related items. Also, under Iowa's open records law, I obtained some documents from the Iowa Insurance Division (IID). However, the IID and Commissioner Nick Gerhart denied access to other documents relating to eight limited purpose subsidiaries that Iowa-domiciled life insurance companies have created.

On September 2, 2016 my attorney filed, in the Iowa District Court for Polk County, which includes Des Moines, a petition seeking judicial review of the IID's and Commissioner Gerhart's denial of access to the documents. My attorney also filed nine exhibits: my letter requesting documents, Commissioner Gerhart's letter denying the request, a report by the New York State Department of Financial Services, comments by the U.S. Financial Stability Oversight Council, a report by the U.S. Office of Financial Research, and four news stories.

Because I am a litigant, I will not comment on the case. However, I am making available two complimentary PDFs containing publicly available court documents: the petition (32 pages) and the exhibits (75 pages). Email jmbelth@gmail.com and ask for the petition only, or the petition and the exhibits, relating to Belth v. IID and Gerhart.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 177: Annuities, Pensions, and the Theft of Benefit Payments

The August 1980 issue of The Insurance Forum carried an article about unclaimed death benefits. However, the subject did not catch fire until July 28, 2010, when Bloomberg News carried an article by reporter David Evans. The article, which dealt with life insurance owned by members of the military, strongly criticized life insurance companies for using the Social Security Death Master File (DMF) to help them stop the theft of annuity benefit payments while failing to use the DMF to help them pay unclaimed death benefits. The New York Times, The Wall Street Journal, and The Washington Post immediately picked up the story, and I wrote about it in the October and November 2010 issues of the Forum. I have never seen a discussion of the magnitude of the theft of annuity benefit payments.

The Notification Problem
A life annuity is a series of payments, often monthly, made to an annuitant. In many instances, the payments are contingent on the survival of the annuitant. Thus the benefits payable under many annuities are supposed to stop when the annuitant dies. When I refer to annuitants, I also have in mind pensioners who receive benefit payments from private employer-sponsored pension plans, from federal, state, and local government pension plans, and from the Social Security System.

Annuity and pension benefit payments are invariably made by mail or by direct deposit into the annuitant's or pensioner's bank account. Thus the insurance company or pension plan depends on a survivor to provide notification of the death of the annuitant or pensioner so that the company or the pension plan can stop the benefit payments. However, a survivor may pretend the annuitant or pensioner is still alive and thereby steal the continuing benefit payments. When the payment comes by check, a survivor may forge the deceased person's endorsement on the check and thereby steal the payment. When the payment goes into a joint bank account owned by the annuitant (or pensioner) and a survivor, it may be even easier for the survivor to steal the continuing payments.

A Recent Example
On August 15, 2016, in a joint press release, New York State Attorney General Eric Schneiderman and Comptroller Thomas DiNapoli announced an indictment charging John H. Eydeler III, a 66-year-old Arizona resident, with grand larceny in the second degree, a class C felony. He allegedly stole over $100,000 in benefits from a New York State pension plan. The benefits were intended for Eydeler's mother, a retired nurse, who died in October 1998. The indictment was filed in a state court in Albany. Here is an excerpt from the press release:

According to investigators, Eydeler concealed his mother's death in 1998 from the New York State and Local Employees Retirement System. As a result, between October 1998 and January 2010, over $100,000 in pension benefits were deposited into a bank account in the name of Eydeler's deceased mother. Eydeler then allegedly diverted these monies to himself by claiming to have power of attorney for his mother and writing checks to himself every month for over a decade.

At Eydeler's arraignment, he pleaded not guilty. If convicted, he would face "up to five to fifteen years" in state prison.

General Observations
Over the years I have seen examples of legal actions against persons who allegedly stole annuity or pension benefits. However, I have not seen any discussions of the magnitude of the problem. I think there are large numbers of such incidents, but many thefts may not be large enough to warrant criminal charges.

I am not mentioning this subject to defend life insurance companies who use the DMF to try to minimize annuity theft while not using the DMF to try to pay unclaimed death benefits. Rather, I am mentioning the subject to point out that the companies may have had—and may still have—a major problem in dealing with the theft of annuity benefit payments.

Available Material
I am offering a complimentary 12-page PDF consisting of the 1-page press release issued by the New York State attorney general and the comptroller, the 2-page article in the August 1980 issue of the Forum, the 4-page article in the October 2010 issue the Forum, and the 5-page article in the November 2010 issue of the Forum. Email jmbelth@gmail.com and ask for the September 2016 package relating to the theft of annuity benefit payments.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com