Wednesday, May 30, 2018

No. 268: Bitcoin and Other Cryptocurrencies—A Report from the Texas State Securities Board

In No. 34 (March 3, 2014) found here, I discussed Bitcoin, the most prominent example of virtual currencies, or cryptocurrencies. In the final sentence of the post I said I would not touch Bitcoin or any other virtual currency with a ten-foot pole.

On April 10, 2018, the Texas State Securities Board (TSSB) announced publication of an enforcement report entitled "Widespread Fraud Found in Cryptocurrency Offerings." Examples of other cryptocurrencies, besides Bitcoin, are Ethereum, Litecoin, and Ripple. Because the 14-page report is copyrighted, I asked TSSB for permission to offer it without charge to my readers. A spokesman expressed a preference for me to provide a link. The report may be found here.

A Few Findings
Over four weeks beginning December 18, 2017, the enforcement division of TSSB began 32 investigations. Here are some findings:
  • No promoters were registered to sell securities in Texas, a violation of the Texas Securities Act;
  • 30 promoters were broadly using websites, social media, and online advertising to market to Texans;
  • Seven promoters were offering securities tied to a new cryptocurrency;
  • At least five promoters all but ignored investing risks by guaranteeing returns, some as high as 40% per month;
  • Only 11 promoters provided potential investors with a physical address;
  • At least six promoters were actively recruiting sales agents without verifying they were registered with the Securities Commissioner; and
  • Six of the offerings involved payment of a commission to investors who recruited new investors into the scheme.
Two Emergency Actions
On May 8, 2018, TSSB announced actions taken against two cryptocurrency firms. TSSB said the orders bring to nine the number of actions taken since the beginning of the investigation.

One of the recent actions is an emergency cease and desist order directed at Bitcoin Trading & Cloud Mining Ltd. (BTCRUSH) and four principals. BTCRUSH and three principals are based in London, England, and the other principal is based in Panama City, Panama.

The other recent action is an emergency cease and desist order directed at Forex EA & Bitcoin Investment LLC (Forex) and two principals. Forex and its principals are based in New York City.

The Reaction from BTCRUSH
On May 11 TSSB reported a development immediately following the cease and desist order directed at BTCRUSH. TSSB said the firm amended the terms of service on its website to say that "use of its current Platform by U.S. citizens and permanent residents is strictly prohibited."

A Third Emergency Action
On May 15 TSSB announced an emergency cease and desist order directed at Wind Wide Coin Inc. and three principals. Wind Wide and its principals are based in Houston, Texas and Lake City, Florida.

Available Material
I urge readers to familiarize themselves with the TSSB report, to which I have provided a link above. I am also offering a complimentary 22-page PDF consisting of the emergency cease and desist order directed at BTCRUSH (8 pages), the emergency cease and desist order directed at Forex (6 pages), and the emergency cease and desist order directed at Wind Wide (8 pages). Email jmbelth@gmail.com and ask for the May 2018 package about the TSSB cryptocurrency investigation.
===================================

Wednesday, May 23, 2018

No. 267: Long-Term Care Insurance—A New and Different Type of Cost-of-Insurance Lawsuit

On May 9, 2018, Carlton F. Gunn filed a long-term care (LTC) cost-of-insurance (COI) class action lawsuit against CNA Financial Corp. (CNA) in federal court in Illinois. He is a California resident but filed the complaint in Illinois, CNA's principal place of business and state of domicile for regulatory purposes. (See Gunn v. CNA, U.S. District Court, Northern District of Illinois, Case No. 1:18-cv-3314.)

The case has been assigned to U.S. Senior District Court Judge Charles P. Kocoras. President Carter nominated him in June 1980, and the Senate confirmed him in September 1980. He served as chief judge from 2002 to 2006 and assumed senior status in June 2006. Magistrate Judge Sheila M. Finnegan has also been assigned to the case.

The Unusual Nature of the Lawsuit
On December 1, 1999, CNA issued an LTC insurance group policy to the Federal Judiciary Group Long Term Care Insurance Trust (Washington, DC). Gunn's certificate of coverage became effective on January 1, 2000. At that time he was an attorney in the federal public defender's office in Tacoma, Washington. According to the complaint, the policy and the certificate contain this language:
We cannot change the Insured's premiums because of age or health. We can, however, change the Insured's premiums based on his or her premium class, but only if We change the premiums for all other Insureds in the same premium class.
The policy and the certificate are not attached to the complaint. According to the complaint, however, the policy contains no additional definition of "premium class."

At the point of sale, CNA also provided a promotional brochure about the coverage. The brochure is not attached to the complaint. According to the complaint, however, the brochure contains this statement about premium changes:
Premiums may change. But for premiums to change, CNA would have to change premiums for everyone in your age category who has the kind of coverage plan that you do.
The Notification Letter
Gunn's policy originally carried an annual premium of $737.52. In a letter dated November 9, 2017, according to the complaint, CNA notified him that his premium would increase by 25 percent, to $921.90, at the beginning of 2018. CNA also said it intends to implement increases of 25 percent in each of the next two years, amounting to a cumulative premium increase of 95.3 percent, to $1,440.38. The letter mentioned options for reducing benefits rather than accepting the premium increases. The notification letter is not attached to the complaint.

According to the complaint, CNA acknowledged in the notification letter that the premium increases may differ by state. The comments are under a heading entitled "Will the premium rate increase be effective for everyone?" The comments allude to Continental Casualty Company (CCC), the CNA subsidiary that wrote the coverage. Here are the comments:
Since CCC must receive approval or authorization from certain states prior to implementing an increase, it is possible that these states will not approve or authorize the same percentage increase or authorize an increase at the same time. It is also possible some states may deny CCC's request for an increase, or require it be reduced or spread over multiple years. In addition, impacted certificate holders have different premium due dates and have different premium billing mechanisms. Premium increases will be staggered in accordance with the timing of regulatory approvals or authorizations and method of premium payment.
The Nature of the Complaint
The nature of the complaint is described in the first two paragraphs of the "Nature of the Case" section of Gunn's complaint. They read:
1. Plaintiff purchased a certificate for LTC insurance offered to those covered by the Federal Judiciary's LTC group policy. LTC insurance covers the costs of assistance with the activities of daily life due to disability or old age, costs not generally covered by health insurance. Insurers selling coverage tout the benefits of purchasing this coverage before reaching old age to guarantee the lowest possible premiums. When an insurance company markets and sells coverage for LTC, it must honor promises made in the policy documents about future premium increases and not misrepresent how premiums will be increased. When marketing materials and the policy state that premiums will not be increased unless they are changed for everyone in the same age group, an insurance company must not increase premiums at different times, and in different amounts, for insureds within the same age group. Similarly, an insurer must not promise that it will change premiums only by age group or premium class when it knows that it will vary future premium increases state-to-state. LTC coverage buyers are buying long-term financial security, and they count on their insurer to accurately describe the process and the commitments it makes and to honor its promises made in touting the policy and in the contract language.
2. CNA has broken these rules. While its marketing materials and policy promise that insureds will never be singled out for a rate increase, and that premiums will not change unless they change for all insureds in the same age category, CNA has done the opposite. CNA has imposed rate increases at different times and in different amounts from one state to the next. As a result, insureds within the same age group find themselves paying completely different premiums from one another, even though they are members of the same age group, premium class, and risk pool. CNA's decisions to seek and implement rate increases that vary from one state to the next blatantly violate its promises of uniform premium increases across the Class. Further, CNA knew its promises of uniform rate increases were false because state regulatory requirements vary. Plaintiff's rates will increase by 95% over three years, an increase far greater than rates charged insureds in other states.
The Allegations
Gunn alleges six causes of action: breach of contract, breach of the implied covenant of good faith and fair dealing, violation of the District of Columbia's Consumer Protection Procedures Act, fraud, fraudulent concealment, and declaratory and injunctive relief. Gunn seeks, among other things, class certification, appointment as class representative, rescission and return of all premiums paid, disgorgement of ill-gotten gains, declaratory and injunctive relief, compensatory and punitive damages, and attorney fees and costs.

General Observations
I have seen many lawsuits involving COI increases for LTC insurance policies. The policies are "guaranteed renewable," meaning the company may not single out policyholders for premium increases. However, the company is allowed to increase premiums on a "class" basis. The crucial question is how "class" is defined.

I think a "class" consists of policies issued by a company to persons of the same age, gender, health, occupation, and state. Gunn alleges in his complaint that CNA does not have the right to increase premiums on a state basis. This is important because there are wide differences in the timing and amounts of state insurance department approvals of company requests for LTC insurance premium increases.

A possibility in the Gunn case is that CNA made errors in drafting the policy, the certificate, and the promotional brochure. Another possibility is that I have an erroneous understanding of the meaning of the word "class" in the context of guaranteed renewable LTC insurance policies. Either way, I plan to follow developments in the case.

Available Material
I am offering a complimentary PDF containing Gunn's 26-page complaint. Email jmbelth@gmail.com and ask for the May 2018 complaint in the case of Gunn v. CNA.

===================================

Wednesday, May 16, 2018

No. 266: Phoenix's Cost-of-Insurance Increases—A Pair of New Lawsuits

Phoenix Companies, Inc. (Phoenix) was a publicly owned company with shares traded on the New York Stock Exchange. In June 2016 Nassau Reinsurance Group Holdings, L.P. (Nassau), a private equity firm based in New York City, acquired Phoenix, which became a privately owned company. PHL Variable Life Insurance Company (PHL) and Phoenix Life Insurance Company (PLIC) are Phoenix subsidiaries.

Over the years Phoenix and its subsidiaries were defendants in many lawsuits relating to cost-of-insurance (COI) increases on Phoenix Accumulator Universal Life (PAUL) policies. They were large policies often used in stranger-originated life insurance (STOLI) arrangements. All the lawsuits were settled.

For further background on Phoenix's litigation relating to COI increases, I suggest readers review my article in the November 2013 issue of The Insurance Forum (offered in the complimentary package mentioned at the end of this post). I also suggest readers review my No. 26 (January 29, 2014) found here, and my No. 103 (June 15, 2015) found here.

The Fan Lawsuit
On February 13. 2018, Derek Fan and Robert Putz filed a class action lawsuit against PLIC, Nassau, and PHL. On May 1 the plaintiffs filed an amended complaint. Here are four paragraphs (lightly edited) from the "Nature of the Action" section of the amended complaint:
2. This case arises from Defendants' breach of express and implied contractual obligations contained in Phoenix's universal life insurance policies and whole life policies.
4. Plaintiff Fan and the other universal life policyholders in the proposed class purchased these universal life policies so that they and their families would be protected in the event that the policyholder died. However, beginning in 2017, Defendants PHL and Nassau suddenly and unilaterally began increasing the cost of insurance charged to universal life policyholders and began withdrawing those costs from the cash value of the universal life policies of Plaintiff Fan and the Class, falsely stating the increases were permitted by the terms of the policies.
8. As described in detail below, Defendants' conduct is unlawful. While the universal life policies permit PHL and Nassau to adjust the COI rates periodically, they allow PHL and Nassau to do so based only on certain specified factors and they prevent those Defendants from changing the rates to recoup prior losses. As numerous courts have recognized, insurers are legally prohibited from basing COI increases on anything other than the factors specified in the policies.
9. Despite their representations to policyholders, Defendants' true reasons for imposing the drastic increases were to: (a) subsidize PLIC's cost of meeting its interest rate guarantees under the policies; (b) recoup past losses in violation of the terms of the policies; (c) induce policy terminations by policyholders; and (d) allow Defendant Nassau to recoup its costs for its 2016 acquisition of PLIC and PHL (and other Phoenix-related businesses) and the capital contributions that Nassau made to strengthen the financial condition of the Phoenix-related businesses.
The Advance Trust Lawsuit
On April 19, 2018, Advance Trust & Life Escrow Services (Waco, TX) filed a class action lawsuit against PHL. Advance Trust is suing in its capacity as nominee of the Life Partners Position Holder Trust, which owns eleven PAUL policies with a combined face amount of $43 million. Here are the first four paragraphs (lightly edited) from the "Nature of the Action" section of the complaint:
1. This is a class action brought on behalf of Plaintiff and similarly situated owners of life insurance policies issued by PHL. Plaintiff seeks to represent a class of PHL policyholders who are being subjected to an unlawful and excessive COI increase by PHL in violation of their insurance policies.
2. This COI increase represents the newest attempt by PHL to financially abuse its policyholders and induce lapses. PHL and its New York sister company PLIC first implemented a COI increase in 2010 on a subset of PAUL policies. The New York Department of Financial Services, California Department of Insurance, and Office of the Commissioner of Insurance of Wisconsin concluded that the 2010 increase was illegal.
3. Undeterred, PHL and PLIC then announced a second COI increase in 2011, also on a subset of PAUL policies. A class action lawsuit was filed by plaintiffs represented by the undersigned law firm, after which PHL and PLIC ultimately settled for more than $130 million in monetary and non-monetary benefits. Among the prospective relief agreed to by PHL and PLIC was a COI rate increase freeze, in which PHL and PLIC agreed not to increase the COI rate schedule any further on class members through and including December 31, 2020. The release in that settlement specifically carved out and "does not include any future COI rate adjustments assessed by" PHL.
4. In June 2016, PHL and PLIC were sold to a private equity firm, Nassau, with the immediate priority of "improving the company's profitability." Fourteen months later, in August 2017, PHL and PLIC sent cryptic letters to policyholders notifying them of a new, third COI rate increase on "certain PAUL and Phoenix Estate Legacy policies," including the prior settlement class. The amount of the new COI rate increase and the actuarial justification for it were not disclosed. PHL disclosed only that "There will be an overall increase to cost of insurance rates, as well as progressive increases to cost of insurance rates beginning when an insured reaches age 71 thorough age 85." [Blogger's note: The August 21, 2017 notification letter is in the complimentary package offered at the end of this post.]
The Judge
The Fan and Advance Trust cases are related, and both have been assigned to Senior U.S. District Judge Paul A. Crotty. President George W. Bush nominated him in February 2005, and the Senate confirmed him in April 2005. He assumed senior status in August 2015. (See Fan v. PLIC and Advance Trust v. PHL, U.S. District Court, Southern District of New York, Case Nos. 1:18-cv-1288 and 1:18-cv-3444.)

The Life Partners Connection
Life Partners, Inc. (Waco, TX) was for many years an intermediary in the secondary market for life insurance policies and the primary operating subsidiary of Life Partners Holdings, Inc. (LPHI). Although LPHI shares traded publicly on NASDAQ, the company was totally controlled by Brian D. Pardo, its chief executive officer, because he owned a majority of the outstanding shares. The company's main business was acquiring policies in the secondary market and reselling to investors fractional interests in those policies.

In January 2012 the Securities and Exchange Commission (SEC) filed a civil lawsuit in federal court against LPHI, Pardo, and two other officers alleging civil violations of federal securities laws and regulations. The SEC later dismissed the charges against one of the two other officers.

In January 2014 the case went to trial. The jury found LPHI, Pardo, and one other officer guilty of some and not guilty of other civil violations of federal securities laws and regulations.

In December 2014 the federal district court judge issued an order imposing huge civil monetary penalties against LPHI, Pardo, and one other officer. The penalty imposed against LPHI was more than twice the company's total assets, prompting me to refer to the penalty as a "death sentence" for the company.

In January 2015 LPHI filed for protection under Chapter 11 of the federal bankruptcy law. Following complex and lengthy proceedings in federal bankruptcy court, arrangements were made for the handling of LPHI's assets to protect those who had invested in fractional interests in the life insurance policies that had been acquired originally by LPHI. The plaintiff in the Advance Trust case now owns some policies that once were owned by LPHI.

For further background on Life Partners, I suggest readers review my article in the April 2012 issue of the Forum (offered in the complimentary package mentioned at the end of this post). I also suggest readers review my No. 29 (February 10, 2014) found here, and my No. 84 (February 26, 2015) found here.

General Observations
The Fan and Advance Trust cases have a long way to go, but I think they will be settled eventually. Earlier cases about Phoenix's COI increases on large universal life policies survived motions to dismiss and then bogged down into long battles before settling. The Fleisher case, for example, was settled almost literally on the courthouse steps. The parties to these cases usually decide it is simply too expensive to continue through a trial and the inevitable appeals process.

Available Material
I am offering a complimentary 74-page package consisting of the amended complaint in the Fan case (39 pages), the complaint in the Advance Trust case (28 pages), the August 2017 Phoenix notification letter (2 pages), and my articles in the April 2012 and November 2013 issues of the Forum (5 pages). Email jmbelth@gmail.com and ask for the May 2018 package about Phoenix's recent COI increase.

===================================

Tuesday, May 8, 2018

No. 265: Long-Term Care Insurance—A Review of Policyholder Complaints in Indiana in 2015-2018

In recent years, in response to my several blog posts about long-term care (LTC) insurance, I received many emails from policyholders disgruntled with their LTC insurance companies. Most of the emails related to claim problems or premium increases. In April 2018, to learn more about the subject, I contacted the insurance department in Indiana, my home state. I asked for information about LTC complaints filed with the department in 2015, 2016, 2017, and thus far in 2018. In response, the department sent me a list of 132 complaints: 44 in 2015, 39 in 2016, 38 in 2017, and 11 thus far in 2018. Here I comment on the information the department provided.

Structure of the List
The list has six columns. The first column is "type." All but one of the complaints related to "LTC." The odd complaint related to "Medi." The second column is "category." All the complaints are categorized as "claim handling," "policyholder service," or "underwriting." I believe that there were complaints about "premium increases," and that such complaints are in the "policyholder service" category. The third column is "respondent," and shows the name of the insurance company.

The fourth column is "complaint confirmed." Each complaint is shown as "Y" or "N." In answer to my inquiry, a department spokesperson said a complaint is confirmed as "Y" (or "Yes") if the department determines that the company violated a statute, violated a policy provision, or made an error. The fifth column shows the date the complaint was filed. The sixth column shows a complaint identification number.

Distribution by Company
The list identifies 31 companies. Those with five or more complaints filed against them during the multiyear period (the number of complaints filed against each company is shown in parentheses) are Bankers Life & Casualty (20), Genworth (15), John Hancock (14), Senior Health Insurance Company of Pennsylvania (14), Continental Casualty (10), Transamerica (10), Pyramid Life (7), and Constitution Life (5).

An Extrapolation
I have written extensively about Senior Health Insurance Company of Pennsylvania (SHIP). My blog posts have dealt with SHIP's worsening financial condition and litigation over claim practices. I decided to extrapolate from the number of complaints against SHIP filed in Indiana to the number of complaints filed against SHIP nationally. I selected SHIP for two reasons: it was near the top of the list above, and it is running off only LTC business.

According to Schedule T on page 49 in SHIP's statutory statement for the year ended December 31, 2017, SHIP's 2017 national premium volume, including premiums waived, was $99.48 million. SHIP's 2017 Indiana premium volume was $2.36 million. Thus the national figure was 42 times the Indiana figure, and the extrapolation suggests that about 588 complaints may have been filed nationally against SHIP during the multiyear period.

 General Observations
No tabulation of complaints filed with state insurance departments can scratch the surface of the dissatisfaction level among consumers. In the first place, many individuals do not know an insurance department exists in every state, and many individuals who know about insurance departments do not know the departments accept complaints. In the second place, it requires considerable effort to prepare a formal written complaint and assemble the relevant documents that should accompany the complaint. To add to the problem, it is rare for a consumer to receive satisfaction as a result of filing the complaint. About all a consumer can reasonably expect from the filing of a complaint is a more detailed explanation of the position taken by the company. In short, if there were indeed almost 600 complaints filed nationally against SHIP alone in the past few years, I think it demonstrates a high level of dissatisfaction among consumers regarding LTC insurance.

Available Material
I am offering a complimentary 7-page PDF consisting of the tabulation that the Indiana insurance department provided to me (6 pages) and Schedule T in SHIP's statutory financial statement for 2017 (1 page). Email jmbelth@gmail.com and ask for the May 2018 package about LTC complaints.

===================================

Monday, April 30, 2018

No. 264: Halali and Others in a Federal Criminal Case Involving Phony Life Insurance Policies—A Third Update

In No. 149 (March 14, 2016) I discussed a criminal case against five defendants involving issuance of phony life insurance policies. I provided updates in Nos. 210 (March 27, 2017) and 251 (February 5, 2018). Here I provide a third update. (See U.S.A. 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 an indictment against Karen Gagarin, Behnam Halali, Kraig Jilge, Ernesto Magat, and Alomkone Soundara. They had 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. In December 2016 Soundara pleaded guilty and agreed to testify for the government. In January 2017 Jilge pleaded guilty to most of the charges against him but did not plead guilty to the two money laundering charges against him.

Trial and Sentencing
On February 15, 2017, the trial of Halali, Magat, and Gagarin began. It consisted of 14 trial days and ended on March 13. The jury found them guilty on the conspiracy charge, the 14 wire fraud charges, and one money laundering charge.

On January 5, 2018, Judge Illston sentenced Halali, Magat, and Gagarin. On February 16 she sentenced Jilge. On March 23 she sentenced Soundara. Here is a brief summary of the sentences:
  • Halali: 60 months in prison followed by three years of supervised release, special assessment of $1,600, restitution of $2,837,791.93 (joint and several with the co-defendants), no fine, self surrender on March 30, 2018.
  • Magat: 48 months in prison followed by three years of supervised release, special assessment of $1,600, restitution of $2,837,791.93 (joint and several with the co-defendants), no fine, self surrender on March 30, 2018.
  • Gagarin: 36 months in prison followed by three years of supervised release, special assessment of $1,600, restitution of $2,837,791.93 (joint and several with the co-defendants), no fine, self surrender on March 30, 2018.
  • Jilge: 12 months and 2 days in prison followed by three years of supervised release, special assessment of $1,600, restitution of $2,837,791.93 (joint and several with the co-defendants), no fine, self surrender on May 15, 2018.
  • Soundara: Time served, three years of supervised release, special assessment of $1,600, restitution of $2,837,791.93 (joint and several with the co-defendants), no fine.
Gagarin's Appeal
On January 22, 2018, in the district court, Gagarin filed a notice of appeal. The next day the appellate court docketed the case. Two assistant federal public defenders in San Francisco represent Gagarin. Five assistant U.S. attorneys in San Francisco represent the government. Gagarin's brief was due May 23, but has been rescheduled for July 9 because the district court reporter needed additional time to prepare the transcripts that are to be used in the appeal. The government's answering brief is due August 8, and Gagarin's optional reply brief is due 21 days after the filing of the government's answering brief. The three-judge appellate court panel has not yet been assigned. (See U.S.A. v. Gagarin, U.S. Court of Appeals, Ninth Circuit, Case No. 18-10026.)

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; two pleaded guilty and the other three went to trial. I was not surprised by the jury findings or the judgments imposed on the defendants.

I plan to provide another update after the appellate court panel hands down its decision on the Gagarin appeal. However, I may provide an earlier update if I find Gagarin's appellate brief interesting.

Available Material
In Nos. 149, 210, and 251 I offered complimentary PDFs containing some important case documents. Those three packages are still available.

Now I offer a new complimentary 20-page PDF consisting of the judgment against Jilge (8 pages), the judgment against Soundara (8 pages), and the docket in the Gagarin appellate case (4 pages). Email jmbelth@gmail.com and ask for the April 2018 package about the Halali case.

===================================

Monday, April 23, 2018

No. 263: Long-Term Care Insurance—More on the Financial Condition of Senior Health Insurance Company of Pennsylvania

In No. 260 (posted April 2, 2018) I wrote about the worsening financial condition of Senior Health Insurance Company of Pennsylvania (SHIP), which is running off the long-term care (LTC) insurance business of the former Conseco Senior Health Insurance Company. My comments there were based primarily on SHIP's statutory financial statement for the year ended December 31, 2017. A reader later shared with me SHIP's "2017 Management's Discussion and Analysis" (MD&A), which contains information that I think warrants this follow-up.

The Runoff Rate
The MD&A provides information about SHIP's policies and the rate at which they are running off. Here is an excerpt:
The Company's business consists exclusively of closed blocks of long-term care policies including more than 70 distinct policy forms with many state variations for each form. The policy forms include home health care, nursing home, and comprehensive plans. The Company discontinued selling policies in 2003 [when it was Conseco Senior Health]. As of December 31, 2017, approximately 65 percent of all active policies are comprehensive plans that include benefits for both home health care and nursing facilities. There are 61,410 members under these policies at year-end, compared to 69,620 at the previous year-end, a decline of 11.8 percent. At the expected runoff rate, in 10 years the number of members is anticipated to decline to approximately 14,000.
Outsourcing
SHIP outsources many of its services. Here is how the MD&A describes those services and the related expenses:
The Company operates from its offices in Carmel, Indiana and utilizes third-party providers for key functions. These providers include a third-party administrator for policy and claim administration, asset managers for investment portfolio management and accounting, and actuarial professionals for pricing and valuation. This outsource approach provides for scalability of services and related expenses.
Effective March 1, 2014, the Company transferred its employees and physical assets to affiliate Fuzion Analytics, Inc. ("Fuzion"), and executed a management services agreement under which Fuzion provides comprehensive management services to the Company. Fuzion, a wholly-owned subsidiary of the Oversight Trust, was founded in 2012 and provides long-term care management services to the Company. Management fees paid by the Company to Fuzion are subject to annual decreases based on policyholder counts and paid claims in the Company's business.
Risk-Based Capital
In No. 260 I discussed SHIP's risk-based capital (RBC) ratios, where the numerators are total adjusted capital and the denominators are company action level RBC. The MD&A says this:
The decline in Total Adjusted Capital in 2017 and 2016 was $19.4 million and $33.5 million, respectively. Favorable underwriting losses and investment gains recognized in the current year compared to prior year was partially mitigated by a reserve credit deficit recognized in current year from a coinsurance agreement that was entered as of July 1, 2016. In 2017, the Company received a dividend from the parent, Oversight Trust, of $4.0 million....
[T]he Company's projections indicate a need for future rate increases to support an RBC ratio above statutory action levels throughout the runoff of the business. The age of these policies and the effect of fixed rate compound inflation has inflated benefits beyond actuarial projections and produced an anti-selection impact that would not have been considered in pricing projections. Accordingly, in 2016, the Company began filing for rate increases....
Investments in Offerings of Platinum Partners
In No. 260 I mentioned SHIP's investments in offerings of Platinum Partners, a hedge fund in serious financial and legal trouble. The MD&A discusses Platinum, although it does not identify Platinum by name. In No. 260 I underestimated the amounts of such investments, because the figures I showed involved only those investments with the word "Platinum" in them. Here is the MD&A's discussion of the situation:
Historically, the Company placed approximately ten percent of its portfolio with other asset managers for investments in alternative asset classes. During 2016, investment principals and investment funds with which these asset managers had connections, came under investigation by the Securities and Exchange Commission for alleged violation of securities laws and criminal activities. In response to this, in 2016 the Company revoked all investment authorization from these asset managers, and directly assumed the ongoing management of these portfolios. As of year-end, the Company's holdings in these portfolios was $184.5 million. The Company recorded losses of $5.2 million in 2017 and $27.8 million in 2016 on assets in these portfolios believed to be other than temporarily impaired. Because of the long-term nature of the Company's liabilities and sufficient liquidity in core assets, the Company determined that a "fire-sale" of assets was not necessary or appropriate. The Company will continue efforts to maximize value as an exit strategy in these portfolios which may take multiple years to fully liquidate.
Reinsurance with Roebling Re
In No. 260 I mentioned that SHIP took credit in 2017 for $1.13 billion of reserve liabilities ceded to Roebling Re (Barbados). I said Roebling Re is not authorized, is a non-U S. reinsurer, and is not affiliated with SHIP. I also said I do not know the name of the owner, the names of its senior officers, or anything about its financial condition. The MD&A discusses Roebling Re, but does not identify the company by name. Here is the MD&A's discussion of SHIP's relationship with Roebling Re:
Effective July 1, 2016, the Company entered a coinsurance with funds withheld agreement, under which the Company ceded 49 percent of the major blocks of its long-term care business. The counterparty to this agreement is a non-profit-motivated reinsurer established exclusively to support insurance companies with long duration liabilities. The reinsurer was to generate capital through investment in long-dated, high-quality investment strategies, and the corresponding issuance of investment-grade bonds; however, the reinsurer was not able to participate in the investment strategies as designed and was not able to meet the obligations under the agreement in 2017.
The coinsurance agreement includes an experience refund provision under which the Company is entitled to 90 percent of profits earned by the reinsurer (this provision does not apply to losses incurred by the reinsurer). Reserves on the ceded business are established by the Company and these reserves are fully supported by assets controlled and managed by the Company in a funds withheld account. In 2016, the Company received a $10 million ceding commission. In 2016 and 2017, the Company recorded loss reimbursements under the agreement of $16.7 million and $23.2 million, respectively. As a result of the reinsurer not meeting its obligations under the reinsurance contract, the Company recognized a $12.6 million reduction in surplus due to a reserve credit deficiency in 2017. The Company will terminate the reinsurance agreement in 2018.
General Observations
I have shown in this follow-up a few excerpts from SHIP's 2017 MD&A that I found interesting. I think the two most important are the discussions of SHIP's investments in the offerings of Platinum Partners and SHIP's relationship with Roebling Re. When I wrote No. 260 I had no idea of the problems with that relationship, or that SHIP will terminate the reinsurance agreement in 2018. I do not know why SHIP decided not to identify Platinum Partners or Roebling Re in the MD&A.

Available Material
I am offering a complimentary PDF containing SHIP's 11-page 2017 MD&A. Email jmbelth@gmail.com and ask for SHIP's 2017 MD&A.

===================================

Monday, April 16, 2018

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.

===================================

Subscribe to: Posts (Atom)