No. 262: Georgia Moves Toward Enactment of a Law in Violation of the Constitutional Rights of Insurance Policyholders

In No. 220 (posted June 1, 2017) I discussed the enactment of a Connecticut law allowing a Connecticut-domiciled insurance company to divide itself into two or more insurance companies. I explained why I think the law violates the constitutional rights of insurance policyholders. Recently the Georgia legislature approved similar legislation that will become effective July 1, 2018 even if the governor does not sign it. Here I discuss the new Georgia legislation. As background, I urge readers to review No. 220 here.

The Baldo Article

On March 30, 2018, an article by Anthony Baldo appeared in The Insurance Insider. A reader brought the article to my attention. The lead sentence of the article reads:

Georgia legislation that lets insurers divide and opens a path for run-off transactions involving legacy books of business will become law by 1 July, even if Governor Nathan Deal fails to sign the measure.

The Creditor-Debtor Relationship

An insurance contract creates a creditor-debtor relationship between the policyholder (the creditor) and the insurance company (the debtor). A debtor cannot be relieved of his, her, or its obligations to a creditor without the consent of the creditor. Therefore, an insurance company cannot be relieved of its obligations to a policyholder without the consent of the policyholder. If the policyholder consents, the transaction would be a "novation," in which a different insurance company is substituted for the original insurance company.

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. I strongly favor the use of affirmative consent.

My Writings on the Subject

My first two of many articles about what I call "insurance policy transfers" were in the October 1989 and December 1989 issues of The Insurance Forum. Three extraordinary cases, all of which came to my attention around the same time, prompted the two articles. I addressed the constitutionality question later, in the August 1992 issue of the Forum. Also, chapter 23 of my 2015 book entitled The Insurance Forum: A Memoir addresses insurance policy transfers.

The Georgia Division Law

Two lead sponsors of Georgia House Bill 754 (HB 754) were Representative Jason Shaw (R-Lakeland) and Senator P. K. Martin IV (R-Lawrenceville). Representative Shaw is a member of the House insurance committee and owns an insurance agency. Senator Martin is a member of the Senate insurance and labor committee and is an insurance agent. The Baldo article quotes both of them:

It quotes Representative Shaw as saying: "It just makes sense." He explained that, if a company has a plan of division, they can sell off an unwanted book "and not disrupt the whole operation."

It quotes Senator Martin as saying: "This bill would allow insurers more decision-making power when it comes to the split of a company, if they so choose, while protecting consumers through the approving authority of the insurance commissioner."

I wrote to Georgia Insurance Commissioner Ralph T. Hudgens. I sent him No. 220 about the Connecticut division law, said I was planning to post an item about HB 754, and asked for a statement to be included in the item. I have not yet received a statement from him. However, an insurance department spokesman said he was working on it. Meanwhile, the spokesman said this preliminarily:

What I can tell you now is that it was not an Insurance Department bill, and we did not oppose it. Also, the bill has not been signed by the Governor.

General Observations

As mentioned earlier, HB 754 will become law on July 1 if the governor does not sign it. Also, I hope the statement from Commissioner Hudgens will explain why the department did not oppose the bill. When this item is posted, I will send it to him and request that he urge the governor to veto the bill.

HB 754 allows a Georgia-domiciled insurance company to transfer its policyholder obligations to another company without obtaining the consent of the policyholders. Thus the bill allows the company to violate the constitutional rights of its policyholders. Further, there is no doubt that prime targets of such laws are legacy blocks of long-term care insurance policies, which have become major headaches for many companies.

With regard to the matter of commissioner approval, the language in HB 754 is important. The bill says:

The Commissioner shall approve a plan of division unless the Commissioner finds that the interest of any policyholder or shareholder will not be adequately protected, or the proposed division constitutes a fraudulent transfer under Article 4 of Chapter 2 of Title 18.  [Blogger's note: Several sections and subsections of Article 4 are interesting.]

Thus the insurance commissioner rather than the insurance company being divided has the burden of proving that the policyholders are adequately protected and that the transfer is not fraudulent. If the commissioner cannot meet the burden of proof, he must approve the plan. I think attorneys in the insurance industry drafted HB 754.

Available Material

I am offering a complimentary 24-page PDF consisting of HB 754 (10 pages) and articles in the October 1989, December 1989, and August 1992 issues of the Forum (14 pages). Email jmbelth@gmail.com and ask for the April 2018 package about the Georgia division law.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 261: Long-Term Care Insurance—More on the Kansas Insurance Department's Bailout of General Electric

In No. 258 (posted March 19, 2018) I reported on the Kansas Insurance Department's use of a "permitted accounting practice" to spread over several years the impact of a huge charge taken by General Electric Company (GE) relating to an old run-off block of long-term care (LTC) insurance policies. Readers immediately informed me of other dimensions of the subject, which I discuss in this follow-up.

Here I also discuss two incidents, one in 1990 regarding Life Assurance Company of Pennsylvania (LACOP) and the other in 1993 regarding The Prudential Insurance Company of America. In both incidents major differences occurred between an accounting practice used by a domiciliary state and an accounting practice used by another state.

A Serious Disclosure Issue
Employers Reassurance Corporation (ERAC) is one of the Kansas-domiciled GE subsidiaries that reinsured the old block of GE's LTC insurance policies. ERAC asked the Kansas department for a "permitted accounting practice to spread and delay over seven years" the full recognition of the $15 billion increase in reserves that otherwise would have been required under statutory accounting principles promulgated by the National Association of Insurance Commissioners.

Yet GE, in documents filed with the Securities and Exchange Commission (SEC), did not disclose the name of the reinsurer. Instead GE said the reinsurer is "North American Life and Health." There is no such company. The nondisclosure is serious because the only detailed description of the "permitted practice" appears in a note in the 2017 statutory financial statement ERAC filed in Kansas and other states.

In response to my inquiry, the Kansas department said GE has two Kansas-domiciled life-health subsidiaries, ERAC and Union Fidelity Life Insurance Company (UFLIC). The department said "North American Life and Health" is a term used by GE to discuss the results of its run-off insurance operations including both ERAC and UFLIC. The department said that, while UFLIC increased reserves, the company did so in the usual way and therefore did not request a permitted accounting practice. In other words, while the department approved a permitted accounting practice for ERAC, there was no need for UFLIC to request or for the department to approve a permitted accounting practice for UFLIC.

After No. 258 was posted, a reader sent me a transcript of GE's "insurance update call" held January 16, 2018. That was the day GE disclosed, in a filing with the SEC, the shocking news of the need for $15 billion of additional reserves for the old LTC block. In the call GE officials mentioned "North America Life & Health" eight times, but did not mention ERAC. Note that the second word of the company name used in the update call was "America," but in the SEC filing was "American."

Another Serious Disclosure Issue

When I asked the Kansas department some questions about ERAC, the department said that ERAC requested the "permitted accounting practice" on December 29, 2017, and that the department approved it on January 11, 2018. After No. 258 was posted, a reader (not the one who sent me the transcript of the update call) pointed out something I had missed. January 16, 2018 was the date on which GE first disclosed the need for the $15 billion increase in reserves. Yet ERAC requested the permitted practice on December 29, 2017.

I asked the Kansas department whether GE knew of the need for the $15 billion of additional reserves on December 29. I said I was asking the question because GE did not publicly disclose the $15 billion figure until January 16. In response, the department mentioned the confidentiality of such matters under Kansas law and suggested I contact GE.

The LACOP Incident

Pennsylvania-domiciled LACOP reinsured a substantial amount of business with Oklahoma-domiciled American Standard Life and Accident Insurance Company (ASLAIC). In 1988 the Oklahoma insurance commissioner placed ASLAIC under state supervision. LACOP at the time was licensed in 37 states, including California. In April 1990 the California insurance commissioner disallowed the credit LACOP had taken for the reinsurance with ASLAIC, declared LACOP insolvent, and barred LACOP from selling new business in California.

In October 1990, about two weeks after LACOP terminated all its agents and stopped selling new business altogether, the Pennsylvania insurance commissioner issued an order barring LACOP from selling new business anywhere. In November 1990 the Pennsylvania commissioner filed a court petition seeking approval to liquidate LACOP. In short, there was a period of about six months during which LACOP was barred from selling new business in California but was allowed to sell new business in other states, including its domiciliary state of Pennsylvania.

The Prudential Incident

In 1993 New Jersey-domiciled Prudential issued $300 million of surplus notes, thereby launching what I call the "surplus note revolution." Prior to that time, only small amounts of surplus notes had been issued by small mutual insurance companies that were in serious financial trouble. Prudential, which was not in financial trouble, issued the surplus notes for income tax reasons. The action set off a stampede of a total of more than $3 billion of surplus notes issued in 1993 and 1994 by many major mutual insurance companies.

State surplus note laws require the prior permission of the domiciliary regulator before interest or principal payments may be made. The New Jersey insurance commissioner deviated from that requirement by merely requiring the company to meet certain financial tests. The New York superintendent of insurance objected to that weakening of the rules and required Prudential to include the $300 million of surplus notes as a liability rather than as surplus in the company's statutory financial statement filed in New York. The New York action was not widely known, because it was reflected only in the New York version of the financial statement. The official New Jersey version of the statement was circulated to other states, to rating firms, and to other interested parties.

General Observations

In No. 258 I expressed skepticism about the Kansas department's explanation for GE's failure to mention ERAC in its January 16 SEC filing. Now, after seeing the transcript of the update call, it is my opinion that GE omitted ERAC's name to avoid calling attention to the first note in the "Notes to Financial Statements" in ERAC's 2017 statutory financial statement. That note, to my knowledge, is the only public disclosure of the details of the permitted accounting practice to spread and delay over seven years the $15 billion of additional reserves for the old LTC block.

With regard to the timing of the disclosure of the $15 billion reserve shortfall, I do not understand why GE delayed for at least 18 days the disclosure of the size of the shortfall. I plan to contact GE about the matter after this item is posted.

Available Material

I am offering a 28-page complimentary package consisting of the transcript of GE's January 16 insurance update call (11 pages), selected pages from ERAC's 2017 statutory financial statement (11 pages), The Insurance Forum article about the 1990 LACOP incident (4 pages), and the Forum article about the 1993 Prudential incident (2 pages). Email jmbelth@gmail.com and ask for the April 2018 package about GE's old LTC insurance block.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 260: Long-Term Care Insurance—The Worsening Financial Condition of Senior Health Insurance Company of Pennsylvania

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 about SHIP in The Insurance Forum, and have posted several items about SHIP on my blog. In No. 209 (posted March 20, 2017) I wrote about increasing financial problems at SHIP based on its statutory financial statement for the year ended December 31, 2016. On March 1, 2018, SHIP filed its 228-page statutory financial statement for the year ended December 31, 2017. In this follow-up I discuss the company's worsening financial condition.

Selected Financial Numbers

SHIP's total assets declined from $2.74 billion at the end of 2016 to $2.69 billion at the end of 2017. During the same period, total liabilities declined from $2.72 billion to $2.68 billion, total surplus declined from $28.02 million to $12.65 million, and net income rose from a net loss of $46.00 million to a net loss of $13.95 million.

Risk-Based Capital

SHIP's risk-based capital (RBC) ratios, where the numerator is total adjusted capital and the denominator is company action level RBC, have been generally declining in recent years. SHIP's RBC ratios, expressed as percentages, were 126 in 2013, 108 in 2014, 80 in 2015, 82 in 2016, and 71 in 2017. The RBC ratio in 2013 was in the adequate zone (125 and above), in 2014 was in the red flag zone (100 to 124), in 2015 and 2016 was in the company action zone (75 to 99), and in 2017 was in the regulatory action zone (50 to 74). I described the history and nature of RBC ratios in the August 2011 issue of The Insurance Forum. The description is in the complimentary package offered at the end of this post.

The Surplus Note

When an insurance company issues a surplus note, the company borrows money from the buyer of the note. State surplus note laws allow an insurance 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 insurance 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 note, and must obtain prior approval of the regulator before the company can make interest or principal payments on the note. I described the history and nature of surplus notes in the August 2011 issue of The Insurance Forum. The description is in the complimentary package offered at the end of this post.

SHIP issued a $50 million surplus note on February 19, 2015, between the end of 2014 and the March 1, 2015 filing of the statutory 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.

SHIP's surplus note matures on April 1, 2020. The interest rate is 6 percent, apparently payable at 3 percent semiannually. According to SHIP's latest financial statement, the "unapproved" and therefore unpaid interest on the note was $8.55 million as of December 31, 2017. Thus the full amount of the note at the end of 2017 was $58.55 million.

The surplus note has a significant impact on SHIP's financial position. Total surplus at the end of 2016 and at the end of 2017 included the note, without which SHIP would have been insolvent at the end of 2016 and 2017. Also, without the note, the RBC ratio in 2014 would have been in the regulatory action zone, and the RBC ratios in 2015, 2016, and 2017 would have been in the mandatory control zone (below 35).

SHIP issued the surplus note to Beechwood Re Investments LLC. According to SHIP's 2017 financial statement, SHIP received $50.17 million of "Beechwood Investments" on February 19, 2015, the very day SHIP issued the $50 million surplus note to Beechwood. As of December 31, 2017, the Beechwood investments had an adjusted carrying value of $37.63 million.

Investments in Platinum Partners

Beechwood is related to Platinum Partners, a hedge fund in serious financial and legal trouble. In subsequent litigation SHIP said it was not aware of that relationship when SHIP issued the surplus note to Beechwood in 2015. At the end of 2017, SHIP owned $39.34 million fair value of Platinum investments for which SHIP had paid $41.6 million. Also, during 2017 SHIP disposed of Platinum investments for $1.25 million, for which it had paid $1.30 million.

Reinsurance with Roebling Re

SHIP took credit in 2017 for $1.13 billion of reserve liabilities ceded to Roebling Re (Barbados), a company created in August 2016. Roebling is not authorized, is a non-U S. reinsurer, and is not affiliated with SHIP. I have no information about Roebling, such as the name of its owner, the names of its senior officers, or its financial condition.

Officers, Directors, and Affiliates

Several years ago two top officers of SHIP were President and Chief Executive Officer Brian Wegner and General Counsel Patrick Carmody. They responded promptly to my inquiries. They later left SHIP. I do not know the circumstances surrounding their departures. My inquiries about SHIP are now handled by a public relations firm in New York.

The officers listed in SHIP's 2017 financial statement are President and Chief Executive Officer Barry Lee Staldine, Chief Financial Officer Ginger Susan Darrough, Secretary Kristine Tejano Rickard, and Treasurer John Edward Robinson. The directors listed, in addition to Staldine and Darrough, are Julianne Marie Bowler, Cecil Dale Bykerk, John Martin Morrison, Gregory Vincent Serio (former New York State superintendent of insurance), and Thomas Edward Hampton.

SHIP and Fuzion Analytics Inc. are wholly owned subsidiaries of the Senior Health Care Oversight Trust. SHIP and Fuzion have a management agreement under which SHIP paid $18.09 million to Fuzion in 2017. SHIP, Fuzion, and the Senior Health Care Oversight Trust file consolidated federal income tax returns.

General Observations

With regard to the surplus note that SHIP issued to Beechwood in 2015, I believe that, because of SHIP's fragile financial condition, the company has not obtained and will not obtain the Pennsylvania insurance commissioner's permission to pay interest or principal on the note. Thus the note is nothing more than a gift from Beechwood to SHIP.

In public documents Conseco filed in 2008 about the transfer of what is now SHIP to the Senior Health Care Oversight 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 a spokesman for the Pennsylvania insurance commissioner said the insolvency would be handled in accordance with Pennsylvania law. In No. 208 (posted March 13, 2017) I discussed Penn Treaty Network America Insurance Company and an affiliate, Pennsylvania-domiciled LTC insurance companies which entered into rehabilitation in 2009, and in 2017 were ordered into liquidation by a Pennsylvania court judge.

The public documents Conseco filed in 2008 in the SHIP case said Milliman Inc., an actuarial consulting firm, concluded in a financial report that SHIP will have enough assets to run off its LTC insurance business. To see how Milliman reached that conclusion, I asked for the report. Conseco and the Pennsylvania insurance commissioner said the report was confidential. I believed in 2008, and I still believe, that SHIP will not remain solvent long enough to run off its LTC insurance business. If SHIP has a losing year in 2018 similar to or worse than in 2017, and if SHIP and the Pennsylvania insurance commissioner cannot devise a plan to strengthen the company, I think it would be necessary for the commissioner to petition the court to allow the company to be placed in rehabilitation or liquidation.

Available Material

I am offering a complimentary 37-page PDF consisting of my two articles in the August 2011 issue of the Forum (10 pages) and selected pages from SHIP's 2017 financial statement from which I drew much of the information for this post (27 pages). Email jmbelth@gmail.com and ask for the April 2018 SHIP package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 259: MetLife's Lost Pensioners—A Fourth Update

In No. 246 (posted January 2, 2018) I discussed a recent disclosure by MetLife, Inc. (NYSE:MET) concerning lost pensioners. I provided updates in No. 252 (February 12), No. 254 (February 19), and No. 256 (March 6). Here I provide a fourth update on two important aspects of the subject: the unclaimed property laws of the states and the interest rates used to calculate the amount of interest paid to pensioners who are found many years after the benefits were due.

Unclaimed Property Laws

Each state has an unclaimed property law (or "escheat law") that requires many firms, including financial institutions, to turn over to the state any property that goes unclaimed for a certain length of time, such as three years. In 2010 media reports said some families of deceased members of the military services and some beneficiaries of deceased members of the general public were being denied benefits because they could not be found. The reports prompted me to write major articles in the October 2010 and November 2010 issues of The Insurance Forum.

MetLife, as mentioned in No. 256, said in its most recent 10-K annual report (filed March 1, 2018) that the company had "previously released" the reserves (liabilities) associated with lost pensioners. When I saw that language, I wondered whether those unclaimed funds would at some point be turned over to the state (as determined by the pensioner's last known address) in accordance with the state's unclaimed property law.

I raised this question with MetLife. A spokesman replied: "When there is a benefit owed and we cannot find a beneficiary, we will escheat funds to the states based on state regulations and contract provisions."

Interest Rates

When I raised the interest rate issue with MetLife, the spokesman sent me a transcript of an earnings call in which the company said the interest rate is comparable to that used by the Pension Benefit Guaranty Corporation (PBGC). I had trouble with PBGC's website, which seemed to refer to a section of the Internal Revenue Code relating to interest rates paid by taxpayers on late tax payments. When I asked the spokesman for clarification, he said:

The PBGC uses the Federal mid-term rate, as determined by the Secretary of the Treasury. MetLife is using the 5-year treasury rate as a comparable rate for administrative ease.

An Interesting Dispute

While working on this post, I learned of a recent lawsuit filed by Metropolitan Life Insurance Company, a unit of MetLife, against Michelle Smith, the executrix of the estate of William P. Toland Sr. The dispute was over the amount of interest credited for the period between Toland's retirement and the company's payment of the benefits. The retirement benefits were unpaid for many years because the company had not been informed of Toland's retirement. (See Metropolitan v. Smith, U.S. District Court, District of Massachusetts, Case No. 1:16-cv-11582.)

Toland retired on February 1, 1994. His employer's retirement plan was subject to the Employee Retirement Income Security Act (ERISA). Metropolitan did not receive notice of Toland's retirement until September 2012. After the company received the needed documents, it tried to make payment in April 2013, but learned that Toland had died in March 2013.

Metropolitan received new documents in December 2013 and sent the estate two checks. One was for $49,346.50 representing the amount due under the plan. The other was for $14,984.10 representing interest from February 1, 1994 to March 1, 2013, which was the last date for which a retirement payment was due. Smith did not cash the checks because she believed that the amount of interest was inadequate.

In July 2016 Metropolitan sent the estate two new checks. One was for $49,346.50 representing the amount due under the plan. The other was for $15,450.06 representing interest from February 1, 1994 to July 1, 2016. Again Smith did not cash the checks because she believed that the amount of interest was inadequate.

Smith appealed without success to several government agencies. Then, because the retirement plan was subject to ERISA rules, she began an arbitration proceeding through the Financial Industry Regulatory Authority (FINRA). Metropolitan filed a lawsuit arguing that the dispute was not appropriate for FINRA arbitration. The judge closed the case after the company and Smith entered into a confidential settlement.

However, among the many documents included in exhibits in the lawsuit was an excerpt from a Metropolitan letter explaining exactly how the company made the interest calculation in 2013. The excerpt said:

Delayed Interest was calculated from the effective date of each retroactive payment due to the true up date of March 1, 2013. Interest was calculated on retroactive payments from February 1, 1994 through March 1, 2013. Interest is based upon the average 3-month Constant Maturity Treasury Rate from the Federal Reserve Board H.15 Release. A minimum interest rate of 1.50% was in effect at the time of the interest calculation for Mr. Toland. Interest is compounded annually in our calculation methodology. Following are the interest rates used for each year for Mr. Toland's delayed interest calculation: 4.37% in 1994, 5.66% in 1995, 5.15% in 1996, 5.20% in 1997, 4.91% in 1998, 4.78% in 1999, 6.00% in 2000, 3.48% in 2001, 1.64% in 2002, 1.50% in 2003 and 2004, 3.22% in 2005, 4.85% in 2006, 4.48% in 2007, and 1.50% in 2008 through 2013.

General Observations

With regard to the unclaimed property issue, MetLife's reference to "released reserves" implied that the liabilities had been transferred to the company's surplus. I think the liabilities for lost pensioners should be moved to the company's liabilities for unclaimed property.

With regard to the interest rate issue, when I first asked MetLife for clarification, I mentioned the idea of using the company's interest rates on settlement options, such as the interest-only option, the fixed-amount option, or the fixed-period option. I think it is common for the interest rates in those settlement options to be subject to change, and sometimes the options guarantee a minimum interest rate such as 3 percent. I mentioned the idea because I thought it would be appropriate to use interest rates resembling MetLife's rate of return on its invested assets, rather than arbitrary interest rates. The MetLife spokesman did not comment on the idea of using settlement option interest rates.

Available Material

I am offering a 22-page complimentary package consisting of the two 2010 Forum articles about unclaimed property (9 pages), the text (without exhibits) of Metropolitan's complaint against Smith (12 pages), and the company's explanation of the interest calculation (1 page). Email jmbelth@gmail.com and ask for the second March 2018 package about MetLife's lost pensioners.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

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