No. 333: Universal Life and Numerous Cost-of-Insurance Lawsuits Against Transamerica

Over the years Transamerica Life Insurance Company has been the defendant in numerous lawsuits stemming from substantial increases in cost-of-insurance (COI) charges in universal life (UL) policies issued by the company. I have written about a few of such cases. Here I discuss several of them, including two on which I had not written previously.

The DCD Lawsuit

On April 30, 2015, Transamerica removed to federal court from a state court in California an individual lawsuit filed by DCD Partners, LLC (DCD), Personal Involvement Center, LLC (PIC), and Reverend Dr. J. Benjamin Hardwick (JBH). DCD owns the policies at issue in this case. PIC is a Nevada LLC. JBH is the founder and trustee of PIC. I have not written previously about this case. (See DCD v. Transamerica, U.S. District Court, Central District of California, Case No. 2:15-cv-3238.)

The case was assigned to Senior U.S. District Judge Christina A. Snyder. President Clinton nominated her in January 1997. The Senate confirmed her in November 1997. She assumed senior status in November 2016.

On June 19, 2015, DCD filed an amended complaint. On July 20, 2015, Transamerica filed a motion to dismiss the amended complaint. On September 8, 2015, DCD filed a second amended complaint. Here are some lightly edited excerpts from the second amended complaint (the full second amended complaint is in the complimentary package offered at the end of this post):

4. Historically, inner-city African-Americans have experienced difficulties in obtaining life insurance. Therefore, JBH, pastor of the Praise of Zion Baptist Church, worked with Transamerica to develop a race-neutral life insurance program that would provide benefits to the members of the congregation to, for example, pay burial expenses. Pursuant to the program, an investor, in exchange for a portion of the benefits, would pay the premiums on the policies issued on members of the congregation who chose to take part in the program. The remainder of the benefits would be provided to the named insured's designated beneficiary and non-profit entities that provide services to youth and families while improving the quality of life in the South Los Angeles community. In March 2004 Transamerica issued 1,229 policies (Pool 1) under the program. In November 2004 Transamerica issued an additional 1,171 policies (Pool 2).

5. For nearly a decade, Transamerica collected millions of dollars in premiums on these charitable life insurance policies, and the policies provided benefits to their insureds, their families, and various non-profit entities. The payment of the life insurance benefits enabled the families of the insureds to pay for funeral and other expenses upon the deaths of their loved ones. Unfortunately, Transamerica recently more than doubled the amounts charged for the policies.

25. Each policy provides a death benefit totaling $275,000. Upon the death of an insured, Transamerica makes three payments: (1) $15,000 to the insured's beneficiary for funeral and other expenses; (2) $35,000 to PIC (which is distributed among various non-profit entities and projects); and (3) $225,000 to the investor paying the premiums.

28. The aggregate cash value of the policies at the time of the increase in rates was approximately $260,000.

48. On February 18, 2014, Transamerica delivered a notice of payment due for Pool 1 that increased the projected remittance amount by an additional 62.5 percent. In the fall of 2014, Transamerica delivered a notice of payment due for Pool 2 that increased the projected remittance amount by an additional 64.8 percent.

49. Prior to the increases in the projected remittance amounts, Plaintiffs paid approximately $1,831,589 in annual premiums for the policies. As of January 2015, projected annual premium payments were $4,318,873, representing a 135.8 percent increase in annual premiums.

The second amended complaint includes six claims for relief. They are breach of written contract, breach of the covenant of good faith and fair dealing, tortious breach of the duty of good faith and fair dealing, unfair competition, declaratory relief, and negligent misrepresentation.

On October 8, 2015, Transamerica filed a motion to dismiss portions of the second amended complaint. On December 23, 2015, the judge denied the motion.

On March 7, 2016, the judge set the trial to begin May 6, 2017. On January 27, 2017, Transamerica filed a motion for summary judgment. On February 25, 2017, the judge postponed the trial until August 29, 2017. On August 9, 2017, the judge granted in part and denied in part Transamerica's motion for summary judgment.

The trial was in two parts. The first part, before a jury, was on DCD's claims for breach of contract and breach of the implied covenant of good faith and fair dealing. The second part, before the judge, was on DCD's claims relating to unfair competition and declaratory relief.

The jury portion of the trial began September 5, 2017 and ended September 13 after five trial days. The jury found in favor of the plaintiffs. (The jury verdict form is in the complimentary package offered at the end of this post.)

The bench portion of the trial began February 6, 2018. On December 13, 2018, the judge handed down a final judgment. She said DCD is entitled to recover from Transamerica $9,761,403.89 (including prejudgment interest), postjudgment interest, and injunctive relief. She denied Transamerica's motion for a new trial, and its motion for judgment as a matter of law. She also denied the following: DCD's claim for violation of California's Unfair Competition Law, DCD's request for declaratory relief, DCD's claim for tortious breach of the duty of good faith and fair dealing, DCD's claim for negligent representation, DCD's claim for attorney fees, and the claims of the other two plaintiffs. (The final judgment is in the complimentary package offered at the end of this post.)

On January 8, 2019, Transamerica filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit. The case number there is 19-55037. At this writing, the appellate docket is lengthy.

The Gail Thompson Lawsuit
On June 18, 2018, Gail Thompson, a California citizen in her late 60s, filed a complaint in this class action lawsuit. The case was assigned to Judge Snyder. I have not written previously about this case. (See Gail Thompson v. Transamerica, U.S. District Court, Central District of California, Case No. 2:18-cv-5422.)

Thompson is owner and primary beneficiary of a TransSurvivor 115 UL policy issued around July 1, 2000, with a face amount of $500,000. On September 19, 2018, Transamerica filed a motion to dismiss the case. On December 26, 2018, the judge denied the motion.

On May 8, 2019, Thompson filed an amended complaint that included eight additional named plaintiffs. They are residents of Colorado, Michigan, New York, Pennsylvania, and Texas. The additional named plaintiffs own policies with a total face amount of $8.2 million. The complaint refers to "monthly deduction rates" (MDRs) rather than "cost-of-insurance" (COI) rates.

The complaint alleges that Transamerica "suddenly, unilaterally, and massively" increased MDR rates on various policies. As examples, some of the increases were 47 percent or 58 percent. Others were 39 percent followed by another 39 percent in each of the following two years "effectively ratcheting the compounded increase to 169% after the third contemplated increase." Here are the final three paragraphs of the "Nature of the Action" section of the amended complaint:

6. In its notices to Policyholders announcing the MDR Increases, Transamerica stated that the increases are "in addition to the customary increases that are associated with age," and attributed them to Transamerica's "current expectations about our future costs to provide this coverage." Transamerica's true reasons for imposing the drastic MDR Increases, however, were (a) to increase its own projected future profits at the expense of the Policyholders, thereby contravening the contractual prohibitions against recouping past losses or imposing MDR Increases for reasons other than legitimate cost factors, (b) to avoid its own contractual obligations to pay guaranteed interest under the Policies and to provide no-lapse coverage under the No-Lapse Endorsement, thereby contravening its duty to treat Policyholders in good faith, and (c) to induce policy terminations by elderly Policyholders, also in bad faith.

7. As a direct result of the MDR Increases, the largely elderly Policyholders are now suddenly facing termination of their life insurance at a time when they can no longer obtain replacement coverage.

8. As alleged below, the MDR Increases violate the express and implied terms of the Policies and were imposed on the Policyholders in bad faith and in contravention of California's Unfair Competition Law ("UCL"), and a violation of California's Elder Abuse Statute. Plaintiffs in this action seek injunctive and equitable relief, and ancillary damages, to halt and reverse Transamerica's massive MDR Increases. These increases have already injured Plaintiffs and, if allowed to proceed, will continue to cause irreparable injury to Plaintiffs and other members of the putative classes (collectively "Class Members").

The three classes of policyholders are a National Class, California Subclass I, and California Subclass II (Senior Policyholders.) The six causes of action are: (1) Breach of Contract—All Classes, (2) Contract Breach of the Implied Covenant of Good Faith and Fair Dealing—Plaintiff Thompson and California Subclass I, (3) Tortious Breach of the Duty of Good Faith and Fair Dealing—Plaintiff Thompson and California Subclass I, (4) Injunctive and Restitutionary Relief Pursuant to UCL—Plaintiff Thompson and California Subclass I, (5) Declaratory Relief—All Plaintiffs and All Classes, and (6) Elder Abuse—Plaintiff Thompson and California Subclass II. (The amended complaint is in the complimentary package offered at the end of this post.)

On May 20, 2019, the judge referred the case to a private mediator. On August 13 the judge extended to September 24 the deadline for the plaintiffs to file a motion for class certification.

The Lebbin Lawsuit
I have posted six items about this individual lawsuit. The most recent post was No. 331 (September 6, 2019). I expect to write more about the case, which relates to UL in the instance of an insured who recently reached age 102. (See Lebbin v. Transamerica, U.S. District Court, Southern District of Florida, Case No. (9:18-cv-80558.)

The Feller Lawsuit
I have posted three items about this class action lawsuit. The most recent was No. 302 (March 1, 2019). The case was handled by Judge Snyder. I discussed her granting of final approval to a $195 million settlement in February 2019. (See Feller v. Transamerica, U.S. District Court, Central District of California, Case No. 2:16-cv-1378.)

The Hill Lawsuit
I discussed this state court lawsuit briefly in No. 245 (December 21, 2017). On February 2, 2018, the Alabama Supreme Court, in a split decision, denied a petition for a writ of mandamus. I am attempting to find out more about what transpired in this case. (See Hill v. Transamerica, Circuit Court, Jefferson County, State of Alabama, Case No. 2016-6000401.)

Other Lawsuits Against Transamerica
In the course of preparing this post, I encountered seven other lawsuits against Transamerica. I have not reviewed them, but I list them here for anyone who might be interested. Each is or was in the U.S. District Court for the Central District of California, and each is or was assigned to Judge Snyder. Here, as of this writing, are the names, case numbers, and dates of the first and last entries on each docket:

Brighton Trustees v. Transamerica, 2:19-cv-4210, 5/15/19-9/6/19
Hamra v. Transamerica, 2:18-cv-6262, 7/19/18-6/26/19
Lois Thompson v. Transamerica, 2:16-cv-3238, 5/16/16-7/10/17
Lyons v. Transamerica, 8:16-cv-973, 5/26/16-6/28/16
Wells Fargo Bank v. Transamerica, 2:19-cv-6478, 7/25/19-9/6/19
Wells Fargo Bank v. Transamerica, 2:19-cv-6791, 8/5/19-9/6/19
White v. Transamerica, 2:16-cv-3578, 5/23/16-6/28/16

General Observations

My purpose in preparing this post is to report on the DCD and Gail Thompson lawsuits, which I had not discussed previously. This is by no means an exhaustive discussion of the subject of COI rate increases associated with UL policies. I have written not only several blog posts but also earlier articles on the subject in The Insurance Forum, a monthly newsletter I published from January 1974 through December 2013.

I have written extensively about problems associated with UL and have offered suggestions on how to address the problems. In No. 294 (November 8, 2018), I identified "the administrative problem" as one of the most important. With regard to that problem, I made several suggestions. One was that state insurance regulators should expand the requirements imposed prior to approval of UL policies, such as the filing of sample annual reports to be issued to policyholders and agents explaining the policies. A second suggestion was that state insurance regulators should require prior approval of COI increases, just as they require prior approval of increases in the premiums for long-term care insurance policies.

Available Material

I am offering a complimentary 87-page PDF consisting of the second amended complaint in the DCD case (32 pages), the jury verdict form in the DCD case (2 pages), Judge Snyder's final judgment in the DCD case (4 pages), and the amended complaint in the Gail Thompson case (49 pages). Email jmbelth@gmail.com and ask for the September 2019 package about the Transamerica UL COI litigation.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 332: Long-Term Care Insurance—An Update on the General Electric Litigation and Other Matters

In No. 329 (August 28, 2019), I discussed the whistleblower report by Harry Markopolos on accounting issues at General Electric Company (GE), with special attention to GE's accounting for its long-term care (LTC) insurance legacy problems. Here is an update on some matters I addressed there, and other related items.

The NAIC LTC Insurance Task Force Meeting

In No. 310 (April 22, 2019), I discussed the formation of a new LTC insurance task force by the National Association of Insurance Commissioners (NAIC). The chairman of the new task force is Scott A. White, the Virginia insurance commissioner. On August 4, 2019, the new task force met during the summer national meeting of the NAIC in New York City. I obtained the minutes from the NAIC website. (The minutes are in the complimentary package offered at the end of this post.) At the outset of the meeting,

Commissioner White said state insurance regulators have been grappling with the issue of long-term care insurance (LTCI) for many years. Several different NAIC working groups and task forces have been focused on addressing the inconsistency among the states in rate review practices and concerns over potential reserve inadequacies within the industry... Commissioner White said it is also fair to say that as state insurance regulators have had discussions, there are strong views but a lack of consensus on how to move forward.

I have said it more bluntly. In No. 313 (May 20, 2019), for example, I said the new task force will "kick the can down the road" as its predecessors have done.

Commissioner White went on to say the new task force has held five regulator-only meetings and identified six "workstreams" to accomplish the goals of the new task force: (1) Multistate Rate Review Practices, (2) Restructuring Techniques, (3) Reduced Benefit Options and Consumer Notices, (4) Valuation of LTCI Reserves, (5) Non-Actuarial Variations, and (6) Data Call Design and Oversight. Commissioner White also said:

The Task Force is currently in the planning stages and will likely continue through the end of August. He said he anticipates some of the workstreams will become full working groups, with significant interaction in open sessions. However, some workstreams will continue to operate in a confidential setting until work products begin to develop, at which time the Task Force will conduct its business in open session. The Task Force has been charged with delivering a proposal on these and other related matters to the Executive (EX) Committee by the 2020 Fall National Meeting.

The A. M. Best Commentary on LTC Insurance

On August 28, 2019, A. M. Best, a major rating firm, issued a five-page commentary entitled "GE's Long-Term Care Exposure Magnifies Counterparty Risk for Several Insurers," and subtitled "Uncertainty about LTC reserving complicates insurers' analysis of counterparty exposure." Here is the first paragraph of the commentary:

Long-term care (LTC) insurance has been the source of many concerns and discussions in the industry for some time. Sentiment surrounding LTC results has been negative for years, driven by poor performance. The poor performance was due to inadequate pricing related to factors such as low interest rates, lapse rates, mortality, morbidity, and policyholder utilization assumptions, among others. These factors led to large losses and significant reserve increases on inforce business and drove many insurers to depart from the market.

One exhibit in Best's commentary shows information from reinsurance exhibits in the 2018 statutory statements filed in March 2019 by 20 insurance companies. The exhibit focuses on two reinsurance companies owned by GE: Employers Reassurance Corporation and Union Fidelity Life Insurance Company. Best refers to those two reinsurance companies together as the "ERAC Group."

The exhibit shows the amount of reserve credit taken by each of the 20 insurance companies for reinsurance with the ERAC Group. For each of the 20 insurance companies, the reserve credit taken for reinsurance with the ERAC Group is shown as a percentage of the ceding insurance company's capital and surplus. Of the 20 insurance companies, seven have at least $1 billion of reserve credit taken for reinsurance with the ERAC Group. Those seven companies, with the ratio (as a percentage) of reserve credit taken for reinsurance with the ERAC Group to capital and surplus shown in parentheses, are: Genworth Life of New York (1,403.8%), Genworth Life and Annuity (519.3%), Genworth Life (443.8%), Lincoln Benefit Life (410.8%), American United Life (194.8%), Allianz Life of North America (46.0%), and Massachusetts Mutual Life (14.4%).

Shareholder Litigation Against GE

In No. 257 (March 12, 2018) and No. 298 (December 10, 2018), I wrote about shareholder litigation that began in November 2017 against GE and several of its current and former top officers. The plaintiffs are large shareholders who allegedly suffered losses because of major charges taken by GE in connection with its operations, including its legacy LTC insurance problems. There were several related lawsuits, all of which were consolidated and assigned to U.S. District Judge Jesse M. Furman. (See, for example, Sjunde AP-Fonden v. GE, U.S. District Court, Southern District of New York, Case No. 1:17-cv-8457.)

On September 20, 2018, GE moved to dismiss the consolidated complaint. On October 12 the plaintiffs opposed the motion to dismiss the consolidated complaint.

On February 27, 2019, new plaintiffs filed another lawsuit against GE, and said the new lawsuit was related to the old lawsuits. The new lawsuit was accepted as related to the old lawsuits and was assigned to Judge Furman.

On March 4 the judge ordered all the parties to confer and submit to him by March 13 a joint letter with suggestions on how to proceed. On March 13 the parties submitted the letter. On March 15 the judge adopted the suggestion and ordered the parties to submit to him, within two weeks after he rules on the pending motion to dismiss the old consolidated lawsuit, another joint letter on how to proceed. When I posted No. 329 on August 28, the judge had not yet ruled on the motion to dismiss the old consolidated lawsuit.

On August 29 the judge issued an opinion and order relating to the motion to dismiss the old consolidated lawsuit. He granted GE's motion to dismiss the old consolidated lawsuit

except as to (1) Plaintiffs' Section 10(b) and Rule 10b-5 claims concerning (a) factoring in GE's 2016 Form 10-K and (b) GE's failure to disclose factoring in its Class Period financial statements, which survive against GE and Bornstein; and (2) for now, Plaintiffs' Section 29(a) claims against each Individual Defendant.

The comments quoted above are in the concluding section of Judge Furman's lengthy and complex opinion and order. He went on to explain why he has decided to give the plaintiffs an opportunity to amend the claims he dismissed. He ordered the parties to confer and submit to him, by September 19, a joint letter with their suggestions about the next steps in the litigation. One possibility is the filing of what would be the fifth amended consolidated complaint. (The full opinion and order is in the complimentary package offered at the end of this post.)

General Observations

Several non-regulators made comments at the August 4 meeting of the NAIC's new LTC insurance task force. However, those non-regulators were handicapped because they had no knowledge of what had happened at the five regulator-only (secret) sessions. Regulators at the August 4 meeting undoubtedly have in their possession a summary of the discussions that occurred during the secret sessions. I would like to see the summary. My address for regular mail is P.O. Box 245, Ellettsville, IN 47429. If an envelope with no return address appears in my regular mail, I would be grateful.

Best's commentary on LTC insurance is copyrighted, and Best denied my request for permission to include it in the complimentary package I am offering to readers at the end of this post. However, on September 4 Best issued a press release about the commentary, and has no objection to my offering the press release, which is in the package. The press release includes a link for obtaining access to the commentary.

Available Material

I am offering a complimentary 71-page PDF consisting of the minutes of the August 4 meeting of the NAIC's new LTC insurance task force (13 pages), Best's September 4 press release about its commentary on GE's LTC exposure (1 page), and Judge Furman's August 29 opinion and order (57 pages). Email jmbelth@gmail.com and ask for the September 2019 package about LTC insurance and GE.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 331: The Age 100 Problem—A Further Update on the Lebbin Lawsuit Against Transamerica

I have been writing for 18 years about "the age 100 problem" in life insurance. In No. 327 (August 19, 2019), I posted an update about a lawsuit filed by Gary H. Lebbin, a centenarian, and the Lebbin-Spector Family Trust ("Trust"). The trustees of the Trust are Gary's two children. The defendant is Transamerica Life Insurance Company. Here I provide another update. (See Lebbin v. Transamerica, U.S. District Court, Southern District of Florida, Case No. 9:18-cv-80558.)

Recent Developments

Several major 2019 developments in the case are described in No. 327. On January 30, by which time Gary was afflicted with dementia, Transamerica offered to settle with Gary for $10,000. On February 5 Gary accepted the offer and withdrew from the lawsuit. On February 22 the Trust filed an amended complaint that omitted Gary as a plaintiff, leaving the Trust as the only plaintiff. The amended complaint included five counts: (1) declaratory relief, (2) breach of contract, (3) breach of the covenant of good faith and fair dealing, (4) reformation, and (5) rescission.

On July 19 the judge issued an order granting the Trust's claim for breach of contract. The other four counts were denied by the judge or later withdrawn by the Trust. On July 30 the judge held a ten-minute conference. He canceled the trial, which had been set for August 5, because the parties said they had resolved the case. (A transcript of the conference is in the complimentary package offered at the end of this post.)

On August 9 the judge issued an order setting the briefing schedule to resolve the issue of damages on the Trust's breach-of-contract claim. The issue of damages is the only remaining issue in the case. The judge ordered the Trust to file, by August 30, a motion for summary judgment (MSJ) on damages. He also provided for the filing of possible further briefs on September 30, October 21, and November 8.

The Trust's MSJ on Damages

On August 30 the Trust filed its MSJ on damages. The MSJ incorporates a memorandum of law. Here is the concluding sentence of the MSJ (the full MSJ is in the complimentary package offered at the end of this post):

For the foregoing reasons, [the Trust] respectfully request[s] that the Court enter summary judgment in [its] favor as to damages, awarding [the Trust] a return of all premiums paid to Transamerica in the sum of $1,670,140.91, along with prejudgment interest.

The prejudgment interest rates the Trust suggests are the Florida statutory rates at the time of each premium payment. The Trust does not anticipate a dispute over the calculation of the damages, and says it will provide the interest figure prior to the entry of final judgment.

General Observations

The MSJ provides a detailed discussion of the Trust's reasoning. It is important to note that the Trust claims damages for its breach-of-contract claim, which the judge had granted, rather than its rescission claim, which the judge had denied. The MSJ discusses in detail the distinction between a breach-of-contract claim and a rescission claim.

The judge's briefing schedule provides that Transamerica's reply brief, or its cross-motion for summary judgment on the damages relating to the breach-of-contract claim, is due September 30. I plan to report further developments.

Available Material

I am offering a complimentary 32-page PDF consisting of the transcript of the judge's July 30 conference (9 pages) and the Trust's August 30 MSJ on damages (23 pages). Email jmbelth@gmail.com and ask for the September 2019 package about Lebbin v. Transamerica.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 330: A Special Request

A close friend of mine has been diagnosed with amyotrophic lateral sclerosis (ALS). The mission of the ALS Association (www.alsa.org) is

To discover treatments and a cure for ALS, and to serve, advocate for, and empower people affected by ALS to live their lives to the fullest.

I would be grateful to readers of this blog who join me in contributing to the ALS Association (P.O. Box 37022, Boone, IA 50037-0022). Please notify me at jmbelth@gmail.com. I will tell my friend of your kindness unless you prefer anonymity. Thank you.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 329: Long-Term Care Insurance—The Markopolos Whistleblower Report on General Electric

On August 15, 2019, Harry M. Markopolos released a 175-page whistleblower report alleging that General Electric Company (GE) is a "bigger fraud than Enron" and is "headed toward bankruptcy." One part of the report relates to GE's accounting for its long-term care (LTC) insurance legacy problem. Another part relates to GE's accounting for a 2017 investment involving a pair of oil and gas businesses. In this post I discuss only the LTC insurance portion of the report.

Harry Markopolos

Markopolos, now aged 62, was born in Erie, Pennsylvania. He received a bachelor's degree in business from Loyola College in Maryland in 1981, and a master's degree in finance from Boston College in 1997. He is a Chartered Financial Analyst and a Certified Fraud Examiner. His name is familiar to those who followed the collapse of the massive Ponzi scheme operated by Bernard Madoff.

Several books have been written about Madoff. One is a 2010 book entitled No One Would Listen: A True Financial Thriller, which is a personal account by Markopolos. David Einhorn, a prominent hedge fund manager and short seller, wrote the December 2009 foreword. In view of recent developments, it is ironic that Einhorn's foreword asks: "How statistically different was Bernie Madoff's track record from General Electric's 100-quarter record of continual earnings growth...?"

Another is a superb 2011 book entitled The Wizard of Lies: Bernie Madoff and the Death of Trust by Diana B. Henriques of The New York Times. She mentions Markopolos prominently because he was one of the first to become suspicious of Madoff. She also describes his several unsuccessful efforts to persuade the Securities and Exchange Commission (SEC) and other regulators to investigate Madoff.

The Markopolos Report

The Markopolos report includes a six-page summary and one page of disclosures. Here is the first paragraph of the summary (the full summary and the page of disclosures are in the complimentary package offered at the end of this post):

This is my accounting fraud team's ninth insurance fraud case in the past nine years and it's the biggest, bigger than Enron and WorldCom combined. In fact, GE's $38 billion in accounting fraud amounts to over 40% of GE's market capitalization, making it far more serious than either the Enron or WorldCom accounting frauds. Enron's CEO Jeff Skilling resigned on August 14, 2001, Enron was downgraded to junk status on November 28, and it filed for bankruptcy protection on December 2. On March 11, 2002, WorldCom received document requests from the SEC related to its accounting and loans to officers. On April 30 CEO Bernie Ebbers resigned regarding his $400 million in personal loans from the company. Then on June 25 CFO Scott Sullivan was fired before WorldCom filed Chapter 11 on July 21. It has been 17 years since WorldCom so we are long overdue for something like GE. As you read our slide deck, you will see that GE utilizes many of the same accounting tricks Enron did, so much so that we have taken to calling this the "GEnron" case.

To obtain the Markopolos report, go to www.gefraud.com. Indicate your name and email address, and confirm you have read the disclosures.

The GE Statements

On August 15, 2019, GE issued a two-page statement entitled "GE Addresses Claims by Harry Markopolos." Here are the first paragraph and the first two sentences of the second paragraph (the full statement is in the complimentary package offered at the end of this post):

The claims made by Mr. Markopolos are meritless. The Company has never met, spoken to or had contact with Mr. Markopolos, and we are extremely disappointed that an individual with no direct knowledge of GE would choose to make such serious and unsubstantiated claims. GE operates at the highest level of integrity and stands behind its financial reporting. We remain focused on running our businesses every day, following the strategic path we have laid out.

Mr. Markopolos openly acknowledges that he is compensated by unnamed hedge funds. Such funds are financially motivated to attempt to generate short selling in a company's stock to create unnecessary volatility.

The statement went on to address the allegations. GE also issued investor updates on August 16 and 19. Here is a paragraph about LTC insurance (underlining in the original) in the August 19 update (the two updates are in the complimentary package offered at the end of this post):

It's important to recognize that there are several characteristics of industry long-term care blocks of business, including coverage and cash benefit options. In addition, GE is a reinsurer that has a variety of contractual relationships and is not responsible for 100% of every claim on every life. And recall how reserves work: the 2017 $15 billion increase to statutory reserves, to be recognized through 2024, was established to cover future claims in addition to claims already incurred.

The Fitch Report

On August 20, 2019, Fitch Ratings, a major rating firm, released a 16-page special report entitled "U.S. Long-Term Care Update: Legacy Exposures Continue to Plague Insurers." The fact that Fitch released the report five days after release of the Markopolos report presumably was a coincidence, but the Fitch report caused more problems for GE. Here is the first paragraph of the executive summary:

Highest Risk Product Exposure. Fitch Ratings ranks legacy individual long-term care (LTC) product exposures among the riskiest products marketed by U.S. life insurers. Our concerns mirror those of insurers that divested this risk or exited the market altogether, including volatile performance, high reserve and statutory capital requirements, as well as heightened exposure to interest rate-related risks. These all have the potential to introduce volatility in companies' capital and earnings generation capabilities for years after policies are issued.

The Fitch report includes a table entitled "Fitch's Individual LTC Observations by Insurer." The table shows, among other things, the "reserve adequacy" of 16 companies that currently offer or have offered LTC insurance. The five companies with "below average" reserve adequacy are Genworth Financial, GE Insurance Operations (including Employers Reassurance Corporation and Union Fidelity Life Insurance Company), UNUM Group, AEGON Americas, and Senior Health Insurance Company of Pennsylvania (SHIP). The seven companies with "above average" reserve adequacy are Manulife Financial, MetLife, Thrivent Financial, CNO Financial Group, Northwestern Mutual, New York Life, and Massachusetts Mutual.

An appendix in the Fitch report provides an update on SHIP. The final paragraph of the update reads:

In 2018 the company also reported reserve strengthening actions of approximately $359 million, driven by revisions in key morbidity, claims cost, lapse and investment yield assumptions. This, along with SHIP's reported asset impairments, led to a reported surplus deficit of about $466.9 million as of December 31, 2018. While we note the company continues to work closely with regulatory bodies, Fitch views SHIP as remaining on-track to becoming the industry's next insolvent LTC writer requiring guaranty fund assessments from the industry.

Regular readers of this blog know I have posted several items about SHIP. The most recent is No. 308 (April 11, 2019) entitled "Long-Term Care Insurance and the Insolvency of Senior Health Insurance Company of Pennsylvania."

Fitch denied my request for permission to include its LTC update in the complimentary package I am offering at the end of this post. However, the firm issued a press release on how to access the report. (The press release is in the complimentary package offered at the end of this post.)

The Litigation

In No. 298 (December 10, 2018), I posted my most recent discussion of the massive legacy problem at GE relating to LTC insurance. I said the then lawsuit, which had been consolidated with other similar lawsuits, was in the hands of U.S. District Judge Jesse M. Burman of the Southern District of New York. On September 20, 2018, GE filed a motion to dismiss the latest consolidated complaint, along with documents in support of the motion. On October 12 the plaintiffs opposed the motion to dismiss the latest consolidated complaint.

On February 27, 2019, new plaintiffs filed a lawsuit against GE, along with a statement that the new case was related to the old case. The next day, the new case was accepted as related to the old case and assigned to Judge Burman. On March 4 the judge ordered the parties in both cases to confer and submit to him a joint letter on how to proceed. On March 13 the parties submitted the joint letter. On March 15 the judge adopted the suggestion that the parties submit another joint letter on how to proceed within two weeks after the judge rules on the pending motion to dismiss the old case. At this writing (late August) the judge has not ruled on the motion to dismiss the old case. (The new case is Touchstone v. GE, U.S. District Court, Southern District of New York, Case No. 1:19-cv-1876.)

General Observations

The Markopolos report is complex, and I do not understand its full implications. Nor am I aware of the status of any investigation of GE by the SEC or any other regulatory agencies. I plan to write again when I learn of any significant developments.

In this post I showed the opening section of GE's August 15 statement about the Markopolos report. In my opinion, the ad hominem attack is unfortunate. It is standard practice for an independent researcher to maintain a distance from the object of the research. An important reason is that to share the research in advance would provide the object of the research with an opportunity to delay and possibly prevent publication in a variety of ways. That is why independent journalists do not share the results of their work in advance with the objects of their news stories.

Available Material

I am offering a complimentary 20-page PDF consisting of the summary and disclosures in the Markopolos report (7 pages), the three GE statements about the Markopolos report (10 pages), and the Fitch press release about the Fitch report (3 pages). Email jmbelth@gmail.com and ask for the August 2019 package about LTC insurance and the Markopolos report on GE.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 328: Long-Term Care Insurance, Universal Life Insurance, and the Hybrids

I have been writing for 31 years about problems associated with long-term-care (LTC) insurance policies, and for 38 years about problems associated with universal life (UL) insurance policies. Now some companies are offering "hybrid" policies that incorporate LTC insurance and UL insurance in a single policy. I first heard about these hybrid policies a year or two ago, and began wondering about the question of whether the problems of LTC insurance and UL insurance can be solved by combining both types of insurance in one policy. My answer is no.

Recently the National Association of Insurance Commissioners (NAIC) and the American Academy of Actuaries (Academy) began studying hybrid policies. Those developments prompted this blog post.

LTC Insurance

I have long taken the position that the problem of financing the LTC exposure cannot be solved through the mechanism of private insurance. The reason is that the LTC exposure violates important insurance principles. The most extensive explanation of my views is in the July 2008 issue of The Insurance Forum, the monthly newsletter I published from January 1974 until December 2013. The article is entitled "The Shortcomings of Private Insurance in Financing Long-Term Care." Here are two paragraphs from the article:

The cost of LTC is high, and can be financially devastating for individuals and their families. When an individual cannot care for himself or herself, the cost of care—in the individual's home, in a nursing home, or in some other facility—can wipe out a family's life savings.

The fact that the cost of LTC is high and potentially devastating does not necessarily mean the problem of financing it can be solved through private insurance. The LTC exposure fails to meet at least three important conditions that are viewed by students of insurance as necessary for the proper functioning of private insurance.

The article goes on to describe three important principles the LTC exposure violates, and several other characteristics of LTC insurance that create problems. The full article is in the complimentary package offered at the end of this post.

UL Insurance

UL insurance has long been touted as solving certain problems associated with traditional cash-value life insurance. However, I have taken the position that UL insurance, while it has characteristics that differ from those of traditional cash-value life insurance, introduces new problems into the life insurance market. My first article about UL insurance is in the November 1981 and December 1981 issues of the Forum. The article is entitled "The War Over Universal Life." Here is the opening paragraph:

In recent months, the life insurance industry and the general public have been subjected to a blitzkrieg by the proponents of so-called universal life insurance. In response, certain segments of the life insurance business have begun to fight back. I believe that some of the claims made for universal life are justified, but that some of the claims are exaggerated if not false. The purposes of this article are to describe universal life, comment on some of the claims made by its advocates, and discuss some of the implications of universal life for the life insurance industry and the public.

The full article is in the complimentary package offered at the end of this post. The most recent discussion of my views on UL insurance is in No. 294 (November 8, 2018). It is entitled "Universal Life Policies—a Disaster for Life Insurance Companies and Their Policyholders."

The NAIC

Because of the failure of Penn Treaty, a major LTC insurance company, and because of large operating losses and the need for substantial premium increases at other LTC insurance companies, the NAIC has long had a keen interest in LTC insurance. In April 2019 the NAIC created a task force to address LTC insurance. Virginia Commissioner Scott A. White chairs the task force. In May 2019 he held a public hearing in Richmond. I expressed my views on LTC insurance in No. 310 (April 22, 2019) and submitted them for the hearing record.

More recently the NAIC asked its Life Actuarial Work Group to study hybrid policies. E. Perry Kupferman, FSA, MAAA, chairs the NAIC work group. He is Chief Life Actuary in the California Department of Insurance. Prior to state service, he worked at various insurance companies.

The Academy

As noted above, the Academy has begun studying hybrid policies. In July 2019 it released an exposure draft of a "Long-Term Care Combination Product Valuation Practice Note." Here are the first three paragraphs of the introduction to the exposure draft:

The purpose of this practice note is to provide information to actuaries on current and emerging practices in which their peers are engaged with respect to the considerations in the statutory, Generally Accepted Accounting Principles and tax valuation of long-term care combination products.

This practice note was prepared by a work group organized by the Health Practice Council of the American Academy of Actuaries. The work group was charged with creating the first practice note on long-term care combination product valuation.

This practice note is not an interpretation of actuarial standards of practice and is not a promulgation of the Actuarial Standards Board, is not an actuarial standard of practice and it is not binding upon any actuary. It is not a definitive statement as to what constitutes generally accepted practice in the area under discussion. Events occurring subsequent to this publication of the practice note may make the practices described in this practice note irrelevant or obsolete.

The full exposure draft is in the complimentary package offered at the end of this post. Warren Jones, MAAA, FSA, chairs the Academy's work group. He is in the Dallas/Fort Worth office of PricewaterhouseCoopers LLP.

General Observations

In recent years, in response to my blog posts about LTC insurance premium increases and about UL insurance cost-of-insurance increases, I have received many comments from frustrated policyholders. It saddens me to have to tell such individuals that I am neither an attorney nor a consultant, and that I am not in a position to comment beyond what I have written. In other words, all I can do is sympathize with them and provide them with easy access to articles and posts I have written.

In the case of LTC insurance, I remain convinced that the LTC exposure cannot be dealt with through private insurance. In the case of UL insurance, I remain convinced that the problems cannot be solved without a massive improvement in the record-keeping systems used by the insurance companies. I believe that combining LTC insurance and UL insurance into a single policy of mind-boggling complexity will not solve the problems associated with those types of insurance.

Available Material

I am offering a complimentary 42-page PDF consisting of the July 2008 Forum article (5 pages), the November/December 1981 Forum article (8 pages). and the July 2019 exposure draft of the actuarial practice note (29 pages). Email jmbelth@gmail.com and ask for the August 2019 package about LTC insurance and UL insurance.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 327: The Age 100 Problem—Update on the Lebbin Lawsuit Against Transamerica

I first wrote about "the age 100 problem" in the January 2001 and May 2001 issues of The Insurance Forum. Later, on my blog, I wrote extensively on the subject, including four posts about a lawsuit filed by Gary H. Lebbin, a centenarian, against Transamerica Life Insurance Company: No. 226 (July 20, 2017), No. 241 (November 17, 2017), No. 269 (June 6, 2018), and No. 296 (November 26, 2018). (In those posts I offered complimentary packages that include the two 2001 Forum articles and other items.) Here I provide an update on Gary's lawsuit.

Background
Gary was born in Germany on September 6, 1917. He came to the U.S. in 1938 to escape Nazi persecution. He married Bernice in 1944; she died in 2015 at age 97. He has two children, four grandchildren, and seven great-grandchildren. In 1990 he and his children, Roger M. Lebbin and Carole Sue Lebbin, created the Lebbin-Spector Family Trust ("Trust"), which purchased two second-to-die universal life policies from Transamerica. The first, issued in 1990, had a face amount of $2 million. The second, issued in 1991, had a face amount of $1.2 million. When Bernice died, the policies became single-life universal life policies.

On July 20, 2017, shortly before Gary turned 100, he and the Trust filed a lawsuit against Transamerica. They alleged that the company had falsely represented the policies as "permanent insurance" for his "whole life," had refused his request to extend the policies beyond their terminal age of 100, and he was facing a potentially serious income tax problem. Initially the lawsuit was filed in federal court in Maryland, but later was transferred at Transamerica's request to federal court in Florida. (See Lebbin v. Transamerica, U.S. District Court, Southern District of Florida, Case No. 9:18-cv-80558.)

The case in Florida was assigned to U.S. District Judge Donald M. Middlebrooks. President Clinton nominated him in January 1997, and the Senate confirmed him in May 1997.

Recent Developments
On May 22, 2018, Judge Middlebrooks set a trial date of January 22, 2019 and alluded to the possibility of mediation. On December 14, 2018, Irma S. Raker, a retired Maryland appellate court judge, held a one-day mediation session that did not resolve the case. On December 21, 2018, Judge Middlebrooks changed the trial date to March 18, 2019 because of the "medical needs of the Plaintiffs' lead counsel."

On January 30, 2019, Transamerica filed a motion for summary judgment. On the same day, the Trust filed a motion for summary judgment.

Also on January 30, 2919, by which time Gary was afflicted with dementia and was no longer aware of the lawsuit, Transamerica offered him $10,000 in full and final settlement of all claims for damages that would otherwise be resolved in a final judgment between him and the company, including costs and attorney fees and any other money damages that could be awarded in a final judgment rendered between him and the company in the lawsuit. No portion of the offer was apportioned to settle any claim for punitive damages.

On February 5, 2019, Gary accepted the offer and withdrew from the lawsuit. On February 22, 2019, the Trust filed an amended complaint with Gary no longer listed as a plaintiff. The amended complaint has five counts: (1) declaratory relief, (2) breach of contract, (3) breach of the covenant of good faith and fair dealing, (4) reformation, and (5) rescission. Here is a paragraph from the introductory section of the amended complaint (the full complaint is in the complimentary package offered at the end of this post):

For decades, life insurance carriers, such as Transamerica, sold universal life insurance policies, marketed as "permanent life insurance" or "insurance for life," utilizing outdated mortality tables that did not take into account the fact that Americans were, and are, increasingly living to and past the age of 100. The result has been the improper termination of life insurance policies that were originally sold to policy holders as "permanent insurance." The life insurance industry has left its customers (who faithfully paid their premiums with the expectation that they would have coverage for the remainder of their lives) uninsured.

On February 26, 2019, with the March 5 trial date approaching, the judge postponed the trial until August 5, 2019. On March 22, 2019, Transamerica filed an amended motion for summary judgment. On July 19, 2019, the judge issued an order containing five conclusions (the full order is in the complimentary package offered at the end of this post):

1. Plaintiff's Motion for Summary Judgment is GRANTED. Summary judgment is ENTERED in Plaintiff's favor on Plaintiff's claim for breach of contract (Count 2).
2. Defendant's Amended Motion for Summary Judgment is GRANTED IN PART and DENIED IN PART.
3. With respect to Plaintiff's claims for declaratory judgment (Count 1), reformation (Count 4), and rescission (Count 5), Defendant's Amended Motion for Summary Judgment is GRANTED and summary judgment is ENTERED in Defendant's favor.
4. Defendant's Motion for Summary Judgment is DENIED with respect to Plaintiff's claims for breach of contract (Count 2) and breach of the covenant of good faith and fair dealing (Count 3).
5. Calendar Call remains scheduled for July 31, 2019, and trial remains set for the two-week period beginning on August 5, 2019. The issues remaining for adjudication at trial are Plaintiff's claim for breach of the covenant of good faith and fair dealing (Count 3) and damages.

On July 29, 2019, the Trust filed a notice of voluntary dismissal of its claim for breach of the covenant of good faith and fair dealing (Count 3). On July 30, Transamerica filed a motion for reconsideration of the judge's July 19 order. On the same day, the judge denied Transamereica's motion for reconsideration. Also on the same day, the judge held a ten-minute conference. He canceled the trial set for August 5 because the "Parties have resolved the issues and will submit pleading(s) and/or order(s)."

On August 1, 2019, the parties jointly filed a "Notice of Submission of Proposed Order." On August 9, the judge issued an "Order Setting Briefing Schedule and Resolving Various Pre-Trial Motions." The briefing schedule is "to resolve the issue of damages, the sole remaining issue in this action." Here is the four-date briefing schedule:

1. August 30, 2019: Plaintiff's motion for summary judgment.
2. September 30, 2019: Defendant's response to plaintiff's motion and cross-motion, if any, for summary judgment.
3. October 21: 2019: Plaintiff's reply to any cross-motion.
4. November 8: 2019: Defendant's reply, if any, on cross-motion.

General Observations
In earlier posts about the Lebbin case, I predicted it would be settled, but I did not expect it would be settled only six days before the trial. It will be interesting to see the motions and cross-motions for summary judgment about damages, and what the judge says about them. Instead of waiting for completion of the briefings about damages, I decided to provide this update and write again after the case is fully settled.

Available Material
In previous posts (cited earlier) about the Lebbin case, I offered complimentary packages that are still available. Now I offer a complimentary 43-page PDF consisting of the Trust's February 22, 2019 amended complaint (20 pages) and the judge's July 19, 2019 order (23 pages). Email jmbelth@gmail.com and ask for the August 2019 package about the Lebbin v. Transamerica case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com