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 jmbelth@gmail.com and ask for the January 2016 Hilbert package.