No. 220: Connecticut Violates the Constitutional Rights of Insurance Policyholders

Connecticut recently enacted a law that authorizes a Connecticut-domiciled insurance company to divide itself into two or more insurance companies. In this post I explain the reasons for my opinion that the law violates the constitutional rights of insurance policyholders.

Novation

An insurance contract creates a creditor-debtor relationship between the parties. The policyholder is the creditor and the insurance company is the debtor. Consider this loan contract analogy:

Sue borrows money by entering into a loan contract with a bank. The bank is the creditor and Sue is the debtor. Sue and her friend Jim later enter into a separate contract under which Jim agrees to take over Sue's obligations. Imagine the reaction of the bank's loan officer when she receives this letter from Sue:

"Effective immediately, my obligations to you have been taken over by Jim. You have no recourse to me in the event of Jim's failure to meet his obligations to you."

The problem is that a debtor cannot be relieved of his, her, or its obligations to a creditor without the consent of the creditor. In the case of an insurance policy, the insurance company (the debtor) cannot be relieved of its obligations to the policyholder (the creditor) without the consent of the policyholder.

If the policyholder consents, the transaction would be a "novation," in which another debtor is substituted for the original debtor. Stated differently, another insurance company is substituted for the original insurance company. Stated still differently, the obligations under an insurance policy contract are transferred from the original insurance company to another insurance company.

Consent

The two major types of consent to a novation are affirmative (positive) consent and implied (negative) consent. Affirmative consent occurs when the creditor signs a form granting permission to complete the novation. Implied consent occurs when the creditor does nothing and is deemed to have consented to the novation.

The Penn Mutual Case

In 1963 Mr. X bought a noncancellable and guaranteed renewable disability insurance policy from Penn Mutual Life Insurance Company. In the 1970s Penn Mutual stopped issuing new disability policies, but continued to administer its previously issued disability policies.

In 1986 Penn Mutual sent Mr. X a letter informing him that his disability policy had been transferred to Benefit Trust Life Insurance Company. In response to Mr. X's inquiry, a Penn Mutual official said that Benefit Trust had taken total control of the disability policies and the obligations under them, and that Penn Mutual had no further obligations under the policies. In response to my subsequent inquiry, a Penn Mutual senior officer said policyholders would have no recourse to Penn Mutual in the event of Benefit Trust's insolvency. None of the three Penn Mutual letters said anything about the need for Mr. X's consent to the transfer.

The Advisory Committee
The Penn Mutual case and other similar cases prompted me to write many articles in The Insurance Forum about policy transfers. I also volunteered to serve on an advisory committee appointed by a working group of the National Association of Insurance Commissioners (NAIC) when the regulators sought to deal with the firestorm my articles had created. I was one of nine members of the advisory committee; the other eight represented insurance companies.

All nine members of the advisory committee agreed an insurance company must obtain the consent of the policyholders in a policy transfer. Eight industry members agreed that implied consent was adequate. I disagreed, insisting that affirmative consent was essential.

The chairman of the advisory committee asked the industry members to draft a model bill or model regulation based on implied consent. The advisory committee then submitted its model to the working group. I drafted a model based on affirmative consent and submitted my model to the working group as a minority report of the advisory committee.

The Constitutional Question

When the advisory committee submitted its model based on implied consent to the chairman of the working group, he was concerned about whether such a model would survive a challenge under the U.S. Constitution. He asked the chairman of the advisory committee to obtain a legal opinion. The chairman of the advisory committee asked an attorney member of the advisory committee to write a legal opinion. Here is the final sentence of the legal opinion:

For the reasons set forth above, we are of the opinion that the implied consent provision of the proposed Model Act would withstand a challenge based upon the United States Constitution.

I asked an attorney who specializes in constitutional law to review the legal opinion that the advisory committee had obtained. He wrote a memorandum that included these two sentences:

Having carefully reviewed the [advisory committee's opinion] letter and the authorities it discusses, I do not believe that the analysis set forth in the letter is persuasive. For the reasons discussed below, it is far from clear that an implied consent provision would pass muster under either the Due Process or Contract Clauses of the Constitution.

The working group and the NAIC decided to rely on the advisory committee's legal opinion. The NAIC model, therefore, is based on implied consent. In an article in the August 1992 issue of The Insurance Forum, I showed the full text of each of the two opinion letters.

The Recent Connecticut Law

On February 16, 2017, a legislative committee held a public hearing on House Bill 7025 "authorizing domestic insurers to divide." In testimony at the hearing, the Connecticut Insurance Department (CID) endorsed the bill, saying in part:

Generally, this bill will authorize a Connecticut domestic insurer to divide into two or more resulting insurers. This type of corporate restructuring is the reverse of a merger: instead of combining two or more insurers into one, a division will divide the Connecticut domestic insurer into two or more resulting insurers... The domestic insurer is required to file the plan of division with the Insurance Commissioner and obtain approval of the plan. The Commissioner may hold a public hearing to consider the matter if it is deemed in the public interest.

At the same hearing, The Hartford Group also spoke in favor of the bill. A company official said in part:

Being able to segregate businesses would allow domestic insurers to pursue more focused management strategies tailored for individual lines of business. This bill also provides domestic insurers a practical way to segregate and sell businesses that are no longer part of their business strategy, something that Connecticut law doesn't currently provide.

A case in point: In 2012, The Hartford announced it was no longer writing certain life insurance business. Later that year, we transferred our individual life and retirement plans businesses to Prudential and Mass Mutual, respectively. However, The Hartford could not realize a full and final sale of these businesses. Instead, we used the only practical option available. We entered into reinsurance arrangements with those companies. As a result, we have ongoing obligations, administrative complexity and compliance risk associated with those businesses. The long term obligations under the reinsurance arrangements means that The Hartford will experience that complexity and risk for many years to come.

On April 5, 2017, the Connecticut House of Representatives approved the bill. On May 3, the Connecticut Senate approved the bill. On May 8, the bill became law as Public Act No. 17-2 after Connecticut Governor Dannel Malloy did not sign or veto the bill within five days. The law will take effect October 1. I am not aware of anyone testifying against the bill at the hearing, nor am I aware of any publicity about the bill.

Based on testimony at the hearing, I believe that Connecticut's division law is patterned after similar laws in Arizona, Pennsylvania, and Rhode Island. I plan to explore those laws and their origins.

The Debevoise Analysis
Debevoise & Plimpton is a law firm that represents insurance companies. On May 11, three days after the bill became law, Debevoise issued a "client update" on the new law. Debevoise said the new law

may prove to be a valuable tool for Connecticut domiciled insurance companies. It could be used to isolate a block of business for sale to a third party in a transactioon that without the statute could only be accomplished through reinsurance. It could also be used by a company to separate its active book of business from a troubled run-off block, potentially improving the capital position and credit rating of the active company.

General Observations

What Hartford failed to mention in its testimony is that the company could have asked the affected policyholders for their consent to novation of their contracts. Prudential and Mass Mutual would have taken over administration of all the contracts, and would have taken over Hartford's obligations under the contracts of policyholders who consented to the transfer of the obligations. With regard to the contracts of policyholders who did not consent to the transfer, Prudential and Mass Mutual would have continued to administer the contracts, but Hartford would have retained responsibility for the obligations under the contracts.

The "case in point" in Hartford's hearing testimony makes clear the objective of the "division law." The "reinsurance arrangements" were "assumption reinsurance agreements" under which Hartford transferred the policies to Prudential and Mass Mutual. Hartford would have been relieved of its obligations to each policyholder only with the consent of that policyholder, and would have had to retain the obligations to each policyholder who did not consent to the transfer. Because policyholder consent is not required for a "division" or for the sale of a company, Hartford is now able to place unwanted blocks of business in a second company and then sell the second company, thus transferring its obligations to all the affected policyholders without their consent.

Hartford is now permitted to write letters to their policyholders similar to Sue's letter to the bank in the loan contract analogy, and similar to Penn Mutual's 1986 letters to its disability insurance policyholders. In my opinion, the division law allows Connecticut-domiciled insurance companies to transfer their obligations without policyholder consent, and thereby to violate the constitutional rights of their policyholders.

Available Material

I am offering a complimentary 31-page PDF containing the full text of the division law (20 pages), the CID and Hartford testimony at the hearing (3 pages), the Debevoise client update (4 pages), and my article in the August 1992 issue of The Insurance Forum (4 pages). Email jmbelth@gmail.com and ask for the June 2017 package relating to Connecticut's division law.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 219: Cost-of-Insurance Increases, Aetna, Lincoln, Voya, and the New York State Department of Financial Services—An Update

In No. 214 (posted April 20, 2017), I reported that, in August 2016, Lincoln Life & Annuity Company of New York (Lincoln) sent letters to agents informing them of a "temporary postponement" of previously announced cost-of-insurance (COI) increases that were to have been imposed on owners of policies issued in New York State. I also said that, on April 10, I filed with the New York State Department of Financial Services (DFS) a request pursuant to the New York State Freedom of Information Law (FOIL). In the request, I mentioned the postponement, said I assume DFS conducted an investigation, and asked for the file on the investigation. On May 10, DFS sent me a package of letters relating to the investigation. In this update, I describe the letters, show some excerpts I edited lightly to improve readability, and offer readers the full package.

DFS's May 13, 2016 Letter
Aetna Life Insurance and Annuity Company (Aetna) issued the affected policies between 1983 and 2000. Aetna is now Voya Retirement Insurance and Annuity Company (Voya). Lincoln administers the policies through a reinsurance arrangement under which Lincoln acts as both reinsurer and administrative agent for the Aetna block on behalf of Voya.

On May 13, 2016, after learning of the upcoming COI increase, DFS sent Voya a two-page letter. Aside from introductory material and contact information, the letter reads:

DFS is investigating whether these increases comply with all applicable New York State laws and regulations. Voya is hereby requested pursuant to Insurance Law §308 to provide the following information to DFS by no later than May 20, 2016.

1. A side-by-side comparison of new and old COI rates by duration. Please also indicate if there are any no-lapse premium guarantees involved.
2. A copy of the contract language for each policy form for which the COI rate will increase.
3. A detailed explanation of the increase in reinsurance costs.
4. The original profit margins projected from the time of the proposed COI increase forward, assuming no COI increase was made compared to the new profit margins reflecting the effect of the proposed changes. This projection should not factor in reinsurance costs.
5. Confirmation that no other nonguaranteed elements are changing, such as expense loads, other than changes in any fixed account interest rates merely to reflect changes in expected investment returns.
6. An explanation of why the change is being made and the derivation of the previous and current pricing assumptions.
7. A description of the affected market, including whether any of this business is owned by life settlement providers or secondary market life settlement investors.

Voya's September 23 Letter
Emails followed DFS's May 13 letter. They mentioned meetings of Voya and DFS officials on June 30 and July 30. On September 23, Voya sent DFS a five-page letter. Here is the two-paragraph conclusion:

In reviewing the policy language and its reference to class, neither the policy nor the submissions to DFS provide any guidance on how class is to be defined. Accordingly, applying a COI increase uniformly to the entire cohort of policies is consistent with the policy language and thus is the approach underlying Voya's June 14, 2016 submission. [Blogger's note: I do not have Voya's June 14 submission.] While we do not believe using two classes (smoker/nonsmoker) is required under the policy language, we agree that doing so would be consistent with Actuarial Standards of Practice (ASOP) and the policy.

While we submit that the COI rate determination submitted by Voya appropriately applies uniformly across the entire cohort of policies, and neither the policy language nor ASOP requires otherwise, if DFS insists that the redetermination must vary depending upon the premium class of the insureds in the Aetna block, we will submit new calculations for COI redetermination on that basis.

DFS's October 14 Letter
On October 14, DFS sent Voya a three-page letter explaining why DFS disagrees with Voya's analysis and conclusions. Here is the final paragraph:

If Voya intends to pursue the COI increase in question, it should provide a response using the appropriate classes in a manner that is consistent with the §308 letter for DFS's consideration. If Voya implements the increase without providing any additional information and on the basis you suggest, DFS reserves all of its rights with respect to what it believes is a violation of §§4232(b) and 4224(a)(1).

Voya's November 18 Letter
On November 18, Voya sent DFS a three-page letter saying that "we must respectfully disagree with many of the propositions underlying the October 14 letter as well as its overall findings." Here is the final paragraph:

It is Voya's great desire to reach an agreement with DFS as to an acceptable methodology for adjusting COI rates, consistent with policy language, to reflect the increases in costs and loss of profitability that Voya is experiencing. In that regard, as you know, Voya and DFS have had continuing dialogue in the form of face-to-face meetings, calls, letters and emails. Throughout this process, Voya has been concerned by what we view as the apparently changing standards DFS is seeking to apply to these requested increases. Accordingly, so that we may have a clear understanding of the standards and methodology that, in DFS's opinion, are to be applied, we request a letter addressing in detail the information DFS requests to not object to the changes, including DFS's definition of class and acceptable profit metric.

DFS's December 5 Letter
On December 5, DFS sent Voya a two-page letter. Following an introductory paragraph, here is the remainder of the letter:

While your letter references "changing standards DFS is seeking to apply to these requested increases," DFS has been consistent in its application of the law throughout the many iterations of proposed COI increases with multiple insurers. DFS has made clear from the beginning that, in order to demonstrate compliance with standards set forth in the Insurance Law, Voya should provide:

1. a comparison of the original COI and the proposed COI, with a clear illustration of the credible experience from Voya that justifies the proposed increase [italics in original];
2. confirmation that the proposed increase is purely prospective and that Voya will not attempt to recoup past losses;
3. confirmation that only eligible criteria under §4232(b) are used as experience factors to determine the credible experience, not including reinsurance (that is, investment experience, mortality, persistency and expenses);
4. confirmation that the classes of policyholders upon which the proposed increased COIs are to be assessed comport, to the extent practicable (such as 5-year age bands), with the original classes established by the original pricing at the time the policies were issued, which for the Aetna block appear to be "the insured's sex, attained age and premium class";
5. confirmation that the proposed COI increase is compliant with all the approved policy provisions; and
6. confirmation that no increase in profit will be obtained through the proposed COI increase.

We understand that Voya believes it has appropriately "considered [the ASOP 2] factors and determined that the policy class ... can be entire cohorts of policies by policy form." We note that Section 3.4 of ASOP 2 provides for factors to be considered in establishing classes "if the policy classes have not been defined in the determination policy." Based upon our discussions and information provided, we cannot conclude that in this case policy classes were not established. Nor can we conclude that a single cohort is appropriate; a single cohort was clearly not the class determined at the time the policies were originally sold and would not be the reasonable expectation for the consumer based on the policy language. Establishing a single cohort as the class would be inconsistent with §§4232 and 4224 and may, if acted upon, constitute an unfair and deceptive trade practice under Article 24.

As stated previously, if Voya intends to pursue the COI increase in question, it should provide a response using the appropriate classes in a manner that is consistent with the foregoing criteria and the §308 letter for DFS's consideration. If Voya implements the COI increase without providing any additional information and on the basis you suggest, DFS continues to reserve all of its rights with respect to what it believes are violations of law.

Voya's February 23, 2017 Email
On February 23, 2017, Voya sent DFS an email ending the correspondence. Voya's attorney said:

I spoke with the client and they do not intend to have any further communication unless they decide to revisit raising the rates, something on which they have not come to a final position. They believe that the prior communication is still accurate and alerted the policyholders that if there was a change, then they would receive further notification.

More on my FOIL Request
I received two responses to my April 10 FOIL request—one from DFS's New York City office and one from the Albany office. Each said I would be hearing from the other. The New York City office sent the material discussed in this post. The Albany office said that Voya had requested confidential treatment when it submitted material, and that DFS must therefore inform the company of my request and ask whether the company has any objection to release of the material. If the company approves release, the material would be sent to me. If the company objects to release, DFS would make a determination. If DFS rules against the company, DFS would have to inform the company so that it could seek court review of DFS's determination. Thus I anticipate a long delay and may or may not receive any material from the Albany office.

General Observations
I lean toward DFS's position in this dispute. I say "lean toward" because I am uncomfortable taking a firm stand without seeing the material filed with DFS's Albany office.

As I have said in articles in The Insurance Forum and posts on this blog, disputes about COI increases often focus on what constitutes a "class." For example, the "class" question was at the heart of numerous lawsuits against the Phoenix Companies, who created—after sale—a separate class for stranger-originated life insurance policies that were funded by minimum premium outlay and maximum borrowing. I usually oppose "post-sale classification" because I think the practice generally is contrary to the interests of policyholders.

I wrote in detail about "post-sale classification" almost 40 years ago in a major article about the calculation of life insurance policy dividends. The article, in the March 1978 issue of The Journal of Risk and Insurance, included a section about post-sale classification. I am including that section in the package mentioned below.

Available Material
I am offering a complimentary 31-page PDF containing the material I received from DFS's New York City office (23 pages) and my 1978 discussion of post-sale classification (8 pages). Email jmbelth@gmail.com and ask for the May 2017 package relating to the DFS/Voya COI dispute.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 218: Massachusetts Mutual's Dividends and the Proposed Settlement of a Class Action Lawsuit

On July 12, 2012, Karen Bacchi, a Massachusetts resident, filed a class action lawsuit in federal court against Massachusetts Mutual Life Insurance Company (Springfield, MA). The plaintiff alleges that the company violated a Massachusetts law by paying insufficient dividends to owners of participating life insurance policies. The filing of the lawsuit preceded by a few months the filing of a similar lawsuit in Pennsylvania against Penn Mutual, as discussed in No. 217 (posted May 11, 2017). Both lawsuits involve the same plaintiff attorneys.

The Bacchi case is in the hands of U.S. District Judge Denise J. Casper. The case was assigned initially to U.S. District Judge Joseph L. Tauro. When he took senior status, the case was reassigned on October 17, 2013 to U.S. District Judge George A. O'Toole, Jr. On March 11, 2015, the case was reassigned (I do not know the reason) to Judge Casper. President Obama nominated her in April 2010, and the Senate confirmed her in December 2010. (See Bacchi v. Massachusetts Mutual, U.S. District Court, District of Massachusetts, Case No. 1:12-cv-11280.)

The Parties
Bacchi, the plaintiff, purchased a participating whole life policy issued in 1975 by Connecticut Mutual Life Insurance Company. In 1996, Connecticut Mutual merged into Massachusetts Mutual, which is the defendant in this case.

The Allegation
Section 141 of Chapter 175 of the Massachusetts General Laws allows a Massachusetts-domiciled mutual life insurance company to hold a "safety fund" not to exceed 12 percent of the company's reserve liabilities, and requires the company to distribute amounts in excess of the safety fund to its participating policyholders. The law gives the Massachusetts insurance commissioner the authority to allow a company to hold a safety fund larger than 12 percent "for cause shown."

The gist of the case is a disagreement concerning the calculation of the excess funds Massachusetts Mutual held over the years. The plaintiff alleges that the company significantly understated the amount of excess funds it held by overstating its reserve liabilities and thereby understating its surplus. In 2010, for example, the company says it held excess funds equal to 4.65 percent of reserves, a figure well below the safety fund limit of 12 percent. The plaintiff, on the other hand, alleges that in 2010 the company held excess funds equal to 15.87 percent of reserves, a figure well above the safety fund limit of 12 percent.

Subsequent Developments
On October 15, 2012, Massachusetts Mutual filed a motion to dismiss the complaint. On August 27, 2013, after extensive briefing, Judge Tauro denied the motion in an order and a memorandum. The judge said the company's arguments for dismissal involve matters that have to be determined by a trier of fact. On September 10, 2013, the company filed its answer to the complaint.

For more than two years thereafter, the parties wrangled over many issues. For example, there was a blizzard of disputes over the confidentiality of documents filed in the case. On February 12, 2016, Judge Casper established a timetable and scheduled a jury trial to begin February 6, 2017.

On May 6, 2016, Massachusetts Mutual filed a motion for summary judgment. On July 27, 2016, after briefing, and at a hearing on the motion, Judge Casper took the motion under advisement.

The Proposed Settlement
On January 6, 2017, the parties filed a joint status report. They said they anticipated filing a stipulation of settlement within 45 days. Judge Casper thereupon canceled the trial, stayed the case, and ordered the parties to file the settlement papers by March 13.

On that day, the parties filed the proposed settlement agreement. It provides for payment of a total of $37.5 million to persons who are or were owners of Massachusetts Mutual participating policies at any time between January 1, 2001 and December 31, 2016. The payments for the most part are to be in the form of paid-up additions. The parties estimate that the average amount paid to class members receiving benefits will be $22.02. The total payment includes plaintiff attorney fees (not to exceed 25 percent of the $37.5 million), plaintiff attorney expenses, and a service award to the named plaintiff, all to be approved by Judge Casper.

The parties also filed a motion for preliminary approval of the proposed settlement, certification of the proposed class for the purposes of the proposed settlement, approval of the class notice, and appointment of the class representative and class counsel. On March 29, Judge Casper preliminarily approved the proposed settlement and scheduled the final approval hearing for July 27, 2017.

General Observations
This is another interesting case based on an old surplus limitation law. As I said in No. 217, I am not able to express an opinion about the fairness of the settlements in such cases because the precise methods by which companies calculate dividends on their participating policies invariably are shrouded in secrecy. Judge Casper has preliminarily determined that the settlement is fair, and will make a final determination after the July hearing. As I also mentioned, New York in 1906 became the first state to enact such a law, which was later enacted in a few other states, including Massachusetts and Pennsylvania.

Available Material
I am offering a complimentary 64-page PDF consisting of a table of contents (1 page), the complaint (18 pages), Judge Tauro's order (2 pages), Judge Tauro's memorandum (7 pages), the answer to the complaint (17 pages), the joint status report (3 pages), the proposed class notice (9 pages), and Judge Casper's order preliminarily approving the proposed settlement (7 pages). Email jmbelth@gmail.com and ask for the May 2017 package relating to the Bacchi/Massachusetts Mutual dividends case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 217: Penn Mutual's Policy Dividends and the Proposed Settlement of a Class Action Lawsuit

On November 1, 2012, Pennsylvania residents Daniel and Edith Harshbarger filed a class action lawsuit in federal court against Penn Mutual Life Insurance Company, which is domiciled in Pennsylvania. The plaintiffs allege that the company violated a Pennsylvania law by paying insufficient dividends to owners of participating life insurance policies. The case involves not only the court but also the Pennsylvania Insurance Department.

On July 19, 2013, the case was reassigned (initially it was assigned to another judge) to U.S. District Judge Nitza I. Quiñones Alejandro. President Obama nominated her in November 2012, and the Senate confirmed her in June 2013. (See Harshbarger v. Penn Mutual, U.S. District Court, Eastern District of Pennsylvania, Case No. 2:12-cv-6172.)

The Parties
The plaintiffs own Penn Mutual participating whole life policies. Daniel owns three policies issued in 1973, 1974, and 1977. Edith owns two policies issued in 1993. The defendant is Penn Mutual.

The Allegation
Section 614 of the Pennsylvania statutes allows a Pennsylvania-domiciled mutual life insurance company to hold a "safety fund" not to exceed 10 percent of the company's reserve liabilities, and requires the company to distribute to its participating policyholders amounts in excess of the safety fund. The plaintiffs allege that the company held funds in excess of the allowable amounts in many recent years.

The complaint shows safety fund amounts each year as a percentage of the reserves. It also shows excess amounts each year as a percentage of the reserves. For example, the safety fund at the end of 2011 was 25.7 percent of the reserves, so the excess was 15.7 percent (25.7 percent minus 10 percent) of the reserves. The safety fund law gives the Pennsylvania insurance commissioner the authority to allow a company to hold a safety fund larger than 10 percent "for cause shown," but Penn Mutual never sought or obtained such permission.

Subsequent Developments
On December 28, 2012, Penn Mutual filed a motion to dismiss the complaint. On April 11, 2014, after extensive briefing, Judge Alejandro granted the motion to dismiss. She said the court will abstain from exercising its jurisdiction in deference to the Pennsylvania Insurance Department. She placed the case in "civil suspense" pending resolution of the plaintiffs' claims before the Department.

On February 20, 2015, the plaintiffs filed an administrative complaint with the Pennsylvania Department. Thereafter the parties engaged in extensive briefing and discovery. The officer presiding over the administrative proceeding before the Department scheduled a hearing for October 26, 2016. However, the hearing was not held because the parties were engaged in efforts to settle the court case.

The Proposed Settlement
On April 15, 2017, with the help of a mediator, the parties reached a proposed settlement. The same day, the plaintiffs filed an unopposed motion for preliminary approval of the proposed settlement, and one of the plaintiffs' attorneys filed an unopposed declaration in support of the motion.

The policies affected are all Penn Mutual participating policies that were in effect at any time from the beginning of 2006 to the end of 2015. The policy types are whole life, term, indexed universal life, universal life, variable universal life (fixed), and variable universal life (variable). Almost 300,000 policyholders are affected.

The financial component of the settlement requires Penn Mutual to pay one-time "terminal dividends" to owners of affected policies. Specifically, the company will pay $97,073,303 to the owners of in-force policies, $13 million to the owners or beneficiaries of terminated policies, $10 million of fees to the attorneys for the class, $700,000 of expenses incurred by the attorneys for the class, and a service award of $3,750 to each of the two named representatives of the class. The total of those figures is $120,780,803.

Penn Mutual is allowed to defer payments to the policyholders should the payments cause the company's risk-based capital (RBC) ratio to fall below 250 percent, where the denominator of the ratio is company action level RBC. See No. 122 (posted October 22, 2015) for a detailed discussion of RBC ratios.

Although surplus notes are debt instruments, state surplus note laws and statutory accounting principles allow companies to include surplus notes in surplus rather than in liabilities. However, in the proposed settlement, Penn Mutual is allowed to exclude its surplus notes from the excess funds in the calculation of amounts to be paid to the policyholders. See No. 183 (posted October 19, 2016) for a detailed discussion of surplus notes.

Completion of the settlement requires a hearing on the parties' motion for preliminary approval of the proposed settlement, the mailing of notices of the proposed settlement to the class members, and a hearing on final approval of the proposed settlement. Judge Alejandro has not yet established a timetable for the approval process.

General Observations
I am not able to express an opinion about the fairness of the proposed settlement because I do not know how Penn Mutual calculates its dividends. As I have written over the years, the precise manner in which companies calculate dividends on participating life insurance policies is invariably a closely guarded secret. The companies justify the secrecy by insisting that the details are proprietary information that would place them at a competitive disadvantage if the details were disclosed. I have always argued that the details should be in the public domain, but my argument has never gained traction.

The Harshbarger case involves an old surplus limitation law. New York was the first state to enact such a law. It was among the reforms enacted in New York in 1906 after the Hughes-Armstrong investigation of 1905. A few other states, such as Pennsylvania, enacted similar laws. The current law in New York is Section 4219(a)(1). In general terms, that section allows a domestic mutual life insurance company to maintain a surplus not exceeding the largest of four figures: (1) $850,000, (2) 10 percent of the reserve liabilities, (3) 10 percent of the reserve liabilities plus (a) 150 percent of the company action level risk-based capital minus (b) the asset valuation reserve, and (4) the minimum capital and surplus required by any state where the company is licensed.

Available Material
I am offering a complimentary 64-page PDF consisting of a table of contents (1 page), the complaint (15 pages), the introduction to the stipulation of settlement (5 pages), the proposed notice to be sent to class members describing the proposed settlement (13 pages), the proposed consent order to be issued by the Pennsylvania Insurance Department (17 pages), and the unopposed declaration by one of the plaintiffs' attorneys supporting the motion for preliminary approval of the proposed settlement (13 pages). Email jmbelth@gmail.com and ask for the May 2017 package relating to the Harshbarger/Penn Mutual dividends case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 216: Donald Trump and the Two Emoluments Clauses of the U.S. Constitution—An Update

In No. 213 (posted April 14, 2017), I wrote about a complaint that Citizens for Responsibility and Ethics in Washington (CREW) filed on January 23 against President Donald J. Trump. CREW alleged that Trump had committed numerous violations of the two emoluments clauses of the U.S. Constitution. The case was assigned to U.S. District Judge Ronnie Abrams. The parties agreed, and the judge ordered, that dispositive motions were due by April 21, that responses were due by June 2, and that replies to the responses were due by June 30. (See CREW v. Trump, U.S. District Court, Southern District of New York, Case No. 1:17-cv-458.)

The Amended Complaint
On April 18, three days before the anticipated filing of Trump's motion to dismiss the complaint, CREW filed a significantly amended complaint. It added two new plaintiffs and many new allegations.

On April 19, the parties, in a joint letter to Judge Abrams, said the Federal Rules of Civil Procedure require a response from the defendant by May 2. However, the parties briefly described the significantly amended complaint and asked for a longer briefing schedule. They requested that the defendant's dispositive motion be due by June 2, that the plaintiffs' response to any dispositive motion be due by July 14, and that the defendant's reply be due by August 11. The judge immediately granted the parties' joint request.

The New Plaintiffs
One new plaintiff is Restaurant Opportunities Centers United, Inc. (ROC United), a nonprofit, nonpartisan organization founded in 2008. It has over 200 restaurant members, nearly 25,000 restaurant-employee members, and about 3,000 diner members. It engages employers, workers, and consumers "to improve wage and working conditions in the restaurant industry, including by providing job training, placement, leadership development, civil engagement, legal support, and policy advocacy." It also owns and operates a restaurant in New York City, and will soon open another restaurant in Washington, D.C.

The other new plaintiff is Jill Phaneuf, a resident of Washington, D.C. She works with a hospitality company to book events for two hotels in Washington, D.C. She seeks to book embassy functions, political functions involving foreign governments, and other events in the Washington, D.C. area. Her compensation is tied directly to a percentage of the gross receipts of the events she books for the hotels.

The Plaintiffs' Injuries
In No. 213, I did not discuss the comments in the original complaint about the injuries CREW suffers as a result of Trump's alleged violations of the two emoluments clauses. The amended complaint provides a similar list of injuries, which includes diversion of communications resources, diversion of legal resources, diversion of research resources, and impairment of programmatic functions and fundamental services.

The amended complaint discusses the injuries to ROC United. They include injuries to ROC United's restaurant members, worker members, and restaurants as a result of Trump's alleged violations of the two emoluments clauses. The amended complaint also alleges that ROC United's restaurants have been and will be injured by competition with Trump's restaurants.

The amended complaint discusses the injuries to Phaneuf as a result of Trump's alleged violations of the two emoluments clauses. It alleges that she has been and will be injured due to a loss of commission-based income.

The Presidential Emoluments Clause
The original complaint focused primarily on alleged violations of the Foreign Emoluments Clause of the Constitution. The amended complaint expands on alleged violations of the Domestic Emoluments Clause, which is also referred to as the "Presidential Emoluments Clause." It is Article II, Section 1, Clause 6 of the Constitution, which reads:

The President shall, at stated Times, receive for his Services, a Compensation, which shall neither be increased nor diminished during the Period for which he shall have been elected, and he shall not receive within that Period any other Emolument from the United States, or any of them.

The amended complaint discusses Trump's alleged violations of the Presidential Emoluments Clause, especially his personal financial interest in the "Old Post Office" building in Washington, D.C. That building is now the Trump International Hotel. It operates under a 60-year lease executed in 2013 with the General Services Administration, a U.S. agency. The amended complaint alleges that Trump has been in breach of the lease since the moment he was inaugurated on January 20.

The amended complaint also discusses Trump's alleged violations of the Presidential Emoluments Clause through the "premium" he receives for goods and services sold by his various businesses. For example, the starting rate for guest rooms at the Trump International Hotel increased to $500 on most nights, up hundreds of dollars from when the hotel opened shortly before the election. As another example, the annual rate for membership in Trump's Mar-a-Lago resort doubled from $100,000 to $200,000 shortly after the election.

General Observations
I think the amended complaint is significantly stronger than the original complaint. I have nothing to add to my general observations in No. 213. I plan to report further on the case after Judge Abrams issues a ruling on Trump's anticipated motion to dismiss the amended complaint.

Available Material
I am offering a complimentary 68-page PDF consisting of the amended complaint (66 pages) and the parties' April 19 joint letter request granted by Judge Abrams (2 pages). Send an email to jmbelth@gmail.com and ask for the May 2017 package relating to the CREW/Trump emoluments case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 215: Lincoln National—An Update on the Consolidation of Four Cost-of-Insurance Class Action Lawsuits

In No. 212 (posted April 7, 2017), I discussed four class action lawsuits filed recently in the federal court in Philadelphia against Lincoln National Life Insurance Company (Fort Wayne, IN) relating to cost-of-insurance (COI) increases imposed on owners of certain universal life insurance policies. On March 20, 2017, U.S. District Judge Gerald J. Pappert, to whom the cases had been assigned, issued an order granting motions to consolidate the cases. He ordered the plaintiffs to file a consolidated class action complaint within 30 days of the order. On April 19, on schedule, the plaintiffs filed a consolidated class action complaint. (See In Re: Lincoln National COI Litigation, U.S. District Court, Eastern District of Pennsylvania, Case No. 2:16-cv-6605.)

The Consolidated Complaint
The plaintiffs in the consolidated complaint are owners of universal life insurance policies originally issued by Jefferson-Pilot Life Insurance Company (Greensboro, NC), which merged into Lincoln in 2006. The defendants are Lincoln and its Philadelphia-based parent company.

The plaintiffs allege that the "COI increases generally appear to have ranged from roughly 50% to 95%—far beyond what the enumerated policy factors permit." The plaintiffs also allege that the defendants breached the policy contracts in at least four ways. First, the increases "were based on non-enumerated prohibited factors." Second, the increases "were designed to recoup past losses rather than respond to future expectations." Third, the increases "were non-uniform across insureds of the same rating class." Fourth, "Lincoln refused to provide an illustration of a policy upon request, which it was required to do."

The Classes
The consolidated complaint describes two classes. One is the "2016 COI Increase Class," which has some state sub-classes; it consists of policyholders who received, in or after 2016, a notice of the COI increase. The other is the "Illustration Grace Class," which consists of policyholders whose policies state that the company will provide an in-force illustration on request; some were told that "While a policy is in a grace period, we are unable to provide an in-force illustration."

The Claims for Relief
The consolidated complaint contains 11 claims for relief. Here is a paraphrase of them:

1. Breach of contract. This claim is on behalf of the plaintiffs and the 2016 COI increase class.
2. Breach of the implied covenant of good faith and fair dealing. This claim is on behalf of the plaintiffs and the 2016 COI increase class.
3. Injunctive relief prohibiting Lincoln from denying illustrations to policyholders during policy grace periods. This claim is on behalf of the plaintiffs and the illustration grace class.
4. Injunctive relief prohibiting Lincoln from collecting the unlawful and unfair COI increase amounts, and requiring the payment of restitution. This claim is on behalf of the plaintiffs and the 2016 COI increase class.
5. Declaratory relief stating that the COI increases are unlawful and in material breach of the policy contracts. This claim is on behalf of the plaintiffs and the 2016 COI increase class.
6. Violations of the North Carolina Deceptive and Unfair Practices Act. This claim is on behalf of the plaintiffs and the 2016 COI increase class.
7. Violations of the Texas Administrative Code and the Texas Insurance Code. This claim is on behalf of one of the plaintiffs and the Texas sub-class.
8. Violations of the New Jersey Consumer Fraud Act. This claim is on behalf of one of the plaintiffs and the New Jersey sub-class.
9. Violations of the New York General Business Law. This claim is on behalf of one of the plaintiffs and the New York sub-class.
10. Violations of the California Unfair Competition Law. This claim is on behalf of one of the plaintiffs and the California sub-class.
11. Violations of the California Elder Abuse Law. This claim is on behalf of one of the plaintiffs and the California sub-class.

The plaintiffs seek a declaration that the class action is properly maintained; an award of compensatory damages, restitution, disgorgement, and any other permitted relief; prejudgment and postjudgment interest; injunctive or declaratory relief; attorneys' fees and costs; and any other just and proper relief. The plaintiffs also demand a jury trial.

General Observations
I think the consolidated complaint is stronger than the complaints filed in the four individual cases. I have nothing to add to the general observations I made in No. 212. The parties have not yet submitted to Judge Pappert a joint proposed timetable for the management of the consolidated case, but they probably will file such a proposal in the near future. I plan to report further as the case progresses.

Available Material
In No. 212, I offered a complimentary PDF (still available) containing some exhibits and other documents relating to the four individual cases, but I did not offer any of the complaints. Now I am offering a complimentary 45-page PDF containing the consolidated class action complaint. Email jmbelth@gmail.com and ask for the April 19, 2017 consolidated complaint in the Lincoln COI increase case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 214: Cost-of-Insurance Increases and the New York Department of Financial Services

For many years, life insurance companies have been imposing substantial cost-of-insurance (COI) increases on the owners of universal life and variable universal life insurance policies. Many of the COI increases have prompted class action lawsuits against the companies.

In No. 212 (posted April 7, 2017), I wrote about the consolidation of four class action lawsuits filed recently in federal court in Philadelphia against Lincoln National Life Insurance Company. The lawsuits relate to COI increases that Lincoln imposed in October 2016 on owners of certain universal life insurance policies. One of my readers—an insurance agent in New York—shared with me a pair of letters that prompted this follow-up post.

Lincoln's May 2016 Letter
In early May 2016, Lincoln Life & Annuity Company of New York sent letters to agents on the subject of "Cost of Insurance Increase—Effective June 1, 2016." The opening sentence said the purpose of the letter was "to provide you with important information regarding your client's life insurance policy so that you are able to help ensure they continue to receive the coverage they need." Here are the next two paragraphs of the letter:

Effective June 1, 2016, current cost of insurance (COI) rates will increase on some UL and VUL policies. Lincoln is the administrative agent and reinsurer for the policies, which were issued by Aetna Life Insurance and Annuity Company (now Voya Retirement Insurance and Annuity Company). Lincoln will implement these changes as a matter of prudent risk and financial management.

These adjustments are based on material changes in future expectations of key cost factors associated with providing this coverage, including lower investment income and higher reinsurance costs. The changes are not taken lightly and are being made only after an in-depth actuarial analysis along with a rigorous review process, including thoughtful consideration of the effect on the policyholders and our distribution partners.

Lincoln went on to describe the situation in more detail. The company enclosed a sample of the letter to be sent to policyholders and "Advisor Questions" consisting of 17 questions and answers.

Lincoln's August 2016 Letter
In early August 2016, Lincoln sent follow-up letters to agents on the subject of "Cost of Insurance Increase." The opening sentence said the purpose of the letter was "to provide you with important information to help you stay informed regarding your client's policy." Here are the next two paragraphs of the letter (the second of the two paragraphs was emphasized in the original):

You recently received a letter advising that effective June 1, 2016, the cost of insurance (COI) rates were increasing on some UL and VUL policies issued by Aetna Life Insurance and Annuity Company (now Voya Retirement Insurance and Annuity Company).

We are notifying you of a temporary postponement of the COI rate change for policies issued in the state of New York. Until further notice, your client's policy will continue to receive the previous COI rates. We will notify you of any change by letter.

Lincoln went on to apologize for any inconvenience to the agent or client. The company also provided contact information for questions the agent might have.

New York's Proposed Regulation
On November 17, 2016, the New York Department of Financial Services (DFS) issued a press release entitled "DFS Proposes New Regulation to Protect New Yorkers from Unjustified Life Insurance Premium Increases" and subtitled "The proposed regulation requires life insurers to notify DFS at least 120 days prior to an adverse change in non-guaranteed elements of an existing life insurance or annuity policy." The proposal is "Insurance Regulation 210" entitled "Life Insurance and Annuity Non-Guaranteed Elements."

According to the press release, "In response to consumer complaints, a DFS review found that some insurers have not been implementing these increases in accordance with DFS approved policy provisions and the relevant provisions of the New York Insurance Law." The press release said the proposed rule was subject to a 45-day comment period beginning November 30. During the comment period, the life insurance industry probably inundated DFS with negative comments about the proposed regulation. Although the comment period ended in mid-January 2017, DFS has not promulgated the rule. DFS may issue the rule in its original form, may issue a revised rule reflecting comments received, may issue a revised rule subject to another comment period, or may not issue a rule.

On November 18, The Wall Street Journal carried an article entitled "Life Insurers Face Heat in New York." The proposed rule applies only to insurance companies operating in New York, but the reporter speculated that it could be copied in other states to address a major problem that many middle-class retirees face.

My Documents Request
On April 10, 2017, I filed with DFS a request pursuant to the New York Freedom of Information Law (FOIL). I mentioned Lincoln's postponement of the COI increase, said I assumed DFS has conducted an investigation of the increase, and asked for the DFS file on the investigation. DFS confirmed receipt of my request.

I probably will not receive documents from DFS in response to my FOIL request any time soon. Under FOIL, if DFS should decide to provide documents to me, Lincoln would have to be notified and given the opportunity to object to release of the documents. Also under FOIL, if Lincoln objects to release of the documents, and if DFS overrules Lincoln, the company would have to be given an opportunity to seek court review of the DFS ruling. In short, if Lincoln decides to do so, the company would be able to delay release of the documents for months or even years.

General Observations
Numerous class action lawsuits filed in recent years provide ample evidence of the problems that life insurance policyholders are facing because of COI increases. Yet state insurance regulators have shown no interest in addressing the problems. The exception is the proposed New York regulation discussed above. Even if the regulation is adopted, I believe that few if any other states will follow New York's lead. I hope I am wrong in that belief.

Available Material
I am offering a complimentary 16-page PDF consisting of Lincoln's May 2016 letter including the sample notification letter and the Q&A (5 pages), Lincoln's August 2016 letter (1 page), the November 2016 DFS press release (1 page), and the DFS proposed Regulation 210 (9 pages). Email jmbelth@gmail.com and ask for the April 2017 package about the New York developments relating to COI increases.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 213: Donald Trump and Alleged Violations of the Constitution's Foreign Emoluments Clause

Prior to his inauguration as President of the United States, Donald J. Trump was the subject of allegations that unless he took drastic steps he would be in violation of the Foreign Emoluments Clause of the U.S. Constitution the moment he took his oath of office. He did not take those steps, and he was inaugurated on Friday, January 20, 2017. On Monday morning, January 23, Citizens for Responsibility and Ethics in Washington (CREW) filed a two-count complaint. (See CREW v. Trump, U.S. District Court, Southern District of New York, Case No. 1:17-cv-458.)

The case was assigned to U.S. District Judge Ronnie Abrams. President Obama nominated her in July 2011, and the Senate confirmed her in March 2012 by a 96-2 vote.

The Plaintiff
CREW is a 501(c)(3) nonprofit, nonpartisan corporation. It is "committed to protecting the rights of citizens to be informed about the activities of government officials, ensuring the integrity of government officials, protecting our political system against corruption, and reducing the influence of money in politics."

The plaintiff's attorneys are Norman L. Eisen, Richard W. Painter, Noah Bookbinder, Adam J. Rappaport, and Stuart C. McPhail of CREW; Deepak Gupta, Jonathan E. Taylor, Rachel S. Bloomekatz, and Matthew Spurlock of Gupta Wessler PLLC; Daniel A. Small, Joseph M. Sellers, and Robert Abraham Braun of Cohen, Millstein, Hausfeld & Toll PLLC; Lawrence H. Tribe of the Harvard Law School; Erwin Chemerinsky of the School of Law at the University of California, Irvine; and Zephyr Teachout of the Fordham Law School.

The Defendant
Donald J. Trump is the President of the United States. He is sued in his official capacity as President.

The defendant's attorneys, all associated with the Civil Division of the U.S. Department of Justice, are Chad A. Readler, Jennifer D. Ricketts, Anthony J. Coppolino, Jean Lin, and James R. Powers.

The Foreign Emoluments Clause
The "Legal Background" section of CREW's complaint describes the nature and background of the U.S. Constitution's Foreign Emoluments Clause. Here is the opening paragraph of that section:

Article I, Section 9, Clause 8 of the U.S. Constitution provides as follows: "No Title of Nobility shall be granted by the United States: And no Person holding any Office of Profit or Trust under them, shall, without the consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State."

The Complaint
CREW alleges that Trump has violated the Foreign Emoluments Clause in various ways. Here is the opening paragraph of the complaint:

Never before have the people of the United States elected a President with business interests as vast, complicated, and secret as those of Donald J. Trump. Now that he has been sworn in as the 45th President of the United States, those business interests are creating countless conflicts of interest, as well as unprecedented influence by foreign governments, and have resulted and will further result in numerous violations of Article I, Section 9, Clause 8 of the United States Constitution, the "Foreign Emoluments Clause."

In the "Relevant Facts" section of the complaint, CREW alleges numerous violations of the Foreign Emoluments Clause. Here is the opening paragraph of that section:

Defendant owns and controls hundreds of businesses throughout the world, including hotels and other properties. His business empire is made up of hundreds of different corporations, limited-liability companies, limited partnerships, and other entities that he owns or controls, in whole or in part, operating in the United States and 20 or more foreign countries. Defendant's businesses are loosely organized under an umbrella known as the "Trump Organization." However, Defendant's interests include not only Trump Organization LLC d/b/a The Trump Organization and The Trump Organization, Inc., both of which are owned solely by Defendant, but also scores of other entities not directly owned by either "Trump Organization" entity but that Defendant personally owns, owns through other entities, and/or controls. Defendant also has several licensing agreements that provide streams of income that continue over time. Through these entities and agreements, Defendant personally benefits from business dealings, and Defendant is or will be enriched by any business in which they engage with foreign governments and officials.

Subsections of the "Relevant Facts" section are New York's Trump Tower; Washington, D.C.'s Trump International Hotel; Other Domestic and International Properties and Businesses; International Versions and Distribution of "The Apprentice" and Its Spinoffs; and Other Foreign Connections, Properties, and Businesses. Countries discussed in the last of the preceding subsections are China, India, United Arab Emirates, Indonesia, Turkey, Scotland, Philippines, Russia, Saudi Arabia, and Taiwan. Another subsection alleges that many of those business interests are likely to cause violations of the "Domestic Emoluments Clause," which is Article II, Section 1, Clause 7 of the Constitution.

The plaintiff seeks court declarations about the meaning of certain words and phrases in the Foreign Emoluments Clause, and an injunction barring the defendant from violating the Foreign Emoluments Clause. The plaintiff also seeks reasonable attorneys' fees and costs.

Early Developments
On January 23, Judge Abrams ordered the parties to submit a joint letter advising of contemplated motions and proposing a briefing schedule. On February 17, the parties filed the joint letter, which the judge endorsed the same day. Trump's answer and any dispositive motions are due April 21, responses are due June 2, and replies are due June 30. The joint letter includes this sentence:

Because the Defendant expects that his dispositive motion, if any, will raise only legal issues pursuant to Federal Civil Rule of Procedure 12(b), the parties have agreed to postpone discussing any discovery schedule in this action until the dispositive motion is adjudicated.

A Related Case
On February 10, William R. Weinstein filed a class action complaint against Trump on behalf of himself and the U.S. people. He filed an amended complaint on March 7. He is a citizen of the United States and of New York State, resides in the Southern District of New York, is an attorney, represents himself, and is counsel for a proposed class. The parties have agreed on initial briefing dates in May, June, and July. Judge Abrams accepted the case as related to the CREW case. (See Weinstein v. Trump, U.S. District Court, Southern District of New York, Case No. 1:17-cv-1018.)

An Amicus Brief
On February 27, Mark Richards, a U.S. citizen, filed an amicus brief in support of Trump. Richards represents himself. He describes the CREW complaint as a "distraction" and calls the claims "frivolous and vexatious."

General Observations
The complaint mentions some intriguing statements in which the defendant denies the existence of conflicts of interest. On November 22, 2016, in an interview with The New York Times, he said "the law is totally on my side, meaning, the president can't have a conflict of interest." On January 11, 2017, at a press conference, he said "I have a no-conflict situation because I'm president" and "I have a no conflict of interest provision as president." By contrast, the plaintiff says: "There is no law or constitutional provision that exempts the President from the Foreign Emoluments Clause."

Rule 12(b), which is referred to under "Early Developments" above, refers to defenses such as lack-of-subject-matter jurisdiction, lack of personal jurisdiction, improper venue, and failure to state a claim upon which relief can be granted. I think it is likely that Trump's attorneys will file a motion to dismiss CREW's complaint using one or more of the above defenses. To say that the case bears close watching is an understatement.

Available Material
I am offering a complimentary 42-page PDF consisting of CREW's complaint (39 pages), the judge's January 23 order (1 page), and the parties' February 17 joint letter endorsed by the judge (2 pages). Email jmbelth@gmail.com and ask for the April 2017 package relating to the CREW/Trump emoluments case.

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Email:jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 212: Lincoln National and Consolidation of Four Cost-of-Insurance Class Action Lawsuits

Lincoln National Life Insurance Company (Fort Wayne, IN) acquired Jefferson-Pilot Life Insurance Company (Greensboro, NC) in 2006. Lincoln's parent company, Lincoln Financial Group, is based in Radnor, Pennsylvania, a Philadelphia suburb.

In September 2016, Lincoln wrote to owners of "Legend series" universal life insurance policies that Jefferson-Pilot issued in and around 2002. The letters notified the policyholders that Lincoln was implementing cost-of-insurance (COI) increases effective in October 2016. Since the notification, affected policyholders have filed four COI class action lawsuits against Lincoln in the federal court in Philadelphia. (See Bharwani v. Lincoln, Mukamal v. Lincoln, US Life v. Lincoln, and Rauch v. Lincoln, U.S. District Court, Eastern District of Pennsylvania, Case Nos. 16-cv-6605, 17-cv-234, 17-cv-307, and 17-cv-837.)

The cases have been assigned to U.S. District Judge Gerald J. Pappert. President Obama nominated him in June 2014, and the Senate confirmed him in December 2014.

Sequence of Events
The plaintiffs filed their complaints on December 23, 2016, January 17, 2017, January 20, 2017, and February 22, 2017. In January, the plaintiffs in the first three cases filed motions for an order consolidating the cases. On March 13, after discussions with Lincoln about the terms of a consolidation order, the plaintiffs in the four cases filed an unopposed motion for a consolidation order. On the same day, Lincoln filed a statement that it does not oppose a consolidation order.

On March 20, 2017, Judge Pappert issued an order consolidating the cases. He appointed four law firms (one from each case) as interim class counsel and as a plaintiffs' steering committee, named one of the law firms in the first case to chair the steering committee, and listed the responsibilities of the steering committee. He ordered the interim class counsel to file a consolidated class action complaint within 30 days of the order. He said that, pending the filing of the consolidated complaint, Lincoln will not be required to respond to any of the four complaints or any other related complaints that may be filed. He said the order applies to any related cases that may be filed subsequently in the same court.

I considered waiting until the consolidated complaint is filed to discuss the cases. However, I decided to describe them here in general terms and write a follow-up after the consolidated complaint is filed.

General Comments about the Cases
Some of the named plaintiffs are individuals and some are trustees of trusts that own the policies. The insureds are residents of states such as New Jersey, New York, and North Carolina. Some of the insureds are now elderly—in their 80s or 90s. The COI increases are large, resulting in large increases in the monthly COI deductions from the account values. The COI increases also result in large increases in the premiums that policyholders would have to pay to prevent rapid depletion of the account values, early lapsation of the policies, and early termination of the death benefits.

The notifications are form letters that say nothing about the size of the COI increases or the size of the premiums that would be necessary to prevent rapid depletion of the account values. Instead, the letters mention that policyholders may request in-force illustrations. For those who request illustrations, their complexity makes it difficult for policyholders to understand the size and the full implications of the COI increases.

The "Cost of Insurance Rates" provision in the policies raises serious questions that are discussed in the complaints. As has happened in other COI cases, there probably will be a major controversy over the precise meaning of the provision. It reads:

The monthly cost of insurance rates are determined by Us. Rates will be based on Our expectation of future mortality, interest, expenses, and lapses. Any change in the monthly cost of insurance rates used will be on a uniform basis for Insureds of the same rate class. Rates will never be larger than the maximum rates shown on page 11. The maximum rates are based on the mortality table shown on page 4.

An Earlier Lawsuit against Lincoln
In No. 157 (posted April 20, 2016), I wrote about an earlier COI class action lawsuit against Lincoln. The plaintiff, who owned an "Ensemble II" Lincoln variable universal life insurance policy, filed his complaint in an Indiana state court in 2014. He alleged three counts of breach of contract. The judge denied Lincoln's motion to dismiss the complaint. After the plaintiff's motion for class certification, the judge ruled in favor of Lincoln on the first two counts and in favor of the plaintiff on the third count.

Lincoln appealed the class certification on the third count, and the plaintiff cross-appealed the denial of class certification on the first two counts. In June 2015, a three-judge Indiana appellate court panel ruled unanimously that class certification was proper for all three counts. The panel sent the case back to the trial court for further proceedings. The panel's 26-page ruling included these comments:

Finally, we cannot help but comment upon the absurdity of Lincoln's own interpretation of the COI rate provision, which is that the Ensemble II allows Lincoln to unilaterally increase rates on customers to reflect a change in mortality factors but offers no parallel commitment to decrease rates despite an overwhelming improvement in mortality. We have grave doubts that any policyholder of average intelligence would read the COI rate provision to confer on Lincoln that sort of "heads we win, tails you lose" power. [Italics in original.]

Lincoln petitioned the Indiana Supreme Court to hear an appeal. The Indiana Supreme Court granted the petition. By that time, however, the plaintiff and Lincoln, following intensive negotiations and with the participation of a mediator, had entered into a settlement agreement that resolved the claims of a class of more than 78,000 policyholders. Lincoln agreed to provide some level term life insurance coverage to each member of the class without cost and without underwriting. The trial court approved the settlement and permanently dismissed the case.

General Observations
It is too early to speculate on what will happen in this litigation, which began only a few months ago. At this stage, however, I have four general comments. First, it is important to determine whether Lincoln's COI increases are for the purpose of recouping losses caused by low market interest rates during the past decade. I mention this because it is my understanding that COI increases are not supposed to be used to recoup past losses. Second, it is important to determine whether the company took improvements in mortality experience into account. Third, it is important to determine whether the COI increases undermine the guaranteed interest rate of 4 percent in the policies. Fourth, it is important to determine whether the company implemented the COI increases to induce elderly insureds to surrender their policies shortly before their deaths and thereby forfeit the death benefits. I plan to post a follow-up after the plaintiffs file their consolidated complaint.

Available Material
I am offering a complimentary 23-page PDF consisting of a sample of Lincoln's notification letter to policyholders including frequently asked questions (3 pages), a sample of Lincoln's in-force illustrations sent to policyholders who request them (9 pages), the plaintiffs' unopposed motion for a consolidation order (4 pages), Lincoln's statement of no opposition to a consolidation order (3 pages), and Judge Pappert's consolidation order (4 pages). Email jmbelth@gmail.com and ask for the April 2017 package relating to the COI complaints against Lincoln.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 211: Donald Trump's "America First" and Lynne Olson's Books

When I heard Donald Trump use his "America First" slogan during his campaign, it rang a bell. I was not alone. The expression drew criticism from many major media outlets. The Anti-Defamation League urged Trump not to use the slogan, but he continued to use it. In his inauguration speech, he said: "From this day forward, it's going to be only America first, America first."

Lynne Olson's Two Recent Books
Readers of The Insurance Forum over the years and readers of this blog know I enjoy reading political biographies and histories, especially those about the United States. Recently I read two superb books by Lynne Olson, an acclaimed World War II historian. One is Citizens of London: The Americans Who Stood with Britain in Its Darkest, Finest Hour (2010). The other is Those Angry Days: Roosevelt, Lindbergh, and America's Fight Over World War II, 1939-1941 (2013). Her books are a delight to read; her writing style, character development, and story telling skill make her books page turners.

Olson's next book is Last Hope Island: Britain, Occupied Europe, and the Brotherhood That Helped Turn the Tide of War. It is to be published April 25, 2017.

Citizens of London
Citizens of London is about the many Americans who stood by Britain. Olson focuses on three in particular. One is John Gilbert Winant; he succeeded Joseph P. Kennedy as U.S. Ambassador to Britain and served in that position from March 1941 to April 1946. Another is Edward R. Murrow, the legendary broadcaster; he arrived in London in 1937 and served there until March 1946. Still another is W. Averell Harriman; he arrived in London shortly after Winant to administer U.S. Lend-Lease aid to Britain. Harriman later succeeded Winant as ambassador, and still later President Harry Truman sent him to disburse billions in Marshall Plan aid to the devastated European countries.

Those Angry Days
Those Angry Days is about the battle between isolationists and interventionists. Another battle was between strong interventionists who felt we should enter the war to save Britain from the Nazis, and moderate interventionists who felt we should help Britain only in other ways.

Olson focuses attention on American aviation hero Charles Lindbergh and his role as an outspoken isolationist. In that role, he associated with some long-time U.S. senators who, two decades earlier, had blocked President Woodrow Wilson's efforts to build the League of Nations. They thought we had been tricked into entering the Great War, and we should avoid being dragged into another world conflagration.

Olson also discusses Anne Lindbergh, who herself was an acclaimed author. Anne seems to have been trapped between her husband's views and her apparent leanings toward interventionism.

Olson describes an isolationist organization called the "America First Committee," with which Lindbergh worked closely. The organization collapsed immediately after the Japanese attack on Pearl Harbor. After the attack, Lindbergh threw himself into the American effort to win the war.

Olson mentions strong concerns in Britain during the first few days after the attack on Pearl Harbor. In President Franklin Roosevelt's "date which will live in infamy" speech, he asked Congress to declare war against Japan. Congress did so. At that point Britain feared American resources would be diverted to a Pacific war and away from support for Britain. However, Hitler came to Britain's rescue by declaring war against the United States. Congress then declared war against Germany.

Olson's Blog Post
On January 30, 2017, ten days after Trump's inauguration, Olson posted on her blog an eight-paragraph item entitled "America First: A Bad Idea Then—and Now." The post is at lynneolson.com/america-first-bad-idea-now. Here are the second and seventh paragraphs:

As Trump is well aware, America First was the name of a notorious organization that crusaded for America's isolationism in World War II. In his channeling of that group, our new president aims to turn the United States into Fortress America, closing its borders, walling it off from the rest of the world, and focusing entirely on its own self-interest—as he defines it.

Now, under Trump, we are going back in time, "embarking," as the conservative columnist Charles Krauthammer has noted, "upon insularity and smallness." Although I usually don't agree with Krauthammer's views, I think he's spot on when he says, "Global leadership is what made America great. We abandon it at our peril."

I question five of Olson's words: "As Trump is well aware." He reportedly does not read books, and he was born after World War II. For those reasons I consider it likely he is not fully aware of the America First Committee and its major role in "those angry days."

I am reminded of the aphorism by philosopher George Santayana: "Those who cannot remember the past are condemned to repeat it." I first saw it more than 50 years ago, when I read William Shirer's towering 1,200-page 1959 masterpiece, The Rise and Fall of the Third Reich.

Personal Comment
My paternal and maternal grandparents immigrated to the United States from eastern Europe through Ellis Island around 1900. I often think about what they endured so that their descendants could live in our magnificent country.

On December 7, 1941, I was 12 years old and living with my family in Syracuse, New York. Early that fateful Sunday afternoon (Syracuse time), over the RCA radio at the north end of our living room, I learned about the attack on Pearl Harbor.

Conclusion
I hope Trump's focus on "America First" does not lead to the kind of disastrous consequences caused by the America First Committee. However, I am apprehensive about the anti-art, anti-immigrant, anti-intellectual, anti-judiciary, anti-media, anti-Muslim, anti-refugee, anti-regulation, anti-science, egotistical, ignorant, isolationist, paranoid, selfish, untruthful, vengeful, wall-building Trump/Bannon administration.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 210: Halali and Others in a Federal Criminal Case Involving Phony Life Insurance Policies—An Update

In No. 149 (posted March 14, 2016), I discussed a criminal case filed in federal court in San Francisco against five defendants and involving the issuance of phony life insurance policies. Here I provide an update on the case. (See U.S. v. Halali, U.S. District Court, Northern District of California, Case No. 3:14-cr-627.)

Background
In December 2014, the U.S. Attorney's office in San Francisco filed the indictment. The case was assigned to U.S. Senior District Judge Susan Illston. In February 2016, the judge denied a motion to dismiss filed by four of the defendants and set the case for trial early in 2017.

The defendants are Behnam Halali, Ernesto Magat, Kraig Jilge, Karen Gagarin, and Alomkone Soundara. They worked for several years as independent contractors selling life insurance for American Income Life Insurance Company. The indictment alleges that the defendants engaged in wrongdoing that caused the company to pay more than $2.5 million in commissions and bonuses.

In No. 149, I described the allegations in some detail. The essence of the allegations is that the defendants 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, in some cases created fraudulent drivers' licenses, opened hundreds of bank accounts from which to pay premiums, typically paid one to four months of premiums before allowing the policies to lapse, returned verification calls to the company purporting to be the applicants, used phony addresses on many applications in an effort to avoid detection, and fabricated the names of policy beneficiaries.

The indictment charged each defendant with one count of conspiracy to commit wire fraud, 14 counts of wire fraud, and one count of aggravated identity theft. The indictment also charged three of the defendants with money laundering: three counts against Magat, two counts against Jilge, and one count against Halali.

Recent Developments
On December 19, 2016, Soundara pled guilty to all 16 counts against him, and he agreed to testify for the government. On January 11, 2017, the government filed a trial memorandum describing the charges and the evidence. On January 18, the judge filed an order that the trial was to begin on February 13, that Jilge intended to plead guilty on January 25, and that the trial defendants were Halali, Magat, and Gagarin.

On January 25, Jilge pled guilty to the conspiracy charge, the 14 wire fraud charges, and the identity theft charge, but he did not plead guilty to the two money laundering charges against him. The judge vacated the trial as to Jilge.

The trial began on February 15. It consisted of 14 trial days and ended on March 13. The jury found Halali, Magat, and Gagarin guilty on the conspiracy charge, the 14 wire fraud charges, and one money laundering charge. The judge said the defendants' motion for a new trial was due April 14, the government's opposition was due May 5, and the defendants' reply was due May 19. She set sentencing for July 21.

The Plea Agreements
Plea agreements often contain important information I share with readers. In this case, I have not yet seen the two plea agreements. They were filed in open court, are listed on the case docket, and are not marked as sealed. However, when I sought them, the message in each instance was: "You do not have permission to view this document." I asked a government attorney for either the documents or an explanation, but he did not reply. I think the problem is that the documents contain information prejudicial to the remaining defendants in any motion for a new trial, or in any appeal. I hope to see the plea agreements after the case is closed.

General Observations
When I wrote about this case in No. 149, I felt that the allegations revealed brazen behavior by the defendants, and that the evidence against them was overwhelming. That is why I expressed the belief that the case would not go to trial, and that the defendants would enter into plea agreements. As it turned out, I was partly right and partly wrong; two defendants pled guilty and three went to trial. I plan to report on any motion for a new trial, any appeals, and any sentencing.

Available Material
I am offering a complimentary 46-page PDF consisting of the indictment (19 pages), the denial of the motion to dismiss (8 pages), the government's trial memorandum (5 pages), the scheduling order (7 pages), and the jury's verdict form (7 pages). Email jmbelth@gmail.com and ask for the March 2017 package about the Halali case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 209: Senior Health Insurance Company of Pennsylvania, a Long-Term Care Insurance Company in Runoff, Faces Increasingly Serious Financial Trouble

Senior Health Insurance Company of Pennsylvania (SHIP) is running off the long-term care (LTC) insurance business of the former Conseco Senior Health Insurance Company. I wrote three major articles about SHIP in The Insurance Forum in 2008 and 2009, and posted several items on my blog in recent years. On March 1, 2017, SHIP filed in a timely manner its 230-page statutory financial statement for the year ended December 31, 2016. Here I discuss the increasingly serious financial trouble the company is facing, as reflected in that financial statement.

Selected Financial Numbers
SHIP's total assets declined from $2.9 billion at the end of 2015 to $2.7 billion at the end of 2016. Total liabilities declined from $2.8 billion at the end of 2015 to $2.7 billion at the end of 2016. Total surplus declined from $55.8 million at the end of 2015 to $28.3 million at the end of 2016. Net income declined from a net loss of $9 million in 2015 to a net loss of $39 million in 2016.

SHIP's total surplus at the end of 2015 and at the end of 2016 included a $50 million surplus note, which is discussed later. Without the surplus note, the company would have been barely solvent at the end of 2015 and would have been insolvent at the end of 2016.

SHIP's risk-based capital (RBC) ratio, where the denominator is company action level RBC, increased from 80 percent at the end of 2015 to 82 percent at the end of 2016. Those ratios are below company action level RBC of 100 percent, and above regulatory action level RBC of 75 percent. Without the surplus note, the ratio would have been 37 percent at the end of 2015, below authorized control level RBC of 50 percent, and 14 percent at the end of 2016, below mandatory control level RBC of 35 percent.

The Surplus Note
When a company issues a surplus note, the company borrows from the buyer of the surplus note. State surplus note laws allow a company to treat the borrowed money as an asset, do not require the company to establish a liability for the borrowed money, and thus allow the company to include the borrowed money as part of surplus. Payments of interest and principal on the borrowed money are not guaranteed, and the debt is subordinate to the claims of policyholders and all other creditors of the company. A company that issues a surplus note must obtain prior approval from its domiciliary regulator (the Pennsylvania insurance commissioner in the case of SHIP) before issuing the surplus note, and must obtain prior approval of the regulator before the company can make interest or principal payments on the borrowed money.

SHIP issued a $50 million surplus note on February 19, 2015, between the end of 2014 and the March 1, 2015 filing of its financial statement for the year ended December 31, 2014. The Pennsylvania insurance commissioner allowed SHIP to reflect the borrowed money as a backdated contribution to surplus in the 2014 statement. The surplus note matures on April 1, 2020. The interest rate is 6 percent, probably payable at 3 percent semiannually. According to SHIP's latest financial statement, the "unapproved" and therefore unpaid interest as of December 31, 2016, was $5.55 million.

SHIP issued the surplus note to (borrowed money from) Beechwood Re Investments, LLC. The latest financial statement says SHIP received the $50 million in cash, but the schedule of "all other long-term investments owned" at the end of 2016 shows that SHIP acquired $50 million (at a cost of about $50.2 million) of Beechwood investment offerings on February 19, 2015, the very day SHIP issued the $50 million surplus note to Beechwood (and thereby borrowed $50 million from Beechwood). As of December 31, 2016, the Beechwood investments had an adjusted carrying value of about $37.6 million.

Investments in Platinum Partners
Beechwood is closely related to Platinum Partners, a hedge fund in serious financial and legal trouble. It is my understanding that SHIP, when it issued the surplus note to Beechwood in February 2015, was not aware of that close relationship. The latest financial statement shows that SHIP owned about $53.8 million fair value of Platinum investment offerings at the end of 2016, and at that time the Platinum investment offerings had an adjusted carrying value of about $39.3 million.

SHIP's latest financial statement shows that during 2016 SHIP acquired Platinum investment offerings at a cost of about $32.9 million. The financial statement also shows that during 2016 SHIP disposed of Platinum investment offerings for consideration of about $28.3 million.

Reinsurance with Roebling Re
Reinsurance exhibits in SHIP's latest financial statement show that SHIP took credit for about $1.2 billion of LTC insurance reserve liabilities ceded to Roebling Re (Barbados), a company created in August 2016. SHIP's latest financial statement says Roebling is not authorized, is a non-U S. reinsurer, and is not affiliated with SHIP. I have tried without success to find information about Roebling, such as the name of its owner, the names of its senior officers, and its financial condition.

Executives
Several years ago I met personally with two top officers of SHIP: President and Chief Executive Officer Brian Wegner and General Counsel Patrick Carmody. During the past year, each has left SHIP. I do not know the circumstances surrounding their departures. Recently my inquiries about SHIP have been referred to a spokesman at a public relations firm in New York. The spokesman has provided answers to some of my questions, but most recently has not been able to provide responses.

General Observations
With regard to the $50 million, 6 percent, approximately five-year surplus note that SHIP issued to Beechwood in February 2015, I believe that, because of SHIP's fragile financial condition, the company will not be able to obtain permission from the commissioner to pay interest or principal on the surplus note. In other words, I believe that the purchase of the surplus note will turn out to have been an outright gift from Beechwood to SHIP.

In public documents Conseco filed in 2008 about the transfer of what is now SHIP to an independent trust in Pennsylvania, Conseco said any assets left over after the LTC insurance business runs off would be donated to charity. However, Conseco said nothing about what would happen if SHIP becomes insolvent before the business runs off. I inquired at the time about that point, and the Pennsylvania Insurance Department said insolvency would be handled in accordance with Pennsylvania law. See No. 208 (posted March 13, 2017) for a discussion of Penn Treaty Network America Insurance Company, a Pennsylvania-domiciled LTC insurance Company which has been in rehabilitation since 2009 and is now in liquidation.

The public documents Conseco filed in 2008 in the SHIP case said Milliman, an actuarial consulting firm, concluded in a financial report that SHIP will have sufficient assets to run off the business. To see how Milliman reached that conclusion, I asked for the report. Conseco and the Pennsylvania Insurance Department said the report was confidential. I had a hunch in 2008, and I believe now, that SHIP will not remain solvent long enough to run off the LTC insurance business. If SHIP has a losing year in 2017 similar to or worse than in 2016, and if SHIP and the commissioner cannot devise a plan to improve the company's financial situation, I think the commissioner would have to petition the court to allow the company to be placed in rehabilitation or liquidation.

Available Material
I am offering a complimentary 36-page PDF consisting of my articles about SHIP in the November 2008, January 2009, and June 2009 issues of The Insurance Forum (9 pages), and 27 selected pages from SHIP's statutory financial statement for the year ended December 31, 2016. The selected pages are those from which I drew much of the data for this post. Email jmbelth@gmail.com and ask for the March 2017 SHIP package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 208: Long-Term Care Insurer Penn Treaty Enters Court-Ordered Liquidation

On March 1, 2017, President Judge Mary Hannah Leavitt of the Commonwealth Court of Pennsylvania ordered Penn Treaty Network America Insurance Company (Allentown, PA) and its subsidiary, American Network Insurance Company (collectively, Penn Treaty), into liquidation. (Judge Leavitt became President Judge in January 2012.) On the same day, Teresa Miller, the Pennsylvania insurance commissioner, issued a press release and a "commissioner's statement." Penn Treaty was prominent in the long-term care (LTC) insurance business.

Background
In January 2009, Penn Treaty became insolvent. Joel Ario, then the Pennsylvania insurance commissioner, petitioned the court to place the company in rehabilitation. In April 2009, the court granted the petition. In October 2009, Ario petitioned the court to place the company in liquidation, but a top Penn Treaty official opposed the petition. Under Pennsylvania law, in a liquidation proceeding, the rehabilitator (the insurance commissioner) has the burden of proving that continuing the rehabilitation would substantially increase the risk to creditors, policyholders, and the public, or would be futile.

During 2010, the parties tried unsuccessfully to reach a settlement. A bench trial before Judge Leavitt began in January 2011. The trial was suspended while the parties tried again, unsuccessfully, to reach a settlement. The trial resumed in October 2011, lasted 30 trial days, and ended in February 2012.

On May 3, 2012, Judge Leavitt handed down a 162-page opinion and a brief order. She ruled that the rehabilitator (by then Michael Consedine was the insurance commissioner) had failed to meet his burden of proof. The judge denied the liquidation petition and ordered Consedine to develop a rehabilitation plan. Consedine did so, and the judge approved it. Since then the rehabilitation plan has been amended twice. Now it has been converted into a liquidation plan under the current commissioner.

The Liquidation Orders
In the orders Judge Leavitt issued recently to the two Penn Treaty companies, she terminated the rehabilitations of the companies, declared them insolvent, ordered them liquidated, and appointed Miller (and any successor commissioner) the liquidator. The judge vested the liquidator with title to the companies' assets, specified the procedures to be followed in the liquidation, and transferred the companies' policy obligations to the state guaranty associations (GAs).

Information about the liquidation is on the Penn Treaty website (www.penntreaty.com). One item there is a listing of the LTC insurance limit for each of the GAs. The limits are $300,000 for most GAs. The exceptions are California ($554,556), Connecticut ($500,000), Louisiana ($500,000), Minnesota ($410,000), Missouri ($100,000), New Jersey (unlimited, subject to policy and statutory provisions and exclusions), Oregon ($100,000), Puerto Rico (no coverage for LTC insurance), Utah ($250,000), and Washington State ($500,000). In other words, after Penn Treaty's assets are exhausted, and after the GA limit is reached, a policyholder would not be entitled to further payments.

Assessments
GAs have no funds. Instead, state GA laws provide for surviving insurance companies to compensate, through assessments, for the inadequacy of the assets of the company being liquidated. Virtually all of Penn Treaty's business was LTC insurance.

I have not examined the various state GA laws. However, I have six understandings about which companies will be assessed in the Penn Treaty failure and the amounts those companies will be assessed. First, LTC insurance is part of the health insurance industry, and therefore surviving health insurance companies (even those which have never sold LTC insurance) will be assessed. Second, the amounts assessed will be based on each surviving company's health insurance premiums. Third, there are upper limits on the amount that can be assessed against each company. Fourth, each assessed company can recover the amount assessed through future state tax credits, thus shifting the burden of the liquidation on to state taxpayers. Fifth, some health insurance companies have argued that the burden of the Penn Treaty failure should be spread more broadly to include life insurance companies. Sixth, amending all the state GA laws to make such a change would be controversial, would require years to complete, and might never be completed.

My NOLHGA Inquiry
Because the National Organization of Life and Health Guaranty Associations (NOLHGA) is coordinating the Penn Treaty liquidation, I asked NOLHGA for a list of companies that will be assessed and the amount that each company will be assessed. A spokesman for NOLHGA said the data I asked for is not yet available. He said that a "company's assessment responsibility to a GA for Penn Treaty will be roughly proportionate to its share of the health premiums reported by all of that GA's member companies."

The NOLHGA spokesman sent me a memorandum dated June 16, 2016 from Long Term Care Group, Inc. (LTCG), which is an LTC insurance administration firm. LTCG is working with Commissioner Miller, NOLHGA, and the GAs on the Penn Treaty case. The LTCG memorandum alludes to a "Common Interest and Confidentiality Agreement," which probably is the secret agreement to which I referred in No. 200 (posted January 27, 2017). Included in the LTCG memorandum is a tabulation showing for each state, and for each of the two Penn Treaty companies separately, estimates of the number of policies, the gross liabilities, the assets, and the net liabilities. The total number of policies was 78,661, gross liabilities were about $3.0 billion, assets were about $434 million, and net liabilities were about $2.6 billion. Regarding the tabulation, the spokesman said:

Please note that the estimates are based on year-end 2015 information. We expect the results of ongoing claim payments over 2016 and the first two months of 2017 will have a significant impact on the final liquidation date projections.

My Survey of Companies
I asked several shareholder-owned companies for their estimates of the amounts they will be assessed in connection with the Penn Treaty liquidation. Several referred me to their 10-K reports filed with the Securities and Exchange Commission (SEC) for the year ended December 31, 2016. Some also said they will comment further in their 10-Q reports filed with the SEC for the quarter ended March 31, 2017. I reviewed the 10-K reports of those companies and those of several other shareholder-owned companies. Here are the results of my survey:

Aetna: $230 million.
AFLAC: $10 million to $20 million.
Anthem: $190 million to $220 million.
Centene: Nothing found in 10-K.
CIGNA: $85 million after tax.
CNO Financial: Nothing found in 10-K.
Genworth: Referred me to the 10-K, in which the company said in part: "[W]e have not established any accruals for guaranty fund assessments associated with Penn Treaty as of December 31, 2016. We will continue to monitor the situation and may record a liability and expense in future reporting periods."
Humana: $30 million.
Manulife: The Canadian parent of John Hancock. Manulife did not respond to my inquiry, and the relevant financial statement for the year ended December 31, 2016 has not yet been filed with the SEC.
MetLife: A spokesman said there is no estimate yet.
Prudential: $47.9 million for Penn Treaty, Executive Life, and Lincoln Memorial combined.
UnitedHealth: $350 million.
Unum: $12 million to $15 million after tax.

Three Other Inquiries
I wrote to New York Life, a mutual company that is in the LTC insurance business. A spokesman said there is no schedule or general interrogatory in the statutory financial statement requiring the company to disclose this detail. He said that, if it were material, the company would disclose it in the company's audited financial statement and potentially in a footnote in the company's statutory financial statement.

I wrote to Northwestern Mutual Life, which has a subsidiary (Northwestern Long Term Care) in the LTC insurance business. A spokeswoman said the company reports the total liability for assessments by all GAs as a "reserve for guaranty fund" write-in for line 25 on page 3 (the liability page) of the statutory financial statement. The figures in the two companies' statutory financial statements as of December 31, 2016 are $33.5 million for the parent company and $5.9 million for the subsidiary.

I wrote to a spokesman for Senior Health Insurance Company of Pennsylvania (SHIP), an LTC insurance company in runoff. I have written extensively about SHIP. The company does not file reports with the SEC. SHIP's spokesman was unable to obtain a response to my inquiry, and there is no relevant write-in for line 25 on page 3 of SHIP's statutory financial statement for the year ended December 31, 2016.

General Observations
I think the lack of a requirement in statutory financial statements for disclosure of the magnitude of the assessments against surviving insurance companies in the Penn Treaty case is unfortunate. I also think the lack of such a disclosure requirement is an example of the difference between the disclosure imposed by federal securities regulators on shareholder-owned insurance companies and the less rigorous disclosure imposed by state insurance regulators on mutual insurance companies.

The failure of Penn Treaty is one of the largest in American insurance history. I fear that the "hole" is so large that many Penn Treaty policyholders will not receive all the benefits they have been promised. I am also concerned that the Penn Treaty liquidation will adversely affect the public perception of the financial stability of not only LTC insurance, but also health insurance generally and even life insurance.

Available Material
I am offering a complimentary 21-page PDF consisting of Commissioner Miller's press release (2 pages), her commissioner's statement (3 pages), the liquidation order for Penn Treaty (6 pages), the liquidation order for American Network (6 pages), and the LTCG memorandum NOLHGA sent me (4 pages). Email jmbelth@gmail.com and ask for the March 2017 package relating to Penn Treaty.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com