Monday, January 25, 2016

No. 140: Senator Elizabeth Warren and the Insurance Company Letters to Her about Annuity Sales Incentives

On April 28, 2015, U.S. Senator Elizabeth Warren (D-MA), the Ranking Member of the Subcommittee on Economic Policy of the Committee on Banking, Housing, and Urban Affairs, wrote to 15 major issuers of annuities seeking "information on rewards and incentives offered by your company to brokers and dealers who sell annuities to families and small investors." I discussed Senator Warren's investigation in No. 97 (May 4, 2015) and in a follow-up in No. 124 (November 2, 2015). This is a second follow-up.

My Request to Senator Warren's Office
Shortly after the May 11, 2015 response date in Senator Warren's letters to the companies, I submitted to her office, pursuant to the U.S. Freedom of Information Act, a request for copies of the companies' response letters. Her office denied my request.

My Request to New York
The New York Department of Financial Services (DFS) asked the companies for copies of their letters to Senator Warren. On May 29, I submitted to DFS, pursuant to the New York Freedom of Information Law (FOIL), a request for copies of the letters. DFS acknowledged the request promptly, but said there would be a delay in responding.

On November 24 DFS sent me the 15 letters. The letter from Prudential is marked confidential, includes a request for confidentiality under the FOIL exemption for trade secrets and confidential financial information, and has portions redacted (blacked out) pursuant to that exemption. The letters from Allianz Life and Jackson National are unredacted. The other 12 letters are not marked confidential but contain redactions made by DFS.

My Requests to the Companies
On January 4, 2016, I wrote by regular mail to the 13 companies whose letters contain redactions. I enclosed a copy of the letter showing the redactions, and asked each company to send me—by January 15—an unredacted copy of its letter. I did not write to Allianz Life or Jackson National because their letters are unredacted.

Responses to My Requests
In response to my requests, Lincoln Financial, New York Life, and Pacific Life sent me their unredacted letters. AXA Equitable Life and Athene Annuity and Life acknowledged my request but declined to send their unredacted letters. The other eight companies did not acknowledge my request: American International Group, American Equity Investment Life, MetLife, Nationwide Life, Prudential, RiverSource Life, TIAA-CREF, and Transamerica.

Redactions by Regulators
Members of the public do not often have the opportunity to evaluate the redactions made by insurance regulators when they respond to requests pursuant to public records laws. Such an opportunity arose in connection with the company responses to Senator Warren's investigation of annuity incentives. That is why I decided, with regard to companies for which I have the unredacted and redacted versions of their letters, to include both versions in the package I am offering. By comparing the two versions, readers can judge for themselves the reasonableness of the redactions.

A similar opportunity arose in connection with the 1986 testimony of four officials of Executive Life Insurance Company of New York during a reinsurance investigation by what was then the New York Department of Insurance. I was able to identify a substantial amount of material that the company wanted redacted and that the Department did not redact. The incident is described briefly on pages 85-88 in my new book, The Insurance Forum: A Memoir, and the full details are in the October 1988 issue of The Insurance Forum.

General Observations
When I compared the unredacted letters with the redacted versions, I was surprised by some of the redactions that DFS made. Here, as examples, are three sentences that DFS redacted but that I think do not warrant trade secret protection:
  • Lincoln uses an independent model to distribute our annuity products, which are sold through affiliated and non-affiliated channels.
  • New York Life does not sponsor trips, contests, or prizes for third party distributors.
  • Registered representatives and producers must be state insurance licensed and appointed by Pacific Life in each state where they sell Pacific Life annuities.
I have said on previous occasions that the life insurance industry is built on the nondisclosure of information that is vital to life insurance consumers. Regrettably, state insurance regulators aid and abet such nondisclosure through their redaction practices in response to requests pursuant to public records laws.

Available Material
I am offering a complimentary 78-page PDF consisting of a one-page cover note listing the contents of the PDF, a sample of Senator Warren's five-page request letter to the companies, and all the unredacted and redacted company response letters I have. Email and ask for the January 2016 Warren/DFS package.


Tuesday, January 19, 2016

No. 139: Stephen Hilbert Returns to the Insurance Business

On January 7, 2016, BestDay carried an article entitled "Former Conseco CEO Hilbert Makes Return to Life Insurance Business as CEO of Sterling Investors Life." That was my first knowledge that Stephen Calvert Hilbert, who will turn 70 on January 23, is returning to the insurance business. When I sought more information, I found other articles about him, including in The New York Times on May 20, 2000, The Indianapolis Star on November 13, 2013, and the Indianapolis Business Journal on September 12, 2015.

In 1979 Hilbert co-founded Security National of Indiana, which later became Conseco. The other co-founder was David Deeds, who soon left the company. They started with $10,000. As chairman, president, and chief executive officer, Hilbert built Conseco into a company with $100 billion of assets under management, and he became one of the highest paid executives in the insurance business. Much of the growth was through acquiring companies, but some of the acquisitions turned out badly. In retrospect, the worst was Green Tree Financial, a subprime mobile home mortgage lender later renamed Conseco Finance. Thus Hilbert was prominent in subprime residential mortgage lending years before it became a major cause of the 2008 crash. In 2000, because of severe losses at Conseco Finance, Hilbert was forced out of Conseco (he uses the word "retired"). Conseco filed for bankruptcy protection in 2002, emerged from bankruptcy in 2003, and changed its name to CNO Financial Group.

Hilbert also has engaged in philanthropic activities. For example, the Circle Theater in downtown Indianapolis is the home of the Indianapolis Symphony Orchestra. In 1996 it was renamed Hilbert Circle Theater after Hilbert and his wife Tomisue Tomlinson Hilbert.

Hilbert has long been associated with Donald Trump. In 1998, for example, Conseco and Trump bought the General Motors Building in New York City. They sold it in 2003.

The Hilberts have been prominent in thoroughbred racing. In 1999, for example, their horse Stephen Got Even finished 14th in the Kentucky Derby, 4th in the Preakness Stakes, and 5th in the Belmont Stakes.

In 1999 the home of the Indiana Pacers became Conseco Fieldhouse. In 2011 CNO Financial renamed it Bankers Life Fieldhouse after Bankers Life and Casualty Company, a CNO subsidiary.

In 2005 Hilbert joined with John Menard, a wealthy hardware store owner, to form MH Private Equity, a money management company. Later Menard and Hilbert had a bitter quarrel that led to litigation in 2011. The litigation remains ongoing.

In September 2008 Hilbert's mother-in-law, Germaine Tomlinson, died as the result of either an accident or foul play. American General Life Insurance Company had issued a $15 million stranger-originated life insurance policy on her life in January 2006. Although the policy was beyond the two-year period of contestability when she died, the company filed a lawsuit against Tomlinson's insurance trust in December 2008 asking the court to declare the policy null and void from inception for lack of insurable interest. The case was settled on confidential terms. (I discussed the case in the April 2009 issue of The Insurance Forum.)

The Formation of SILAC
In April 2015 Hilbert formed SILAC LLC, a Delaware limited liability company, to acquire Sterling Investors Life Insurance Company, a small company domiciled in Georgia, and to redomesticate it (change its state of domicile) from Georgia to Indiana. I think SILAC stands for Sterling Investors Life Acquisition Corporation. SILAC assembled about $10.5 million of capital. It proposed to buy Sterling for about $7.2 million, with some adjustments. It may add some additional capital to Sterling, and may acquire other companies in the business of life insurance, health insurance, and annuities.

SILAC's inside investors are the Hilbert Joint Trust, James Adams, Scott Matthews, and William Stone. SILAC has two outside investors. One is Great American Life Insurance Company. The other is Rollin Dick, according to one document, and JLT PR LLC, an Indiana limited liability company, according to another document. I think Dick and JLT PR LLC are connected.

Sterling, which was owned by a company in Texas, was involved only in running off its existing business. It will focus on working, middle class consumers. It is licensed in all but a few states, but at the outset will concentrate on only eight states. It will offer life insurance and annuities.

According to its statutory quarterly statement as of June 30, 2015, Sterling had net admitted assets of $15.8 million, capital and surplus of $6.5 million, and virtually no net income. It was rated B (Fair) by A. M. Best Company from 2009 to 2013. In 2014 Best withdrew the rating at Sterling's request.

The Form A
On August 17, 2015, SILAC filed a Form A with the Indiana Department of Insurance seeking approval of the acquisition and redomestication of Sterling. The Form A was signed by Hilbert as chairman and chief executive officer of SILAC, and by Matthews as secretary. The "public copy" of the Form A consists of only 13 pages.

The Hearing
On August 26, eight business days after receiving the Form A, the Department held a so-called public hearing. I say "so-called" because no one attended other than representatives of the Department and SILAC. Stephen Robertson, the Indiana insurance commissioner, recused himself because for many years he had been a Conseco executive under Hilbert. He directed Doug Webber, chief of staff in the Department, to conduct the hearing as administrative law judge (ALJ) and issue the necessary order after the hearing.

The public notice of the hearing appeared in The Indianapolis Star on August 19, only one week before the hearing. The notice said the hearing was to begin at 1:30 p.m. However, it did not begin until 1:55 p.m. The delay, according to the transcript of the hearing, "was at the request of counsel for a conference" (in other words, an off-the-record, confidential conference). The ALJ repeatedly expressed satisfaction that Sterling was not going to offer long-term care insurance. The hearing ended at 4:34 p.m.

Attorneys for SILAC, attorneys for the Department, and several other staff members of the Department attended the hearing. The witnesses were Hilbert and Adams. Matthews and Tomisue Hilbert also attended. Absent from the hearing were Stone and three officers who had been with Sterling and were to remain with the company after the acquisition.

Confidential Documents
A substantial amount of material was withheld from the public in accordance with Indiana's holding company law. It exempts from public disclosure many documents filed with the Department in the course of an investigation of transactions such as the one in this case. Here is the relevant exchange reflected in the hearing transcript (Brent Coudron is a Department attorney, and Derrick Smith is a SILAC attorney):
ALJ: I strongly favor as much transparency as you can have. Have you been through that and are there statutory reasons that support why those documents are being held as confidential?
Coudron: Yes, I believe there is.
ALJ: Okay. Mr. Smith, I take it that you feel likewise?
Smith: Yes, Your Honor.
ALJ: Okay. All right.
In response to my request, the Department promptly provided the public copy of Form A, the hearing transcript, the ALJ's order, and two affidavits—by Hilbert and Adams—that were offered in evidence at the hearing. However, the Department denied my request for the biographical affidavits of the four principals—Hilbert, Adams, Matthews, and Stone. The Department said the biographical affidavits are exempt from disclosure in their entirety.

The Form A contains an interesting statement about the biographical affidavits of the four principals. Here is the language:
No such person has been convicted in a criminal proceeding (excluding minor traffic violations) during the past ten years. No such person has been the subject of any disciplinary proceedings with respect to a license or registration with any federal, state or municipal government agency, during the past ten years.
I think the second sentence of the above statement is incorrect. Adams was the subject of disciplinary proceedings in July 2006, nine years and one month before the filing of the Form A in August 2015. The matter began on March 10, 2004, when the Securities and Exchange Commission (SEC) filed a civil lawsuit against Adams, a certified public accountant (CPA), who had been the chief accounting officer of Conseco. Another defendant was Rollin Dick, who had been the chief financial officer of Conseco, and who is an outside investor in the SILAC acquisition of Sterling. The SEC alleged that Conseco and Conseco Finance, in filings with the SEC and in public statements, had made false and misleading statements about their earnings, overstating their results by hundreds of millions of dollars. The lawsuit ended on July 3, 2006, with judgments under which Dick and Adams paid to the SEC civil penalties of $110,000 and $90,000, respectively. Each was barred for five years from acting as an officer or director of a publicly held company. They consented to the judgments without admitting or denying the allegations in the complaint. Adams was also barred from appearing or practicing before the SEC as an accountant. He could have applied for reinstatement after five years, but has not done so, according to the transcript of the August 2015 hearing. Also, effective March 31, 2011, Adams' membership in the American Institute of Certified Public Accountants was terminated following an indefinite suspension of his CPA license by the Indiana Board of Accountancy in connection with his suspension from practice as an accountant before the SEC. The information in this paragraph is from documents in the public domain. Presumably the information is disclosed in Adams' biographical affidavit, which the Indiana Department of Insurance says is confidential. (See, for example, SEC v. Dick and Adams, U.S. District Court, Southern District of Indiana, Case No. 1:04-cv-457; SEC Litigation Release No. 19756, July 7, 2006; and SEC Accounting and Auditing Enforcement Release No. 2466, July 25, 2006.)

The Order
On August 26, the very day of the hearing that ended at 4:34 p.m., the ALJ signed and filed his 16-page order containing findings of fact and conclusions of law. The order grants, with conditions, final approval of the acquisition and redomestication of Sterling. Among the conditions, for example, on page 15 of the order is a requirement that a conflict-of-interest policy be prepared "specifically disqualifying Stephen Hilbert and Tomisue Hilbert from participating in votes [by Sterling's board of directors] relating to their compensation, benefits, and related party agreements."

General Observations
The approval of the acquisition and redomestication of Sterling was the result of an expedited process. Only eight business days elapsed between SILAC's filing of the Form A on Monday, August 17, 2015, and the ALJ's filing of his order on Wednesday, August 26. Regrettably, it seems to be fairly standard practice for a state insurance department to prepare an order in advance of a perfunctory hearing and file the order immediately after the hearing. Finally, I think it is wrong for biographical information about the principals in an acquisition and/or redomestication to be withheld from public scrutiny.

Available Material
I am making available a complimentary 48-page PDF consisting of the 13-page Form A SILAC filed, the 11-page combination of the Adams and Hilbert affidavits submitted in evidence at the hearing, the 16-page order the ALJ filed the day of the hearing, and the 8-page July 2006 federal court judgment against Adams. Email and ask for the January 2016 Hilbert package.


Monday, January 11, 2016

No. 138: The Life Partners Bankruptcy and an Offer from ASM Capital to Investors with Matured Fractional Interests

Life Partners Holdings, Inc. (LPHI) is the parent of Life Partners, Inc. (LPI), which was a participant in the secondary market for life insurance policies. On January 20, 2015, as discussed in No. 81 (posted January 22, 2015), LPHI filed for protection under Chapter 11 of the federal bankruptcy law. LPI later became a part of the bankruptcy court proceedings. H. Thomas Moran II is the Chapter 11 Trustee appointed by the bankruptcy court. Among those with an interest in the bankruptcy court proceedings are those who invested in fractional interests in the life settlements marketed by LPI. (See In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, Case No. 15-40289.)

The Preliminary Letter
ASM Capital (Woodbury, NY) is a firm that invests in the obligations of companies in bankruptcy. On or about December 1, 2015, ASM sent a one-page letter to a small sample of LPI fractional interest investors who have a "matured fund interest." That expression refers to a fractional interest in a policy on the life of an insured who has died. ASM asked the investor to contact ASM if the investor was interested in selling his or her claim in exchange for a prompt cash payment. Based in part on responses to the preliminary letter, ASM moved to the next step.

The Offer Letter
On December 22, ASM sent a one-page letter to each LPI fractional interest investor with a matured fund interest. The top of the letter shows the name and address of the owner of the matured fund interest. Just below that is the policy number, the policy face value, and the percentage owned by the investor. In the body of the letter are three items:
  • The "payout amount" is the policy face value multiplied by the percentage owned.
  • The "purchase percentage" is the percentage of the payout amount that ASM will pay to the investor.
  • The "ASM purchase price" is the payout amount multiplied by the purchase percentage.
Consider an example. Suppose the policy face value is $5 million and the percentage owned by the investor is one-third of 1 percent. The payout amount would be $16,666.65 ($5 million multiplied by 0.00333333). Suppose the purchase percentage is 75 percent. The ASM purchase price would be $12,499.99 ($16,666.65 multiplied by 0.75).

The Purchase Agreement
Enclosed with the offer letter was a two-page, small-print "matured funds purchase agreement." ASM asks the investor, if he or she wants to receive the ASM purchase price, to sign, date, and send the agreement to ASM, which will send payment within three to five business days provided everything is in order.

The matured funds purchase agreement consists of ten paragraphs. The titles of the ten paragraphs, along with the full text of the "Indemnification" paragraph, are as follows:
  • Purchase of Matured Funds.
  • Representations; Warranties and Covenants.
  • Execution of Agreement.
  • Consent and Waiver.
  • Matured Fund Interest or Recovery Impaired or paid on an Amount Less than the Payout Amount.
  • Notices (including Voting Ballots) Received by Seller; Further Cooperation.
  • Recovery (including Cure Payments) Received or Delayed by Seller.
  • Governing Law, Personal Jurisdiction and Service of Process.
  • Indemnification. Seller further agrees to reimburse Purchaser for all losses, costs and expenses, including reasonable legal fees at the trial and appellate levels incurred by Purchaser as a result of, in connection with, or related to any (a) impairment, (b) Seller's breach of this Agreement, including without limitation any misrepresentation by Seller, and/or (c) litigation arising out of or in connection with this Agreement or in order to enforce any provision of this Agreement.
  • Miscellaneous.
Below those ten paragraphs is the execution section of the agreement. The "Seller" (the investor) signs and dates the agreement, and the "Purchaser" (ASM) later signs and dates the agreement.

My Contact with ASM
I learned of the ASM offer when a reader sent me a copy of the offer letter and the agreement. The agreement was virtually unreadable. I contacted ASM and requested a good copy. ASM promptly provided a generic John Doe offer letter and the agreement. In the course of conversation, I learned of the preliminary letter and ASM provided a generic copy of that letter as well.

The only problem with the generic letters is that they are dated January 6, 2016, the date ASM prepared them for me. It is my understanding that the preliminary letters were dated around December 1, and that the actual offer letters were dated December 22.

General Observations
The Chapter 11 Trustee has a website at I have not yet seen anything on that website concerning the ASM offer. I doubt that the Trustee will offer what would amount to legal advice about the ASM offer to investors with matured fund interests, although he might indicate that it is usually a good idea to obtain legal advice from an attorney before entering into a complex legal agreement.  Nor will I offer advice, because I am not an attorney, a consultant, or a financial adviser.

Available Material
I am making available a complimentary four-page PDF consisting of the generic forms of the ASM preliminary letter, the ASM offer letter, and the matured funds purchase agreement. Send an email to and ask for the December 2015 ASM/Life Partners package.


Monday, January 4, 2016

No. 137: The Consumer Financial Protection Bureau and the Business of Insurance

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 provided for the creation of the Consumer Financial Protection Bureau (CFPB). Two years ago, Alan Press and I submitted to CFPB a complaint involving an insurance matter. CFPB immediately brushed off the complaint because it related to insurance. We asked CFPB to show us the statutory basis for its rejection of the complaint, but we received no reply. Recently I explored the massive Dodd-Frank Act in an effort to identify the statutory basis for CFPB's rejection of the complaint.

Our Complaint to the CFPB

Alan Press, CLU, is a retired general agent in New York City for Guardian Life Insurance Company of America, a past president of what is now the National Association of Insurance and Financial Advisors, and the recipient of several prestigious insurance industry awards. Press and I have been good friends for many years.

Press was familiar with the mission statement of Primerica Life Insurance Company. In January 2014, he saw CFPB's mission statement. Here are the two statements:

Primerica: Our mission is to serve middle income families by helping them to make informed financial decisions and providing them with a strategy and means to gain financial independence.... Our clients are generally middle income consumers, which we define as households with $30,000 to $100,000 of annual income.
CFPB: Our mission is to make markets for consumer financial products and services work for Americans—whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products. Above all, this means ... no provider should be able to use unfair, deceptive, or abusive practices.
Press called CFPB's whistleblower number. He asked whether CFPB would be interested in information about a life insurance company that imposes undisclosed charges equivalent to an unfair, deceptive, and abusive annual percentage rate (APR) of 29.7 percent on millions of policyholders who pay premiums monthly (rather than annually) through preauthorized withdrawals from checking accounts. The CFPB person who answered the telephone encouraged Press to file a complaint.

Press was aware of my extensive writings about fractional (modal) premium charges imposed on policyholders who pay premiums more often than once a year, and he contacted me. We assembled a 52-page PDF and submitted the complaint to CFPB by email at 8:45 a.m. on February 12, 2014. The package consisted of a two-page explanatory cover letter, brief biographical sketches of the two of us, an article Press had written, and seven articles I had written. The complaint described the unconscionable 29.7 percent APR Primerica imposed and still imposes on buyers of life insurance who pay premiums monthly with preauthorized checks.

In the cover letter we quoted the mission statements of Primerica and CFPB. Several of my articles in the package described in great detail how state insurance regulators not only have refused to require APR disclosure of fractional premium charges but also have fought to prevent consumer access to such information. At 11:34 a.m. the same day, CFPB rejected the complaint with this email:

Thank you for your information that was sent to Consumer Financial Protection Bureau's whistleblower email address. The Bureau has authority to investigate possible violations of Federal consumer financial laws, and to enforce such statutes. These matters typically involve mortgages, student loans, credit cards, payday loans, and auto finance. The Bureau generally does not have jurisdiction over matters involving life insurance or securities. We therefore are not able to investigate your allegations relating to an insurance matter.
We asked CFPB to send us the statutory language prohibiting CFPB from investigating harmful practices that insurance companies perpetrate against consumers. We also asked CFPB to explain why its mission statement refers to "any number of other consumer financial products" and fails to warn the reader that CFPB is barred from investigating harmful insurance practices. Finally, we asked that CFPB staff members read the complaint and reconsider their rejection of it. We received no further reply.

The Dodd-Frank Act

The version of the Dodd-Frank Act that I examined is an 848-page PDF posted on the website of the Securities and Exchange Commission. The page numbers mentioned later in this blog post are page numbers of that PDF. The Dodd-Frank Act consists of these 16 titles:
I Financial Stability
II Orderly Liquidation Authority
III Transfer of Powers to the Comptroller of the Currency, the [Federal Deposit Insurance] Corporation, and the [Federal Reserve] Board of Governors
IV Regulation of Advisers to Hedge Funds and Others
V Insurance
VI Improvements to Regulation of Bank and Savings Association Holding Companies and Depository Institutions
VII Wall Street Transparency and Accountability
VIII Payment, Clearing, and Settlement Supervision
IX Investor Protections and Improvements to the Regulation of Securities
X Bureau of Consumer Financial Protection
XI Federal Reserve System Provisions
XII Improving Access to Mainstream Financial Institutions
XIII Pay It Back Act
XIV Mortgage Reform and Anti-Predatory Lending Act
XV Miscellaneous Provisions
XVI Section 1256 Contracts
Title V on insurance deals with such matters as nonadmitted insurance and reinsurance. That title is not relevant to the CFPB matter discussed in this blog post.

Title X
The Dodd-Frank Act's Title X, which begins on page 580, provides for the creation of CFPB. On the same page, "business of insurance" is defined as follows:
The term "business of insurance" means the writing of insurance or the reinsuring of risks by an insurer, including all acts necessary to such writing or reinsuring and the activities relating to the writing of insurance or the reinsuring of risks conducted by persons who act as, or are, officers, directors, agents, or employees of insurers or who are other persons authorized to act on behalf of such persons.
Beginning on page 582, there is a lengthy section in which the term "financial product or service" is defined. The following brief exclusion is on page 585, near the end of that section:
The term "financial product or service" does not include the business of insurance.
General Observations
I have long been impressed by the ability of the insurance industry to lobby successfully for enactment of laws that allow insurance companies to harm consumers with "unfair, deceptive, or abusive practices." One of my early experiences in that regard was the enactment of federal legislation in 1979 prohibiting the Federal Trade Commission from taking action against insurance companies and from even investigating insurance companies without a formal request from a congressional committee. I discussed the matter on pages 78-79 in my new book, The Insurance Forum: A Memoir, where I showed the current language of the relevant federal statute.

Now we have the Dodd-Frank Act prohibiting CFPB from doing anything about insurance. The combination of the definition of "business of insurance" and the exclusion of insurance from the definition of "financial product or service" allows insurance companies to engage in practices harmful to insurance consumers, given the industry's success in preventing state insurance regulators from taking effective action against such practices. As an example, the complaint we submitted to CFPB includes detailed discussions of how state insurance regulators opposed a potential requirement that insurance companies disclose APRs associated with fractional premium charges.

Available Material
I am making available as a complimentary 52-page PDF the complaint Press and I submitted to CFPB. My primary reasons for offering the package are to allow readers to see the discussions of the significance of APR disclosure of fractional premium charges and how state insurance regulators opposed that important form of consumer protection. Email and ask for the Press/Belth 2014 complaint to CFPB.