Thursday, July 27, 2017

No. 227: Long-Term Care Insurance—A Major Ruling in a Lawsuit against CalPERS

Los Angeles Superior Court Judge Ann I. Jones recently handed down a major ruling in a class action lawsuit against the California Public Employees' Retirement System (CalPERS). The case relates to large premium increases CalPERS imposed on owners of long-term care (LTC) insurance policies.

The Complaints
On August 6, 2013, the plaintiffs filed the original complaint after CalPERS notified them of an 85 percent increase in the premiums for their LTC insurance policies. On January 10, 2014, the plaintiffs filed an amended complaint. (See Sanchez v. CalPERS, Superior Court of California, County of Los Angeles, Case No. BC517444.)

The Parties
The plaintiffs in the original complaint were Alma Sanchez and Holly Wedding. The plaintiffs in the amended complaint are Sanchez, Wedding, Richard M. Lodyga, and Eileen Lodyga. Sanchez is no longer a class representative because of her advanced age and incapacity; she was born July 5, 1925.

The defendant in the original complaint was CalPERS. The defendants in the amended complaint are CalPERS, eight current and former members of its administrative board (Rob Feckner, George Diehr, Michael Bilbery, Richard Costigan, J. J. Jelincic, Henry Jones, Priya Mathur, and Bill Slaton), and the actuaries who initially helped set the premiums (Towers Watson and two predecessor firms).

The Causes of Action
The amended complaint asserts six causes of action: (1) breach of fiduciary duty, (2) breach of contract, (3) breach of the implied covenant of good faith and fair dealing, (4) rescission, (5) declaratory and injunctive relief, and (6) professional negligence. The sixth cause of action was against Towers Watson, with whom the plaintiffs have settled.

The Defendants' Motion
On March 10, 2017, the defendants filed a motion for summary judgment or, in the alternative, summary adjudication. Here are a few comments (selected and edited) from the defendants' motion:
In accordance with the Public Employees' Long Term Care Act adopted by the California legislature in 1995, CalPERS provides the nation's only self-funded, voluntary, and not-for-profit LTC insurance program. In 1995, LTC insurance was a relatively new product and robust actuarial data were not available to assist insurers in pricing. CalPERS retained a leading LTC actuarial firm, Towers Perrin, and a leading LTC administrator, Long Term Care Group, to assist in designing the LTC program, developing a premium rate schedule, and administering the LTC program.
CalPERS is a government entity, not a for-profit corporation. Accordingly, when it set its pricing, CalPERS did not incorporate a profit margin or the cost of commissions for insurance brokers. In addition, because the LTC program is not subject to insurance regulations, CalPERS enjoyed flexibility in investing the LTC fund.
CalPERS retained Coopers & Lybrand to review Towers Perrin's initial pricing model and provide an actuarial second opinion. Coopers did not recommend that CalPERS make any changes to the premium schedule for the LTC program, nor did Coopers recommend that any changes be made to the pricing assumptions made by Towers Perrin.
The actuarial assumptions used by CalPERS, like those used by the rest of the fledgling LTC insurance industry, did not prove to be accurate. In addition to substantial deviations relating to policy lapse rates and claims experience, financial market crashes in 2002 and 2008 led to premium increases throughout the LTC industry. Many private insurers exited the LTC insurance business: decreasing from over 100 private LTC carriers in 2002 to only about a dozen today. Other private insurers went into receivership. To address this industry-wide problem, CalPERS instituted substantial premium increases in 2003 (30 percent increase) and 2007 (41.7 percent increase), and 5 percent thereafter in 2010, 2011, 2012, and 2013. In early 2013, CalPERS advised policyholders of a further rate increase of 85 percent spread out over two years, beginning in 2015.
The Plaintiffs' Opposition
On April 28, 2017, the plaintiffs filed an opposition to the defendants' motion. Here are a few comments (selected and edited) from the plaintiffs' opposition:
In 1995, CalPERS decided to compete in the LTC insurance market by offering LTC insurance to CalPERS' members and their families. To sell its policies, CalPERS aggressively marketed the program through written materials, seminars, and word of mouth. CalPERS' advertising stated that, as a trusted, non-profit entity, it could offer rates that were 30 percent less than those of commercial carriers. Class Members were also repeatedly told that premiums were "designed to remain level" throughout the life of the program and to enroll at a young age. By 2003, CalPERS' aggressive marketing campaign led to more than 175,000 people enrolling in its LTC program. Compared to private insurance, CalPERS' LTC plan was initially cheaper, provided excellent benefits, and was purportedly managed by CalPERS, who the Class Members thought they could trust.
That trust was misplaced. After several years advising Class Members that the LTC trust fund was a "great success," in 2003, CalPERS announced a 30 percent rate increase for all policyholders as "a direct result of the LTC fund's lower than expected investment earnings related to the prolonged downturn of the stock markets." CalPERS raised premiums again in 2007 and 2010. But in 2013, CalPERS announced that, on top of all other rate increases, it was increasing premiums for LTC policyholders with certain benefits by another 85 percent!
The 2013 rate increase resulted from three failures by CalPERS. First, at the outset of the program, CalPERS mispriced certain policies that included a benefit known as "inflation protection." Second, at the beginning of the program, CalPERS adopted a highly aggressive investment strategy. In 2012, when CalPERS decided to change this investment strategy, it had to increase premiums. Third, CalPERS' pricing model did not include any reserves. In 2012, CalPERS decided to incorporate a 10 percent reserve into its pricing model and that too resulted in increased premiums.
In 1996, CalPERS retained Coopers & Lybrand to examine its LTC program and provide recommendations regarding its investment strategies and pricing. Coopers warned CalPERS that its conduct would likely lead to "criticism that it had 'low-balled' premiums to attract sales, with the intent—or at least willingness—to make future increases." But CalPERS ignored those warnings.
The Ruling
On June 15, 2017, Judge Jones handed down her ruling. She denied the defendants' motion for summary judgment. With regard to the defendants' motion for summary adjudication, she granted the motion as to the first cause of action (breach of fiduciary duty) and the fourth cause of action (rescission). However, she denied the motion as to the second cause of action (breach of contract), the third cause of action (breach of the implied covenant of good faith and fair dealing), and the fifth cause of action (declaratory and injunctive relief). Thus she allowed the case to proceed with three of the causes of action, and the case may go to trial early in 2018.

General Observations
The Sanchez case is reminiscent of a personal experience I had 20 years ago. In No. 144 (posted February 16, 2016), I said I had seen an LTC insurance promotional letter distributed by a predecessor of Genworth. The letter included this sentence, with the indicated underlining: "Your premiums will never increase because of your age or any changes to your health." I wrote to the company expressing the opinion that, although the sentence was technically correct, it was deceptive because the company had the contractual right to increase premiums on a class basis. A company officer said he understood my concern, because some companies had increased premiums, but he provided reasons why the sentence was not deceptive. One reason, for example, was that the company had never increased premiums and had an "internal commitment to rate stability." Later I saw a promotional letter virtually identical to the earlier letter except that the company had quietly removed the sentence about which I had expressed concern. I say "quietly" because the company did not inform me it had made the change. Now the plaintiffs in the Sanchez case allege, in paragraphs 35 and 37 of the amended complaint, that CalPERS in 1995 said the premiums for its LTC insurance were "set," the "rates do not increase simply because of age or illness," and the rates are "locked in for the life of your coverage."

I plan to report on the results of the trial. I also plan to report on any settlement agreement that the parties may reach.

Available Material
I am offering a 120-page complimentary PDF consisting of the text of the amended complaint (39 pages), the defendants' motion (33 pages), the plaintiffs' opposition to the defendants' motion (33 pages), and the judge's ruling (15 pages). Email and ask for the July 2017 package about the Sanchez/CalPERS case.


Thursday, July 20, 2017

No. 226: The Age 100 Problem—The Achilles' Heel of Life Insurance—Lands in Court

On July 20, 2017, Gary Lebbin and a trust he created filed a lawsuit against Transamerica Life Insurance Company relating to what I have called "the age 100 problem in life insurance." The case involves universal life and illustrates problems faced by elderly insureds. The following paragraph is in the introductory section of the complaint:
2. For decades, life insurance carriers, such as Transamerica, sold permanent universal life insurance policies, marketed as "insurance for life," utilizing outdated mortality tables that did not take into account the fact that Americans were, and are, increasingly living to and past the age of 100. The result has been the improper termination of life insurance policies that were originally sold to policy holders as "permanent insurance." The life insurance industry has left its customers (who faithfully paid their premiums with the expectation that they would have coverage for the remainder of their lives) uninsured. Further twisting the knife, these terminations have exposed customers to adverse tax consequences that are in direct contradiction to the guarantees made when these policies were purchased.
The case was assigned to U.S. District Judge Theodore D. Chuang. President Obama nominated him in September 2013 and the Senate confirmed him in May 2014. (See Lebbin v. Transamerica, U.S. District Court, District of Maryland, Case No. 8:17-cv-1870.)

The Plaintiffs
Lebbin was born in September 1917 in Germany, came to the United States in 1938 to escape Nazi persecution, and married in 1944. His wife died in 2015 at age 97. He has two children, four grandchildren, and seven great-grandchildren. In 1990 he created a trust that purchased two second-to-die universal life policies from Transamerica with a total face amount of $3.2 million. His two children are the trustees of the trust.

The Policies
The policies are second-to-die policies on Lebbin and his wife. Now that she is deceased, the policies are single-life policies. They are based on the 1980 Commissioners Standard Ordinary (CSO) mortality table, in which the terminal age is 100. The terminal age is the age at which the table shows no survivors among insureds. In other words, the death rate in the year prior to the terminal age is 1 (or 1,000 deaths per 1,000 lives). Thus the table is based on the assumption that no one among the insured population survives to age 100. Lebbin will reach the terminal age in September 2017.

Marketing of the Policies
Lebbin says Transamerica represented the policies as "permanent" coverage that would insure him and his wife "for life," that would provide for the "cash value earnings" to grow income-tax-deferred, that the death benefit would be income-tax-exempt, and that "withdrawals (and thus the ability to determine when and if the cash value earnings would constitute taxable income) would be within the control of the Plaintiffs."

I visited the Transamerica website in July 2017. Here is how the company describes whole life and universal life:
Whole life insurance provides permanent protection for life as long as premiums are paid. In addition to guaranteed cash value that you can access through a loan, your loved ones are guaranteed to receive a death benefit. You should expect to pay a higher premium than you would for a term life policy, but your premiums remain the same throughout your lifetime.
Unlike term and whole life insurance, universal life provides an additional level of flexibility. It allows policy owners to modify the amount and frequency of premium payments as long as there is sufficient cash value in the policy to cover monthly deductions. When the insured dies, a guaranteed amount of money, or death benefit, is left to the named beneficiaries. In addition to the death benefit, universal life also contains a cash value. The cash value grows tax-deferred until funds are withdrawn.
The Insuring Agreement
The insuring agreement is the heart of any insurance policy. Here is the full insuring agreement in Lebbin's policies:
While the policy is in force, Transamerica Occidental Life Insurance Company will pay the death benefit to the beneficiary if both Joint Insureds die before the policy anniversary nearest Joint Equal Age 100, or will pay the net cash value, if any, to the owner on the policy anniversary nearest Joint Equal Age 100 if both or either Joint Insured is living on that date. All payments are subject to the provisions of this policy.
The definitions section of the policy says "Joint Equal Age" is "the adjusted age of the Joint Insureds which reflects a risk that would be equivalent to two people of the same age, class of risk, and smoking status." Since Lebbin's wife is no longer living, the policy is now a single-life policy. Here is the effective language of the insuring agreement:
While the policy is in force, Transamerica Occidental Life Insurance Company will pay the death benefit to the beneficiary if the Insured dies before the policy anniversary nearest age 100, or will pay the net cash value, if any, to the owner on the policy anniversary nearest age 100 if the Insured is living on that date. All payments are subject to the provisions of this policy.
Lebbin alleges that, on top of the loss of the death benefit, his (or the trust's) receipt of the cash values of the policies at age 100 will have adverse income tax consequences. I do not know the magnitude of the tax problem because I do not know how Transamerica calculates the amount of taxable income shown on the Form 1099 it sends to the policyholder. Nor do I have access to the statements that Transamerica promised to provide to the policyowner each year.

Extended Maturity Riders
The 2001 CSO mortality table has a terminal age of 121. According to the Lebbin complaint, some life insurance companies—but not Transamerica—offer the option of an Extended Maturity Rider (EMR) for universal life policyholders who own policies based on older mortality tables that have a terminal age of 100. Although EMRs are discussed in actuarial publications, I am not aware of any discussions of EMRs for traditional whole life policies. Here is Principal Life Insurance Company's brief description of its EMR for universal life policies:
If the insured reaches the stated maturity age, maturity is extended to the date of his or her death. The rider is automatically added to policies in states where approved, and there is no charge for the rider. There will be no charges during the maturity extension period. However, loan interest will continue to be charged. No additional premium payments, other than loan payments, will be allowed.
According to the Lebbin complaint, he wrote to Transamerica and asked the company to attach EMRs to his policies. The company declined the request.

The Complaint
The counts in Lebbin's complaint are breach of contract, negligent misrepresentation, fraud (intentional misrepresentation), violations of Maryland's Consumer Protection Act, unjust enrichment, declaratory relief, reformation, and rescission. He requests, among other forms of relief, a declaratory judgment, compensatory and punitive damages, an injunction, reformation or rescission, pre-judgment and post-judgment interest, attorney fees, and court costs.

General Observations
I first wrote about the age 100 problem in 2001, in two articles in The Insurance Forum. I also wrote about the problem in No. 141 (posted February 1, 2016), where I said I was writing to four companies in which my wife and I own life insurance to ask about the problem. Three letters went to policyholder service departments. They did not understand my inquiry. One, for example, sent beneficiary change forms.

The fourth letter went to an executive who understood my inquiry. He said his company writes to the policyholder several months before the insured reaches age 100. The company offers to hold the money after age 100, pay interest on it, refrain from charging further premiums, and pay the money at the insured's death. He sent me a sample letter. It did not address the question of whether the policyholder who accepts the offer would have constructive receipt (for income tax purposes) of the death benefit at the terminal age after having accepted the offer to allow the company to hold the money until the insured's death. The standard company response to the income tax question is to "consult your tax adviser," despite the fact that there is no way a tax adviser would be in a position to answer the question.

It is an understatement to say the age 100 problem is serious. Indeed, I think the problem is the Achilles' heel of life insurance. The bedrock principles of life insurance marketing are the income-tax-deferred inside interest and the income-tax-exempt death benefit. The problem is so serious that, as I said in my second Forum article on the subject, the companies do not want to discuss the matter. I further believe that neither the Internal Revenue Service (IRS) nor the income-tax-writing committees of Congress want to discuss the matter.

Now we have the Lebbin case. It is not a class action; indeed, there is no time for a class action because Lebbin is close to the terminal age. Even if the case survives the inevitable motion to dismiss the complaint, there would be no time for discovery, and there would be no time for a trial. I believe and hope that Transamerica and Lebbin's attorneys will be able to reach a confidential settlement that will solve his immediate problem.

I think the only way to force the industry and other interested parties to address the age 100 problem is to mount a class action. If it survives the motion to dismiss the complaint, and if a class is certified, the parties would have powerful incentives to avoid a trial, and any proposed settlement would be in the public domain.

Available Material
In No. 141, I offered a 37-page complimentary PDF consisting of the two 2001 Forum articles (4 pages), an excerpt from a variable universal life prospectus (1 page), a 2009 IRS request for comments (8 pages), a 2009 comment letter from the American Council of Life Insurers (22 pages), and a 2010 IRS revenue procedure (2 pages). The package is still available. Email and ask for the February 2016 package about the age 100 problem.

I am now offering a 54-page complimentary PDF consisting of the Lebbin complaint (20 pages) and an exhibit showing the $2 million Lebbin policy (34 pages). Email and ask for the July 2017 package about the age 100 problem.


Friday, July 14, 2017

No. 225: Genworth Financial—Voluntary Dismissal of a Class Action Lawsuit Filed by Long-Term Care Insurance Policyholders

On December 28, 2016, Erika Leifer and two other long-term care (LTC) insurance policyholders filed a class action lawsuit against Genworth Financial, two subsidiaries, and four executives. The plaintiffs had been notified of substantial increases in the premiums for their policies. The plaintiffs alleged that the premium increases had harmed millions of current and former Genworth LTC insurance policyholders, that the defendants had wrongfully depleted reserve liabilities, and that the defendants had enriched themselves. (See Leifer v. Genworth, U.S. District Court, Eastern District of Virginia, Case No. 3:16-cv-1008.)

The Original Complaint
The situation faced by Leifer, a resident of New York, illustrates what prompted the lawsuit. In September 2002, at age 51, she bought an LTC insurance policy from Genworth Life Insurance Company of New York (GLICNY). The quarterly premium was $500.24. About two years later, she bought another LTC insurance policy from GLICNY. The quarterly premium was $270.40. Here is a paragraph of the original complaint:
26. By letters dated February 20, 2016, GLICNY informed Plaintiff Leifer, now age 65, that the premiums on both of her long-term care insurance policies would be increasing by 60%, and warning that "it is possible that your premium will increase again in the future." In that letter, GLICNY explained that the decision to increase premiums was not based on any change in health or "the current economic environment." Rather, "Our decision to increase premiums is primarily based upon the fact that the expected claims over the life of your policy are significantly higher today than was anticipated when your policy form was originally priced, and as a result, a premium increase is warranted."
I reported on the case in No. 197 (posted January 13, 2017). There I offered readers the 61-page original complaint.

The Motion to Dismiss the Original Complaint
The defendants did not respond to the original complaint. Instead, on March 27, 2017, they filed a motion to dismiss the original complaint. They also filed a memorandum and several other documents in support of the motion. They said the motion was based on the "lack of subject matter jurisdiction (due to a lack of standing)" and "failure to state a claim upon which relief can be granted."

The Amended Complaint
The plaintiffs did not respond to the motion to dismiss the original complaint. Instead, on April 10, they filed a 114-page amended complaint on behalf of 19 policyholders. They are residents of California (2), Florida (2), Maryland, Michigan, New York (2), North Carolina (2), Pennsylvania (5), South Carolina, Texas (2), and Virginia.

Aside from the expanded version of the "parties" section in the amended complaint because of the increased number of plaintiffs, the 58-page "factual background" section in the amended complaint was about twice the size of the corresponding section in the original complaint. Also, there were eight counts in the amended complaint, compared to seven counts in the original complaint. Here are the first and last paragraphs of the expanded "introduction" section in the amended complaint:
1. This case concerns the financial harm caused to current and former policyholders of Genworth long term care ("LTC") insurance policies in the United States, as a direct result of Genworth's deliberate misconduct in wrongfully depleting needed policy reserves—which is the portion of an insurer's revenue held aside to pay future claims—while masking its true financial condition by not disclosing facts required by the National Association of Insurance Commissioners ("NAIC") and statutory accounting fundamentals.
31. Consequently, Plaintiffs, as well as other similarly situated policyholders that comprise the Classes, now seek either restitution, damages for the diminution in their LTC policies' economic value, or damages for out-of-pocket losses incurred by former policyholders who have had to pay higher premiums for new LTC coverage to replace terminated Genworth policies.
The Motion to Dismiss the Amended Complaint
The defendants did not respond to the amended complaint. Instead, on May 22, they filed a motion to dismiss the amended complaint. They also filed a memorandum and several other documents in support of the motion. They used the same reasoning they used in the motion to dismiss the original complaint.

The Plaintiffs' Notice of Withdrawal
The plaintiffs did not respond to the motion to dismiss the amended complaint. Instead, on June 10, they filed a notice of withdrawal of the amended complaint and of voluntary dismissal of the case "without prejudice." That expression means the case can be refiled later. On June 26, the judge endorsed the notice and said "so ordered."

General Observations
Why the plaintiffs dropped the case is a mystery. I asked one of the plaintiffs' attorneys, with whom I am acquainted, for an explanation, but received no reply. I will not speculate on why they dropped the case. I will say I am perplexed in view of the enormous amount of resources that must have gone into preparation of the original and amended complaints.

The dropping of the Leifer case is reminiscent of a class action lawsuit I wrote about in No. 110 (posted July 17, 2014). There the 105-page complaint (and 67 additional pages of exhibits) alleged phony reinsurance transactions with affiliates and participation in a Racketeer Influenced and Corrupt Organizations Act (RICO) enterprise. The lead plaintiffs were Clarice Whitmore, an Arkansas resident who bought an annuity in 2012 from Security Benefit Life Insurance Company, and Helga Maria Schulzki, a California resident who bought an annuity in 2013 from EquiTrust Life Insurance Company. The defendants were Guggenheim Partners LLC, Guggenheim Life and Annuity Company, Security Benefit Life, and EquiTrust Life. The complaint was withdrawn without explanation one day after it was filed. In No. 110, I offered readers the 172-page filing. (See Whitmore v. Guggenheim, U.S. District Court, Northern District of Illinois, Case No. 1:14-cv-948.)

Available Material
I am offering a complimentary 118-page PDF consisting of the amended complaint in the Leifer case (114 pages) and the notice of voluntary dismissal (4 pages). Email and ask for the July 2017 package relating to the Leifer lawsuit against Genworth.


Friday, July 7, 2017

No. 224: Savings Bank Life Insurance Company of Massachusetts—The Plan to Convert into a Mutual Company

On May 19, 2017, James Morgan, president and chief executive officer of Savings Bank Life Insurance of Massachusetts (SBLI), notified policyholders about a plan to buy out the stockholders and convert the organization into a mutual company. He said the board of directors had unanimously approved the plan, and implementation required the approval of a majority of the policyholders who vote on the plan. He said a special meeting of policyholders was to be held on June 28. He urged them to vote in person at the meeting, or by another method. A "Summary Policyholder Information Statement" accompanied the notification letter and described the plan. Policyholders interested in further details were invited to request a more lengthy "General Policyholder Information Statement."

On June 22, 2017, Leslie McEvoy, a policyholder who received the notice, filed a class action lawsuit in state court against SBLI. She also filed a motion for a preliminary injunction blocking implementation of the plan, and she asked for an expedited hearing. The case was referred to Superior Court Justice Mitchell Kaplan. (See McEvoy v. SBLI, Suffolk Superior Court, Commonwealth of Massachusetts, Case No. 2017-1961.)

The Plan
SBLI has 30 stockholders who are savings banks in Massachusetts. SBLI plans to buy back all the shares of Class A common stock for $500 per share and all the shares of Class B common stock for $128 per share, for a total of $57.3 million. SBLI plans to obtain the money by issuing a surplus note (explained later). The Massachusetts insurance commissioner has approved the plan, subject to approval of the policyholders.

The Complaint
The general thrust of the plaintiff's opposition to the plan is that the notice to the policyholders is "grossly defective," that the policyholder vote based on that notice would not be valid, and that the plan should not proceed until SBLI provides an adequate notice. Some of her objections to the plan are mentioned in the first paragraph of the complaint:
Plaintiff is seeking preliminary and injunctive relief related to the imminent vote of SBLI's policyholders — scheduled to occur at a Special Meeting on June 28, 2017 — on SBLI's proposed Plan of Conversion. Plaintiff seeks to enjoin the Special Meeting and block the policyholder vote on grounds that the Notice disseminated by SBLI to its policyholders and holders of annuity contracts eligible to vote, whose affirmative vote is statutorily required to secure approval of the Plan of Conversion, is false, deceptive and misleading. Plaintiff and the Putative Class of its participating policyholders will be irreparably harmed if the Special Meeting is allowed to convene and/or the policyholder vote, which is based on the grossly defective Notice, is allowed to proceed. [Emphasis in original.]
The Alleged Problems
The plaintiff alleges that SBLI's notice is "false, deceptive and misleading" because of several major problems. Here are five of those alleged problems.

First, SBLI has $219 million of net operating losses (NOLs) to carry forward. If the Internal Revenue Service deems the conversion a "change of control" transaction, SBLI may be deprived of a significant portion of the NOLs. The notice did not disclose the likelihood or the consequences of such a development.

Second, the notice did not disclose that Piper Jaffray (PF), SBLI's financial advisor, analyzed the plan and prepared a fairness opinion. The plaintiff alleges that PF said the plan would provide a windfall to the stockholders and adversely affect the policyholders.

Third, the notice did not disclose that the costs of the surplus note may adversely affect the policyholders. A surplus note is a debt instrument that increases the issuing (borrowing) company's surplus because the company is not required to establish a liability for the amount borrowed. A surplus note is subordinate to the issuing company's other obligations, can be issued only with the prior approval of the insurance commissioner in the issuing company's state of domicile, and interest and principal payments can be made only with the commissioner's prior approval.

Fourth, when a stock company issues participating (dividend paying) policies, invariably there are questions about the relative interests of the shareholders and the policyholders in the earnings and surplus of the company. The plaintiff alleges that SBLI's plan will dilute the interests of the policyholders, and that the notice does not adequately address the problem.

Fifth, the notice asserts shareholders have a 37.5 percent interest in SBLI's original surplus. The plaintiff alleges that the assertion is false.

Other Filings
In addition to the complaint, the parties have filed many other documents. Here are a few of them. The plaintiff filed a motion for a preliminary injunction, with a supporting memorandum. SBLI filed an opposition to the motion for a preliminary injunction, with supporting memoranda. SBLI also filed the general policyholder information statement, frequently asked questions, an independent auditor's report, and financial statements.

The Milliman Opinion
SBLI retained Steven Schreiber, FSA, MAAA, of Milliman, Inc., an actuarial consulting firm, to provide an opinion as to whether the proposed plan of conversion is fair to the policyholders from an actuarial standpoint. The opinion, dated January 4, 2017, is appended to the general policyholder information statement offered to policyholders. The plaintiff alleges that the Milliman opinion is "flawed," and that SBLI's use of the opinion in connection with the proposed plan is "irrelevant and erroneous." Therefore the plaintiff alleges that inclusion of the opinion in the general policyholder information statement is "misleading."

The Milliman opinion says it can be used as necessary in connection with the proposed plan, but any other use of the opinion requires Schreiber's consent. I asked him for permission to provide it as part of a complimentary package I plan to offer to my readers. He declined to grant permission, citing "Milliman's longstanding policy of not discussing or distributing client work product."

The Hearing
On June 27, Judge Kaplan held a hearing on the plaintiff's motion for a preliminary injunction. It is my understanding that the judge expressed concern about SBLI's notice in several areas. However, because the special meeting of policyholders was the next day, and because the plan could not be implemented quickly, he decided not to issue an injunction immediately. The reason why the plan could not be implemented quickly is that SBLI has not completed arrangements for the surplus note.

The Special Meeting
On June 28, the special meeting of policyholders was held. It is my understanding that about 60,000 of SBLI's 480,000 policyholders voted, and that about 90 percent of those voted in favor of the plan.

The Order
On June 30, Judge Kaplan issued an order denying the plaintiff's motion for a preliminary injunction. He analyzed the plaintiff's allegations, generally sided with SBLI on them, and said the plaintiff was not likely to succeed on the merits of her allegations. The judge also said that "speed is more important than a carefully crafted explanation of the court's reasoning, so that the plaintiff may consider any other opportunities for the relief she requested."

Since the early 1990s, most insurance company reorganizations have been demutualizations. In such a reorganization, a policyholder-owned (mutual) company converts into a shareholder-owned (stock) company.

During the same period, some mutual companies have partially demutualized by creating a mutual holding company (MHC). In some such cases, the companies later dissolved their MHCs and demutualized; however, some MHCs still exist. I have expressed the opinion that creating an MHC is contrary to the interests of policyholders.

Prior to the early 1990s, most insurance company reorganizations were mutualizations, in which a stock company converts into a mutual company. An example is Equitable Life Assurance Society of the United States. Originally it was a stock company. However, after revelations in the Hughes-Armstrong investigation of 1905, the company mutualized. In 1992, the company demutualized under the sponsorship of AXA, a French company, and became AXA Equitable Life Insurance Company.

The Provident Case
Provident Mutual Life Insurance Company of Philadelphia, which at the time was an old and highly-regarded company, had an experience about 20 years ago reminiscent of the SBLI case. Provident notified its policyholders that the board of directors had approved a plan to create an MHC. The Pennsylvania insurance department held a hearing, the company amended the plan, the department approved the plan, the company asked the policyholders to vote on the plan, and 89 percent of those voting approved the plan.

However, a group of policyholders had filed a lawsuit in a Pennsylvania state court seeking an injunction blocking implementation of the MHC plan. They alleged that the policyholder information statement omitted important information, and that the policyholder vote therefore was not valid. Two days after the vote, the judge issued a preliminary injunction blocking implementation of the plan. Later the judge made the injunction permanent. Provident eventually scrapped the MHC plan and demutualized under the sponsorship of Nationwide Corporation.

As the Provident case progressed, I wrote extensively in The Insurance Forum about the case; the last major article was in the November 1999 issue. Jason Adkins, the lead plaintiff's attorney in the SBLI case, was involved in the Provident case.

General Observations
In general I agree with the plaintiff's allegations about the shortcomings of SBLI's notice to policyholders. Therefore I disagree with Judge Kaplan's order. In my opinion, the motion for a preliminary injunction should have been granted, the initial policyholder vote should have been voided, SBLI should have modified the notice and sent it to the policyholders, and another policyholder vote should have occurred.

I do not know whether the plaintiff can appeal Judge Kaplan's order or take some other action to seek relief. I plan to report significant further developments in the case, should they occur.

Available Material
I am offering a complimentary 68-page PDF consisting of SBLI's notification letter (1 page), SBLI's summary policyholder information statement (18 pages), McEvoy's complaint (29 pages), Judge Kaplan's order (14 pages), and the article in the November 1999 issue of The Insurance Forum (6 pages). Email and ask for the July 2017 package about SBLI's mutualization plan.