Monday, November 25, 2013

No. 10: The Danger of Announcing Dividend Interest Rates

I have expressed the opinion that announcing dividend interest rates associated with traditional participating life insurance policies is a deceptive sales practice. Also, I have expressed the opinion that announcing gross interest rates associated with universal life policies is a deceptive sales practice. For example, see "How Not To Advertise Universal Life" in the May 1984 issue of The Insurance Forum.

MassMutual's Press Release
On November 4, 2013, MassMutual issued a two-page, seven-paragraph press release entitled "MassMutual Approves Record $1.49 Billion Dividend Payout for Policyowners." The release contains three footnotes and some descriptive material entitled "About MassMutual." The lead paragraph of the release reads:
Massachusetts Mutual Life Insurance Company (MassMutual) announced today that its Board of Directors has approved the company's largest dividend payout ever in the company's history for 2014: a record payout estimated at $1.49 billion to eligible participating policyowners. The dividends to be paid in 2014 reflect a dividend interest rate1 of 7.10 percent for eligible participating permanent life and annuity blocks of business, an increase over last year's rate of 7.00 percent.
A footnote is indicated after the words "dividend interest rate" in the above lead paragraph. The footnote reads:
The dividend interest rate is not the rate of return on the policy. Dividends consist of an investment component, a mortality component and an expense component. Therefore, dividend interest rates should not be the sole basis for comparing insurers or policy performance. Additionally, dividends for a given policy are influenced by such factors as policy series, issue age, gender, underwriting class, policy year and policy loan rate, as well as changes in experience.
The footnote says what the dividend interest rate is not, but does not say what it is. Further, saying dividend interest rates should not be the sole basis for comparisons implies they are a basis for comparisons.

A Brokerage E-mail
On November 5, a MassMutual brokerage office in Georgia sent an e-mail to producers. The subject is "MassMutual Announces 2014 Dividend." The title, in large boldface type, is "7.10% Dividend Announced." Here is the full text, except for contact information:
MassMutual has officially announced our 2014 dividend. We will payout [sic] a record $1.49 Billion. The dividend interest rate is 7.10%. Please see attachment for official news release.
The full press release, including its three footnotes, was attached to the e-mail. A recipient of the e-mail shared it with me.

Another Brokerage E-mail
On November 12, a MassMutual brokerage office in Indiana sent an e-mail to producers. The subject is "2014 Dividend Announcement," and there is no title. The third paragraph of the five-paragraph text includes this sentence: "Additionally, a 7.10% dividend interest rate1 represents a 10 basis point increase for all participating permanent life and annuity blocks of business (from 7.00% to 7.10%)." [The boldface type is in the original.] Footnote 1 is shown at the bottom of the e-mail in exactly the form shown in the company's press release. A recipient of the e-mail shared it with me.

A Newspaper Article
On November 4, an article appeared in The Republican, a newspaper in MassMutual's home city of Springfield, based on the press release. The title is "MassMutual announces record dividend estimated at $1.49 billion." Here are the first two sentences of the text:
MassMutual Financial Group has approved the insurer's largest dividend payout in history for 2014. The record payout to eligible policy holders is estimated at $1.49 billion. The dividends to be paid in 2014 reflect a dividend interest rate of 7.1 percent for eligible policy holders, an increase over last year's rate of 7 percent flat.
The article does not mention anything that appears in footnote 1 of the press release. Thus it does not warn the reader against drawing the inference that 7.1 percent is a policy rate of return or that the figure may be used for comparison purposes.

My Inquiry and MassMutual's Statement
I contacted a MassMutual spokesman, explained my concerns, said I was planning to post an article, and requested a statement from the company to include in the article. In response, the company said:
Based on the information you shared, the initial e-mail message that you forwarded is accurate and links through appropriately to our news release with full disclosures. Regarding your latter question on a news story, although our release cited full disclosures, we cannot dictate what a news organization includes in its coverage.
I am more concerned about what producers say to policyholders and prospects than what MassMutual says to producers. I think producers, in their sales work, and especially in the current environment of low market interest rates, will emphasize the 7.10 percent dividend interest rate in such a way as to imply that it is the rate of return on the policy, and that it may be used for comparison purposes. Thus I think the figure will be used in such a way as to constitute a deceptive sales practice. For these reasons, it is my opinion that companies should not announce dividend interest rates, even with cautionary footnotes.

I have long argued for a rigorous system of disclosure to life insurance consumers. Among other things, the system includes information about yearly rates of return on the savings component of cash-value life insurance, and reflects the combined effect of interest, mortality, and expenses. My most complete description of the system is in the December 1975 issue of the Drake Law Review. I am making the 26-page article available as a complimentary PDF. Just e-mail me a request for the Drake Law Review article.

Thursday, November 21, 2013

No. 9: The Unsealing of Some Phoenix Court Documents

I have written extensively about cost-of-insurance (COI) increases that subsidiaries of Phoenix Companies, Inc. imposed on owners of universal life policies of the type used in stranger-originated life insurance transactions. I discussed five federal court lawsuits. I also discussed investigations of the "2010 increase" by what is now the New York State Department of Financial Services (DFS), the California Department of Insurance (CDI), and the Wisconsin Office of the Commissioner of Insurance (OCI).

Phoenix rescinded the 2010 increase imposed on New York policyholders after DFS ordered the company to do so. Phoenix later imposed the "2011 increase" on New York policyholders, apparently without objection by DFS. Numerous important court documents relating to the COI increases have been sealed or heavily redacted, but I am continuing my efforts to obtain them. My June 2012 public records request to DFS remains pending. Although my public records request to CDI was denied, I obtained some documents through a public records request to OCI. See the October 2012, December 2012, and November 2013 issues of The Insurance Forum

The September 2011 DFS Letter to Phoenix
On September 6, 2011, Michael Maffei, chief of the life bureau of DFS, sent a three-page letter to Kathleen McGah, vice president and counsel of Phoenix. He described the results of the DFS investigation into the 2010 increase and alleged that Phoenix committed five violations of New York insurance laws. He ordered Phoenix to reduce the COI rates to the rates used prior to the 2010 increase; credit the difference, with interest, to policy values; and refrain in the future from using the "funding ratio" (the ratio of a policy's accumulated value to the policy's face amount) as a basis for COI increases. The Maffei letter remains sealed in court files, but I obtained it through my August 2013 public records request to OCI. I am making the letter available as a complimentary PDF. Just e-mail me a request for the Maffei letter. 

The Mills Reports
Robert Mills is an economist and director at Micronomics, Inc., an economic research and consulting firm. The plaintiffs' attorneys retained him to calculate damages in the event Phoenix is found liable for breach of contract as alleged in court complaints.

On September 16, 2013, Mills submitted a report based on data provided by Phoenix. On September 30, he submitted a supplemental report based on additional data provided by Phoenix. The reports were sealed pursuant to a protective order. On November 6, they were unsealed. The figures below are from the supplemental report.

Mills focused on the 2011 increase Phoenix imposed on New York policyholders. He said owners of 87 policies were affected by the 2011 increase, and 55 of them remained in force as of June 30, 2013. The total estimated COI overcharges for the 55 policies was $1,517,849 through August 30, 2013, and that figure will increase over time. Mills also estimated prejudgment interest (through March 31, 2014 on estimated overcharges through August 30, 2013) of $172,277 at a 9 percent interest rate (the statutory rate in New York) or $76,568 at a 4 percent interest rate (the rate Phoenix argues should be used).

Mills discussed 22 policies that lapsed between notification of the 2011 increase and June 30, 2013. He estimated that $7.95 million in premiums were paid into those policies. He also gave some lower damages figures based on the assumption that a small percentage of the policies lapsed for reasons other than the 2011 increase.

Two Important Unanswered Questions
After their investigations, CDI and OCI ordered Phoenix to rescind the 2010 increase imposed on policyholders in those states, but Phoenix refused to do so. Question: Why did Phoenix refuse to comply with the CDI and OCI orders to rescind the 2010 increase imposed on California and Wisconsin policyholders after having complied with the DFS order to rescind the 2010 increase imposed on New York policyholders? OCI began an administrative proceeding, the results of which will not be known for some months. To my knowledge, CDI has done nothing further.

Although DFS ordered Phoenix to rescind the 2010 increase, DFS apparently did not object to the 2011 increase. Question: How did Phoenix implement the 2011 increase on New York policyholders in such a way as to avoid the problems that caused DFS to order rescission of the 2010 increase? Hopefully the question will be answered when further court documents are unsealed or DFS complies with my public records request.

Other Documents
Numerous court documents relating to Phoenix's COI increases remain sealed, and I still await numerous documents in response to my public records request to DFS. When more documents become available, I will report on them.

Thursday, November 14, 2013

No. 8: More on the Reversal of the Neasham Conviction

In No. 6, I discussed the reversal of the conviction of Glenn Neasham, a California agent who sold an Allianz annuity to Fran Schuber in 2008, just before her 84th birthday. An important issue was whether Schuber was suffering from dementia at the time of the sale. A reader expressed some thoughts about my posting, and we engaged in further correspondence. The exchange prompts me to elaborate on three points.

The $14,000 Commission
The first point relates to Neasham's $14,000 commission, which I view as an appropriation of Schuber's funds to Neasham's use. The reader asked whether I am opposed to commissions. I said I am not. I have often said commissions are essential in situations where financial services are sold rather than bought. The consumer's tendency is to procrastinate, and someone must perform what I call the "anti-procrastination function." A person has to be paid to perform that function, and commissions are a reasonable form of compensation. I have often said many people die without wills because no one is paid to perform the anti-procrastination function.

I failed to make sufficiently clear in my previous posting that the annuity in question was not a single-premium annuity, but rather a flexible-premium annuity in which the first premium was large and no further premiums were contemplated. The first-year commission rate on a flexible-premium annuity is significantly higher than the commission rate on a single-premium annuity. In other words, I think the annuity sold in this case generated an excessive commission.

Jochim's Financial Interest
The second point relates to the financial interest of Louis Jochim, Schuber's 82-year-old live-in boyfriend, who precipitated the sale by bringing Schuber to Neasham's office. The reader said the question of Jochim's financial interest in the sale had nothing to do with Neasham. In response, I said it had everything to do with Neasham. In my opinion, the purpose of the sale was to allow Jochim--rather than Schuber's son Ted--to take eventual control of Schuber's property.

As described in my June 2012 article, Jochim's plan was thwarted. After Neasham's conviction, and after Allianz refunded the entire annuity premium to Schuber with interest, Ted obtained a court order. It designated Ted the conservator of Schuber's person and property. Jochim moved out of Schuber's house, and Ted moved her to the memory loss unit of an assisted living facility.

The Suitability Issue
The third point relates to suitability of the annuity. As I said in No. 6, the fact that the California Department of Insurance had approved the annuity contract form for sale to persons up to age 85 does not mean it is necessarily suitable. The reader said he sees no problem with an annuity that provides a period certain. In my view, when a person selects an annuity consisting of a period certain and a deferred life annuity, the arrangement would not be suitable for a person in poor health because the portion of the funds going to the purchase of the deferred life annuity would be forfeited entirely if the person dies during the period certain.

Wednesday, November 13, 2013

No. 7: John Grisham Strikes Again

John Grisham, one of our most popular novelists, has done it again. His latest book is Sycamore Row (Doubleday, 2013). It is set in 1988 in the fictional Mississippi town of Clanton. It involves many of the characters in his first book, A Time to Kill, which was set in 1985.

Seth Hubbard, a white man in his 60s, is dying of lung cancer and commits suicide by hanging himself from an old sycamore tree. He leaves a suicide note containing instructions about his funeral, a letter to Jake Brigance, the attorney hero of Grisham's first book, and a handwritten will executed the day before he committed suicide.

The handwritten will revokes Hubbard's previous will, which was of the usual type prepared by a law firm. The handwritten will disinherits Hubbard's two adult children, their children, and his two ex-wives. It leaves the bulk of his estate, which turned out to be large, to his black housekeeper, with relatively small bequests to a church and a long lost brother. The housekeeper had been with Hubbard for three years and had cared for him during his difficult final days. The handwritten will names the executor and instructs him to appoint Jake the attorney for the estate. The letter to Jake instructs him to carry out the terms of the handwritten will "at all costs," and warns there will be a big fight. The letter to Jake includes these sentences: "The doctors have given me only weeks to live and I'm tired of the pain.... If you smoke cigarettes, take the advice of a dead man and stop immediately."

Hubbard was correct about the fight. All through the book I wondered whether the second word of the title was "row," rhyming with "grow," or whether it was "row," rhyming with "brow." At the end of the book we learn there was a row (rhyming with grow) of sycamore trees of which the hanging tree was a remnant. However, the legal war that ensued certainly qualified as a row (rhyming with brow).

I have read all of Grisham's books, and I think this one may be his best yet. It is 447 pages but is a page-turner.