No. 315: Long-Term Care Insurance —A Lawsuit Relating to the Calculation of Inflation Benefits

On May 17, 2018, Gerald Issokson (Gerald), executor of the estate of his mother, Pearl Issokson (Pearl), filed a class action lawsuit against Connecticut General Corporation and three other firms. Pearl owned long-term care (LTC) insurance coverage under a group LTC policy. The policy included home health care benefits up to a lifetime maximum benefit of $10,000, and an inflation provision. Pearl's coverage was provided through a certificate effective November 1, 1988. (See Issokson v. Connecticut General, U.S. District Court, District of Massachusetts, Case No. 3:18-cv-30070.)

The Complaint
Pearl died April 20, 2015. At the time of her death she was aged 92 and had been receiving home health care since 1990 due to physical and cognitive impairments. She was eligible for home health care benefits from 1990 through 2013, but neither she nor her family collected those benefits. Gerald asked the company to look into the matter.

The company sent Gerald a check for $16,130 representing the sum of the $10,000 lifetime maximum benefit and $6,130 for the impact of the inflation provision. Gerald alleges in the complaint that the company calculated the impact of the inflation provision using simple interest, although the insurance certificate seems to require that the impact of the inflation provision should be calculated using compound interest.

The Inflation Provision
The inflation provision in Pearl's insurance certificate consists of one sentence. It reads:

The benefits will automatically be increased by the lesser of the percent of increase in the Consumer Price Index during the prior calendar year or 5 percent.

When Gerald requested an explanation of the inflation calculation, a company spokesperson responded in a letter dated February 4, 2016. The letter shows the yearly percentage increases in the Consumer Price Index (CPI) for the years 1990 through 2013. The simple total of the yearly percentage increases in the CPI is indeed 61.3 percent. According to my calculation, however, the total of the yearly percentage increases in the CPI, compounded annually,  is 82.98 percent. Thus the check should have included $8,298 rather than $6,130 for the impact of the inflation provision. The reason why the discrepancy was only $2,168 was that the yearly percentage increases in the CPI were small during the time period in this case. Gerald's complaint and the spokesperson's letter are in the complimentary package offered at the end of this post.

The Classes
Gerald seeks to represent four classes. They are: (1) a "damages class" consisting of all current and future policyholders, nationwide, of any of the defendants whose certificates of insurance contain the language quoted above, or similar language, (2) an "injunctive class" consisting of all current policyholders, nationwide, of any of the defendants whose certificates of insurance contain the language quoted above, or similar language, (3) a "Massachusetts damages class," and (4) a "Massachusetts injunctive class."

The Counts
The complaint consists of five counts. They are: (1) breach of contract, (2) violations of the Connecticut Unfair Insurance Practices Act, (3) declaratory relief, (4) bad faith breach of duty of good faith and fair dealing, and (5) violations of certain Massachusetts laws.

Progress of the Case
The defendants have not filed an answer to the complaint. However, on July 16, 2018, the plaintiff and the defendants filed a joint stipulation containing three items:

1. This Court lacks personal jurisdiction over the claims of non-Massachusetts putative class members and all claims against Connecticut General Corporation.
2. Plaintiff lacks standing to assert class action claims under the Connecticut Unfair Insurance Practices Act against Connecticut General Corporation.
3. Plaintiff lacks Article III standing to seek declaratory relief.

On July 20, 2018, the judge commented on the joint stipulation. He said in part:

The court adopts the parties' proposal set forth in the Stipulation. Therefore, the court will treat the Stipulation as a fully briefed and opposed partial motion to dismiss, incorporating the identical arguments made in the briefing and oral argument regarding the partial motion to dismiss in Rain v. Connecticut General Corp., 17-cv-30115....

It is important to note that the subject of the Rain case is not related to the subject of the Issokson case. The judge has not yet ruled on the partial motion to dismiss in either the Rain case or the Issokson case.

General Observations
The underlying issue in the Issokson case is whether the impact of the inflation provision in Pearl's certificate should be calculated on a simple basis or on a compound basis. The defendants have not yet said a word about that underlying issue.

Based on my reading of the wording of the inflation provision in Pearl's certificate, I think the company should have used the compound calculation rather than the simple calculation. Even if one believes the opposite, the language in the certificate is certainly ambiguous on the subject, and an ambiguous provision is supposed to be interpreted against the party that drafted the provision.

Available Material
I am offering a complimentary 29-page PDF consisting of the Issokson complaint (22 pages), the company spokesperson's letter (2 pages), and the joint stipulation (5 pages). Send an email to jmbelth@gmail.com and ask for the June 2019 package about the Issokson LTC insurance case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 314: Indexed Universal Life Policies—The Views of Two Prominent Professionals About the Risks for Buyers

During the years of The Insurance Forum, and more recently on my blog, I have never written an article about indexed universal life (IUL) policies. I have been asked by many readers to write on the subject, but have not done so. The reason is simple. I have obtained and looked closely at samples of IUL policies. However, I have not understood them well enough to feel comfortable writing about them, and I have always avoided writing on topics I do not understand. Promoters of IUL policies have occasionally said I am too stupid to recognize a good thing when I see it. My response to such promoters is that they are welcome to their opinions.

Recently I have seen articles by two professionals for whom I have the highest regard: Lawrence Rybka and Richard Weber. I have obtained permission from them to share the articles with my readers. Here I introduce the authors briefly. I also show executive summaries and in one instance a few comments from the article. The full articles are in the complimentary package offered at the end of this post.

Lawrence Rybka

Lawrence J. Rybka, JD, CFP, is Chairman and Chief Executive Officer of Valmark Financial Group, which includes a broker dealer, an investment advisor, and Executive Insurance Agency (the nation's first producer group). Valmark serves 120 premier independently-owned and independently-run wealth management/transfer firms in 31 states and has helped place over $60 billion of life insurance death benefits while managing insurance policies with a cumulative cash value of over $8 billion. Valmark's affiliated Registered Investment Advisor, Valmark Advisors, has over $6 billion in assets under management, including about $3 billion in variable sub-account assets within its TOPS funds. He earned his Bachelor's degree with honors in Finance from the University of Akron, and his Juris Doctorate from Wake Forest University.

Richard Weber

Richard Weber, MBA, CLU, AEP, is President and primary consultant for The Ethical Edge, Inc., providing fee-only insurance analytics and consulting services to family offices and high net worth individuals. He holds an MBA from the Haas School of Business at the University of California at Berkeley with a specialty in Insurance and Finance. He served for 11 years as an Instructor of Insurance at the University of California at Berkeley's Program in Personal Financial Planning. From 1993 through 1998, he served as Adjunct Professor of Ethics at The American College. He currently serves as Senior Adjunct Professor of Risk and Insurance in California Lutheran University's MBA program and is on the faculty of Texas Tech University's Personal Financial Planning degree program.

The Rybka Article

The Rybka article is entitled "How to Retire in the Magical Retirement Income Castle in the Clouds," and subtitled "What looks too good to be true, usually is." Here is the executive summary, followed by the first paragraph of the article:

Executive summary: This article examines the use of premium financed Indexed Universal Life (IUL) policies to provide retirement income for clients. It explores the major assumptions in the IUL policies and in the bank loans used to finance them. Most importantly, it reveals undisclosed risks often taken by clients in these transactions.

I recently attended a top meeting in the U.S. life insurance industry. During it, I experienced no less than three sessions where insurance agents shared presentations of major sales they claimed to have made during the year, each of which generated hundreds of thousands of dollars in commissions. All three presentations were variations on the recommendation that clients borrow significant sums to finance the premiums on IUL policies. The proposals showed that the loans would be paid back using projected policy cash values and have plenty remaining in the policy to provide a lifetime income of hundreds of thousands of dollars a year to the policyholder and a multi-million-dollar death benefit at the end. The presentations proposed the clients borrow money from major commercial banks who were willing to lend $2 to $3.5 million to each client over five to seven years to purchase these policies. These proposals are not outliers but part of massive sales efforts by some insurance companies and banks to push products that may be good for them, but carry significant risk for the client.

The Weber Article

The Weber article is entitled "Are You in Good Hands?" It was published as a newsletter on May 14, 2019 by Leimberg Information Services, Inc. The article discusses not only risk tolerance questions in IUL policies, but also risk tolerance questions in whole life policies, guaranteed death benefit universal life policies, universal life policies, and variable universal life policies. The technical editor of the article is Ben G. Baldwin, Jr., CLU, ChFC, CFP. Here is the executive summary:

Long associated within the financial practitioner community for addressing and attempting to overcome policy illustration abuse, Dick Weber began his decades-long exploration of these issues when assuming the Chair of the Society of Financial Service Professionals (FSP)'s Illustration Questionnaire (IQ) Committee. IQ emphasizes that the "illustration is not the policy," and educates its members about the responsible use of policy illustrations. Yet Indexed Universal Life (IUL) products have created new challenges for professionals seeking to apply a customer-focused standard of care to their recommendations for policies designed for a lifetime. IUL is most often characterized as giving owners the best of both worlds by offering investment upside potential, a minimum guaranteed growth feature and underlying life insurance protection. These features, along with the (largely incorrect) slogan "Zero is the Hero" has made IUL the fastest growing permanent life insurance product of the past decade.

Recent regulations intended to moderate the calculation and display of non-guaranteed benefits projected in IUL policy illustrations have largely backfired, inspiring what objectively appear as unachievable promises of future performance. How should insurance and non-insurance professionals react and respond? This newsletter goes beyond just the potential for misusing policy illustrations and delves into the suitability and fiduciary issues of serving a client's best interest.

Available Material

I am offering a complimentary 37-page PDF consisting of the full Rybka article (12 pages) and the full Weber article (25 pages). Email jmbelth@gmail.com and ask for the May 2019 package about IUL policies.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 313: Long-Term Care Insurance and More on the Upcoming Hearing before the Virginia Bureau of Insurance

In No. 310 (April 22, 2019), I wrote about the May 21 public hearing to be held by the Virginia Bureau of Insurance (Bureau) on the subject of long-term care (LTC) insurance premium increase requests filed by many companies. April 22 was the deadline for filing public comments in advance of the hearing. On that date, I filed No. 310 as my comment. The Bureau posted on its website all the comments it received from the public, as well as information about the LTC insurance premium increase requests filed by many companies. This follow-up post is based on my review of the material posted on the Bureau's website.

Recent Bureau Approvals

The Bureau recently approved some substantial premium increase requests affecting substantial numbers of policyholders. Here are the companies and, in parentheses, the approved average premium increases expressed as percentages and the numbers of policyholders affected by the increases: American Fidelity Assurance (3%, 92), Jackson National Life (15%, 47), Kanawah Insurance (two plans) (48% and 44%, 1,204), Lincoln Benefit Life (35%, 257), Lincoln National Life (60%, 74), Mutual of Omaha (27%, 1,551), Northwestern Long Term Care (two plans) (28% and 27%, 2,710), Provident Life & Accident (102%, 734), RiverSource Life (35%, 1,305), Senior Health Insurance of Pennsylvania (25.0%, 633), and Virginia Insurance Guaranty Association (32%, 4,121).

Number of Comments

My tabulation suggests the Bureau received 177 comments from the public. I think the ten obscure public notices printed in newspapers around Virginia did not generate such a large number of comments. However, several articles about the hearing appeared in Virginia newspapers, and I think those articles prompted the large number of comments. One example is an excellent article entitled "Insurers now seeking huge increases in Virginians' premiums for long term care." The article, by reporter Dave Ress, appeared in the March 17, 2019 issue of the Daily Press (Newport News, VA).

Nature of the Comments

Many of the comments focused on the financial problems consumers are confronting because of increasing LTC insurance premiums. Many said that, when they purchased the insurance, they were not told the premiums would increase. Many said they were told that, if there were premium increases, the increases would be small and infrequent. Many expressed displeasure about being forced to absorb increases that were not their fault, but rather were caused by the companies' pricing errors. A few comments were from insurance agents who were upset because they had misled policyholders who trusted them.

Companies Identified

Seventy of the public comments did not identify the company with which the writer of the letter is or was a policyholder. Here are the 13 companies identified in 107 of the public comments, with the number of comments in parentheses: CNA Financial (2), CUNA Mutual (3), General Electric Capital (4), Genworth (36), John Hancock (44), Kanawha Insurance (3), Lincoln Benefit Life (1), Massachusetts Mutual (5), MetLife (3), Penn Treaty (2), TPM Life (1), Trustmark (1), and Unum (2).

Among the public comments, several of those who identified John Hancock as their company said they have coverage offered through the group LTC insurance program for federal government employees. I think many of the others who identified John Hancock without mentioning the group plan also have their coverage through the group plan.

There were two public comments that identified the company as the Virginia Life, Accident, and Sickness Insurance Guaranty Association. Those comments were references to Penn Treaty, where a court-ordered liquidation brought the Virginia Insurance Guaranty Association into the picture.

Most of the comments appear to have been from consumers. However, there were a few from agents, groups of agents, and other individuals writing on behalf of policyholders.

The ACLI/AHIP Letter

There were no comments from insurance companies. Instead, as usual, the companies hid behind their trade associations.

The American Council of Life Insurers (ACLI) is a trade association with approximately 290 member companies. America's Health Insurance Plans (AHIP) is a national association whose members provide coverage for health care and related services. ACLI and AHIP filed a joint six-page letter for the hearing record. The letter is over the signatures of Chuck Piacentini of ACLI and Amanda Matthiesen of AHIP. The letter is in the complimentary package offered at the end of this post. Here are the "Recommendation" and "Conclusion" paragraphs of the letter:

Recommendation

To ensure a stable regulatory environment that provides Virginia consumers with choice, transparency and protections for LTC insurance, we encourage the Commission to approve pending actuarially justified rate increases. Additionally, we encourage the Department of Insurance to adopt the most recent changes to the NAIC [National Association of Insurance Commissioners] LTC Insurance Model Regulation (NAIC Model), as well as issue the NAIC LTC Insurance Rate Increase Model Bulletin on Alternative Filing Requirements for LTC Premium Rate Increases (NAIC Bulletin).

Conclusion

We appreciate the opportunity to provide this statement and look forward to working with the State Corporation Commission and the Department of Insurance on creating a regulatory environment that ensures a robust private LTC insurance market that provides consumers with a choice of solid and dependable coverage for their LTC needs. We are committed to ensuring that consumers continue to enjoy the greater piece of mind that comes with knowing their coverage will be there when and for as long as they need it.

General Observations

It is not surprising that ACLI and AHIP "encourage the Commission to approve pending actuarially justified rate increases." The associations represent the companies, and would not be expected to encourage the Commission to deny or reduce the size of the requested premium increases.

The words "actuarially justified" should have been omitted from the "Recommendation" paragraph in the ACLI/AHIP letter.  Those words falsely imply that some premium increase requests are not actuarially justified.  Because company actuaries sign off on all premium increase requests, there is no such thing as a request that is not actuarially justified.  However, it is possible that a Bureau actuary might disagree with a company actuary.

As indicated in No. 310, for many years I have expressed the belief that the problem of financing the LTC exposure cannot be solved through the mechanism of private insurance. I explained in detail the reasoning behind that belief in an article in the July 2008 issue of The Insurance Forum. The article is in the complimentary package offered at the end of this post.

Now LTC insurance companies and their regulators are trying to figure out how to address the intractable problems they have created. I believe that nothing significant will emerge from the latest NAIC task force. I think it will "kick the can down the road," as several task force predecessors have done.

Available Material

I am offering a complimentary 11-page PDF consisting of the ACLI/AHIP letter to the Bureau (6 pages) and the July 2008 Forum article (5 pages). Email jmbelth@gmail.com and ask for the May 2019 LTC insurance package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 312: Robert Caro's Magnificent Small Book

Robert A. Caro is one of my favorite authors. For his work he has received two Pulitzer Prizes and other major awards too numerous to count. His first book was his 1,246-page master work, The Power Broker: Robert Moses and the Fall of New York, published in 1974. For it he received his first Pulitzer Prize.

Robert Moses
Although I lived the first 25 years of my life in Syracuse, New York, I had only a vague knowledge of Robert Moses. When I read Caro's book many years ago, I came to understand the achievements of that unelected individual who had amassed enormous political power, and who, in exercising that power, had transformed not only New York City but also disrupted the lives of millions of people. Anyone who doubts that the acquisition of political power and the use of that power are Caro's lifetime focus need only note the titles of the last five of the seven major parts of The Power Broker: "The Rise to Power," The "Use of Power," "The Love of Power," "The Lust for Power," and "The Loss of Power."

Lyndon Johnson
Caro then turned to Lyndon Johnson, about whom he has written four volumes and is now working on the fifth and final volume. The 882-page first volume was The Years of Lyndon Johnson: The Path to Power, published in 1982. The 506-page second volume was The Years of Lyndon Johnson: Means of Ascent, published in 1990. The 1,167-page third volume was The Years of Lyndon Johnson: Master of the Senate, published in 2002, and for which he received his second Pulitzer Prize. The 752-page fourth volume was The Years of Lyndon Johnson: The Passage of Power, published in 2012. The fourth volume ends in the summer of 1964, during the first year of Johnson's presidency, after passage of the 1964 Civil Rights Act.

The fifth and final volume does not have a title or a publication date. Presumably it will cover Johnson's other "Great Society" achievements, including the 1965 Civil Rights Act, the 1965 Voting Rights Act, Medicare, and Medicaid. Presumably it will also cover the Vietnam War, Johnson's decision not to run for reelection, and his life after he left office.

Working
Meanwhile, Caro has just come out with a magnificent 240-page book entitled Working: Researching, Interviewing, Writing, published in April 2019. It is a fascinating description of Caro's early life, how he got interested in Robert Moses and Lyndon Johnson, how his wife Ina serves as his principal helper, how they survived financially during the lean years when he was working on The Power Broker, how he does his research, how he conducts interviews, and how he writes. The book explains why he and Ina moved to the Hill Country of West Texas for three years, to get a feeling for the area where Johnson grew up, and to mingle with the people who knew Johnson and his family in the early years.

Theodore White's Views
In No. 307 (April 4, 2019), I quoted from a 1975 book entitled Breach of Faith: The Fall of Richard Nixon, by Theodore H. White. White died in 1986, but he remains one of my favorite authors. On the 1974 dust jacket of The Power Broker are ten strong endorsements from prominent authors and journalists. One of the endorsements was from White, who said this:

A masterpiece of American reporting. It's more than the story of a tragic figure or the exploitation of the unknown politics of our time. It's an elegantly written and enthralling work of art.

I agree with White. Caro's books are indeed works of art. Below I quote two paragraphs that appeared on page 6 of The Power Broker. They drew me in to read the entire book, and made me a Caro watcher.

The Paris Review Interview
The final section of Working is an interview with Caro entitled "The Art of Biography." It is reprinted from the Spring 2016 issue of The Paris Review. The interviewer is James Santel, whose sole function seems to have been to ask 14 brief questions and let Caro take it from there. In one of his responses, Caro quotes a portion of these two paragraphs from The Power Broker. They illustrate Caro's style and artistry:

Standing out from the map's delicate tracery of gridirons representing streets are heavy lines, lines girding the city or slashing across its expanses. These lines denote the major roads on which automobiles and trucks move, roads whose very location, moreover, does as much as any single factor to determine where and how a city's people live and work. With a single exception, the East River Drive, Robert Moses built every one of those roads. He built the Major Deegan Expressway, the Van Wyck Expressway, the Sheridan Expressway and the Bruckner Expressway. He built the Gowanus Expressway, the Prospect Expressway, the Whitestone Expressway, the Clearview Expressway and the Throgs Neck Expressway. He built the Cross-Bronx Expressway, the Brooklyn-Queens Expressway, the Nassau Expressway, the Staten Island Expressway and the Long Island Expressway. He built the Harlem River Drive and the West Side Highway.

Only one borough of New York City—the Bronx—is on the mainland of the United States, and bridges link the island boroughs that form metropolis. Since 1931, seven such bridges were built, immense structures, some of them anchored by towers as tall as seventy-story buildings, supported by cables made up of enough wire to drop a noose around the earth. Those bridges are the Triborough, the Verrazano, the Throgs Neck, the Marine, the Henry Hudson, the Cross Bay and the Bronx-Whitestone. Robert Moses built every one of those bridges.

Doing the Math
Caro watchers wonder whether Caro, now 83, will live long enough to finish the fifth and final volume on Johnson. Caro says they ask him to "do the math," and they wonder why he interrupted that effort to publish Working. He says he has done the math, there remain "several" more years of work on the fifth volume, and explains why he published Working now. Among elderly Caro watchers, there is the other math question of whether we will live long enough to read the fifth volume on Johnson.

For those who are not Caro watchers, I strongly recommend you read Working. I am confident you will find it enjoyable, and well worth the time. When you read it, you may join the ranks of Caro watchers.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 311: Genworth Financial, China Oceanwide, the Delaware Department, and the Hindenburg Letter

On April 15, 2019, Genworth Financial, Inc. (Genworth) filed with the Securities and Exchange Commission (SEC) an amended 10-K report for the year ended December 31, 2018. Here I discuss the amended report and several other recent developments relating to the proposed merger agreement between Genworth and China Oceanwide.

The Amended 10-K Report

In its 2018 proxy statement, filed with the SEC on November 1, 2018, Genworth said it expected to hold its 2019 annual meeting on or about July 18, 2019. The amended 10-K report says that, because Genworth and China Oceanwide are still trying to satisfy the closing conditions under their proposed merger agreement, Genworth postponed the meeting and implied there may not be a 2019 annual meeting. If there is a 2019 annual meeting, Genworth will provide adequate notice to shareholders. The explanatory note in the amended 10-K report is in the complimentary package offered at the end of this post.

A Recent 8-K Report

On March 14, 2019, Genworth filed with the SEC an 8-K (significant event) report listing developments relating to the proposed merger with China Oceanwide. The original merger agreement was entered into on October 21, 2016. Since then, the parties entered into nine "waiver agreements" under which the parties extended the "end date" in the merger agreement. In the waiver agreements, the parties also waived the right to terminate the merger agreement and abandon the merger due to a failure to consummate the merger agreement on or before a specified date. The dates of the waiver agreements listed in the recent 8-K report are: August 21, 2017; November 29, 2017; February 23, 2018; March 27, 2018; June 28, 2018; August 14, 2018; November 30, 2018; January 30, 2019; and March 14, 2019. In the last of those waiver agreements, the parties extended the end date to April 30, 2019, and waived until that date the right to terminate the merger agreement and abandon the merger due to a failure of the merger to have been consummated on or before March 15, 2019.

Also attached to the recent 8-K report is a Genworth press release dated March 14, 2019. It discusses the last of the above waiver agreements, and says the closing of the merger agreement remains subject to the approval of regulators in Canada and China. The Genworth press release is in the complimentary package offered at the end of this post.

The Delaware Department

On November 8, 2018, the Delaware Department of Insurance (Department) issued a press release announcing a November 24 hearing to be held on China Oceanwide's application to acquire Genworth and certain affiliates. The Department said the hearing would be presided over by Stephen P. Lamb, a former Vice Chancellor of the Delaware Court of Chancery. Judge Lamb is now of counsel in the Corporate and Litigation Departments in the Wilmington, Delaware office of the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP. The Department's press release is in the package offered at the end of this post.

The Hindenburg Letter

On November 28, 2018, the Department held the hearing. The transcript mentioned a 13-page letter Hindenburg Research had submitted to the Department on November 20, 2018. Hindenburg, which was founded by Nathan Anderson, CFA, CAIA, engages in financial research. Hindenburg sometimes takes either a long position or a short position on the shares of public companies it examines. Hindenburg's name stems from what the firm describes as the "epitome of a totally man-made, totally avoidable disaster" where "Almost 100 people were loaded onto a balloon filled with the most flammable element in the universe."

In the Hindenburg letter, which is included in its entirety in the complimentary package offered at the end of this post, the firm discloses its short position on Genworth shares. The firm questions the ability of China Oceanwide to carry out its responsibilities under the merger agreement. Here are some of Hindenburg's comments:

• China Oceanwide has consistently generated negative operating performance.
• It has plugged its performance hole with borrowings, which have reached the point of clear unsustainability.
• Rating agencies have downgraded its key operating subsidiaries, similarly citing their debt load as "unsustainable." Meanwhile, recent media reports have shown that operating subsidiaries are scrambling to sell assets to pay off debt.
• When factoring in questionable "current" assets, the true working capital position of the conglomerate is impaired, and there are red flags in regard to related party receivables.
• The conglomerate has used more short-term debt and unstable equity share pledges to sustain its operations.

One witness at the Department's hearing was Thomas J. McInerney, president, chief executive officer, and a director of Genworth. Another witness was Xiaoxia Zhao, a director of Oceanwide Holding Co., Ltd., and general manager and director of Asia Pacific Global Capital. Zhao is not a native English speaker, and testified through an interpreter. Both witnesses said they were aware of the Hindenburg letter and disagreed with the findings described in it.

Judge Lamb's Recommendations

On December 14, 2018, Judge Lamb submitted to the Department a 44-page letter including his recommendations and a proposed order approving the merger agreement. Here are some comments he provided (shown here without citations) about the Hindenburg letter:

8. The First Email, the Second Email and the Third Email all relate to articles published by Hindenburg Investment Research. Those articles and the Hindenburg Letter purport to raise concerns primarily related to the financial stability of the Applicants and, to a lesser degree, the financial stability of Genworth and the Domestic Insurer.

9. Regarding the financial stability of the Applicants, the conclusions drawn by Hindenburg are inconsistent with the results of the due diligence conducted by Genworth and its outside financial advisors, and the sworn testimony of Mr. Zhao on behalf of the Applicants.

10. Given the analysis conducted by Genworth, the Department and their experts, there is sufficient evidence that the concerns raised by Hindenburg, insofar as such concerns relate to Section 5003(d)(1)(c) regarding the financial condition of any acquiring party being such as might jeopardize the financial stability of the insurer, or prejudice the interests of its policyholders, have been sufficiently addressed.

11. Genworth and the Department have both concluded and the evidence supports the conclusion, that the financial condition of the Applicants is not such as would jeopardize the financial stability of the Domestic Insurer or prejudice the interest of its policyholders.

17. Hindenburg states that it has a short position on shares of Genworth, essentially betting against the success of Genworth and the Proposed Acquisition. Based on this conflicting financial interest, the statements made by Hindenburg in its articles and the Hindenburg Letter should be viewed with skepticism.

The above five comments are from a subsection entitled "Public Comments" in Judge Lamb's letter. The full subsection is in the complimentary package offered at the end of this post.

The Department's Approval

On December 21, 2018, the Department issued a press release announcing Delaware Insurance Commissioner Trinidad Navarro's four-page Final Order and Decision approving the merger agreement between Genworth and China Oceanwide. The press release is in the complimentary package offered at the end of this post.

A Recent Press Release

On April 29, 2019, Genworth issued a press release announcing the parties' tenth waiver agreement. The parties extended the end date to June 30, 2019, and waived until that date the right to terminate the merger agreement and abandon the merger due to a failure of the merger to have been consummated on or before April 30, 2019. The press release is included in the complimentary package offered at the end of this post.

A Recent Article

Also on April 29, Best's Insurance News & Analysis posted an article entitled "Policyholders, Agents Allege Genworth Stripped $410 Million From Long-Term Care Unit." The article, by reporter Frank Klimko, discussed a lawsuit filed in Delaware state court, and said Genworth has filed a motion to dismiss the lawsuit.

General Observations

I have written extensively about long-term care (LTC) insurance in general and about Genworth in particular, but have never tried to evaluate the proposed merger agreement between Genworth and China Oceanwide. Thus I cannot comment about the likelihood of success for the merger. However, after reading the Hindenburg letter, I am concerned about the merger. I am also disturbed, for two reasons, by the manner in which the Department brushed off the letter.

First, I am troubled by McInerney's reference, in his testimony at the hearing, to allegations in a then-pending lawsuit filed in state court in New York against Hindenburg and others. On March 12, 2019 (3½ months after the hearing), the judge in the New York case granted the defendants' motion to dismiss the complaint. The judge ruled, among other matters, that statements the defendants made about the plaintiff were protected expressions of opinion and were not defamatory. (See Eros International v. Mangrove Partners et al., Supreme Court of the State of New York, New York County, Index No. 653096/2017.)

Second, I am troubled by Judge Lamb's assertion that "the Hindenburg Letter should be viewed with skepticism" because of a "conflicting financial interest." Judge Lamb made the statement without acknowledging that the companies' executives, attorneys, accountants, investment consultants, and other advisors have "conflicting financial interests." In due course we will see whether the merger agreement is consummated, and if so, its impact on Genworth's policyholders.

Available Material

I am offering a complimentary 28-page PDF consisting of the explanatory note in Genworth's amended 10-K report (1 page), Genworth's March 14, 2019 press release (3 pages), the Department's November 8, 2018 press release (2 pages), the Hindenburg letter (13 pages), a subsection of Judge Lamb's December 14, 2018 letter (5 pages), the Department's December 21, 2018 press release (2 pages), and Genworth's April 29, 2019 press release (2 pages). Email jmbelth@gmail.com and ask for the May 2019 Genworth package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 310: Long-Term Care Insurance and the National Association of Insurance Commissioners

In No. 308 (posted April 11, 2019), I discussed the insolvency of Senior Health Insurance Company of Pennsylvania (SHIP), a long-term care (LTC) insurance company in run-off. On April 10, the National Association of Insurance Commissioners (NAIC) issued a press release entitled "NAIC Prioritizes Long-Term Care Insurance" and subtitled "State regulators form executive-level task force." The NAIC's press release is in the complimentary package offered at the end of this post.

The New Task Force

The chair of the new NAIC task force is Virginia Commissioner Scott A. White, and the vice chair is Colorado Commissioner Michael Conway. The first meeting of the task force is tentatively scheduled for Kansas City in connection with what the NAIC calls an "Insurance Summit" relating to "Where Innovation Meets Regulation." It is not surprising that insurance regulators in Florida (home of many retirees), Pennsylvania (home of Penn Treaty and SHIP), South Carolina (home of Kanawha), and Virginia (home of Genworth) are among those instrumental in forming the new task force.

On April 12, I sent No. 308 to the Virginia Bureau of Insurance and asked for confirmation of my belief that Commissioner White is chairing the new task force because Genworth is based in Virginia. In response, a spokesperson referred me to the NAIC. On April 15, I made the same request to the NAIC. An NAIC spokesperson responded, but did not answer the question I asked.

The Upcoming Virginia Hearing

On March 15, 2019, the Virginia Bureau of Insurance issued a press release announcing a public hearing to be held in Richmond on May 21. The Bureau said it is inviting public comment on recent LTC insurance premium rate increase requests the Bureau has received from numerous insurance companies. The Bureau said public comments for the hearing record may be submitted in advance by April 22. I am submitting this blog post for the hearing record. The Bureau's press release is in the complimentary package offered at the end of this post.

A Few Articles About LTC Insurance

I have been writing about LTC insurance for three decades. Several of the early articles appeared in my monthly newsletter, The Insurance Forum, which I began in 1974 and ended in 2013. Four of the Forum articles about LTC insurance are discussed briefly here, and are in the complimentary package offered at the end of this post.

My first article about LTC insurance was in the February 1988 issue of the Forum. It was in the form of an open letter to Danny Thomas, the legendary entertainer and philanthropist who founded St. Jude's Children's Research Hospital in Memphis. Thomas had endorsed an LTC insurance policy offered by Union Fidelity Life Insurance Company, but I felt the policy presented serious problems for anyone who purchased it. Thomas did not respond to my open letter, but a company officer told me the company was no longer selling the policy.

Within a few years, many companies had begun selling LTC insurance. The August 1991 issue of Consumer Reports, the magazine of Consumers Union (CU), contained a study entitled "Gotcha! The Traps in Long Term Care Insurance." CU identified some "fair" LTC insurance policies and some "poor" policies, but no "excellent" or "good" policies. I wrote about the CU study in the August 1991 issue of the Forum. I explained that an "excellent" or "good" policy could never be found, because the LTC exposure violates important insurance principles. For example, the potential loss should be of a type that is fortuitous; that is, the potential loss should be of a type that occurs by chance and should not be within the control of the insured person or family members. Another example is that the potential loss should be definite; that is, the potential loss should be of a type in which there is little room for dispute over whether a loss of the type covered by the insurance has occurred.

In the May 1997 issue of the Forum, I wrote about a promotional letter used by General Electric Capital Assurance Company in selling LTC insurance. The letter included this sentence, with the indicated underlining: "Your premiums will never increase because of your age or any changes in your health." I told a company officer that, although the sentence was technically correct, it was deceptive because the policy allowed the company to increase the premiums. The company officer explained why he thought the sentence was not deceptive. However, the company removed the sentence from its promotional letters.

In the July 2008 issue of the Forum, I expressed the opinion that the problem of financing the LTC exposure could not be solved through the mechanism of private insurance. There I expanded on what I had said earlier about the important insurance principles that LTC insurance violates. I also identified several other considerations that render private LTC insurance unworkable.

A Few Blog Posts about LTC Insurance

When I shut down the Forum, I started a blog on which I have continued to write about LTC insurance. Here I describe briefly three such blog posts, and provide links to them.

In No. 191 (posted December 9, 2016), I wrote about a looming catastrophe for the LTC insurance business. I discussed, among other matters, the financial problems at Penn Treaty, an LTC insurance company that had become insolvent in 2009. I also discussed a Congressional hearing that was prompted by sharp premium increases on LTC group insurance coverage purchased by federal government employees.

In No. 223 (posted June 23, 2017), I explained why it is wrong for state governments to help private LTC insurance companies sell the coverage to citizens of those states. I mentioned, among other matters, a mailing to residents of California over the signature of the California governor, and a similar mailing to residents of Indiana over the signature of the Indiana governor. The letters implied that LTC insurance coverage was endorsed by the respective states.

In No. 257 (posted March 12, 2018), I wrote about a major problem that had surfaced at General Electric. The company announced that, after a review of some old LTC insurance policies, the company had to increase its liabilities relating to those policies by about $15 billion. The announcement shocked the market and prompted intense discussion of the problems associated with LTC insurance.

General Observations

I believe that the problem of financing the LTC exposure cannot be solved through the mechanism of private insurance. In my view, there are only two solutions to the problem. One is through personal savings, an approach I described in the July 2008 Forum article.

The other solution is through mandatory coverage that would be part of a federal program of universal health insurance. I say mandatory, because we already have evidence that a national voluntary plan would not be workable. A national voluntary plan called "Community Living Assistance Services and Supports" ("CLASS") was part of the 2010 Patient Protection and Affordable Care Act. Experts in the Department of Health and Human Services tried, without success, to devise a workable voluntary CLASS program, but it never got off the ground and was quietly repealed.

The new NAIC task force is the most recent effort to address the problems associated with LTC insurance. I think it will meet with the same fate as earlier efforts unless it recognizes that "personal savings" and a "mandatory federal program" are the only workable solutions to the problem of financing the LTC exposure.

Available Material

I am offering a complimentary 14-page PDF consisting of the NAIC's press release (1 page), the Virginia Bureau's press release (1 page), and the four Forum articles mentioned in this post (12 pages). Email jmbelth@gmail.com and ask for the April 2019 LTC insurance package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 309: Greg Lindberg and Three Others Indicted by a Federal Grand Jury in North Carolina

On March 18, 2019, in a sealed indictment, a federal grand jury in North Carolina charged Greg E. Lindberg and three others with criminal wrongdoing. On April 2, a magistrate judge unsealed the indictment. On April 3, the case was assigned to U.S. District Judge Max O. Cogburn, Jr. President Obama nominated him in January 2011, and the Senate confirmed him in March 2011, (See U.S.A. v. Lindberg, U.S. District Court, Western District of North Carolina, Case No. 5-19-cr-22.)

The Defendants and the Charges

Lindberg, a resident of Durham, North Carolina, is the founder and chairman of Eli Global, LLC, a Durham-based investment company, and the owner of Global Bankers Insurance Group (GBIG), a Durham-based managing company for several insurance and reinsurance companies. The other defendants, all residents of North Carolina, are John D. Gray, a Lindberg consultant; John V. Palermo, Jr., a vice president of Eli Global; and Robert Cannon Hayes, chairman of the state Republican party in North Carolina. All four defendants were charged with one count of conspiracy to commit honest services wire fraud and one count of bribery concerning programs receiving federal funds, and aiding and abetting. Hayes was also charged with three counts of false statements.

The arrest warrants were issued in Charlotte in March. Each warrant described the offense as follows:

did knowingly combine, conspire, confederate, & agree with one another, and with others known and unknown to the Grand Jury, to devise & intend to devise a scheme and artifice to defraud and to deprive, by means of material false and fraudulent pretenses, representations, & promises, & to transmit and cause to be transmitted by means of wire communication in interstate commerce, any writings, signs, signals, pictures, & sounds for the purpose of executing the scheme & artifice to defraud & deprive, that is, to deprive North Carolina & the citizens of N.C. of their intangible right to the honest services of the COMMISSIONER, an elected State official, through bribery, in violation of 18 U.S.C. §§ 1343 & 1346

The defendants were arrested and arraigned on April 2. They pleaded not guilty, were released with conditions, and each posted an unsecured appearance bond of $100,000. Pretrial reports were filed under seal on April 3. A docket call is set for July 1. The arrest warrant for Lindberg is in the complimentary package offered at the end of this post.

The Indictment

In most states, the insurance commissioner is appointed by the governor. North Carolina is one of the minority of states in which the insurance commissioner is elected. Commissioner Mike Causey heads the North Carolina Department of Insurance (NCDOI). Paragraph 4 of the indictment reads:

GBIG managed several insurance companies across the United States and was subject to regulation by the NCDOI. Beginning in or about September 2017, and continuing through in or about February 2018, GBIG was subject to an ongoing periodic examination conducted by the NCDOI pursuant to North Carolina General Statute § 58-2-131, which provides that the NCDOI shall conduct a financial examination of every domestic insurer when "prudent for the protection of the policy holders or the public," but "not less frequently than once every five years." Following the periodic investigation, GBIG was subject to a remediation agreement it signed with the NCDOI in or about May 2018.

I asked the NCDOI for the remediation agreement. A spokesperson said it is confidential. I also asked for the examination reports. The spokesperson sent me reports for two Lindberg companies: Colorado Bankers Life Insurance Company (a report that is in the complimentary package offered at the end of this post) and Southland National Insurance Corporation. Both reports are as of December 31, 2015, and dated May 10, 2017. I found no reference to a remediation agreement in either report. Other companies mentioned in the reports are:

Colorado Benefits Administration, LLC
Colorado Benefits Administrators, LLC
Dearborn National Life Insurance Company
North Carolina Mutual Life Insurance Company
Preferred Financial Corporation, LLC
SNG Holdings & Reinsurance Company, Inc.
Southern Financial Life Insurance Company
Southland Benefit Solutions, LLC
Southland National Holdings, Inc.
Southland National Reinsurance Corporation

Paragraphs 14, 30, and 31 of the indictment are important. They read as follows:

14. The defendants corruptly gave, offered, and promised things of value to [Causey], including millions of dollars in campaign contributions and through an independent expenditure committee, in exchange for specific official action favorable to GBIG, including the removal of the Senior Deputy Commissioner of the NCDOI responsible for overseeing the regulation, including the pending periodic examination, of GBIG ("Senior Deputy Commissioner A").

30. On or about February 14, 2018, Lindberg and Gray met with [Causey] in a private conference room at the Concord Regional Airport in Concord, North Carolina. Leading up to the meeting, Gray explained that the meeting would be secret, and told [Causey] that Gray and Lindberg would enter the facility through a different door from [Causey] so that nobody would see them together.

31. During the meeting, Lindberg complained about various issues with the NCDOI, including Senior Deputy Commissioner A. Lindberg stated that she was "deliberately and intentionally and maliciously hurting my reputation with other regulators," and that she's "been lying to you to, to hurt my bad name." [Blogger's note: The end of paragraph 31 is exactly the way it reads in the indictment.]

On the website of the NCDOI, the "leadership" section includes a photograph and biographical information for Chief Deputy Commissioner Dr. Michelle Flynn Osborne. There are no other women in the NCDOI leadership. I asked NCDOI whether I am correct in my belief that "Senior Deputy Commissioner A" is Dr. Osborne. The spokesperson said "need to contact FBI." I have not done so, because I know the FBI would have no comment. The indictment is in the complimentary package offered at the end of this post.

Media Coverage

On March 1, 2019, The Wall Street Journal (WSJ) carried a 2,480-word story entitled "Insurance Tycoon Diverts $2 Billion—Greg Lindberg's business practices have little precedent and are under investigation." The reporters were Mark Maremont and Leslie Scism. Here are the opening sentences:

Soon after Greg Lindberg moved into the insurance business, the North Carolina entrepreneur went on a spending spree. He bought nearly 100 companies around the globe, an estate in the Florida Keys, an Idaho lakeside retreat, a Gulfstream jet and the most expensive mansion ever sold in Raleigh, N.C. In September 2018 he added a 214-foot yacht with room for a dozen overnight guests. He also became the largest political donor in North Carolina and lavished money on other races around the country. The cash came, at least in part, from huge sums Mr. Lindberg diverted from the group of life insurance firms he began assembling in 2014, a Wall Street Journal investigation found.

On March 3, Lindberg spokespersons responded to the WSJ story. They said the story omitted key facts and contained numerous inaccuracies.

On April 3, WSJ carried a 591-word story entitled "Financier, State GOP Chairman Indicted," by the same reporters. Here are the opening sentences:

Greg Lindberg, a North Carolina entrepreneur who lent at least $2 billion from insurers he controlled to his own enterprises, was indicted on federal criminal charges of conspiring to bribe the state regulator overseeing his insurers. The indictment rocked North Carolina's Republican Party. One of Mr. Lindberg's three co-defendants in the case is party Chairman and former Congressman Robert "Robin" Cannon Hayes, who allegedly agreed to direct $250,000 from state party coffers to the state insurance commissioner on Mr. Lindberg's behalf. Mr. Hayes, 73 years old, is also alleged to have lied about the scheme to the Federal Bureau of Investigation.

On April 5, WSJ carried an 869-word story entitled "Commissioner Helped Spot Alleged Bribery," by the same reporters. Here are a few of the opening sentences:

In the fall of 2017, Mike Causey, a Republican who had been elected North Carolina's insurance commissioner the year before, was trying to get up to speed on medical-insurance scams. He attended a seminar on the issue in Charlotte, N.C., organized by federal prosecutors. As the event was ending, Mr. Causey said in an interview Wednesday, he mentioned to one of the prosecutors that his department was struggling to understand complex transactions at a couple of life insurers. The prosecutor followed up, requesting more information on the matter. By early 2018, Mr. Causey was secretly recording conversations for the Federal Bureau of Investigation, The Wall Street Journal previously reported, citing people familiar with the matter.

On April 5, The New York Times carried a 1,468-word story entitled "G.O.P. Agenda in North Carolina Is Bruised by a Bout With Scandal." The reporters were Alan Blinder and Richard Fausset. The story included discussions of major political missteps by both political parties, but mostly by Republicans. The story referred to such scandals as the Republican-backed bill limiting the bathroom choices of transgender people, the court-rejected gerrymandering plan, and the recent harvesting of absentee ballots. The story also mentioned that the Republican National Convention in 2020 is scheduled for Charlotte.

General Observations

This is a disturbing case. The details on how the defendants are alleged to have tried to bribe Causey are presented in clinical detail in the indictment. I plan to follow the case, but it is likely to take a long time unless the defendants reach a plea agreement with the federal prosecutors.

The hero in the case is Causey, who tipped off the prosecutors about what was going on, and later cooperated in building the case. It remains to be seen what happens in the case and to Causey's political career.

Available Material

I am offering a complimentary 47-page PDF consisting of the arrest warrant for Lindberg (1 page), the indictment (24 pages), and the examination report on Colorado Bankers Life (22 pages). Email jmbelth@gmail.com and ask for the April 2019 Lindberg package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com