No. 342: Long-Term Care Insurance and the Expanding Insolvency of Senior Health Insurance Company of Pennsylvania

Senior Health Insurance Company of Pennsylvania (SHIP), which is domiciled in Pennsylvania, has been running off the long-term care (LTC) insurance business of Conseco Senior Health Insurance Company (CSHI) since 2008. I wrote four articles in The Insurance Forum about the transfer of CSHI's LTC insurance business to SHIP. (The four articles are in the complimentary package offered at the end of this post.)

In No. 308 (April 11, 2019), I said SHIP was insolvent by $447 million. According to the company's financial statement for the year ended December 31, 2018 (filed March 1, 2019), total liabilities of $2.653 billion exceeded total assets of $2.206 billion. Here I report that the deficit has been expanding in 2019. I also discuss a few related matters.

Quarterly Data in 2019
According to SHIP's financial statement for the quarter ended March 31, 2019 (filed May 15), the deficit had grown to $462 million. According to the statement for the quarter ended June 30, 2019 (filed August 15), the deficit had grown to $477 million. According to the statement for the quarter ended September 30, 2019 (filed November 15, 2019), the deficit had grown to $524 million. (Six selected pages from the latest quarterly statement are in the complimentary package offered at the end of this post.)

RBC Data
The numerator of a risk-based capital (RBC) ratio is "total adjusted capital," the denominator is "company action level," and the quotient is the RBC ratio. According to SHIP's financial statement for the year ended December 31, 2018, total adjusted capital was minus $467 million, company action level was $102 million, and the RBC ratio was minus 458 percent. RBC data do not appear in quarterly statements, but the RBC ratios are negative because total adjusted capital is negative.

According to state RBC laws, when a company's RBC ratio falls below 35 percent, the company is in the "mandatory control zone," and the primary regulator—the Pennsylvania Insurance Department (Department) in this instance—is required to seek state court permission to seize control of the company. Yet the Department has not done so. I asked the National Organization of Life and Health Guaranty Associations (NOLHGA) about SHIP. NOLHGA referred me to the Department. I asked the Department about SHIP, but received no reply.

In SHIP's statement for the year ended December 31, 2018, this sentence appears: "There is not substantial doubt about the Company's ability to continue as a going concern." I do not know how a company deep in the mandatory control zone can justify that assertion. In SHIP's three quarterly statements in 2019, these two sentences appear:

The Company has suffered recurring losses from operations and has a net capital and surplus deficit. The Company is actively working with the Pennsylvania Insurance Department to develop a corrective action plan.

The Limited-Scope Examination
On the Department's website, I recently found a "Report of Limited-Scope Examination" of SHIP as of December 31, 2016. The "Conclusion" of the report contains these comments (the full report is in the complimentary package offered at the end of this post):

Although each of the Consulting Actuary's scenarios produce less favorable results than the Company's base scenario, and indicate material reserve deficiencies, the Department is making no recommendation to change the financial statement at this time.

The Company has agreed to consider several long-term monitoring suggestions from the Consulting Actuary and incorporate those monitoring suggestions as needed into future reserve studies. The Department will continue to closely monitor the Company's financial condition and operating results.

The next regularly scheduled financial condition examination of the Company will cover the five-year period ending December 31, 2018.

I asked the Department when the examination for the five-year period ending December 31, 2018 will be available. I received no reply.

The Market Conduct Examination Report
On the Department's website, I recently found a "Market Conduct Examination Report" of SHIP as of April 24, 2019. The report includes a detailed history of the company, refers to a third-party administration agreement with Long Term Care Group (LTCG), and contains the company's response. Here are two of several recommendations (the full report is in the complimentary package offered at the end of this post):

The Company must review and revise internal control procedures to ensure compliance with claims handling requirements, so that the violations relating to claim acknowledgment, status letters, acceptance or denials, and payments as noted in the Examination Report, do not occur in the future.

The Company must ensure LTCG representatives are trained to fully disclose to first-party claimants the benefits, coverages, alternative plans of care, or other provisions of the insurance policy or insurance contract when the benefits, coverages or other provisions are pertinent to a claim.

Licensing
According to SHIP's financial statements, the company remains licensed in all U.S. jurisdictions except Connecticut, New York, Rhode Island, Vermont, American Samoa, Guam, Puerto Rico, and Northern Mariana Islands. In reply to my inquiries, a few of those eight jurisdictions said they have no record of the company ever being licensed there.

General Observations
Normally, when an insurance company is in financial trouble, the primary regulator seeks state court permission to seize control of the company and place it in rehabilitation or liquidation. (Liquidation would trigger state guaranty association coverage.) In this instance, however, SHIP and its predecessor, CSHI, have been in runoff mode since 2003. Because the company does not sell new policies, perhaps the thinking is that there is no need for the Department to take formal control of the company. In the absence of straight answers from the Department and NOLHGA, it appears that the Department has effectively taken control of SHIP without a court order. Stated another way, it appears that the company is "in limbo" without disclosure of the situation to the premium-paying policyholders and the recipients of benefits. To my knowledge SHIP provides no annual reports to policyholders and claimants. I think the Department should require SHIP to do so.

There is another way to look at this highly unusual regulatory procedure. The "in limbo" status of SHIP's policyholders and claimants may continue for many years—probably decades—until the assets run out. At that point the company would have to close down, cancel the policies, and stop benefit payments to claimants. The situation raises important questions: when and how should the company's status be disclosed to (1) premium-paying policyholders that they likely will not receive the benefits promised under their policies, and (2) claimants that their benefit payments likely will stop. This doomsday scenario is the result of "kicking the can down the road" and leaving the problem in the hands of a future generation of regulators.

When this item is posted, I will send it to the Department. I will say I plan to write a follow-up, and will ask the Department for a statement about SHIP in a form suitable for inclusion in the follow-up. I will impose no limitation on the length of the statement, but will ask the Department to provide the statement within three weeks.

Available Material

I am offering a complimentary 49-page PDF consisting of the four Forum articles (10 pages), selected pages from the latest quarterly statement (6 pages), the limited-scope examination report (6 pages), and the market conduct examination report (27 pages). Email jmbelth@gmail.com and ask for the December 2019 SHIP package.

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Blog: www.josephmbelth.com

No. 341: The Age 100 Problem—Another Update on the Lebbin Lawsuit Against Transamerica

In No. 331 (September 6, 2019), I posted an update about a 2017 lawsuit by Gary H. Lebbin—at the time he was almost 100—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

On February 5, 2019, by which time Gary was afflicted with dementia, Transamerica settled with him for $10,000. 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: declaratory relief, breach of contract, breach of the covenant of good faith and fair dealing, reformation, and rescission. On July 19 the judge granted the Trust's claim for breach of contract. The other four counts were denied by the judge or withdrawn by the Trust.

On July 30 the judge canceled the trial, which had been set for August 5. The parties said they had agreed to resolve the case, but they had not agreed on the damages for the Trust's breach-of-contract claim. The damages thus became the only remaining issue in the case. Had there been a trial, it would have been interesting to see what the jury would have said about the amount of damages. The judge set a briefing schedule under which the Trust was required to file its motion for summary judgment (MSJ) on damages by August 30.

The Trust's MSJ on Damages

On that date the Trust filed its MSJ on damages. The Trust requested a return of all premiums paid to Transamerica—a total of $1,670,140.91 plus prejudgment interest. The prejudgment interest rates the Trust suggested are the Florida statutory rates at the time of each premium payment. The Trust said it would provide the interest figure prior to the entry of final judgment.

Transamerica's Response

The briefing schedule required Transamerica to file its response to the Trust's MSJ by October 10. On that date the company filed a massive amount of material, including a document opposing the Trust's MSJ, a cross-motion for summary judgment, a memorandum of law, a response to the Trust's statement of undisputed material facts, 48 exhibits, and three supplemental declarations in opposition to the Trust's MSJ. Here is the first paragraph of Transamerica's opposition document. (The full opposition document is in the complimentary package offered at the end of this post.) It is important for the reader of the paragraph to understand that each of the two policies was a second-to-die universal life policy.

The result sought by Plaintiffs in this case would turn fundamental principles of insurance law and justice on their head. Gary Lebbin purchased two life insurance Policies insuring himself and his wife with a total death benefit of $3.2 million. Mr. Lebbin was fully aware that the Policies provided that, if both insureds died before each was 100 years old, the Policies would pay the death benefit. If either insured lived to be 100, the Policies would terminate and instead pay any cash value. Mr. Lebbin was a very sophisticated businessman who worked with expert brokers in purchasing these Policies, and personally managed them for 24 years. His management fully and repeatedly comported with and ratified this understanding of the Policies. In managing the Policies, Mr. Lebbin could either pay just enough premium to maintain the Policies to age 100, or he could pay sufficient premiums to build a cash value upon termination. He paid only the minimum premium because he believed he would not live to be 100, and he wanted the least expensive insurance.

The Trust's Reply

The briefing schedule required the Trust to reply to Transamerica's response by November 8. On that date the Trust filed its reply in support of its MSJ for damages, its response to Transamerica's cross-motion for summary judgment, and a motion to strike or disregard the supplemental declarations. Here, without citations, is the first paragraph of the Trust's reply in support of its MSJ for damages (the full reply document is in the complimentary package offered at the end of this post):

Transamerica argues that, regardless of the measure of damages the Court selects for Transamerica's wrongful termination of the Policies, Plaintiffs should not be compensated in any fashion for Transamerica's breach of contract. According to Transamerica's concept of "insurance law and justice," a life insurance company can breach its life insurance policies by improperly terminating them and yet retain millions of dollars in premium, interest, investment gains, profits, and reserved death benefits. Transamerica asks the Court to put Transamerica in a better position than if it had performed under the Policies, notwithstanding that the Policies have been adjudged so "incomprehensible" as to be "rendered ambiguous." [Emphasis in original.]

General Observations

The briefing schedule on damages requires Transamerica to file any response to the Trust's reply by November 25. As I understand it, after briefing is completed, the judge will rule on the damages for the Trust's breach-of-contract claim. I plan to prepare yet another update on this case after the judge rules on the damages.

Available Material

My previous posts about the Lebbin case, in addition to the above-mentioned No. 331, are Nos. 226, 241, 269, and 327. In each of those posts, I offered a complimentary package containing additional material. Those packages are still available.

Now I am offering a complimentary 55-page package consisting of Transamerica's October 10 opposition document (28 pages) and the Trust's November 8 reply document (27 pages). Email jmbelth@gmail.com and ask for the November 2019 package about Lebbin v. Transamerica.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 340: The Markopolos Book about the Madoff Ponzi Scheme

In No. 329 (August 28, 2019), I wrote about a whistleblower report by Harry M. Markopolos 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, a subject that has been of great interest to me for a long time.

In that post I mentioned a 2010 book entitled No One Would Listen: A True Financial Thriller, a personal account by Markopolos of his efforts to expose the massive Ponzi scheme Bernard Madoff operated for many years. When I wrote that post, I had not read the Markopolos book. I have now read it, and it is excellent.

The Markopolos Book

The 354-page Markopolos book consists of nine chapters following the front matter, and also includes an epilogue, three appendixes, a note on sources, acknowledgments, biographical information about the author, and an index. The entire book is a good read, but the most interesting section begins with Chapter 7 entitled "More Red Flags Than the Soviet Union" and ends with the collapse of Madoff's scheme. The first two paragraphs of Chapter 1 illustrate the author's writing style:

On the morning of December 11, 2008, a New York real estate developer on a JetBlue flight from New York to Los Angeles was watching CNBC on the small back-seat television. A crawl across the bottom of the screen reported that Bernard Madoff, a legendary Wall Street figure and the former chairman of NASDAQ had been arrested for running the largest Ponzi scheme in history. The developer sat silently for several seconds, absorbing that news. No, that couldn't be right, he thought, but the message streamed across the screen again. Turning to his wife, he said that he knew that she wasn't going to believe what he was about to tell her, but apparently Bernie Madoff was a crook and the millions of dollars that they had invested with him were lost. He was right—she didn't believe him. Instead, she waved off the thought. "That's not possible," she said, and returned to the magazine she was reading.

The stunned developer stood up and walked to the rear of the plane, where the flight attendants had gathered in the galley. "Excuse me," he said politely, "but I'm going to be leaving now. So would you please open the door for me? And don't worry—I won't need a parachute."

The Report of the SEC OIG

On December 11, 2008, Madoff confessed and was arrested. The Securities and Exchange Commission (SEC) charged him with securities fraud for a multi-billion dollar Ponzi scheme he had perpetrated on clients of his firm, and the U.S. Attorney in the Southern District of New York indicted him on criminal charges.

On December 18, 2008, the SEC Office of Inspector General (OIG) issued a document preservation notice to the entire SEC. On March 12, 2009, Madoff pled guilty to all charges. On June 29, 2009, he was sentenced to serve 150 years in prison.

On August 31, 2009, H. David Kotz, the inspector general of the SEC, issued a major report. The complimentary package offered at the end of this post includes the entire public version of the report. Here is the first paragraph in the concluding section of the report:

The OIG investigation found that the SEC received numerous substantive complaints since 1992 that raised significant red flags concerning Madoff's hedge fund operations and should have led to questions about whether Madoff was actually engaged in trading and should have led to a thorough examination and/or investigation of the possibility that Madoff was operating a Ponzi scheme. However, the OIG found that although the SEC conducted five examinations and investigations of Madoff based upon these substantive complaints, they never took the necessary and basic steps to determine if Madoff was misrepresenting his trading. We also found that had these efforts been made with appropriate follow-up, the SEC could have uncovered the Ponzi scheme well before Madoff confessed.

The Recent GE 10-Q Report

On October 30, 2019, GE filed its 10-Q report for the quarter ended September 30, 2019. The report contains information about GE's legacy LTC insurance business. The information is on pages 27-31 and 65-66 of the report. Those pages are in the complimentary package offered at the end of this post.

General Observations

In the above mentioned No. 329, I expressed the opinion that the ad hominem attack against Markopolos in GE's initial response to the release of the Markopolos report was unfortunate. The 11th edition of Merriam-Webster's Collegiate Dictionary defines "ad hominem" as "marked by or being an attack on an opponent's character rather than by an answer to the contentions made." After reading the Markopolos book, I feel more strongly about GE's initial response to the Markopolos report.

Available Material

In the above mentioned No. 329, I offered a complimentary 20-page package containing some information about the Markopolos report on GE. That package is still available.

Now I offer a complimentary 484-page PDF consisting of excerpts from GE's recent 10-Q report (7 pages) and the full 2009 SEC OIG report on Madoff (477 pages). Email jmbelth@gmail.com and ask for the November 2019 package about the 2010 Markopolos book.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 339: The House Judiciary Committee Wins a Major Court Victory

On July 26, 2019, the House Judiciary Committee (HJC) filed in federal court an application for an order authorizing release to HJC of certain grand jury materials. On September 13 the Department of Justice (DOJ) responded to the application. On October 3 Doug Collins, the ranking minority member of HJC, filed an amicus brief arguing that the court should deny the application without prejudice because, among other reasons, the House has not authorized HJC to open an impeachment proceeding.

On October 25 Chief Judge Beryl A. Howell of the U.S. District Court for the District of Columbia handed down a lengthy opinion and a brief order granting HJC's application. DOJ had redacted certain material from the report filed in March 2019 by Special Counsel Robert S. Mueller III. (See In re Application of HJC for an order authorizing release of certain grand jury materials, U.S. District Court. District of Columbia, Grand Jury Action No. 19-48.)

Excerpts from the Opinion
The opinion includes a one-page table of contents and 74 pages of text. Here (without citations) are the first three paragraphs and the concluding two paragraphs of the opinion (the full opinion and the order are in the complimentary package offered at the end of this post):

In March 2019, Special Counsel Robert S. Mueller III ended his 22-month investigation and issued a two-volume report summarizing his investigative findings and declining either to exonerate the President from having committed a crime or to decide that he did. The Special Counsel explained that bringing federal criminal charges against the President would "potentially preempt constitutional processes for addressing presidential misconduct." With this Statement, the Special Counsel signaled his view that Congress, as the federal branch of government tasked with presidential impeachment duty under the U.S. Constitution, was the appropriate body to resume where the Special Counsel left off.

The Speaker of the House of Representatives has announced an official impeachment inquiry, and the House Judiciary Committee ("HJC"), in exercising Congress's "sole Power of Impeachment," is reviewing the evidence set out in the Mueller Report. As part of this due diligence, HJC is gathering and assessing all relevant evidence, but one critical subset of information is currently off limits to HJC: information in and underlying the Mueller Report that was presented to a grand jury and withheld from Congress by the Attorney General.

The Department of Justice ("DOJ") claims that existing law bars disclosure to the Congress of grand jury information. DOJ is wrong. In carrying out the weighty constitutional duty of determining whether impeachment of the President is warranted, Congress need not redo the nearly two years of effort spent on the Special Counsel's investigation, nor risk being misled by witnesses, who may have provided information to the grand jury and the Special Counsel that varies from what they tell HJC. As explained in more detail below, HJC's application for an order authorizing the release to HJC of certain grand jury materials related to the Special Counsel investigation is granted....

For the foregoing reasons, HJC's application is granted. Consequently, DOJ is ordered to provide promptly, by October 30, 2019, to HJC all portions of the Mueller Report that were redacted pursuant to Rule 6(e) and any underlying transcripts or exhibits referenced in the portions of the Mueller Report that were redacted pursuant to Rule 6(e). HJC is permitted to file further requests articulating its particularized needs for additional grand jury information requested in the initial application.

An appropriate Order accompanies this Memorandum Opinion.

The Order
The "final and appealable" order grants HJC's application and orders DOJ to disclose to HJC, by October 30, certain material from the Mueller Report. It also says HJC may submit further requests for material in addition to the material requested in the application.

General Observations
At this writing I do not know whether DOJ will comply with the order. Recent press reports say DOJ is studying the ruling and considering its options. Meanwhile, I strongly recommend you read the entire opinion, whether or not you have read the Mueller Report. The early sections of the opinion include an interesting summary of the Mueller report.

In No. 295 (November 9, 2018), I wrote about the "Road Map" the Watergate Grand Jury transmitted under seal to HJC in 1974. HJC used the Road Map in developing articles of impeachment against President Richard Nixon. On September 14, 2018, three individuals petitioned for an order to unseal the Road Map. On October 11, 2018, Chief Judge Howell granted the petition.

Available Material
In the above mentioned No. 295, I offered a complimentary 68-page package containing the Road Map. That package is still available.

Now I am offering a complimentary 77-page PDF consisting of Chief Judge Howell's opinion (75 pages) and her order (2 pages). Email jmbelth@gmail.com and ask for the October 2019 package relating to Chief Judge Howell's ruling on the HJC application.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 338: Greg Lindberg—An Update

In No. 309 (April 17, 2019), I discussed the indictment of Greg E. Lindberg and three others by a federal grand jury in North Carolina. In No. 320 (July 1, 2019), I provided an update, including a discussion of the placement of four Lindberg insurance companies into court-ordered rehabilitation at the request of the North Carolina insurance commissioner. Here I provide a further update. (See U.S.A. v. Lindberg, U.S. District Court, Western District of North Carolina, Case No. 5-19-cr-22.)

The Lindberg Motion to Dismiss

On September 18, 2019, Lindberg filed a motion to dismiss the indictment for failure to state an offense. Here (without citations) are the first two paragraphs of the supporting memorandum (the motion and the full supporting memorandum are in the complimentary package offered at the end of this post):

The government's entire case against Greg E. Lindberg turns on a legally flawed understanding of what constitutes an "official act." According to the government, requesting a personnel move is an official act giving rise to federal criminal liability even when the defendant in no way requested an ultimate outcome on any matter or proceeding that may in the future be pending before the government.

The government's theory is foreclosed by the logic of two recent decisions of the Supreme Court: McDonnell v. U.S. and Skilling v. U.S. And the government's theory raises the full range of constitutional issues that the Court identified in those decisions. Most notably, prosecutions of this nature will inhibit the rights of all Americans to make demands of their elected representatives—and vote and contribute accordingly. Because the charges against Mr. Lindberg are legally infirm, this Court can—and should—dismiss the indictment against him.

The Government Opposition

On September 25 the U.S. Attorney filed an opposition to the Lindberg motion to dismiss the indictment. Here (without citations) is the three-paragraph introduction to the opposition (the full opposition is in the complimentary package offered at the end of this post):

Decisions to hire, fire, assign, and reassign government employees are core official acts under McDonnell v. U.S. The Bill of Indictment charges the defendant, a wealthy insurance executive, with offering a $2 million bribe to the top ranking insurance official in North Carolina to remove a subordinate regulator the defendant did not like, and replace her with one of the defendant's co-conspirators or another individual of his choosing. The defendant's argument that he could do this as long as he did not explicitly request an "ultimate outcome" rests upon a misreading of McDonnell, which nowhere applies an "ultimate outcome" test. Instead, as McDonnell and the courts that have subsequently interpreted that decision have made clear, the removal of the disfavored regulator—and her replacement by a regulator of the defendant's choosing—were themselves "official acts." This Court should reject the defendant's novel and erroneous interpretation of McDonnell.

Similarly, the defendant's argument that Skilling v. U.S. imposed a new requirement that the government must prove a personal financial benefit to a bribe payor is unsupported by any authority, including the Skilling decision itself. A bribe is a bribe, regardless of the payor's motive or realization of profit.

Finally, the defendant's constitutional concerns—regarding the First Amendment's alleged protection of the exchange of campaign contributions for specific action—are unfounded, and have already been addressed by the Supreme Court. When a campaign contribution is conditioned on specific official action it constitutes a bribe and is not protected by the First Amendment. McCormick v. U.S.

The Lindberg Reply

On October 2 Lindberg filed a reply to the government's opposition to the motion to dismiss the indictment. Here is the first paragraph of the argument in the reply (the full reply is in the complimentary package offered at the end of this post):

The government is incorrect that the jury, rather than the Court, must decide the legal definition of "official act." Before trial, a defendant may move to dismiss an indictment for failure to state an offense. And the Court must grant the motion if the "indictment fails to allege facts which constitute a prosecutable offense." Thus, where there is "an infirmity of law in the prosecution" contained in the indictment, a case should not reach a jury. That is the situation here. Because Mr. Lindberg's indictment fails to allege either an official act—a required element of all charges against him—or a bribery scheme that benefitted him, the Court must dismiss the indictment.

The Hayes Guilty Plea

Robert Cannon Hayes is one of Lindberg's four co-defendants named in the indictment. He was charged with five criminal counts: one count of conspiracy to commit honest services wire fraud, one count of bribery concerning programs receiving federal funds and aiding and abetting, and three counts of false statements.

On September 27 Hayes pleaded guilty to one count of false statements. The plea agreement is not publicly available. What is publicly available is a document called "entry and acceptance of guilty plea." It lists 39 questions the magistrate judge asked Hayes, and shows the answers given by Hayes. It also includes the magistrate judge's acceptance of the guilty plea on October 2. The document is in the complimentary package offered at the end of this post.

The Journal Article

On October 4 the print edition of The Wall Street Journal carried a 2,540-word front-page article entitled "Indicted Executive Used Operatives To Spy on Women—Insurance tycoon's surveillance included GPS trackers, secret photos, dossiers." The reporters were Mark Maremont and Leslie Scism. Here are the first few sentences of the article:

Federal investigators were closing in on Greg Lindberg. FBI agents confronted the North Carolina insurance tycoon last year as they probed whether he tried to bribe a state regulator. In March, officials obtained a sealed warrant for his arrest. His attorneys were negotiating his surrender.

Mr. Lindberg also had something else on his mind—the comings and goings of a number of women he was dating, interested in dating, or, in at least one case, cultivating as an egg donor for his future offspring.

Mr. Lindberg paid for dozens of surveillance operatives to tail the women up to 24 hours a day, taking surreptitious photos and sometimes putting GPS trackers on their vehicles, according to former security staffers and copies of internal reports produced by these operatives that were reviewed by The Wall Street Journal.

General Observations

As indicated in No. 320, I think the federal criminal case against Lindberg and his four associates will be lengthy. I plan to report further developments.

I found the Journal article shocking. I have no idea where it might lead, and will not speculate on what if anything will happen as a result of the findings in the article.

Available Material

The complimentary packages offered in Nos. 309 and 320 are still available. Now I am offering a complimentary 62-page PDF consisting of the Lindberg motion to dismiss the indictment (27 pages), the government's opposition to the motion to dismiss (16 pages), Lindberg's reply to the opposition (15 pages), and the material relating to the guilty plea by Hayes (4 pages). Email jmbelth@gmail.com and ask for the October 2019 Lindberg package.

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No. 337: Long-Term Care Insurance—Another Class Action Lawsuit Against Genworth

On September 21, 2018, Richard F. Burkhart and four other individuals filed a class action lawsuit against Genworth Financial, Inc. (Genworth) and four affiliates relating to long-term care (LTC) insurance. The plaintiffs filed the lawsuit in state court in Delaware, where Genworth and several of its affiliates were organized. On January 29, 2019, according to the docket, the plaintiffs filed a confidential, unredacted version of an amended complaint, which I have not seen. On February 5, 2019, the plaintiffs filed a redacted version of the amended complaint, which I discuss in this post. (See Burkhart v. Genworth, Court of Chancery, State of Delaware, Case No. 2018-0691.)

The Parties

Three plaintiffs are Massachusetts residents and two are Connecticut residents. Three of them bought LTC insurance policies during the 2002-2004 period from General Electric Capital Assurance Company, a predecessor of Genworth Life Insurance Company (GLIC). One bought an LTC insurance policy in 2013 from GLIC. One is an agent who sold LTC insurance policies and other policies issued by GLIC. The defendants are Genworth, GLIC, and three other Genworth affiliates.

The Amended Complaint

The amended complaint describes how Genworth and its affiliates allegedly reduced GLIC's capital to the detriment of policyholders and agents. Here is the first paragraph of the introduction (the amended complaint is in the complimentary package offered at the end of this post):

This action challenges a deliberate, long-term scheme by defendant Genworth, an insurance holding company, and by its affiliated defendants, to bleed capital from GLIC, a wholly-owned insurance subsidiary of Genworth upon which over a million policyholders depend for long-term care insurance benefits in the event that they become disabled. This conduct has profoundly harmed and will continue to harm GLIC policyholders and the agents through whom such policyholders purchased insurance. Absent injunctive and other equitable relief, defendants' conduct will leave the policyholders at critical risk at the point in their lives when they have greatest need for the benefits provided by the policies.

The amended complaint describes how Genworth allegedly used fraudulent transfers to remove assets and capital support from GLIC for the benefit of other Genworth companies, shareholders, bondholders, and management, to the detriment of GLIC, its policyholders, and its agents. Among the allegedly fraudulent transfers are substantial dividends, the termination of a reinsurance transaction, and the proposed merger with China Oceanwide. The amended complaint includes four counts: (1) Intentional Fraudulent Transfer—Payment of GLIC Dividends, (2) Constructive Fraudulent Transfer—Payment of GLIC Dividends, (3) Intentional Fraudulent Transfer—Reinsurance Termination, and (4) Constructive Fraudulent Transfer—Reinsurance Termination. The plaintiffs seek, among other things, an unwinding of the reinsurance termination, an unwinding of the GLIC dividends, attorney fees, and costs.

The Redactions

The redactions are three paragraphs (24 lines) in the amended complaint. Here are four paragraphs preceding and four paragraphs following the redactions:

60. There is substantial evidence that was not known or discoverable by Plaintiffs at the time the GLIC dividends were paid that demonstrates that Genworth knew full well that GLIC's DLR [disabled life/claim reserve] was inadequate long before it corrected the DLR in November 2014 and again in 2016, and rather than correct the inaccuracies in the Statutory Financial Statements filed with the [Delaware] Department, Genworth suppressed the adverse information.

61. In January 2014, Genworth hired James Boyle as the CEO of its U.S. Life Insurance Division ("Division"), which included the long-term care business of GLIC. Shortly thereafter, Lynne Patterson was hired as the Division's interim CFO. In May 2014, Patterson began a review and investigation of the underlying actuarial assumptions for long-term care reserves.

62. On information and belief, in early June 2014, following a series of meetings with the actuaries involved in developing the reserves, Patterson discovered that the assumptions the actuaries were using to develop the reserves had been "back-fitted" to meet the demands of senior management and were unreliable. Boyle and Patterson shared their concerns with Genworth's CFO, Martin Klein, on June 16, 2014.

63. On July 16, 2014, Boyle advised Genworth's Audit Committee: that John Nigh, the Division's chief actuary, and Loida Abraham, a supervising actuary, had attempted to manipulate actuarial assumptions to reduce long-term care claim reserves; that Genworth's chief actuary, Robert Vrolyk, on June 6, 2014, had admitted to Boyle that based on independent work Vrolyk had performed, there may have been an error in Genworth's long-term care claim reserve calculations of as much as 20%, or approximately $500-600 million; that three in-house actuaries overseen by Patterson to prepare a new "clean-slate" estimate of long-term care claim reserves using actual claims experience had arrived at a claim reserve that was $800 million higher than previously stated; that assumptions underlying the long-term care claim reserve announced in December 2013 had not been properly peer-reviewed, and that the documentation needed to support the claim reserve announced in December 2013 was incomplete or missing; and that Boyle and Patterson were being isolated and that efforts were being made to slow down a final conclusion regarding the claim reserve's adequacy and amount. Those efforts included directions to Milliman, an independent actuarial firm that Genworth had retained, to eliminate its validation of the proposed $800 million claim reserve adjustment.

64. Five lines redacted.

65. Seven lines redacted.

66. Five lines redacted.

67. Seven lines redacted.

68. On information and belief, in or around mid-July 2014, Boyle gave a "red alert" warning to Genworth's Board of Directors.

69. Less than two weeks later, on July 28, 2014, Boyle and Patterson resigned, about six months after joining the company. Genworth issued a press release stating that Thomas J. McInerney, Genworth's CEO, would also assume the duties of CEO of the Division effective immediately.

70. Immediately following the resignation of Boyle and Patterson, on a July 30, 2014 investor conference call, McInerney, who was now CEO of both Genworth and the Division, revealed that Genworth would be conducting a detailed review of its DLR assumptions, methodology and process, and that changes to the assumptions for the DLR could be required as a result.

71. On November 6, 2014, Genworth's management disclosed during an earnings call with investors that the DLR for its long-term care policies had been understated by $589 million in the Statutory Financial Statements filed with the [Delaware] Department, resulting in a reserve restatement in that amount (the "2014 DLR Restatement"). During that call, Klein, Genworth's CFO, stated that approximately half of this overall increase in the DLR was attributable to "updating" assumptions regarding claim termination rates, including adjusting the average length of claim assumption to reflect Genworth's actual experience between 2010 and 2013, the period during which the GLIC Dividends were paid.

The Motion to Dismiss

On March 13, 2019, Genworth filed a motion to dismiss. Here is the first paragraph of the summary (the full motion to dismiss is in the complimentary package offered at the end of this post):

The named plaintiffs in this purported nationwide class action are long term care ("LTC") insurance policyholders of defendant Genworth Life Insurance Company ("GLIC") and agents who sold LTC policies for GLIC. The policyholder Plaintiffs have been insured continuously since they bought their policies. Not one alleges to have ever made an LTC policy claim, let alone that a claim has gone unpaid. The agent Plaintiffs are compensated through commissions paid each time an annual premium is paid on an LTC policy they sold; they also do not allege that GLIC has ever failed to pay them a commission they are owed. Plaintiffs nonetheless ask this Court to reverse GLIC's payment of $410 million in dividends between 2012 and 2015 to its corporate shareholder parent and to unwind a 2016 merger of subsidiaries because, at some unspecified point in the distant future, GLIC might have insufficient assets to pay their possible LTC claims and commissions. Plaintiffs assert that these were fraudulent transfers of GLIC's assets to other Genworth affiliates. This action should be dismissed in its entirety because Plaintiffs fail to allege an actual or imminent injury sufficient to confer standing in this Court.

The Opposition to the Motion to Dismiss

On April 26, 2019, the plaintiffs filed an opposition to the motion to dismiss. Here is the first paragraph (the full opposition is in the complimentary package offered at the end of this post):

In their Motion to Dismiss, Defendants posit a classic Catch-22. They argue first that Plaintiffs sued too soon, because Defendant Genworth Life Insurance Company ("GLIC") has not (yet) defaulted on the relevant insurance policies. At the same time, Defendants argue Plaintiffs sued too late, because the challenged transfers cannot be avoided more than four years after they were made. That is, Plaintiffs must wait decades until they are infirm and GLIC collapses, at which point they will be told it is too late to avoid the challenged transfers. Catch-22. [Emphasis in original.]

The Reply to the Opposition to the Motion to Dismiss

On June 14, 2019, Genworth filed a reply to the opposition to the motion to dismiss. Here, without citations, is the first paragraph of the summary (the full reply is in the complimentary package offered at the end of this post):

Plaintiffs assert repeatedly that Defendants' 2012-2015 dividend payments and purported "Reinsurance Termination" caused them "injury," but Plaintiffs do not plead facts demonstrating that any such injury is actual or imminent. Their Answering Brief admits that "GLIC has not yet defaulted" on any obligations to Plaintiffs. Their Amended Complaint can only conclusorily [sic] speculate that GLIC "will likely become unable to pay its policyholders and agents in full" at some indeterminate point in the far future. And Plaintiffs also admit that "the maturity date and scope of any particular policyholder's claim is unknowable."

General Observations

Oral argument on Genworth's motion to dismiss is scheduled for October 21, 2019. It will be interesting to see the judge's ruling on the motion to dismiss.

With regard to the redactions in the amended complaint, they probably reflect Milliman's findings, which Milliman probably submitted to Genworth on a confidential basis. I have been through this before.

In 2008, when Conseco transferred its LTC insurance company to a trust that would own Senior Health Insurance Company of Pennsylvania (SHIP), Conseco told the Pennsylvania Insurance Department that Milliman had prepared a report saying the assets transferred would be sufficient to run off all of SHIP's LTC insurance business. I tried to obtain the Milliman report, but Conseco and the Department said it was confidential. As I reported in No. 308 (April 11, 2019), SHIP's liabilities of $2.653 billion at the end of 2018 exceeded its assets of $2.206 billion, leaving the company insolvent by $447 million. The deficit was $481 million as of March 31, 2019, and $496 million as of June 30, 2019. Many years remain before all of SHIP's LTC insurance business runs off.

As a layman—I am not an attorney—I read the documents in this case. In my opinion, the arguments advanced by the plaintiffs are stronger than those advanced by the defendants, although others who read the documents may feel differently. If the lawsuit survives the motion to dismiss, the case should be followed closely. However, like other such lawsuits, the case is likely to be settled before trial. I plan to report further developments.

Available Material

I am offering a complimentary 227-page PDF consisting of the amended complaint (65 pages), the motion to dismiss the amended complaint (60 pages), the opposition to the motion to dismiss the amended complaint (64 pages), and the reply to the opposition to the motion to dismiss the amended complaint (38 pages). Email jmbelth@gmail.com and ask for the October 2019 package relating to Burkhart v. Genworth.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 336: Long-Term Care Insurance—An Update on the Newman Lawsuit Against Metropolitan Life

In No. 253 (February 15, 2018), I wrote about a class action lawsuit filed in March 2016 by Margery Newman, an Illinois resident, against Metropolitan Life Insurance Company relating to long-term care (LTC) insurance. She was 56 when she bought an "LTC Premier" policy in September 2004. The policy included a "reduced-pay at 65 option," which Metropolitan had described as follows in a marketing brochure:

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

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

The Complaint

In her March 2016 complaint and June 2016 amended complaint, Newman alleged breach of contract, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, fraud, and fraudulent concealment. In July 2016 Metropolitan filed a motion to dismiss the complaint for failure to state a claim. In March 2017 U.S. District Court Judge Thomas A. Durkin dismissed the complaint without prejudice. His ruling is in the complimentary package, which is still available, offered at the end of the above-mentioned No. 253.

In April 2017, in accordance with the judge's ruling, Newman filed a motion for leave to file a second amended complaint and attached a proposed second amended complaint. The judge denied the motion and dismissed the case with prejudice. (See Newman v. Metropolitan, U.S. District Court, Northern District of Illinois, Case No. 1:16-cv-3530.)

The Appeal

Newman appealed to the Seventh Circuit, and the case was assigned to a three-judge panel. On February 6, 2018, the panel unanimously reversed the district court's action and sent the case back to the district court for further proceedings. Here is the final paragraph of the panel's ruling (the full ruling is in the complimentary package, which is still available, offered at the end of the above-mentioned No. 253):

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

On February 20, 2018, Metropolitan petitioned for a rehearing by the full appellate court. On March 7 Newman opposed the petition. On March 22 the panel denied the petition and filed an amended ruling. There were only a few changes from the panel's original ruling. One of the changes was in the next-to-the-last sentence of the final paragraph quoted above. That sentence in the amended ruling reads: "These allegations were enough to state a claim under the theories Newman presented." The amended 17-page appellate ruling is in the complimentary package offered at the end of this post. (See Newman v. Metropolitan, U.S. Court of Appeals for the Seventh Circuit, Case No. 17-1844.)

Recent Developments in the District Court

On April 18, 2018, Metropolitan filed an answer to Newman's complaint. During the next few months several individuals sought to intervene in the case, and three were allowed to do so. During that time, there were also discussions of mediation with the goal of settling the case. In August 2018 the parties held a settlement conference. In November the judge held a telephone conference to discuss settlement issues, but the parties were not able to reach a settlement. In December the judge ordered the parties to submit a proposed discovery plan for class certification.

On January 3, 2019, the parties submitted a proposed discovery plan for class certification. On January 24 the parties said settlement discussions were ongoing. On January 27 the parties said they have agreed to private mediation. On March 5 Newman filed a motion for a stay pending the outcome of the private mediation. On March 12 the judge granted the motion. On April 25 the parties said they are proceeding with private mediation.

On September 24, I emailed an attorney on each side asking whether they think the private mediation eventually will succeed or whether they think the case will go to trial. One acknowledged the email but declined to comment. The other did not acknowledge the email.

General Observations

Newman is an interesting case. However, I will not speculate on whether the private mediation will succeed, or whether the case will go to trial. I plan to report significant further developments in the case.

Available Material

I am offering a complimentary 17-page PDF consisting of the March 22, 2018 appellate panel's amended ruling. Email jmbelth@gmail.com and ask for the October 2019 package relating to Newman v. Metropolitan.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com