No. 258: Long-Term Care Insurance—The Kansas Insurance Department's Bailout of General Electric

In No. 257 (posted March 12, 2018) I reported on shareholder litigation against General Electric Company (GE) relating to a huge charge taken by GE in connection with an old run-off block of long-term care (LTC) insurance policies. A reader immediately informed me of another dimension of the subject, which I discuss in this follow-up.

The Huge Charge

It was not widely known until recently that GE had retained financial responsibility for a run-off block of LTC insurance policies sold more than a decade ago, prior to the creation of Genworth Financial, Inc. In July 2017 GE disclosed problems in its old LTC block. In November GE disclosed that its old LTC block had been largely reinsured, that the company was reviewing the reserve liabilities for its old LTC block, and that the charge was expected to be more than $3 billion.

On January 16, 2018, GE shocked the insurance world by disclosing that it will contribute about $15 billion of capital to the reinsurer over the next seven years, consisting of about $3 billion in the first quarter of 2018 and about $2 billion per year in each of the six following years. On January 24 GE disclosed the existence of an investigation by the Securities and Exchange Commission (SEC). GE said the SEC is "investigating [GE's] process leading to the insurance reserve increase and the fourth-quarter charge as well as GE's revenue recognition and controls for long-term service agreements."

The Reinsurer

In its January 16 disclosure, which was in an 8-K (significant event) report filed with the SEC, GE alluded to accounting rules of the Kansas Insurance Department and identified the reinsurer as "North American Life and Health (NALH)." I learned recently that the reinsurer for which GE used a Kansas "permitted accounting practice" was Employers Reassurance Corporation (ERAC), a Kansas-domiciled GE subsidiary. Later I discuss that error in GE's January 16 filing.

In ERAC's statutory annual statement for 2017, as filed March 1, 2018, the first note under "Notes to Financial Statements," on page 19.1 of the statement, discusses the old LTC block. The note says an accounting practice permitted in Kansas, but not permitted under the statutory accounting principles promulgated by the National Association of Insurance Commissioners (NAIC), allowed ERAC to add almost $11 billion (the figure is $10,983,500,000) to its surplus. Here is my edited version of a portion of the note (the full note is in the complimentary package offered at the end of this post):

During December 2017, ERAC requested and subsequently received approval from the Kansas Insurance Department for a permitted accounting practice to spread and delay the full recognition of the indicated increase in additional actuarial reserves (AAR) that would otherwise be required under the NAIC's statutory accounting principles over the years 2017 through 2023. The increase in AAR is predominantly related to the changes in ERAC's asset adequacy (cash flow testing) assumptions for long-term care business. The effects of the permitted practice are included in ERAC's calculation of its risk-based capital (RBC). Absent the permitted practice, ERAC would have required an additional capital contribution from GE under the terms of the existing Capital Management Agreement in place. The amount of AAR recognized in ERAC's 2018-2023 statutory financial statements will be computed by taking a percentage of the difference between the total estimated AAR adjustment as determined by the respective year's cash flow testing and the year-end 2016 AAR, and then subtracting the amount of change in AAR recognized in each of the preceding years starting in 2017.

ERAC's RBC Ratios

From ERAC's statutory financial statement for 2017, I calculated the RBC ratios (as percentages) at the end of each of the last five years, where the denominators of the ratios are company action level RBC. The ratios were 310 in 2013, 202 in 2014, 173 in 2015, 224 in 2016, and 187 in 2017. Without the Kansas permitted accounting practice, ERAC would be deeply insolvent and far below mandatory control level RBC.

My Public Records Request to the Kansas Department

On March 13 I asked the Kansas department, pursuant to the Kansas Open Records Act (KORA), for a copy of ERAC's request for the permitted accounting practice and a copy of the department's approval of the request. On March 14 Elizabeth J. Hickert Fike, an attorney in the legal division of the department, said:

The documents you are requesting are not subject to public disclosure. We consider that material to be included in our financial analysis workpapers. Please see 40-222(k)(7) for confidentiality of financial examination, including ongoing analysis.

Ms. Fike provided me with the text of that subsection of the Kansas Statutes (45-215 referred to below is the KORA). It reads:

All working papers, recorded information, documents and copies thereof produced by, obtained by or disclosed to the commissioner or any other person in the course of an examination made under this act including analysis by the commissioner pertaining to either the financial condition or the market regulation of a company must be given confidential treatment and are not subject to subpoena and may not be made public by the commissioner or any other person, except to the extent otherwise specifically provided in K.S.A. 45-215 et seq., and amendments thereto. Access may also be granted to the national association of insurance commissioners [sic] and its affiliates. Such parties must agree in writing prior to receiving the information to provide to it the same confidential treatment as required by this section, unless the prior written consent of the company to which it pertains has been obtained.

My Other Request to the Kansas Department

On March 13 I also asked the Kansas department some questions about the "permitted accounting practice to spread and delay additional actuarial reserves." On March 15 Tish M. Becker, chief financial analyst in the department, responded in detail. She said ERAC requested the department's approval of the permitted accounting practice on December 29, 2017. She said the department notified all the states where ERAC is licensed (the District of Columbia and all states except New York) and received no objections. Any objecting state can require the company to file a statement in that state not reflecting the permitted accounting practice, but such a statement would be rarely seen because it would not be the official statement circulated by the NAIC. I do not know how many states formally approved the permitted accounting practice, and how many tacitly approved it by not commenting on it.

Ms. Becker said the department reviewed ERAC's request "utilizing various actuarial and financial experts" and approved the request on January 11, 2018. She also said that, if the department had not granted the request, the Capital Management Agreement would have resulted in GE contributing the full amount. Ms. Becker made this general comment:

Please recognize there is a difference between what is booked on a statutory accounting basis for the insurance legal entity, versus what is booked on a GAAP [Generally Accepted Accounting Principles] basis on a group's consolidated financials.

In response to my inquiry about GE's erroneous identification of the reinsurer, Ms. Becker pointed out that GE has two life-health insurance subsidiaries, ERAC and Union Fidelity Life Insurance Company (UFLIC), both of which are domiciled in Kansas. She said "North American Life and Health (NALH)" is a term used by GE to discuss the results of its run-off insurance operations including both ERAC and UFLIC. She explained that, while UFLIC also identified an increase in additional actuarial reserves as of December 31, 2017, the increase was fully funded. Thus the department did not approve a permitted accounting practice for UFLIC.

I am not satisfied with that explanation. I can conceive of only two possible explanations for GE's error. A charitable explanation is that GE first requested the permitted accounting practice from an outside company, which declined to get involved, and GE then turned to ERAC. A less charitable explanation is that GE used a phony name for the reinsurer to avoid calling attention to the details of the permitted accounting practice shown in the note in ERAC's statutory statement.

My Writings about Permitted Accounting Practices

I have written extensively about permitted accounting practices in state regulation of insurance. My most important articles on the subject were in the February 2009, April 2009, May 2009, and August 2009 issues of The Insurance Forum. It is no coincidence that the articles appeared during the Great Recession. The articles are in the complimentary package offered at the end of this post.

General Observations

For a single state insurance regulator to approve—in violation of the NAIC's statutory accounting principles, and with the approval (or lack of disapproval) of the other state insurance regulators—the bailout of GE to the tune of almost $11 billion is an outrage. This case illustrates that any deviation, no matter how large, from acceptable accounting practices can be deemed acceptable by state insurance regulators.

Uniformity among the states was the basic reason for the creation of the NAIC's predecessor almost 150 years ago. In the wake of the unacceptable accounting practice described here, it will be interesting to see what rating actions, if any, are taken by the major firms that assign financial strength ratings to insurance companies.

Available Material

I am offering a 16-page complimentary package consisting of the note in ERAC's 2017 statutory financial statement (1 page) and the four 2009 Forum articles (15 pages). Email jmbelth@gmail.com and ask for the March 2018 follow-up about GE's old LTC insurance block.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 257: Long-Term Care Insurance—A Major Legacy Problem for General Electric

The Cleveland Bakers and Teamsters Pension Fund, a General Electric Company (GE) shareholder, recently filed a class action lawsuit against the company and several of its current and past officers. The lawsuit grew out of a huge charge taken by GE relating to a legacy run-off block of long-term care (LTC) insurance policies, and a resulting decline in the market value of GE shares. Here I discuss the background of GE's involvement in LTC insurance and the current status of the lawsuit.

Background

My first experience with GE insurance was in 1997, when I received a promotional letter about guaranteed renewable LTC insurance offered by General Electric Capital Assurance Company. The letter included this sentence, with this underlining: "Your premiums will never increase because of your age or any changes in your health." I wrote the company expressing concern that the sentence, although technically correct, was deceptive. I said the promotional letter should make clear that the company has the right to increase premiums on a class basis.

The company officer who had signed the promotional letter responded. He defended the sentence by saying, among other things, that the company had never raised rates on existing policyholders and had an "internal commitment to rate stability." Nonetheless, and without telling me, the company removed the deceptive sentence from its promotional letters. I wrote about the incident in the May 1997 and February 1998 issues of The Insurance Forum.

Genworth Financial

Genworth Financial, Inc. was created in 2003. GE transferred to Genworth some of the LTC insurance business that had been sold through General Electric Capital. Genworth became a major company in the LTC insurance business. Genworth also sold life insurance, annuities, and mortgage insurance. In No. 144 (posted February 16, 2016) I reported that Genworth's companies had suffered sharp declines in their financial strength ratings, and that Genworth had discontinued the sale of life insurance and annuities. In Nos. 185 and 187 (posted in November 2016) I reported that Genworth and China Oceanwide Holdings Group Co., Ltd. had entered into a definitive agreement under which China Oceanwide had agreed to acquire all the outstanding shares of Genworth.

The Genworth agreement with China Oceanwide has been approved by some but not all the necessary regulators. An update is in Genworth's 10-K report as of December 31, 2017, as filed with the Securities and Exchange Commission (SEC) on February 28, 2018. An excerpt from the 10-K is in the complimentary package offered at the end of this post. Also, in an 8-K (significant event) report filed with the SEC on March 9, Genworth said it entered into a $450 million five-year senior secured loan agreement with China Oceanwide on March 7.

GE's Recent Disclosures

It was not widely known until recently that GE had retained financial responsibility for a run-off block of LTC insurance policies sold prior to the creation of Genworth. On July 21, 2017, GE said it recently had adverse claims experience in the old LTC insurance block. On October 20 GE said it was conducting a comprehensive review. On November 13 GE said it was cutting its dividend in half, only the second cut since the Great Depression. On November 14 GE said that the old LTC insurance block had been largely reinsured, that it was reviewing its reserves for the old LTC insurance block, and that the charge was expected to be more than $3 billion. On January 16, 2018, in an 8-K report, GE said:

On January 16, 2018, GE provided an update on the previously reported review of premium deficiency assumptions related to GE Capital's run-off insurance business (North American Life and Health ("NALH")). With the completion of that review, and of NALH's annual premium deficiency test, GE recorded an increase in future policy benefit reserves of $8.9 billion and $0.6 billion of related intangible asset write-off for the fourth quarter of 2017. This will result in a $6.2 billion charge ($7.5 billion upon remeasurement under tax reform) on an after-tax GAAP [Generally Accepted Accounting Principles] basis to GE's earnings in the fourth quarter of 2017.

As a regulated insurance business, NALH is subject to a statutory accounting framework for setting reserves that requires the modification of certain assumptions to reflect moderately adverse conditions and other differences from the reserve calculation under GAAP. Under that framework, we estimate that GE Capital will need to contribute approximately $15 billion of capital to NALH over the next seven years. GE Capital plans to make a first capital contribution of approximately $3 billion in the first quarter of 2018 and expects to make further contributions of approximately $2 billion per year in each of the six following years, subject to ongoing monitoring by NALH's primary regulator, the Kansas Insurance Department. GE Capital plans to fund the capital contributions with its excess liquidity and other GE Capital portfolio actions and does not expect to make a common share dividend distribution to GE for the foreseeable future.

On January 24, 2018, GE disclosed the existence of an SEC investigation. The company said the SEC would be "investigating [GE's] process leading to the insurance reserve increase and the fourth-quarter charge as well as GE's revenue recognition and controls for long-term service agreements."

The Cleveland Bakers Lawsuit

On February 20, 2018, Cleveland Bakers filed a class action lawsuit against GE and four individuals: Jeffrey Immelt, GE's chief executive officer from September 2001 until August 2017; John Flannery, GE's chief executive officer since August 2017; Jeffrey Bornstein, GE's chief financial officer from July 2013 until November 2017; and Jamie Miller, GE's chief financial officer from November 2017 until the end of the class period (January 24, 2018). The Cleveland Bakers case focused primarily on LTC insurance, and grew out of recent disclosures, especially the January 16, 2018 disclosure of the huge charge relating to the old LTC insurance block. (See Cleveland Bakers v. GE, U.S. District Court, Southern District of New York, Case No. 1:18-cv-1404.)

Cleveland Bakers alleged that the defendants had understated reserve liabilities in financial statements. The complaint included one count of violations of Section 10(b) of the Exchange Act by all the defendants, and one count of violations of Section 20(a) of the Exchange Act by the individual defendants. Cleveland Bakers sought class certification, damages, pre-judgment and post-judgment interest, attorney fees, expert fees, and other costs.

The Earlier Cases

Three shareholder class action lawsuits against GE preceded the Cleveland Bakers case. They were filed November 1, November 2, and December 18, 2017. The earlier cases dealt for the most part with GE operations other than LTC insurance. (See Hachem v. GE, Mirani v. GE, and Tampa Maritime Association-International Longshoremen's Association Pension Plan v. GE, U.S. District Court, Southern District of New York, Case Nos. 1:17-cv-8457, 1:17-cv-8473, and 1:17-cv-9888.)

The Judge

All the cases were assigned to U.S. District Court Judge Jesse M. Furman. President Obama nominated him in June 2011, and the Senate confirmed him in February 2012.

General Observations

On February 26 Judge Furman issued an order consolidating the cases. He closed the Cleveland Bakers, Mirani, and Tampa Maritime cases, thus leaving only the Hachem case open. I believe that a consolidated complaint in the Hachem case will be filed soon, and that it will incorporate the allegations in the Cleveland Bakers complaint relating to GE's old LTC insurance block. I plan to follow the case closely and report major developments.

Available Material

I am offering a 42-page complimentary package consisting of the May 1997 and February 1998 Forum articles (4 pages), the excerpt from Genworth's recently filed 10-K report (5 pages), and the complaint in the Cleveland Bakers case (33 pages). Email jmbelth@gmail.com and ask for the March 2018 package relating to GE's old LTC insurance block.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 256: MetLife's Lost Pensioners—A Third Update

In No. 246 (posted January 2, 2018) I discussed a recent disclosure by MetLife, Inc. (NYSE:MET) concerning about 600,000 lost pensioners. I provided updates in Nos. 252 (February 12) and 254 (February 19). Here I provide a third update.

MetLife's 10-K Report for 2017

In its discussions of the problem of lost pensioners, MetLife said it would discuss the subject in the 10-K report as of December 31, 2017 to be filed with the Securities and Exchange Commission on March 1, 2018. The first reference to the subject is this paragraph on page 87 of the 417-page 10-K (all references to the subject are in the complimentary package offered at the end of this blog post):

On December 15, 2017, the Company announced that it was undertaking a review of practices and procedures used to estimate its reserves related to certain RIS [Retirement Income Solutions] group annuitants who have been unresponsive or missing over time. As a result of this process, the Company increased reserves by $510 million, before income tax, to reinstate reserves previously released, and to reflect accrued interest and other related liabilities. Of the increase of $510 million ($331 million, net of income tax), $138 million ($90 million, net of income tax) was incurred in 2017 and $372 million ($241 million, net of income tax) was considered an error and, recording this amount in the fourth quarter of 2017 financial statements would have had a material effect on the results of operations for 2017. Approximately 25 years ago, companies that are or have been MetLife, Inc. subsidiaries established a practice of releasing the full insurance liability after two attempts at contacting these annuitants, based on the presumption that these annuitants would never respond and had not become entitled to benefits based on certain contractual provisions. The number of impacted annuitants for whom the Company released the full insurance liability was no more than 1,000 in any one year, and over the entire period totaled approximately 13,500 as of December 31, 2017, which is approximately 2% of the total group annuitant population.

The Lenna Retirement

On February 27, 2018, The Wall Street Journal carried an article by reporter Leslie Scism entitled "MetLife Pension-Benefits Executive to Retire." The article cited an internal memorandum indicating that Executive Vice President Robin Lenna will retire as of March 1 after 14 years at the company. According to the article, she headed the company's "Retirement Income Solutions unit, which oversees a 'pension-risk-transfer' business in which the insurer assumes responsibility for some or all payments due participants in private-sector pension plans."

Identify Theft Alerts

In recent months at least four state insurance departments have issued consumer alerts warning the public about the activities of criminals engaged in identity theft. In July 2017 and September 2017 the Nebraska Department of Insurance issued alerts. The first was entitled "Beware of Fraudulent Attempts to Disburse Funds from Annuity Contracts." The second was entitled "Fraudulent Disbursement of Funds from Annuity Contracts." The thieves had annuitants' contract numbers, Social Security numbers, and dates of birth.

In November 2017 the Kansas Insurance Department issued an alert entitled "Identity thieves go after annuities." The thieves had annuitants' account numbers, Social Security numbers, and dates of birth.

On February 6, 2018, the Colorado Division of Insurance issued an alert entitled "Identity thieves target annuities." The division warned annuitants to watch for unauthorized withdrawals.

On February 28, 2018, the South Carolina Department of Insurance issued a media release entitled "South Carolina Department of Insurance Warns of Identity Thieves Targeting Annuities and Annuity Recipients." The thieves had annuitants' account numbers, dates of birth, Social Security numbers, names and addresses of relatives, and other information.

Steven Weisbart's Comments

In my previous posts about lost pensioners, I invited comments from readers, especially from those with direct knowledge of record keeping procedures. I heard from several readers who had no inside information, but recently I received an email from Steven Weisbart. He served on the faculty at Georgia State University, later worked at TIAA-CREF, and is now senior vice president and chief economist at the Insurance Information Institute. I edited his comments lightly, and he approved my editing. Here are his thoughts on the subject of lost pensioners:

I have dealt with the issue of "lost participants" at two points in my career. The first was at TIAA-CREF. The second is at a defined benefit pension plan for insurance-support organizations. Although it is clear that MetLife "dropped the ball," I understand that this is a very difficult problem to overcome, particularly if success is defined as not losing anyone.

There are several problems that should be recognized. First, methods of keeping records have changed dramatically over the last 50 years or so. The older a record, the harder it is to search. This is not just paper-to-computer, but one computer system to another. Companies are replacing "legacy" systems with newer ones that do not necessarily read older data.

Second, a related problem is that record keepers are often changed. When they are, some historical records, which might have been helpful in a search, are likely lost. In my current defined benefit plan, for example, we switched record keepers in 2010, and some useful historical information on current participants might not have been handed over to the new record keeper.

Third, in establishing non-pension records, such as drivers' licenses, people often use different forms of their names, making a match uncertain. For example, I sometimes use my middle initial and sometimes do not. Also, some external data bases, such as the Social Security Master Death File, contain errors that pose a challenge in locating a lost participant accurately.

Fourth, most lost participants have small benefit amounts at stake. Thus they have little incentive to keep the contact information accurate.

Fifth, even when you think you have found a lost participant and want to confirm it by direct contact, the person may not respond because he or she interprets the inquiry as a marketing effort, or worse, a senior citizen scam. That is especially true in a case such as MetLife, where the obligation was originally assumed by a different sponsor. A recipient may never have dealt with MetLife and may think the contact letter is a fake.

I am not trying to excuse MetLife. Rather, I am trying to explain why they may continue to struggle with this issue for a long time.

Available Material

I am offering a complimentary 12-page PDF consisting of excerpts from MetLife's 10-K filed March 1, 2018 (6 pages) and consumer alerts from state insurance departments (6 pages). Email jmbelth@gmail.com and ask for the March 2018 package about MetLife's lost pensioners.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 255: Mueller's Grand Jury Hands Up an Indictment Against the Russians—A Major Development in the Investigation

On February 16, 2018, Special Counsel Robert S. Mueller III of the U.S. Department of Justice filed a District of Columbia federal grand jury indictment of three Russian entities and 13 Russian individuals. I think the indictment should be widely read. (See USA v. Internet Research Agency, U.S. District Court, District of Columbia, Case No. 1:18-cr-32.)

The Judge

The case has been assigned to U.S. District Court Judge Dabney L. Friedrich. President Trump nominated her in June 2017, and the Senate confirmed her in November 2017 by a vote of 93 to 4.

The Attorneys

The government attorneys are Jeannie Sclafani Rhee of the special counsel's office, Lawrence Rush Atkinson of the special counsel's office, and Ryan Kao Dickey of the criminal division of the U.S. Department of Justice. The names of the defendants' attorneys are not yet known.

The Charges and the Defendants

The indictment includes eight counts: one count of conspiracy to defraud the United States, one count of conspiracy to commit wire fraud and bank fraud, and six counts of aggravated identity theft. The government makes different numbers of charges against the various defendants, and seeks forfeiture against some of the defendants. The defendants are Internet Research Agency LLC (it has five other names), Concord Management and Consulting LLC, Concord Gathering, and 13 individuals. The names and aliases of the individual defendants are shown in the court docket, which is part of the complimentary package offered at the end of this post. Here is the first paragraph of the indictment:

The United States of America, through its departments and agencies, regulates the activities of foreign individuals and entities in and affecting the United States in order to prevent, disclose, and counteract improper foreign influence on U.S. elections and on the U.S. political system. U.S. law bans foreign nationals from making certain expenditures or financial disbursements for the purpose of influencing federal elections. U.S. law also bars agents of any foreign entity from engaging in political activities within the United States without first registering with the Attorney General. And U.S. law requires certain foreign nationals seeking entry to the United States to obtain a visa by providing truthful and accurate information to the government. Various federal agencies, including the Federal Election Commission, the U.S. Department of Justice, and the U.S. Department of State, are charged with enforcing these laws.

Structure of the Indictment

A major section of the indictment addresses the Count 1 conspiracy charge. The section identifies the defendants, lists the federal regulatory agencies, explains the object of the conspiracy, describes the manner and means of the conspiracy, explains the use of U.S. social media platforms, talks about the use of U.S. computer infrastructure, describes the use of stolen U.S. identities, explains actions targeting the 2016 U.S. presidential election, describes political advertisements (with 13 examples), explains the staging of political rallies in the U.S., describes the destruction of evidence, and lists overt acts.

Another section of the indictment addresses Counts 2 and 3. The section explains the object of the conspiracy, describes the manner and means of the conspiracy, and includes 23 examples of identify theft. The final section of the indictment describes the forfeiture allegation.

General Observations

I think the filing of this indictment is the most important development to date in the investigation. It may be difficult or impossible to bring the alleged wrongdoers into a U.S. courtroom, but the indictment sends a strong message. The alleged wrongdoers may hesitate to travel out of Russia because they may find themselves in countries that have extradition agreements with the U.S. In addition, I think the indictment strengthens the special counsel's political position, making it more difficult to remove him. Deputy Attorney General Rod Rosenstein, not Special Counsel Mueller, conducted the press conference at which the indictment was announced.

Available Material

I am offering a complimentary 47-page PDF consisting of the court docket (10 pages) and the indictment (37 pages). Email jmbelth@gmail.com and ask for the February 2018 package about Special Counsel Mueller's charges against Russian entities and individuals.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 254: MetLife's Lost Pensioners—A Further Update

In No. 246 (posted January 2, 2018) I discussed a recent disclosure by MetLife, Inc. (NYSE:MET) concerning about 600,000 lost pensioners. In No. 252 (February 12, 2018) I provided an update. I am rushing this further update for a reason I will explain.

The January 29 Postponement

On January 29 MetLife postponed its fourth quarter and full year 2017 earnings report and the related earnings conference call by about two weeks. The company provided preliminary results and said management had found a "material weakness in internal control over financial reporting."

The February 13 Announcement

On February 13 MetLife announced the fourth quarter and full year 2017 earnings report. The following statement appears at the bottom of the first page of the news release:

"Although our underlying financial performance remained solid, the reserve charge and its impact on our fourth quarter and full year earnings—as well as the material weakness that led us to delay our earnings announcement—are unacceptable and deeply disappointing," said Steven A. Kandarian, chairman, president and CEO of MetLife, Inc. "We can and will do better. We are rigorously addressing the situation and are committed to significantly improving our operational performance to better serve our customers and strengthen shareholders' confidence in our organization. MetLife is an iconic franchise with strong businesses, and we are working very hard to continue to successfully execute on our strategy and deliver great value to our customers and shareholders."

The Conference Call

MetLife held its earnings conference call on February 14. Here is the first portion of Kandarian's opening remarks:

Most of my comments this morning will focus on the issue within our Retirement and Income Solutions business that caused us to delay earnings and take an after-tax charge of $331 million or $510 million pre-tax. Simply put, this is not our finest hour. We had an operational failure that never should have happened and it is deeply embarrassing. We are undertaking a thorough review of our practices, processes and people to understand where we fell short and how we can reset the bar at the high level people have come to expect from us over our 150-year history. The Board of Directors is fully engaged on this issue as well.

Replay of the Conference Call

According to the February 13 news release, the conference call will be available for replay by telephone for one week—specifically, until Wednesday, February 21, at 11:59 p.m. (EST). To listen to a replay by telephone, dial 800-475-6701 (U.S.) or 320-365-3844 (outside the U.S.). The access code for the replay is 433148. I am rushing this post in case any readers would like to listen to the replay by telephone.

The Advisory Report to the DOL

Shortly after I began writing about MetLife's lost pensioners, a reader brought to my attention a November 2013 advisory report submitted to Thomas E. Perez, then the Secretary of the U.S. Department of Labor (DOL). The report, produced by the Advisory Council on Employee Welfare and Pension Benefit Plans, is entitled "Locating Missing and Lost Participants." Here is the abstract:

The 2013 ERISA Advisory Council ("Council") examined the issues plan sponsors, fiduciaries, service providers, and other parties ("Plan Representatives") face in handling plan benefits payable to participants and beneficiaries who cannot be found or are nonresponsive ("Lost Participants"). The focus of the Council's examination was on both methods of maintaining contact with participants so they do not become Lost Participants and methods of finding participants once they become Lost Participants.

The Council learned from witnesses who testified that locating Lost Participants to pay them their benefits can be an administrative burden. Further, while there is DOL guidance on dealing with Lost Participants, that guidance is (i) focused on terminated defined contribution plans, (ii) presented in multiple sources rather than one central and cohesive resource, or (iii) outdated. Furthermore, there does not appear to be sufficient inter-agency coordination among the DOL, the Pension Benefit Guaranty Corporation, and the Social Security Administration to address overlapping issues surrounding Lost Participants. The Council makes several recommendations in this report regarding how to address each of these findings.

Available Material

I am offering a complimentary 47-page PDF consisting of MetLife's February 13 news release without the unaudited statements (17 pages) and the advisory report to the DOL (30 pages). Email jmbelth@gmail.com and ask for the second February 2018 package about MetLife's lost pensioners.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 253: Long-Term Care Insurance—Metropolitan Life Suffers a Setback in a Class Action Lawsuit Relating to Premium Increases

On February 6, 2018, a federal appellate court handed Metropolitan Life Insurance Company a setback in a class action lawsuit relating to premium increases on certain long-term care (LTC) insurance policies. A district court judge granted the company's motion to dismiss the complaint, but a three-judge appellate panel unanimously reversed the decision and sent the case back to the district court for further proceedings. Here I discuss this extraordinary case. (See Newman v. Metropolitan, U.S. District Court, Northern District of Illinois, Case No. 1:16-cv-3530, and U.S. Court of Appeals, Seventh Circuit, Case No. 17-1844.)

The Complaint

On March 23, 2016, Margery Newman, an Illinois resident, filed a class action complaint against Metropolitan. The case was assigned to U.S. District Court Judge Thomas M. Durkin. President Obama nominated him in May 2012, and the Senate confirmed him in December 2012.

On June 29, 2016, Newman filed a first amended complaint, on which the discussion here is based. She was aged 56 when she purchased an "LTC Premier" policy that was effective September 1, 2004. The policy included a "reduced-pay at 65 option," which she selected. Metropolitan's marketing brochure described the option as follows:

By paying more than the regular annual premium amount you would pay each year up to the Policy Anniversary on or after your 65th birthday, you pay half the amount of your pre-age 65 premiums thereafter.

Before Newman turned 65, the semiannual premium was $3,813.68. On September 1, 2012, the semiannual premium declined by 50 percent, to $1,906.84. On March 1, 2015, Metropolitan increased the semiannual premium by 102 percent, to $3,851.81.

In her complaint Newman suggested a definition of the "class" for purposes of this case. Here is her suggestion:

All persons age 65 and older in the United States who purchased an individual long-term care insurance policy from MetLife (or a subsidiary or affiliate thereof) and selected the "Reduced-Pay at 65 Option" at any time during the period from June 1, 1986 to the present and have been subjected to a class-wide rate increase that increased their premiums above and beyond the promised 50% of their pre-age 65 premiums.

Newman alleged breach of contract, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, fraud, and fraudulent concealment. She sought class certification, compensatory and punitive damages, statutory and exemplary damages, imposition of a constructive trust, a claims resolution facility, attorney fees, and costs. She attached several exhibits to the complaint, including Metropolitan's marketing brochure and the policy under discussion.

The Dismissal

On July 29, 2016, Metropolitan filed a motion to dismiss the complaint for failure to state a claim. On March 9, 2017, after briefing, Judge Durkin issued a memorandum and order dismissing the complaint without prejudice. Here is the concluding paragraph (persons interested in Judge Durkin's reasoning are invited to read his ruling, which is part of the complimentary package offered at the end of this post):

For the reasons stated above, Plaintiff's complaint is dismissed. The dismissal is without prejudice, however, and Plaintiff may move to amend her complaint within 30 days of the date of this Order. Any such motion should attach a proposed amended complaint and be supported by a brief of no more than five pages describing how the proposed amendments cure the deficiencies in the current complaint. Defendant should not respond to the motion to amend unless ordered to do so by the Court. If after 30 days no motion to amend is filed, this dismissal will be converted into a dismissal with prejudice.

On April 7, 2017, Newman filed a motion for leave to file a second amended complaint, attached the second amended complaint, and submitted a short memorandum in support of the motion. On April 12, at a motion hearing, Judge Durkin denied the motion for reasons he stated orally, and he dismissed the complaint with prejudice.

The Appellate Court Case

On April 21, 2017, Newman filed a notice of appeal to the Seventh Circuit. On June 12 she filed her brief. On July 12 Metropolitan filed its brief. On July 26 Newman filed a reply brief.

The case was assigned to a panel consisting of Chief Judge Diane P. Wood and Circuit Judges Frank H. Easterbrook and Ilana Diamond Rovner. President Clinton nominated Judge Wood in March 1995, the Senate confirmed her in June 1995, and she became Chief Judge in 2013. President Reagan nominated Judge Easterbrook in February 1985, the Senate confirmed him in April 1985, and he served as Chief Judge from 2006 to 2013. President George H. W. Bush nominated Judge Rovner in July 1992, and the Senate confirmed her in August 1992.

On February 6, 2018, the panel filed its unanimous decision, which Chief Judge Wood wrote. The decision reversed the district court's dismissal of the complaint and sent the case back to the district court for further proceedings. Here is the final paragraph of the panel's decision:

Newman asserts that MetLife lured her into a policy by promising a trade of short-term expense for long-term stability. She took the deal and spent nine years investing in a plan, only to have MetLife pull the rug out from under her. Neither MetLife's brochure nor the terms of the policy forecast this possibility. These allegations were enough to entitle her to prevail on the liability phase of her contract claim, and they are enough to permit her to go forward on her other theories. We therefore REVERSE the district court's grant of MetLife's motion to dismiss and REMAND for further proceedings.

On the same day Judge Durkin set a status hearing for the morning of February 16. What will emerge from the hearing and what will happen in the "further proceedings" remain to be seen.

General Observations

At the outset I said this case is extraordinary. It may also be unusual, because I think it is unlikely that many policyholders would have signed up to pay higher premiums initially in order to qualify for lower premiums later. If the complaint survives dismissal, which seems likely now, if Metropolitan does not settle quickly, if a class is certified, and if the parties agree to settle the case rather than go to trial, we may learn about the magnitude of the problem through the terms of the settlement agreement. It is also important to recognize that Metropolitan stopped selling LTC insurance policies several years ago, and is currently engaged in administering and running off its existing block of LTC insurance policies. I plan to follow this case and report further developments.

Available Material

I am offering a complimentary 58-page PDF consisting of the first amended complaint without exhibits (14 pages), Judge Durkin's memorandum and order (28 pages), and the appellate court panel's ruling (16 pages). Email jmbelth@gmail.com and ask for the February 2018 package about Newman v. Metropolitan.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 252: MetLife's Lost Pensioners—An Update

In No. 246 (posted January 2, 2018) I discussed a recent disclosure by MetLife, Inc. (NYSE:MET) concerning about 600,000 lost pensioners. Here I provide an update.

The December 15 8-K Report

On December 15, 2017, MetLife filed an 8-K (significant event) report with the Securities and Exchange Commission (SEC). The company said "we are improving the process used to locate a small subset of our total group annuitant population of approximately 600,000 that have moved jobs, relocated, or otherwise can no longer be reached via the information provided for them." The company said it currently believes that "the portion of the subset that is most impacted is less than 5% of our total group annuitant population and they tend to be smaller size cases with average benefits of less than $150 per month."

The same day MetLife's chief financial officer made similar comments during a "Business Update Call" with analysts. I contacted the company, and a spokesman provided a statement. I showed it in No. 246.

The January 30 8-K Report

On January 30, 2018, Metlife filed an 8-K report with the SEC. The text consisted of two sentences:

On January 29, 2018, MetLife, Inc. issued a news release preannouncing preliminary fourth quarter 2017 earnings and the rescheduling of its related earnings and conference call. A copy of the news release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

The January 29 News Release

The eight-page January 29 news release was entitled "MetLife Preannounces Preliminary Fourth Quarter 2017 Earnings, Reschedules Earnings Release and Conference Call." The news release had two subtitles: "Company Expects to Report Net Income of $2.0 to $2.1 billion and Adjusted Earnings of $650 to $700 million" and "Rescheduling Due to Revision of Prior Year Financials to Reflect Reserve Strengthening." The company had been scheduled to issue its fourth quarter earnings report on January 31, but will now issue the report after the market closes on February 13. The company expects to file its 10-K report for 2017 by March 1.

According to the news release, "Management of the company has determined the prior release of group annuity reserves resulted from a material weakness in internal control over financial reporting." The company "expects to increase reserves in total between $525 million and $575 million pre-tax, to adjust for reserves previously released, as well as accrued interest and other related liabilities." Also, "The total amount expected to impact fourth quarter 2017 net income is between $135 million and $165 million pre-tax," and "the full year 2017 net income impact [is expected] to be between $165 million and $195 million pre-tax."

MetLife said it had previously informed the New York Department of Financial Services (DFS), the company's primary state regulator, about the matter, and is responding to questions from DFS and other state insurance regulators. Also, the enforcement staff of the SEC has made an inquiry and the company is responding. The company said it is not aware of any intentional wrongdoing in the matter.

General Observations

As mentioned in No. 246, I think lost pensioners are a serious problem stemming from the mobility of our population and the administrative challenge of dealing with huge numbers of pensioners. I invited comment from readers—especially from those with direct knowledge of how companies maintain their records. I received very little feedback, and no responses from persons with direct knowledge of record keeping procedures. I plan to prepare another update after February 13 or after March 1, if further significant details emerge.

Available Material

I am offering a complimentary eight-page PDF containing MetLife's January 29 news release. Email jmbelth@gmail.com and ask for the February 2018 package about MetLife's lost pensioners.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 251: Halali and Others in a Federal Criminal Case Involving Phony Life Insurance Policies—A Further Update

In No. 149 (posted March 14, 2016) I discussed a federal criminal case against five defendants involving issuance of phony life insurance policies. In No. 210 (March 27, 2017) I provided an update on the case. Here I provide a further update. (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 in San Francisco filed the indictment. The defendants were Karen Gagarin, Behnam Halali, Kraig Jilge, Ernesto Magat, and Alomkone Soundara. They worked for several years as independent contractors selling life insurance for American Income Life Insurance Company.

The indictment alleged that the defendants engaged in wrongdoing that caused the company to pay more than $2.5 million in commissions and bonuses. Specifically the indictment alleged 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. In February 2016 U.S. Senior District Judge Susan Illston denied a motion to dismiss filed by four of the defendants. She set the case for trial in early 2017.

In December 2016 Soundara pleaded guilty to all 16 counts against him and agreed to testify for the government. In January 2017 Judge Illston set the trial date, said Jilge intended to plead guilty, and said the trial defendants were Halali, Magat, and Gagarin. Jilge pleaded guilty to most of the charges against him but did not plead guilty to the two money laundering charges against him. Judge Illston vacated the trial as to Jilge.

The trial began on February 15, 2017, 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. Judge Illston set sentencing for July 21.

Recent Developments

On January 5, 2018, after the filing of post-trial motions, and after the filing of sentencing memoranda, Judge Illston sentenced Halali, Magat, and Gagarin. She filed a judgment against Gagarin on January 9, and judgments against Halali and Magat on January 10. Here is a brief summary of the sentences:

Halali: 60 months in prison followed by three years of supervised release with special conditions, a special assessment of $1,600, restitution of $2,837,791.93 (joint and several with the co-defendants), no fine, no forfeiture, and self surrender on March 30, 2018.

Magat: 48 months in prison followed by three years of supervised release with special conditions, a special assessment of $1,600, restitution of $2,837,791.93 (joint and several with the co-defendants), no fine, no forfeiture, and self surrender on March 30, 2018.

Gagarin: 36 months in prison followed by three years of supervised release with special conditions, a special assessment of $1,600, restitution of $2,837,791.93 (joint and several with the co-defendants), no fine, no forfeiture, and self surrender on March 30, 2018.

On January 16 Halali waived his right to appeal. On January 22 Gagarin filed a notice of appeal. The next day the appellate court issued an order under which briefing is to be completed by June 13. (See U.S. v. Gagarin, U.S. Court of Appeals, Ninth Circuit, Case No. 18-10026.)

On January 23 Judge Illston set sentencing of Soundara for March 23. On the same day Jilge filed a sentencing memorandum in which he seeks to avoid prison time. The government's reply memorandum is expected soon, and sentencing of Jilge is set for February 16.

The Plea Agreements

Plea agreements often contain important information I share with readers. In this case I have not been able to obtain the Jilge and Soundara plea agreements. They were filed in open court, are listed in the docket, and are not marked as sealed. However, when I sought them from the court file, the message in each instance was: "You do not have permission to view this document." I do not know why the plea agreements are unavailable, but perhaps they will become available eventually.

General Observations

Life insurance performs important social functions, not the least of which is to provide financial protection for the insured's loved ones. Yet, as often said, life insurance is sold, not bought. Thus it is necessary to pay commissions to agents who perform the many functions associated with the sale of life insurance including, most importantly, what I call the "antiprocrastination function." It is disgraceful when agents engage in criminal behavior to increase their commissions.

This case involved atrocious activity by the defendants. The evidence was so overwhelming that I thought the case would not go to trial, and that all five defendants would plead guilty. I was wrong; only two pleaded guilty and the other three went to trial. I was not surprised by the jury findings or by the judgments imposed on the defendants who went to trial. I plan to report on further developments in the case.

Available Material

In Nos. 149 and 210 I offered complimentary PDFs containing important case documents. Those two packages are still available.

Now I am offering a new complimentary 37-page PDF consisting of the judgment against Gagarin (7 pages), the judgment against Magat (8 pages), the judgment against Halali (8 pages), Halali's waiver of appeal (2 pages), Gagarin's notice of appeal (1 page), and Jilge's sentencing memorandum (11 pages). Email jmbelth@gmail.com and ask for the February 2018 package about the Halali case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 250: Beneficiary Designations—Another Case Involving the Outrageous Practices of an Insurance Agent

In No. 249 (January 17, 2018) I described a case illustrating how the actions of an insurance agent led to a dispute over who should receive the proceeds of two annuities. While preparing that post, I learned of an earlier case in which an insurance agent used outrageous practices to victimize two elderly widows. Here I discuss the earlier case.

Richard Klinkner

Richard J. Klinkner (Two Rivers, Wisconsin) received his agent's license in 1983. He worked for New York Life Insurance Company (NYL) until 1992, when he became an independent agent. His victims were Mrs. Mildred Kaufman and Mrs. Janet Hlinak (both of Manitowoc, Wisconsin).

Mrs. Mildred Kaufman

Mildred was born in 1914. She and her husband had three children and five grandchildren, and were longtime Klinkner clients. Mildred paid the bills and mostly handled finances when her husband was alive and after he died in 2000. For a number of years Klinkner handled Mildred's investments and financial affairs. He also prepared her tax returns, for which she paid him. In 2003 Mildred appointed her daughter-in-law her power of attorney (POA) for finances. In 2006 Mildred moved into an assisted living facility. She died in 2008 after the hearing in this case.

In 1990 Klinkner sold Mildred a whole life insurance policy issued by NYL. In February 2006 Klinkner hand wrote a beneficiary change letter for the policy. The letter asked that her "friend" Klinkner be named beneficiary. NYL recorded the change effective on the date of the letter. Klinkner later testified that Mildred wanted him to be the beneficiary, that she signed the letter, that he took it to his office to make a copy, that he mailed it back to Mildred to send to NYL, and that he did not know whether NYL received the letter until an attorney representing Wisconsin's Office of the Insurance Commissioner (OIC) contacted him. A few days after the proceedings in this case began, Mildred named her daughter-in-law and grandchildren beneficiaries of the NYL policy.

In 2002 Klinkner sold Mildred, who was aged 88 at the time, a deferred annuity issued by National Western Life Insurance Company (NWL). It was funded by surrendering four annuities issued by Jackson National Life Insurance Company (JNL) and five annuities issued by a Conseco company. Mildred incurred substantial surrender charges.

Mrs. Janet Hlinak

Janet was born in 1923. She and her husband had no children. Her husband handled finances until he died in 1999. Shortly before her husband died, Janet appointed her husband's brother her POA for finances. Janet and her husband were longtime clients of Klinkner. He prepared tax returns for them, and for Janet after her husband died. They paid Klinkner for that work.

Janet has an 8th grade education and has always had difficulty with basic math skills. She does not know what bills to give the cashier to pay for a $15 lunch, and she generally does not understand what things cost or are worth. She does not know how to write checks, and she signs her name after someone writes the checks for her. She takes care of herself and her home, and lives by herself.

After Janet's husband died, Klinkner, at his own suggestion, came to her house each month to write checks to pay her monthly bills. She signed the checks and Klinkner mailed them. Each month she paid Klinkner $100 in cash (or by checks Klinkner wrote) for that work.

Klinkner sold Janet two life insurance policies issued by NYL (and was servicing another), one policy issued by a Conseco company, and three annuities issued by JNL. One of the JNL annuities was paid for by surrendering the Conseco policy. On the JNL application, which Janet signed and Klinkner mailed, Klinkner named himself the beneficiary.

On another JNL annuity, Klinkner typed a letter to JNL from Janet stating that she "would like Mr. Richard J. Klinkner listed as beneficiary on this annuity" and that her "husband before he passed away on April 10, 1999 had asked Mr. Klinkner to act as my caretaker until the day I die." Janet signed the letter and Klinkner sent it to JNL. At various times Klinkner typed letters asking NYL to list her "friend/caretaker" Klinkner beneficiary on the NYL policies.

In October 2000 Janet signed a will making bequests of $4,000, naming Klinkner beneficiary of the rest of her estate, and naming him her personal representative. She later testified she put Klinkner in her will because she thought he would handle her finances but did not want him to have all her money when she died. She later signed a new will.

In January 2001 Janet revoked the appointment of her brother-in-law as her POA for finances. Two weeks later she appointed Klinkner her POA for finances. In 2007, after the proceedings in the case began, she appointed her sister-in-law her POA for finances.

The Complaint

In August 2006 Mildred's daughter-in-law filed a complaint about Klinkner with the OCI. In June 2007 OCI issued a hearing notice alleging that Klinkner violated insurance laws by naming himself beneficiary on multiple life insurance policies he had sold to two different consumers, that he made false or misleading statements to OCI when asked whether he was named beneficiary on any customers' insurance policies, that he made false or misleading statements to consumers, and that he made unsuitable sales of life insurance policies and annuities to two elderly consumers. Klinkner generally denied the allegations.

The ALJ's Proposed Decision

In 2008, after amended hearing notices and pre-hearing conferences, an administrative law judge (ALJ) held a six-day hearing—three days in late May and three days in early July. In April 2009 the ALJ issued a proposed decision to be considered by the Wisconsin insurance commissioner. The ALJ recommended that the insurance commissioner issue an order that would revoke Klinkner's license as an insurance agent, require him to forfeit $7,000 for naming himself beneficiary on life insurance policies and for other violations, require him to pay Janet and her current POA $6,513 as restitution for the net loss on surrender charges she incurred when he replaced her JNL annuities, and require him to pay Mildred $67,000 as restitution for his profit from the sale of the NWL annuity.

Commissioner Dilweg's Final Decision

In August 2009, after he considered the objections filed by Klinkner and by the OCI, then Commissioner Sean Dilweg issued his final decision. He discussed the parties' objections and made numerous findings of fact. He ordered that Klinkner's license be revoked, that Klinkner pay $8,000 to the state of Wisconsin for six violations of insurance laws, that Klinkner pay $10,000 to the state of Wisconsin for repeated violations of another insurance law, that Klinkner pay $27,137 to Janet and her current POA for the surrender charges she incurred when Klinkner replaced her JNL annuities, that Klinkner pay Mildred's estate $17,592 for the surrender charges she incurred when Klinkner replaced her JNL annuities and Conseco annuities, and that Klinkner pay $67,000 to the state of Wisconsin for the profit he made from the sale of the NWL annuity to Janet.

Klinkner's Appeals

Klinkner appealed Commissioner Dilweg's decision to a Wisconsin circuit court. The judge affirmed the commissioner's decision except for reimbursement of the surrender charges Mildred incurred in the surrender of her Conseco annuities. The judge remanded that portion of the decision to the commissioner with the request that the commissioner either remove that requirement or explain further why the replacement was unsuitable.

Klinkner appealed the circuit court judge's ruling to the Wisconsin Court of Appeals. A three-judge panel affirmed the ruling.

Commissioner Nickel's Final Decision on Remand

In July 2011 then Commissioner Ted Nickel issued his final decision on remand. He explained why replacement of the Conseco annuities was unsuitable, and he retained the requirement that Klinkner reimburse Mildred for the surrender charges she incurred when Klinkner replaced her Conseco annuities.

General Observations

I am deeply troubled by the Klinkner case, for two reasons. First, the facts of the case describe outrageous actions by Klinkner. Second, the amount of time and effort expended by numerous regulatory employees, by numerous court employees, and by all the others involved in this case must have been staggering. Cases like this one and the one described in No. 249 cause me to ask how there can ever be enough resources to protect the public adequately against wrongdoing in the insurance business.

Available Material

I am offering a complimentary 19-page PDF consisting of Commissioner Dilweg's August 2009 final decision (10 pages) and Commissioner Nickel's July 2011 final decision on remand (9 pages). E-mail jmbelth@gmail.com and ask for the January 2018 package about the Klinkner case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 249: Beneficiary Designations and How an Insurance Agent's Actions Can Create a Dispute

On December 29, 2017, the Milwaukee Journal Sentinel carried an article by reporters Cary Spivak and Mary Spicuzza entitled "Who gets $1.6 million inheritance—relatives of a virtual hermit or his financial adviser?" The case focuses on Blanche Berenzweig, an insurance agent in Wisconsin, and illustrates how an agent's actions can lead to a major dispute over who should receive annuity proceeds.

The Berenzweig Case

LeRoy Ern, a Wisconsin resident, purchased an annuity from Lincoln Benefit Life Company in October 1993 with an initial deposit of about $33,000. He named his estate the primary beneficiary. Berenzweig signed the application as agent. Less than two weeks later Ern made an additional deposit of about $67,000 into the annuity.

In May 2006 Ern applied for an annuity with Integrity Life Insurance Company. He named his sister the primary beneficiary, and Berenzweig was the agent. Less than two weeks later he transferred about $166,000 from an ING annuity into the Integrity annuity as an initial deposit.

In November 2009 Berenzweig faxed a Broker Dealer Change of Record form to Lincoln Benefit. On the fax cover sheet, she hand-wrote: "Please make me agent of record for [this contract]. I have tried repeatedly to become the agent on this contract. My insurance license is attached w/this fax."

Less than two weeks later Ern executed three estate planning documents: a last will and testament, a durable power of attorney for property and finances, and a durable power of attorney for health care. Attorney Susan M. Drewitz drafted, witnessed, and notarized the estate planning documents. At the time Drewitz shared office space with Berenzweig, who referred Ern to Drewitz and accompanied him on his first meeting with Drewitz.

In the last will and testament, Ern named Berenzweig his personal representative and beneficiary of all tangible personal property and the residual estate. In the durable power of attorney for property and finances, Ern appointed Berenzweig his attorney-in-fact. In the durable power of attorney for health care, Ern designated Berenzweig his primary health care agent.

In April 2010, when Ern was aged 86, he transferred about $315,000 from a bank account to the Lincoln Benefit annuity. About two weeks later a request for beneficiary change was submitted to Lincoln Benefit naming Berenzweig primary beneficiary, identifying her as "friend," and naming Ern's estate contingent beneficiary. Two days later a request for beneficiary change was submitted to Integrity naming Berenzweig primary beneficiary, identifying her as "friend," and naming no contingent beneficiary. In April 2015 Berenzweig faxed the durable power of attorney for property and finances to Lincoln Benefit.

Ern's Death

Ern died on April 13, 2016 at age 92. According to the death certificate, the cause of death was "failure to thrive due to or as a consequence of advanced dementia." The interval between onset of the dementia and death was listed as "years." He died at a hospice facility. On May 12 Berenzweig submitted a death claim to Integrity. On May 26 she submitted a death claim to Lincoln Benefit. On May 27 Integrity issued a check for about $277,000 to Berenzweig. On June 15 Lincoln Benefit issued a check for about $734,000 to Berenzweig.

The Dispute

On August 3, 2017 an attorney for some of Ern's surviving family members filed a complaint with the Office of the Commissioner of Insurance (OCI) of Wisconsin. On September 1, based on an agreement among the parties, a Milwaukee County Circuit Court judge issued a temporary injunction that prevented Berenzweig from spending the remaining funds from the proceeds of the annuities.

OCI investigated the case and made the findings that are summarized briefly above. OCI alleged it is an unfair trade practice and a violation of a Wisconsin statute for an agent to knowingly be listed as a beneficiary of a life insurance policy or annuity unless the agent has an insurable interest in the life of the customer. OCI further alleged it had grounds to revoke or suspend Berenzweig's license as an agent and to order forfeiture in the amount of twice the profit gained from the violations.

On September 18 OCI announced a two-day public hearing to be held November 28 and 29 before an administrative law judge (ALJ). The hearing was held.

On December 8 OCI filed its initial brief. OCI requested a seven-part order: (1) permanent revocation of Berenzweig's license as an insurance agent, (2) payment of restitution of $2,022,232.62 (twice the profit from the violations), (3) forfeiture of $3,000 ($1,000 for each of three violations of insurance law), (4) bar of Berenzweig from receiving or retaining any proceeds of the Lincoln Benefit and Integrity annuities, (5) return of the full annuity proceeds to Lincoln Benefit and Integrity, (6) change of beneficiary on the Integrity annuity to provide for the proceeds to be paid to Carole Carter per stirpes (she was the original beneficiary), and (7) change of beneficiary on the Lincoln Benefit annuity to provide for the proceeds to be paid to the brothers and sisters of Ern and the issue of any deceased brother or sister of Ern per stirpes.

On December 29 Berenzweig's attorney filed a response brief. Here are the two concluding paragraphs:

There is no dispute but that Blanche Berenzweig was perhaps the only person in LeRoy Ern's life since the death of his long time girlfriend and her son. Ms. Berenzweig gave him the time of day when others did not. He obviously eschewed his family. She was deemed by Mr. Ern to be the worthy beneficiary of his entire estate. He was a frugal man who amassed significant wealth. Nevertheless, he was fully aware of his financial status and dictated the terms of his investments. Blanche Berenzweig simply carried out his wishes. She also undertook the rather onerous duties associated with his durable power of attorney and health care power of attorney. She looked after LeRoy Ern until his death. She did not violate any of the prohibited practices described under Wisconsin's Administrative Code. Moreover, her actions were excepted from the Code requirements because of the lapse of time, the arms-length nature of the transactions and Mr. Ern's natural affinity towards her. It must not be forgotten that Susan Drewitz and Blanche Berenzweig urged him to find different beneficiaries of his estate. He rejected that and insisted upon Blanche Berenzweig. His knowing intentions must be carried out.

Blanche Berenzweig is a good and honest woman. She has never had a single blemish on her record. The character evidence was unequivocal. This case should be dismissed.

On January 12, 2018 OCI filed its reply brief. Here is the concluding paragraph:

Respondent has placed herself in a dire position. Because she has admitted the conduct constituting three violations of insurance law and faces license revocation and a significant financial penalty, she hopes the reputation testimony from her friends and her time invested in Ern will mitigate the penalty for her conduct. However, the substantial evidence supports the maximum penalty. Respondent abused the trust of Ern and acted in her own self-interest in naming herself the beneficiary of two annuities that she sold and was servicing for Ern. Respondent obtained the financial power of attorney for the purpose of isolating Ern and preserving Ern's finances for the eventual transfer to herself. Respondent's conduct violated the ethical obligations of an insurance agent and she was unjustly enriched $1,011,116.31. The maximum financial penalty and permanent insurance license revocation are warranted.

The ALJ is expected to issue her recommendation within 30 days. Wisconsin Commissioner of Insurance Ted Nickel will then rule on the case. If he rules against Berenzweig, she could appeal the ruling to the Milwaukee County Circuit Court.

General Observations

This is a troublesome case. Ern's relatives did not keep in close touch with him, and it is not known exactly when the dementia set in. The briefs are more detailed than my summary under "The Berenzweig Case" at the beginning of this post. My summary was based on OCI's hearing notice. Berenzweig's attorney portrays her as someone who befriended and aided a lonely, elderly person.

The Wisconsin law prohibiting an agent from being the beneficiary of a client's life insurance policy or annuity in the absence of an insurable interest cannot be ignored. Berenzweig claimed ignorance of the law, but the conflict of interest was obvious. Attorney Drewitz should have refused to prepare the estate planning documents. Berenzweig should have contacted family members and obtained their assistance in caring for Ern. I plan to report further developments in this case.

Available Material

I am offering a complimentary 60-page PDF consisting of OCI's hearing notice (6 pages), OCI's initial brief (16 pages), the response brief prepared by Berenzweig's attorney (21 pages), and OCI's reply brief (17 pages). E-mail jmbelth@gmail.com and ask for the January 2018 package relating to the Berenzweig case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 248: Shadow Insurance—An Update Involving Two Surprises

In No. 107 (posted June 30, 2015) I wrote about a federal class action lawsuit filed in June 2015 on behalf of Rachel Silva and Don Hudson, who had purchased Aviva annuities in 2010. The elaborate complaint alleged that Aviva, Athene, and Apollo—together with other companies and individuals—participated in an unlawful Racketeer Influenced and Corrupt Organizations Act (RICO) enterprise involving phony reinsurance with affiliates. (See Silva v. Aviva, U.S. District Court, Northern District of California, Case No. 5:15-cv-2665.)

Since 2015 I had not followed the case. Recently a reader asked what happened to the case, so I decided to write an update. In the process of preparing the update, two developments came as surprises to me.

The Transfer to Iowa

The plaintiffs in the Silva case originally filed their lawsuit in California. The case was assigned to U.S. Magistrate Judge Paul Singh Grewal. In August 2015 the defendants filed motions to dismiss the complaint and transfer the case to Iowa, where most of them were based. In March 2016 Judge Grewal issued an order denying without prejudice the motions to dismiss and granting the motions to transfer the case to Iowa.

The Iowa Case

In Iowa the case was assigned to U.S. District Judge Stephanie M. Rose and U.S. Magistrate Judge Helen C. Adams. In April 2016 the defendants filed a motion to reinstate their motions to dismiss. In May 2016 Judge Adams denied the defendants' motion. Shortly thereafter Hudson filed an amended complaint against Athene and Apollo. Silva was no longer a plaintiff, and Aviva, whose U.S. business had been acquired by Athene, was no longer a defendant. In June 2016 the defendants filed a motion to dismiss the amended complaint.

In November 2016 Judge Rose issued an order staying the defendants' motion to dismiss the amended complaint. In her order, she mentioned a pending decision in a similar case in the U.S. Court of Appeals for the Eighth Circuit, which covers Iowa, Missouri, and five other midwestern states.

In May 2017 Judge Rose lifted the stay and granted the defendants' motion to dismiss the amended complaint. In the order she relied on the Eighth Circuit ruling. (See Hudson v. Athene, U.S. District Court, Southern District of Iowa, Case No. 4:16-cv-89.)

The Ludwick Case

The Eighth Circuit case to which Judge Rose referred was indeed similar to the Hudson case. The appellate ruling grew out of a district court case in Missouri. (See Ludwick v. Harbinger, U.S. District Court, Western District of Missouri, Case No. 4:15-cv-11.)

In April 2015, two months before Silva filed her RICO complaint in California, Dale Ludwick filed a class action RICO complaint against Harbinger Group, Inc., Fidelity and Guaranty Insurance Company, Raven Reinsurance Company, and Front Street Re (Cayman), Ltd. The case was assigned to U.S. Chief District Judge David Gregory Kays. In February 2016 Judge Kays dismissed the complaint. Here, without citations, are the fifth paragraph and the concluding paragraph of his order:

Plaintiff alleges that F&G [Life Insurance Company], Harbinger, and Harbinger's chairman and CEO, Philip A. Falcone, created a fraudulent accounting scheme to hide F&G's liabilities and artificially inflate F&G's reported assets. This scheme ignored the Statutory Accounting Principles promulgated by the National Association of Insurance Commissioners designed to protect annuity holders and certify that F&G had assets sufficient to meet current and future annuity holder obligations. Harbinger and Falcone orchestrated a series of transactions using wholly-owned captive subsidiaries and a reinsurance company named Wilton Re to transfer F&G's liabilities from its financial statements. Throughout 2011, 2012, and 2013, F&G created a false appearance of capital adequacy by transferring F&G liabilities to and among entities Raven Re, Front Street Cayman, and Wilton Re. F&G also used these transactions to report its holdings of non-agency mortgage-backed securities in its admitted asset base at cost, rather than at their true market value. Plaintiff contends that, absent these financial maneuvers, F&G would have had to report a negative statutory surplus after its acquisition by Harbinger....

Because the McCarran-Ferguson Act preempts RICO claims, the Court need not address whether Plaintiff has plausibly pled these claims. Plaintiff's complaint fails to state a claim upon which relief can be granted and Defendants' Motion to Dismiss is GRANTED.

The Eighth Circuit Ruling

Ludwick appealed the ruling to the Eighth Circuit. In November 2016 the case was assigned to a three-judge appellate panel consisting of Chief Judge William J. Riley and Circuit Judges Roger L. Wollman and Jane Kelly. (See Ludwick v. Harbinger, U.S. Court of Appeals, Eighth Circuit, Case No. 16-1561.)

In April 2017 the appellate panel, in a unanimous ruling written by Chief Judge Riley, affirmed the district court's dismissal of Ludwick's complaint. Here are the introductory and concluding paragraphs of the appellate ruling:

• The question in this case is whether letting Dale Ludwick pursue her federal racketeering claims against an insurance company and its affiliates would impair state regulation of the insurance business in Iowa, Maryland, or Missouri. We agree with the district court that it would, and the McCarran-Ferguson Act forbids that result. See 15 U.S.C. § 1012(b). We affirm the dismissal of Ludwick's claims....
• Litigating Ludwick's RICO claims would interfere with state regulation of the insurance business, and the claims are barred by the McCarran-Ferguson Act. The district court was right to dismiss. We affirm.

General Observations

I was surprised by Judge Kays' ruling and the Eighth Circuit's affirmation for two reasons. First, I was surprised by the involvement of Philip Falcone, about whom I wrote in Nos. 242 (posted November 20, 2017) and 244 (December 11, 2017). The Ludwick lawsuit was filed less than two years after Falcone's August 2013 settlement with the Securities and Exchange Commission. In that settlement he and his company paid civil penalties of more than $18 million, he was barred from the securities industry for at least five years, and he admitted wrongdoing.

Second, I had not heard of cases where the McCarran-Ferguson Act was used to dismiss federal RICO lawsuits. However, based on a review of documents in the Ludwick case, it appears that there have been other such cases. It is sobering to consider the implications for insurance consumers when some state insurance regulators are allowed by other state insurance regulators to deviate significantly from statutory accounting principles adopted by all state insurance regulators.

Available Material

In No. 107 I offered a complimentary PDF containing the Silva RICO complaint. The package is still available. Email jmbelth@gmail.com and ask for the June 2015 package containing the Silva RICO complaint.

Now I am offering a complimentary 48-page PDF consisting of Judge Grewal's order granting the motion to transfer the Silva case to Iowa (13 pages), Judge Rose's order staying the defendants' motion to dismiss the amended complaint in the Hudson case (2 pages), Judge Rose's order dismissing the amended complaint in the Hudson case (7 pages), Judge Kays' order dismissing the complaint in the Ludwick case (13 pages), and the Eighth Circuit panel's ruling in the Ludwick case (13 pages). E-mail jmbelth@gmail.com and ask for the January 2018 package relating to shadow insurance and the RICO complaints.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 247: Donald Trump and the Emoluments Clauses of the U.S. Constitution—A Further Update

In No. 213 (posted April 14, 2017) and No. 216 (May 4, 2017), I wrote about a lawsuit that Citizens for Responsibility and Ethics in Washington (CREW) filed on January 23 against President Donald J. Trump. CREW filed an amended complaint on April 18 and a second amended complaint on May 10. The amended complaints expanded on the allegations and involved additional plaintiffs. Here I provide a further update. (See CREW v. Trump, U.S. District Court, Southern District of New York, Case No. 1:17-cv-458.)

The Judges
The case was assigned initially to U.S. District Judge Ronnie Abrams. President Obama nominated her in July 2011, and the Senate confirmed her in March 2012. On July 11 the case was reassigned to U.S. District Judge George B. Daniels. President Clinton nominated him in August 1999, and the Senate confirmed him in February 2000. No reason for the reassignment of the case was given.

The Amicus Briefs
To say the case has drawn a great deal of attention is an understatement. The case generated many amicus briefs from legal scholars, legal historians, former government ethics officers, members of Congress, and others.

The Motion to Dismiss
On June 9 the defendant filed a motion to dismiss the case. The parties filed briefs in support of and in opposition to the motion. On October 18 Judge Daniels held a conference on the motion. On February 6, 2018, a transcript of the conference will become readily available to members of the public.

The Memorandum and Order
On December 21 Judge Daniels issued a memorandum opinion and order granting the defendant's motion to dismiss the case. Here are five key sentences (without citations) and one footnote from the introductory section of the memorandum opinion and order:

• Plaintiffs principally allege that Defendant's "vast, complicated, and secret" business interests are creating conflicts of interest and have resulted in unprecedented government influence in violation of the Domestic and Foreign Emoluments Clauses of the United States Constitution.
• Plaintiffs seek (i) a declaratory judgment declaring that Defendant has violated and will continue to violate the Domestic and Foreign Emoluments Clauses; (ii) an injunction enjoining Defendant from violating the Emoluments Clauses; and (iii) an injunction requiring Defendant to release financial records in order to confirm that he is not engaging in further transactions that would violate the Emoluments Clauses.
• Defendant argues that Plaintiffs lack standing to sue and moves to dismiss this lawsuit for lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure Rule 12(b)(1).
• Defendant also moves to dismiss this case for failure to state a claim under the Emoluments Clauses pursuant to Federal Rule of Civil Procedure Rule 12(b)(6).
• Defendant's motion to dismiss for lack of standing under Rule 12(b)(1) is GRANTED.
• Footnote: Because Plaintiffs' claims are dismissed under Rule 12(b)(1), this Court does not reach the issue of whether Plaintiffs' allegations state a cause of action under either the Domestic or Foreign Emoluments Clauses, pursuant to Rule 12(b)(6). Nor does this Court address whether the payments at issue would constitute an emolument prohibited by either Clause.

A notice of appeal to the U.S. Court of Appeals for the Second Circuit must be filed within 30 days of the ruling, or 60 days if an officer of the U.S. is a party, and an extension may be requested. The timetable for the filing of briefs is set by the appellate court.

A Related Case
In No. 213 I mentioned a related case. On February 10 William R. Weinstein filed a lawsuit on behalf of himself and the U.S. people. He is an attorney, a citizen of the United States and New York State, and a resident of the Southern District of New York. He represents himself and is counsel for a proposed class. Weinstein filed an amended complaint on March 7 and a second amended complaint on June 2.

The defendants are Donald J.Trump, Donald J. Trump, Jr., Eric Trump, and Allen Weisselberg. The latter three defendants are trustees of a publicly described but not publicly named trust. On July 7 the defendants filed a motion to dismiss the case. The case was assigned initially to Judge Abrams, and on July 11 it was reassigned to Judge Daniels. On December 21 Judge Daniels issued a memorandum and order granting the defendants' motion to dismiss the case. (See Weinstein v. Trump, U.S. District Court, Southern District of New York, Case No. 1:17-cv-1018.)

General Observations
I am disappointed and troubled by the failure of the CREW case to survive the defendant's motion to dismiss. However, I think the case is not over, because I believe that CREW will appeal the ruling to the Second Circuit. I do not know whether Weinstein will appeal the ruling in his case. I plan to report further when significant developments occur at the appellate level.

Available Material
I am offering a complimentary 40-page PDF consisting of Judge Daniels' memorandum opinion and order in the CREW case (29 pages) and his memorandum and opinion in the Weinstein case (11 pages). Email jmbelth@gmail.com and ask for the January 2018 package relating to the emoluments lawsuits against Trump.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 246: Pension Problems—Lost Pensioners and Stolen Pension Benefits

In recent years I have observed two serious problems facing the pension business. One is lost pensioners. The other is stolen pension benefits. Here I discuss the two problems.

Lost Pensioners
On December 15, 2017, MetLife, Inc. (NYSE:MET) filed an 8-K (significant event) report with the Securities and Exchange Commission. The report provided a "Consolidated Company Outlook—Near-Term Guidance." These two paragraphs are at the end of the report:

Further, MetLife has been in the retirement business for many decades. As practices have evolved, we are improving the process used to locate a small subset of our total group annuitant population of approximately 600,000 that have moved jobs, relocated, or otherwise can no longer be reached via the information provided for them. We currently believe the portion of the subset that is most impacted is less than 5% of our total group annuitant population and they tend to be smaller size cases with average benefits of less than $150 per month.

We are making our process more robust to include a wider set of search techniques and better utilize available technology. Taking these actions would result in strengthening reserves, which in the period recorded may be material to our results of operations and is not reflected in the outlook presented herein. We do not have an estimate at this point but we plan to provide further disclosure on our fourth quarter earnings call and in our annual report on Form 10-K for the year ended December 31, 2017.

The same day, John Hele, MetLife's chief financial officer, made similar comments during a "Business Update Call" with analysts. The next day, The Wall Street Journal ran an article by reporter Leslie Scism entitled "MetLife Discloses Pension Bungle" and subtitled "Some Wall Street analysts assumed that payments could be 10 or more years overdue."

In light of these developments, I contacted MetLife. A spokesman provided this statement:

What used to be standard protocol for finding retirees who are owed benefits is no longer sufficient. While it is still difficult to track everyone down, we have not been as aggressive as we could have been. When we realized this was a significant issue, we launched an effort to do three things: figure out what happened, strengthen our processes so that we do a better job locating retirees, and promptly pay anyone we find—as we always do. We are implementing enhanced techniques within MetLife's Retirement and Income Solutions business to better locate and promptly pay any group annuitant who may be entitled to benefits. We are deeply disappointed that we fell short of our own high standards. Our customers deserve better. We are committed to making this right for our customers. We found the issue, we self-reported it, and we are committed to doing better. We are fully cooperating with regulators.

MetLife said in its 8-K, and Hele said in his comments, that further information will be included in the company's 10-K report for the year ended December 31, 2017. MetLife filed its 10-K for 2016 on March 1, 2017. Therefore the company probably will file its 10-K for 2017 on or about March 1, 2018. I plan to post a follow-up then.

Stolen Pension Benefits
In No. 177 (posted August 31, 2016) and No. 179 (September 15, 2016), I wrote about two cases involving stolen pension benefits. Recently I learned of a third case.

In the first case, an individual was charged with grand larceny after stealing over $100,000 from a pension fund. His mother was receiving a pension payable monthly until her death. The payments were sent to her bank account. When she died, no one informed the fund. Her son, claiming power of attorney for her, wrote checks to himself for ten years until he was arrested.

In the second case, an individual was charged not only with grand larceny but also criminal impersonation after he stole over $180,000 from a pension fund. The payments were sent to a trust account for which the pensioner's brother was the trustee. Seven years after the pensioner's death, the fund learned of the problem and stopped the payments. The brother then contacted the fund by telephone, said he was the pensioner, and requested that the payments be resumed. The brother was arrested shortly thereafter.

In the third case, an individual was charged with bank larceny (a federal crime) after he stole more than $100,000 of pension benefits intended for his sister. He did not inform the pension fund of her death, and thereafter stole the benefits.  He pleaded guilty and was ordered to pay restitution. However, his financial and health problems were so serious that he was sentenced to probation for three years and ordered to pay the restitution without interest at the rate of $25 per month.

The Unpaid Death Benefits Analogy
The problem of lost pensioners is reminiscent of a problem that burst on the scene seven years ago involving life insurance death benefits. On July 28, 2010, Bloomberg News ran an article by reporter David Evans entitled "Duping the Families of Fallen Soldiers" and subtitled "Life insurers are secretly profiting from death benefits owed to the survivors of service members and other Americans."

The article involved "retained asset accounts" (RAAs). They are used by many life insurance companies that send a book of drafts to the beneficiary instead of sending a check for the death benefit. The beneficiary then can use the drafts to make withdrawals from the RAA as desired. The article said that many RAAs had gone dormant, and that the companies had lost contact with many RAA owners. The article was a bombshell because of its focus on beneficiaries of life insurance covering deceased members of the military services. The article prompted many investigations of unpaid death benefits involving not only members of the military services but also members of the general public.

I first wrote about unpaid death benefits in the August 1980 issue of The Insurance Forum. After the Evans article appeared, I wrote about RAAs in the October 2010 issue, and about unclaimed property more generally in the November 2010 issue.

General Observations
I think the problems of lost pensioners and stolen pension benefits are far more serious than the isolated cases discussed here. Both problems stem from the mobility of our population and the administrative challenge of dealing with huge numbers of insureds, pensioners, and beneficiaries. I invite the thoughts of readers—especially those with direct knowledge of how records are maintained—about the magnitude of the problems and potential solutions to the problems. The identity of any reader who responds to this invitation will not be divulged unless the reader gives permission.

Available Material
I am offering a complimentary 17-page PDF consisting of MetLife's 8-K filed December 15, 2017 (6 pages), the article in the August 1980 issue of the Forum (2 pages), the article in the October 2010 issue (4 pages), and the article in the November 2010 issue (5 pages). Email jmbelth@gmail.com and ask for the January 2018 package about lost pensioners and stolen pension benefits.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com