Thursday, June 28, 2018

No. 274: The Phoenix-Wisconsin Settlement of a Long Dispute Over Cost-of-Insurance Increases

During and after the 2004-2007 heyday of stranger-originated life insurance (STOLI), PHL Variable Life Insurance Company and its affiliates (collectively, Phoenix) issued many universal life insurance policies destined for sale into the secondary market for life insurance policies generally, and for sale into the STOLI market specifically. Many of the policies had face amounts of at least $1 million, and were on the lives of insureds aged at least 68. Many eventually became owned by Fortress Investment Group, a global asset management firm that invests in the secondary market for life insurance. When market interest rates declined after the Great Recession, the policies became unprofitable to Phoenix, which then imposed cost-of-insurance (COI) increases.

COI Increases
In 2010 PHL singled out certain STOLI policies for large COI increases. Fortress, by then the owner of many such policies, filed complaints with state insurance regulators. California, New York, and Wisconsin found the 2010 COI increases to be in violation of their insurance laws. PHL disagreed with that finding. The California Department of Insurance took no further action, and the 2010 COI increases imposed on California policyholders remained in effect.

Developments in New York
What was then the New York State Department of Insurance ordered PHL to rescind the 2010 COI increases and return the money, with interest, to the owners of policies issued in New York. PHL did so.

In 2011 PHL implemented new COI increases only on policies issued in New York. The New York Department did not object to the 2011 COI increases.

Developments in Wisconsin
The Office of the Commissioner of Insurance (OCI) of Wisconsin ordered PHL to rescind the 2010 COI increases on policies issued in Wisconsin. PHL refused to do so, and began what turned out to be a long legal battle. Here I describe the dispute and the settlement agreement that ended it.

The Hearing Notice
On April 30, 2013, OCI Attorney Richard B. Wicka notified PHL there would be a prehearing conference on May 20, 2013, followed by a hearing on June 26, 2013, before Administrative Law Judge (ALJ) Alice M. Shuman-Johnson. The notice said OCI had received a complaint from Fortress on February 9, 2012 alleging the 2010 COI increases were discriminatory because they targeted investor-owned policies, were not in accordance with the terms of the policies, and the marketing materials misled consumers. The hearing notice said PHL issued nine Wisconsin policies subject to the 2010 COI increases, and seven were still in force. The notice also explained why OCI determined that the 2010 COI increases violated Wisconsin insurance laws. On June 7, 2013, Commissioner of Insurance Theodore K. Nickel of Wisconsin ordered that the ALJ's decision would be the OCI final decision.

The Motions for Summary Judgment
On January 31, 2014, PHL and OCI filed motions for summary judgment. On October 16, 2014, after the motions had been fully briefed, the ALJ issued a decision granting in part and denying in part the motions for summary judgment. On January 13, 2015, the ALJ issued a preliminary order. On March 23, 2015, the ALJ issued a final order requiring PHL to pay restitution in the aggregate amount of about $535,000, including interest, to the owners of the seven policies. The ALJ also required PHL to pay $40,000 to the State of Wisconsin.

The Petition for Judicial Review
On April 1, 2015, PHL filed in the Dane County (Wisconsin) Circuit Court a petition for judicial review of the preliminary order and the final order. On April 16, 2015, PHL and OCI entered into a stipulation staying enforcement of the preliminary order and the final order during the judicial review. While the judicial review was ongoing, PHL made three escrow payments to the Dane County Circuit Court clerk totaling about $79,000.

The Public Records Dispute
On July 2, 2015, PHL filed a complaint in the Dane County Circuit Court alleging OCI and Commissioner Nickel had violated Wisconsin's Public Records Law. The public records dispute had begun on January 6, 2015. On September 15, 2015, the Circuit Court judge stayed the petition for judicial review pending resolution of the public records dispute.

The Settlement Agreement
By way of a settlement agreement signed by an OCI official on June 19, 2017 and by a PHL attorney the next day, OCI and PHL settled the matter. Also, PHL and the policyholders have resolved their differences. The agreement provides no information about the financial aspects of the settlement. Two key paragraphs of the agreement read:
10. In light of the foregoing, the Parties wish to resolve all complaints, claims, charges, grievances and appeals, demands and liabilities arising specifically under the Preliminary Order, the Final Order, the Judicial Review Action, and the Public Records Action.
11. The Parties enter into this binding Settlement Agreement to resolve all pending disputes from the beginning of time to and including the effective date of this Settlement Agreement, and solely to avoid expense and further litigation in court.
General Observations
I think few state insurance departments have the human and financial resources necessary to carry on an extended legal battle with a major insurance company. Wisconsin is one of them, but the dispute described in this post illustrates the limits even there. I have written this post in part to illustrate why states with limited resources are reluctant to take on a major insurance company.

I express my thanks to OCI officials, who responded promptly and thoroughly to the public records requests I submitted when the dispute began. Thereafter I did not follow developments closely. When I learned recently about the settlement agreement, OCI officials again responded promptly and thoroughly to my public records requests.

Available Material
I wrote in The Insurance Forum about Phoenix COI increases, and I have written about the subject on my blog. For example, I refer interested readers to No. 9 (11/21/13), No. 26 (1/29/14), No. 103 (6/15/15), and No. 266 (5/16/18). The complimentary packages offered in those posts are still available.

Now I offer a complimentary 43-page PDF consisting of the OCI hearing notice (6 pages), the ALJ decision on motions for summary judgment (22 pages), the ALJ preliminary order (3 pages), the ALJ final order (5 pages), and the settlement agreement (7 pages). Email and ask for the June 2018 package about the Phoenix-Wisconsin dispute.


Monday, June 25, 2018

No. 273: Trump and His Latest Atrocity

For almost 60 years I have focused in my writings on matters of concern to persons with a professional or consumer interest in insurance. I have deviated occasionally, such as a blog post on President Donald Trump's executive order imposing the original travel ban, and in a later blog post on his executive order requiring that two regulations be withdrawn for each new regulation adopted. Now it is time for another deviation in view of his zero-tolerance policy relating to refugees seeking asylum in our country from life-threatening conditions in Central America.

Recently I have seen numerous comments on the situation written by persons more qualified and skilled than I am. Two examples stand out.

One was written by Stephen R. Leimberg. He is a professional fine art, portrait, and wildlife photographer in Amelia Island, Florida. He previously taught law at Temple and Villanova University Schools of Law in their Tax Masters programs. In the interest of full disclosure, he is a long-time close friend of mine.

The other was written by Robert Weissman. He is president of Public Citizen, a nonprofit consumer advocacy organization founded in 1971 that champions the public interest in the halls of power. In the interest of full disclosure, the Public Citizen Litigation Group has represented me pro bono on several occasions, and I am a regular donor to the organization.

My usual practice is to offer complimentary packages to readers and invite them to request the packages by email. In this instance I am offering the two statements, which I have edited slightly, as a part of this blog post.

by Stephen R. Leimberg

"Insane." "Close to Obscene." "Pure evil." These are not my words. They are the words of Father James Martin with reference to Jeff Sessions' citing of the New Testament to justify tearing children from the arms of their parents. He rightfully called Sessions' shameful statement "cherry picking," i.e., taking words out of context, and added, "It is wantonly cruel and targets the most vulnerable."

Ask yourself how you would feel as a parent—or as a child—if, after fleeing for your life and enduring a gut-wrenching months-long journey, you were suddenly ripped apart from your loved ones. What would you think if those who administered such unspeakable acts did not even keep track of where those children or parents were incarcerated—so that you could be reunited quickly at some point—even if such horrendous, heinous, morally barren actions were somehow necessary or appropriate? Yet these "follow orders from the top" "public servants" did not have the foresight or competence to establish a means or mechanism to put parent and child back together—or even allow them to keep in touch. How would you feel if—for weeks or even months—you had no idea where your child was taken—or what your child's physical or emotional condition is? More importantly for the long run, what should we think of the character and competence of those who engineered and carried out such atrocities—in our country?

Now you may be saying to yourself, "I was told that these rapist, drug dealing, foreigner migrants will infest our country, and that we cannot let these pests pour in!" Raise your hand if you have no relatives who immigrated to this country to gain religious freedom, escape tyranny, and literally save their lives, or who came to our shores with the hope of a better life for themselves and their families. But wait, you say, "Mine were different from these people. And that was a different time!" Really?

Were they Irish? Fleeing from famine and starvation, "these poor and disease-ridden folks"—according to newspapers of the time—"threaten to take away jobs from Americans and strain welfare budgets, practice an alien religion, pledge allegiance to a foreign leader, and bring crime with them." Yes, at one time America feared and despised the Irish!

Italian? In the late 1800s, it was written of Italian immigrants: "Those sneaking and cowardly Sicilians, the descendants of bandits and assassins, who have transported to this country the lawless passions, the cut-throat practices, and the oath-bound societies of their native country, are a pest without mitigation. Our own rattlesnakes are as good citizens as they are." Read your history. Italians were lynched in this country!

Polish? German? Jewish? Chinese? Japanese? Indian? Pakistani? Go to Google and type in: "your nationality's American Experience." Our country, unfortunately, has always had fearmongers willing to promote and perpetuate a legacy of lies, discrimination, and stereotyping designed to further their own agendas. What is different now is that it has seldom been the nation's highest elected leaders opening the Pandora's box of hate.

We have been awakened by the beyond-callous sheer barbarism of this governmental child snatching. But this mean-spirited morally corrupt action—the utter unraveling of decency—is just the tip of a (melting) iceberg of inexcusable ugliness. And it is not happening behind our backs. It is being thumbed at our very noses. And we have made a deal with a devil to hear or see no evil in return for false promises or lowered taxes for the ultra-wealthy (with trillions of dollars of debt passed on to our children) or the opportunity to make the already more than rich even richer.

Here is a short list of what you and your children are giving up. As you read the list, ask yourself what you are getting—really getting—in return, and give yourself an honest answer. Is it worth it? Is the bargain worth the loss of our country's soul?

Federal funding for science is being cut back. Federal agencies are being directed to ignore science-based evidence. The EPA is a cruel joke. Rules or funding for programs protecting us against harmful water and air pollutants such as car emissions are being emasculated. Threatened species of animals are losing their protections. Weather disasters are increasing. Seas are rising (yes, the seas and waters surrounding Amelia Island), yet FEMA does not seem to care. Offshore drilling is being allowed to expand—risking Florida's pristine beaches. Americans are continually massacred by bullets shot from AR-15/AK-47s and from pistols that can be purchased by those not subject to a universal background check—but no one in our government seems to care, or have the will or fortitude to do something about it. Workers' rights and basic human rights are being rolled back. The internet will be more expensive. Consumer protections are being weakened. Big banks are again being allowed to do some of the same things that triggered the great recession and economic collapse. Health care and food for our most needy in our country are being stripped away.

These are not "right or left," Republican or Democrat, issues. We can live our American dream under either party's normal push and pull. But what is happening now is very different. It is our moral compass that is deviating—and it is pointing south! We are at a crossroad. Wake up! It is ALL of us who are in this—together! What harms your neighbor harms you. We cannot allow our highest elected officials to deliberately and consciously misinform, distort, misrepresent, and mislead—or to turn us against each other. We need to decide who and what we want to be as individuals and as a country—and do what needs to be done to restore integrity and character and decency.

Cruel and Heartless!
by Robert Weissman

Thanks to growing public outrage, President Donald Trump has ended his cruel and heartless policy of ripping children of immigrant families away from their parents. But he proposes to replace family separation with family detention, leaving children in prison camps for an undetermined period of time. Now is the time when we have to intensify our pressure and deliver a roaring message about what we insist America should—and should not—be.

Public Citizen is joining with dozens of other organizations in sponsoring "Families Belong Together" demonstrations in Washington, D.C., and around the country on Saturday, June 30. Find a demonstration near you. This is how we speak out and make a difference.

Like you, over the past couple of weeks, I have been sickened and horrified by stories and images of children from families arriving at the U.S.-Mexican border being taken away from their parents. I've lost track of the number of conversations I've had with people asking: What's wrong with the people inside the Trump administration? Isn't this too much even for them? These are not rhetorical questions. We all are struggling to grapple with how this could happen and why.

This is my best explanation. While the people making policy in the Trump administration surely love their own children, they are utterly without compassion or concern for the children of people they don't know, especially for children of the immigrant families they have rhetorically dehumanized. On an individual level, that lack of compassion is a terrible character flaw. But at a policy level, lacking compassion and a readiness to treat groups of people as less than human can lead to truly grotesque outcomes. It is that combination that has underlaid many of the most horrible events in human history.

The good news in this story is that the American people have made clear they don't want to be complicit in policies that tear children from families. The intensifying disgust and fury has made a difference. Fueled by news coverage, the public engagement has kept the news media focused on the issue. Even in the alternative universe of Fox News and Rush Limbaugh, doubts have started to be raised. Trump saw his base of support eroding.

Then, on the very same day he said there was no alternative to taking children from their parents, Trump announced an end to the policy. Except, unsurprisingly, he proposed to replace it with yet more cruelty. Now Trump aims to keep children who are newly arriving immigrants with their parents—but in detention facilities—for undefined and potentially limitless periods. And the new Trump policy does nothing to reunite the 2,300 children already separated from their families. Here is what a group of the world's leading human rights experts said about this approach in December 2016, long before Trump's latest announcement: "Immigration detention is a clear child rights violation and States must prohibit it by law and cease the practice immediately....Let us be clear: immigration detention is never in the best interests of the child."

So we have not yet succeeded in ending the administrations's sadistic policy toward newly arrived immigrants. But we have shown that pressure can move Trump. Indeed, if you have ever doubted that protests and civic engagement make a difference—amid a torrent of Trump lies and his administration's appalling policies—be sure: They do.

So now it is time for us to turn up the pressure. Come to Washington or join a demonstration near you on June 30. Protest for children, and protest for our country. In just a few days, plans have come together for a demonstration at the White House and at least 450 other sites around the country. Hundreds of thousands of people have pledged to join, and the numbers are rising every hour. Together, we are going to force a modicum of humanity and decency on the Trump administration.

We can end family separation and family detention. We can end the administration's other barbarous anti-immigrant policies, including the separation of families that have been in the United States for more than a decade. Taking children away from their parents—or proposing to lock them up together indefinitely in cage-and-cement detention centers—are just the immediate, visible manifestations of an administration that has made cruelty a centerpiece of its agenda. It is up to us to reject this. We get to define what America is.


Thursday, June 21, 2018

No. 272: Accordia, Athene, the California Department of Insurance, and the Victimization of Life Insurance Policyholders

On June 12, 2018, the California Department of Insurance (CDI) issued a press release announcing an extraordinary action against Accordia Life and Annuity Company and Athene Annuity and Life Company (Respondents). The announcement by Insurance Commissioner Dave Jones refers to an "Order to Show Cause and Accusation" against the Respondents "for failing to service over 50,000 policies issued to California consumers and imperiling the benefits to which they are entitled." The key document accompanying the press release describes one of the strongest state insurance regulatory actions I have ever seen.

Introduction in the Key Document
The key document consists of an "Order to Show Cause" (including a hearing notice and a statement of charges), an "Accusation," and "Relief Requested" (including a cease and desist order, monetary penalties, a request for a declaration of unfair methods, acts, or practices, and a suspension of certificate of authority). Here is a lightly edited version of the five-paragraph introduction in the key document:
  1. In 2013, Accordia, a relatively new entrant into the life insurance market, acquired a $10 billion book of life insurance business—consisting of approximately 500,000 policies nationwide, approximately 50,000 of which were issued to Californians—from Aviva USA through a complex, multi-step transaction involving other parties and the creation of numerous captive reinsurers. Instead of purchasing the business directly from Aviva USA, Accordia acquired the life business through an assumption reinsurance agreement with another company, Athene, who had bought both the life insurance and annuity business of Aviva USA. Pursuant to the terms of the agreement, Athene requested its policyholders to consent to the transfer of their policies from Athene to Accordia.
  2. In late 2014, Accordia sent a notice of transfer to the policyholders, apprising them of the acquisition and requesting their consent to the transfer of their policies from Athene to Accordia. Those policies for which the policyholders either affirmatively consented or consented by silence were transferred from Athene to Accordia. For those policyholders who rejected the transfer, their policies remained insured with Athene, but are administered by Accordia under a third-party administrator agreement between the two entities.
  3. From the very start of administering the policies, Accordia faced numerous substantial difficulties. In 2013, Accordia had transitioned the administration of its life policies to a third-party administrator, Alliance-One Services. Due to compatibility issues between Alliance-One's policy management system and the policies to be converted, in late 2015, the vast majority of the policies were "restricted," such that they could not be converted to the system and could only be administered on a manual basis. As a result, policyholders did not receive their statutorily-mandated annual statements, nor could they receive bills, pay premiums, or access any of the benefits of their policies. Over two years have passed since the conversion issues first surfaced and policies still remain restricted.
  4. Even after a policy gets "unrestricted" and is being electronically administered, problems continue for policyholders, raising questions as to whether their policies are being serviced properly. For instance, policyholders still are not receiving their up-to-date annual statements. Some face risk of lapse because premiums were not billed or collected while their policies were restricted, which created unpaid past premium obligations amounting to thousands of dollars in some cases. Without the benefit of their annual statements, these policyholders cannot make a fully-informed decision as to whether to pay the back premiums and keep their policies in force. Other policyholders have suffered accounting issues, with premium payments being improperly applied or not at all. Others have expressed concerns that they feel stuck with their policies due to advanced age.
  5. CDI, therefore, seeks an order that the Respondents cease and desist from engaging in the conduct set forth below, an order suspending Respondents' certificates of authority, and requests that Respondents be fined under California Insurance Code section 790.035.
Remainder of the Key Document
The background section of the key document describes "Accordia's Corporate History," which includes references to Goldman Sachs, Global Atlantic, Aviva USA, Aviva plc, and Presidential Life. It also describes "Accordia's Multi-Step Purchase of the Life Policies." The latter subsection describes how Accordia was able to purchase Aviva USA's life business with the help of a "permitted practice" and "limited purpose subsidiaries" (LPSs) based in Iowa, Delaware, and Vermont.

The statement of charges section describes how the "Respondents 'Restrict' the Policies, Causing Them to Be Frozen in Time." It also describes how the "Respondents Fail to Provide Timely Annual Reports" and how the "Respondents Fail to Administer the Policies in Good Faith."

The order to show cause and notice of hearing sections describe the relevant California code sections. The remainder of the key document describes the accusation and the relief requested.

Attached to the key document is an exhibit listing 109 complaints received by CDI. Each entry shows the consumer's first name, the initial of the consumer's last name, in some instances the alleged violations of California law, and a brief description of the violations. Also attached to the key document is a notice of defense, a statement to respondent, and the texts of the relevant California statutes.

General Observations
In recent years I received emails from several Accordia/Athene policyholders telling me about their problems. I had not written squarely on the subject, and I was not able to help them. By coincidence, I saw the CDI announcement while I was working on a generalized post about servicing problems faced by universal life policyholders. I stopped working on that post in order to work on the CDI regulatory action taken against Accordia and Athene.

Regular readers of my blog are aware of my longstanding efforts to obtain information about the use of LPSs, especially those based in Iowa. Until I saw the CDI action, I was not aware of the connection between those LPSs and the situation involving Accordia and Athene. Among the entities about which I have written are Cape Verity I, Cape Verity II, Cape Verity III, and Tapioca View, LLC.

Another aspect I found interesting was the transfer of policies from Athene to Accordia. I wrote many articles in The Insurance Forum about policy transfers, and devoted Chapter 23 of my 2015 book, The Insurance Forum: A Memoir, to that subject.

I sympathize with those who purchased policies from companies such as Aviva USA, AmerUs Life, Athene, and Accordia. Those persons paid premiums in good faith. However, they are now in limbo with no information about the status of their policies, no way to learn what premiums they need to pay, and no way to access the benefits of their policies.

The sort of administrative problems that prompted the CDI action may be extremely difficult or even impossible to solve. Yet those types of problems are to be expected when private equity firms are allowed to acquire the long-term obligations of insurance companies in an effort to earn short-term profits for the benefit of their investors. I think state insurance regulators are aware of insurance company acquisitions by private equity firms. In my opinion, however, state insurance statutes have been drafted by the insurance industry in such a way as to force regulators to approve such acquisitions.

Available Material
I wrote about the regulatory situation in Iowa in numerous blog posts. Five of them are available at the following links: No. 44 (April 22, 2014), No. 71 (November 6, 2014), No. 72 (November 12, 2014), No. 73 (November 19, 2014), and No. 109 (July 13, 2015). I offered complimentary packages of material in each of those posts, and the packages are still available.

Now I offer a complimentary 27-page PDF consisting of the CDI press release (1 page) and the entire key document (26 pages). Email and ask for the June 2018 package about the California/Accordia/Athene case.


Monday, June 18, 2018

No. 271: A Nationwide Cost-of-Insurance Lawsuit Ends in a Confidential Settlement

In No. 202 (posted February 6, 2017 and available here), I discussed a lawsuit filed against Nationwide Life Insurance Company relating to cost-of-insurance (COI) increases on variable universal life insurance policies. Here I provide an update about the confidential settlement of the case. (See Palumbo v. Nationwide, U.S. District Court, District of Connecticut, Case No. 3:16-cv-1143.)

Background on the Case
In July 2016 two plaintiffs filed a lawsuit against Nationwide about COI increases on variable universal life insurance policies. The lawsuit has an extra dimension that transformed the case into a strange one.

One plaintiff is Laura L. Palumbo, a Connecticut resident. She is the trustee of an irrevocable insurance trust created in 1994. The other plaintiff is William J. Palumbo. He is the grantor of the trust, the insured in the two policies the trust owns, and Laura's father.

Both policies are variable universal life, each with a $500,000 death benefit. They were issued in 1994 and 1996 by Provident Mutual Life Insurance Company. William was aged 57 when Provident issued the first policy. The initial planned annual premium for the first policy was $9,800. In 2002 Provident demutualized under the sponsorship of Nationwide, and the policies became Nationwide policies.

The plaintiffs said they obtained updated illustrations in September 2014 and were shocked to learn the account values of the policies had declined sharply. They said they were also shocked to learn that in the first policy, for example, the new planned annual premium—about $29,000 compared to the $9,800 initial planned annual premium—made the policies unaffordable. The plaintiffs said that, when Laura wrote to Nationwide asking how the monthly mortality charges were calculated, the company's compliance office said it was "unable to get that question answered."

The Extra Dimension
Laura had long been a registered representative authorized to sell securities such as variable life insurance policies, and she was involved in the sale of the policies to the trust. In April 2015 she wrote to Nationwide alleging the company had made misrepresentations and omissions relating to the COI charges.

In May 2015 Nationwide filed a U5 (the termination notice used in the securities industry) with the Financial Industry Regulatory Authority (FINRA) saying a complaint had been made against Laura by the Palumbo Trust alleging misrepresentations and omissions in the sale of variable life insurance. Laura contacted FINRA disputing the U5. In January 2017, when I looked at the BrokerCheck report about Laura on FINRA's website, I found no mention of the U5 or any other "disclosure event." I therefore concluded that the U5 had been deleted.

The Allegations
The plaintiffs alleged Nationwide made misrepresentations and omissions of material facts to the plaintiffs regarding the COI charges in the two policies. Among the first seven of the ten allegations in the original complaint were breach of contract and violations of certain Connecticut statutes. The other three allegations related to Laura and the U5.

In August 2016 Nationwide filed a motion to dismiss the first seven claims. In that filing Nationwide said the parties were discussing the possibility of an amicable resolution of the final three claims.

In December 2016 the judge ordered the plaintiffs to file an amended complaint adding FINRA as a nominal defendant. The plaintiffs thereupon filed the amended complaint adding FINRA as a nominal defendant. In the amended complaint the plaintiffs made clear FINRA was not accused of wrongdoing and was added as a nominal defendant only to facilitate relief with respect to the final three claims. In February 2017 the parties filed stipulations dismissing the final three claims.

The Settlement
On March 20, 2018, the judge stayed all case deadlines in anticipation of settlement.  On May 10 he said the parties reported the case has settled, and he dismissed the case.  He directed the clerk "to administratively close the file without prejudice to re-opening on or before 6/10/18." He said the parties may file a stipulation of dismissal prior to that date if they wish to do so.  On June 8 the parties filed a joint motion for a one-month extension until July 10.  They said: "Good cause exists for this request because the parties are still working together to effectuate the terms of the settlement reached between the parties before filing a Stipulation of Dismissal."  On June 14 the judge granted the motion.  The court file contains no information about the terms of the settlement.

General Observations
Usually the focus in a COI case is on the question of whether the mortality charges imposed upon the policyholders are implemented in a manner consistent with the precise language of the policy. In this case I was not able to deduce the answer to that question.

In its motion to dismiss the first seven claims, Nationwide attached not only the policies but also a few of the quarterly statements sent to Laura in her capacity as trustee of the trust. The statements show beginning account values and ending account values. If the plaintiffs had reviewed the statements, it should have come as no surprise that the account values had declined significantly.

An important question is whether Nationwide should have routinely provided each year, without a request from Laura, updated illustrations showing the future planned annual premiums needed to prevent substantial erosion of the account values. A company may say it has no contractual or other legal obligation to provide updated illustrations. However, I think a company should provide updated illustrations at least once a year to reduce the likelihood of policyholder disappointment.

As indicated at the outset, the "extra dimension" made this a strange case and was the primary reason for my decision to report on the case. I had never heard of a case in which a U5 was filed against a person who submitted a complaint to the company.

In No. 202 I predicted the case would be settled quietly. I say "quietly" because this was not a class action lawsuit, and the terms of settlements in individual lawsuits usually remain confidential.

Available Material
In No. 202 I offered a complimentary 10-page PDF containing a few case documents. The package is still available. Email and ask for the February 2017 package about the Palumbo/Nationwide case.


Tuesday, June 12, 2018

No. 270: Company Division Laws—A Major Defeat and a Minor Victory for Insurance Policyholders

In No. 220 (June 1, 2017) I discussed the enactment of a Connecticut law allowing a Connecticut-domiciled insurance company to divide itself into two or more insurance companies. I explained why I think the law violates the constitutional rights of insurance policyholders. In No. 262 (April 16, 2018) I discussed the Georgia legislature's adoption of similar legislation. To access those two posts, click on the links in this paragraph. Here I provide updates on recent developments in both states.

Connecticut Developments
On April 17, 2018, in a Form A filing, Hopmeadow Acquisition and several related entities sought the approval of Connecticut Insurance Commissioner Katherine L. Wade for the proposed acquisition of control of Hartford Life Insurance Company and three affiliated companies. On May 17, Timothy Curry, who Commissioner Wade appointed as hearing officer, held a public hearing on the proposal. On May 24, Curry concluded in a 19-page proposed final decision that the "Proposed Acquisition is not likely to be hazardous or prejudicial to those buying insurance," and he recommended that Commissioner Wade issue an order approving the proposed acquisition. On the same day, Commissioner Wade issued a two-page order approving the proposed acquisition.

Georgia Developments
In April 2018 a reader sent me a news story that reported on the Georgia legislature's approval of House Bill 754, which is similar to the Connecticut legislation. Here is one sentence of the news story:
Georgia legislation that lets insurers divide and opens a path for run-off transactions involving legacy books of business will become law by 1 July, even if Governor Nathan Deal fails to sign the measure.
In May 2018, through an alert from the Federation of Regulatory Counsel, I was surprised to learn that Governor Deal vetoed HB 754. Here is his veto message:
House Bill 754 would allow insurers domiciled in Georgia to divide into two or more insurers. Any plan of division must be submitted to and approved by the Commissioner of Insurance, giving the Commissioner broad discretion to decide on a case by case basis if the company meets the requirements to divide. If a company was deemed acceptable by the Commissioner to divide and one of the resulting insurers stopped turning a profit, issues could arise as to how to distribute the liability. I am unaware of the need for the division process provided for in HB 754 and am unconvinced that the appropriate safeguards are provided for in the proposed legislation. For the foregoing reasons, I VETO HB 754.
Commissioner Hudgens
Prior to posting No. 262, I wrote to Georgia Insurance Commissioner Ralph T. Hudgens. I sent him No. 220 about the Connecticut division law, said I was planning to post an item about HB 754, and asked for a statement from him to be included in the item. An insurance department spokesman said it was not an insurance department bill. He also said the department did not oppose the bill. However, I did not receive a statement from Commissioner Hudgens.

After learning of Governor Deal's veto of HB 754, I tried again to obtain a statement from Commissioner Hudgens. The department spokesman said there will be no such statement.

The Sponsors
In No. 262 I said two lead sponsors of HB 754 were Representative Jason Shaw (R-Lakeland) and Senator P. K. Martin IV (R-Lawrenceville). Shaw is a member of the House insurance committee and owns an insurance agency. Martin is a member of the Senate insurance and labor committee and is an insurance agent. They were quoted in the news story from which I first learned of HB 754, and I showed the quotes. Shaw and Martin did not return my calls.

After learning of Governor Deal's veto of HB 754, I tried again to reach Shaw and Martin, but they did not return my calls. My primary reason for trying to reach them was to learn the identity of the insurance company or companies behind HB 754.

General Observations
In Nos. 220 and 262 I explained in some detail my objections to company division laws. In a nutshell, I have two major objections. First, such laws allow insurance companies to transfer their obligations to other insurance companies without the consent of the affected policyholders, and therefore the laws violate the constitutional rights of those policyholders. Second, the laws place on the insurance commissioner the burden of proving that the plan adversely affects policyholders, and requires the commissioner to approve the plan if he or she is unable to meet that burden of proof. At the very least, I think the burden should be on the companies to prove that the plan does not adversely affect the policyholders.

I think Connecticut Insurance Commissioner Wade's approval of the transfer of Hartford's policyholders—without their consent—to a private equity firm is a major defeat for those policyholders. I also think Georgia Governor Deal's veto of HB 754 is a minor victory for the policyholders of whatever company was responsible for the introduction and legislative passage of the bill.

Available Material
The packages I offered in Nos. 220 and 262 are still available. Now I offer a complimentary 21-page PDF consisting of the Connecticut insurance commissioner's order approving the Hopmeadow-Hartford proposal (2 pages) and the Connecticut hearing officer's recommendation that the proposal be approved (19 pages). Email and ask for the June 2018 package about company division laws.


Wednesday, June 6, 2018

No. 269: The Age 100 Problem—An Update on a Lawsuit and Comments on My Upcoming Survey

I first wrote about "the age 100 problem" in cash-value life insurance 17 years ago, in the January 2001 and May 2001 issues of The Insurance Forum. More recently, on my blog, I posted three items: No. 141 (February 1, 2016), No. 226 (July 20, 2017), and No. 241 (November 17, 2017), each of which may be found by clicking on the post number. In each of those posts I offered complimentary packages that included my 2001 articles and other documents relevant to the subject.

In this post I provide an update on a federal court lawsuit filed in 2017 by Gary Lebbin, an elderly insured, against Transamerica Life Insurance Company. I also describe a company survey I am planning.

Background on the Lebbin Case
Lebbin was born in September 1917 in Germany, came to the U.S. 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. When his wife died, the policies became single-life universal life policies. His two children are the trustees of the trust.

On July 20, 2017, two months before Lebbin reached the policies' terminal age of 100, he and the trust filed a lawsuit against Transamerica. They alleged the company had falsely represented the policies as "permanent insurance" for his "whole life," the company had refused his request to extend the policies beyond their terminal age, and he was facing a potentially serious income tax problem. (See Lebbin v. Transamerica, U.S. District Court, District of Maryland, Case No. 8:17-cv-1870.)

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.

In September 2017 Lebbin reached the policies' terminal age. On October 2, 2017, Transamerica filed a motion to transfer the case from the federal court in Maryland, where the trust and one of the trustees are located, to a federal court in Florida, where the policies were originally sold, one of the trustees is located, and other potential witnesses are located. The motion to transfer was fully briefed by early November 2017.

Recent Developments in the Lebbin Case
On April 30, 2018, Judge Chuang issued a memorandum opinion and a brief order. He granted Transamerica's motion and transferred the case to Florida. (See Lebbin v. Transamerica, U.S. District Court, Southern District of Florida, Case No. 9:18-cv-80558.)

In Florida the case was assigned to U.S. District Judge Donald M. Middlebrooks. President Clinton nominated him in January 1997, and the Senate confirmed him in May 1997. U.S. Magistrate Judge Dave Lee Brannon was also assigned to the case.

On May 22, Judge Middlebrooks issued an order setting a trial date of January 22, 2019, referring the case to Magistrate Judge Brannon, and alluding to the possibility of mediation and settlement. On May 23, Magistrate Judge Brannon issued a detailed scheduling order indicating, among other things, that all discovery is to be completed by October 29.

General Observations on the Lebbin Case
I think the Lebbin case will end with a confidential settlement before the trial. I say "confidential" because the lawsuit is not a class action, and there is no requirement for the settlement terms to be made public. The last thing Transamerica wants is publicity about this type of case.

General Observations on the Age 100 Problem
In my writings about the age 100 problem, I have said the bedrock principles of life insurance marketing are the income-tax-deferred inside interest and the income-tax-exempt death benefit. Yet there is no guidance on how policyholders who reach the terminal age of 96 (in whole life policies based on the American Experience mortality table) or the terminal age of 100 (in whole life policies based on the 1941 CSO, 1958 CSO, or 1980 CSO mortality tables) can avoid a serious income tax problem.

Some insurance companies offer elderly policyholders an opportunity to postpone payment of the death benefit beyond the terminal age. However, the policyholder who accepts such an offer could be deemed as having constructive receipt of the death benefit at the terminal age.

Companies who offer elderly policyholders an opportunity to postpone payment of the death benefit beyond the terminal age tell their policyholders to "consult your tax advisor" before accepting the offer. However, in the absence of guidance, there is no way for a tax advisor to assist the policyholder in deciding whether to accept the offer.

My Upcoming Survey
After this item is posted, I will send it to some life insurance companies. I will set up a hypothetical case involving a traditional dividend-paying whole life insurance policy based on the 1958 CSO mortality table with its terminal age of 100. I will ask the company to explain how it would respond to an elderly policyholder who seeks the company's help in dealing with the potentially serious income tax problem should the insured survive to the terminal age. I plan to publish a blog post describing the survey results.

An Interesting Idea
Harold D. Skipper, Professor Emeritus of Risk Management and Insurance at Georgia State Universiy and a longtime reader of my blog, recently presented an interesting idea. He suggested that, some years prior to the terminal age, the company offer the policyholder a 1035 exchange to a policy based on the most recent mortality table, which has a terminal age of 121. In my survey I will ask the companies what they think of the idea.

Available Material
In my three previous posts about the age 100 problem (see the links at the beginning of this post), I offered complimentary packages that are still available. In No. 141 I offered a January 2016 package, in No. 226 a July 2017 package, and in No. 241 a November 2017 package.

Now I offer a complimentary 26-page PDF consisting of Judge Chuang's memorandum opinion (12 pages), his order (1 page), Judge Middlebrooks' order (3 pages), and Magistrate Judge Brannon's order (10 pages). Email and ask for the June 2018 package about the age 100 problem.