Wednesday, May 29, 2019

No. 314: Indexed Universal Life Policies—The Views of Two Prominent Professionals About the Risks for Buyers

During the years of The Insurance Forum, and more recently on my blog, I have never written an article about indexed universal life (IUL) policies. I have been asked by many readers to write on the subject, but have not done so. The reason is simple. I have obtained and looked closely at samples of IUL policies. However, I have not understood them well enough to feel comfortable writing about them, and I have always avoided writing on topics I do not understand. Promoters of IUL policies have occasionally said I am too stupid to recognize a good thing when I see it. My response to such promoters is that they are welcome to their opinions.

Recently I have seen articles by two professionals for whom I have the highest regard: Lawrence Rybka and Richard Weber. I have obtained permission from them to share the articles with my readers. Here I introduce the authors briefly. I also show executive summaries and in one instance a few comments from the article. The full articles are in the complimentary package offered at the end of this post.

Lawrence Rybka
Lawrence J. Rybka, JD, CFP, is Chairman and Chief Executive Officer of Valmark Financial Group, which includes a broker dealer, an investment advisor, and Executive Insurance Agency (the nation's first producer group). Valmark serves 120 premier independently-owned and independently-run wealth management/transfer firms in 31 states and has helped place over $60 billion of life insurance death benefits while managing insurance policies with a cumulative cash value of over $8 billion. Valmark's affiliated Registered Investment Advisor, Valmark Advisors, has over $6 billion in assets under management, including about $3 billion in variable sub-account assets within its TOPS funds. He earned his Bachelor's degree with honors in Finance from the University of Akron, and his Juris Doctorate from Wake Forest University.

Richard Weber
Richard Weber, MBA, CLU, AEP, is President and primary consultant for The Ethical Edge, Inc., providing fee-only insurance analytics and consulting services to family offices and high net worth individuals. He holds an MBA from the Haas School of Business at the University of California at Berkeley with a specialty in Insurance and Finance. He served for 11 years as an Instructor of Insurance at the University of California at Berkeley's Program in Personal Financial Planning. From 1993 through 1998, he served as Adjunct Professor of Ethics at The American College. He currently serves as Senior Adjunct Professor of Risk and Insurance in California Lutheran University's MBA program and is on the faculty of Texas Tech University's Personal Financial Planning degree program.

The Rybka Article
The Rybka article is entitled "How to Retire in the Magical Retirement Income Castle in the Clouds," and subtitled "What looks too good to be true, usually is." Here is the executive summary, followed by the first paragraph of the article:
Executive summary: This article examines the use of premium financed Indexed Universal Life (IUL) policies to provide retirement income for clients. It explores the major assumptions in the IUL policies and in the bank loans used to finance them. Most importantly, it reveals undisclosed risks often taken by clients in these transactions.
I recently attended a top meeting in the U.S. life insurance industry. During it, I experienced no less than three sessions where insurance agents shared presentations of major sales they claimed to have made during the year, each of which generated hundreds of thousands of dollars in commissions. All three presentations were variations on the recommendation that clients borrow significant sums to finance the premiums on IUL policies. The proposals showed that the loans would be paid back using projected policy cash values and have plenty remaining in the policy to provide a lifetime income of hundreds of thousands of dollars a year to the policyholder and a multi-million-dollar death benefit at the end. The presentations proposed the clients borrow money from major commercial banks who were willing to lend $2 to $3.5 million to each client over five to seven years to purchase these policies. These proposals are not outliers but part of massive sales efforts by some insurance companies and banks to push products that may be good for them, but carry significant risk for the client.
The Weber Article
The Weber article is entitled "Are You in Good Hands?" It was published as a newsletter on May 14, 2019 by Leimberg Information Services, Inc. The article discusses not only risk tolerance questions in IUL policies, but also risk tolerance questions in whole life policies, guaranteed death benefit universal life policies, universal life policies, and variable universal life policies. The technical editor of the article is Ben G. Baldwin, Jr., CLU, ChFC, CFP. Here is the executive summary:
Long associated within the financial practitioner community for addressing and attempting to overcome policy illustration abuse, Dick Weber began his decades-long exploration of these issues when assuming the Chair of the Society of Financial Service Professionals (FSP)'s Illustration Questionnaire (IQ) Committee. IQ emphasizes that the "illustration is not the policy," and educates its members about the responsible use of policy illustrations. Yet Indexed Universal Life (IUL) products have created new challenges for professionals seeking to apply a customer-focused standard of care to their recommendations for policies designed for a lifetime. IUL is most often characterized as giving owners the best of both worlds by offering investment upside potential, a minimum guaranteed growth feature and underlying life insurance protection. These features, along with the (largely incorrect) slogan "Zero is the Hero" has made IUL the fastest growing permanent life insurance product of the past decade.
Recent regulations intended to moderate the calculation and display of non-guaranteed benefits projected in IUL policy illustrations have largely backfired, inspiring what objectively appear as unachievable promises of future performance. How should insurance and non-insurance professionals react and respond? This newsletter goes beyond just the potential for misusing policy illustrations and delves into the suitability and fiduciary issues of serving a client's best interest.
Available Material
I am offering a complimentary 37-page PDF consisting of the full Rybka article (12 pages) and the full Weber article (25 pages). Email and ask for the May 2019 package about IUL policies.

Monday, May 20, 2019

No. 313: Long-Term Care Insurance and More on the Upcoming Hearing before the Virginia Bureau of Insurance

In No. 310 (April 22, 2019), I wrote about the May 21 public hearing to be held by the Virginia Bureau of Insurance (Bureau) on the subject of long-term care (LTC) insurance premium increase requests filed by many companies. April 22 was the deadline for filing public comments in advance of the hearing. On that date, I filed No. 310 as my comment. The Bureau posted on its website all the comments it received from the public, as well as information about the LTC insurance premium increase requests filed by many companies. This follow-up post is based on my review of the material posted on the Bureau's website.

Recent Bureau Approvals
The Bureau recently approved some substantial premium increase requests affecting substantial numbers of policyholders. Here are the companies and, in parentheses, the approved average premium increases expressed as percentages and the numbers of policyholders affected by the increases: American Fidelity Assurance (3%, 92), Jackson National Life (15%, 47), Kanawah Insurance (two plans) (48% and 44%, 1,204), Lincoln Benefit Life (35%, 257), Lincoln National Life (60%, 74), Mutual of Omaha (27%, 1,551), Northwestern Long Term Care (two plans) (28% and 27%, 2,710), Provident Life & Accident (102%, 734), RiverSource Life (35%, 1,305), Senior Health Insurance of Pennsylvania (25.0%, 633), and Virginia Insurance Guaranty Association (32%, 4,121).

Number of Comments
My tabulation suggests the Bureau received 177 comments from the public. I think the ten obscure public notices printed in newspapers around Virginia did not generate such a large number of comments. However, several articles about the hearing appeared in Virginia newspapers, and I think those articles prompted the large number of comments. One example is an excellent article entitled "Insurers now seeking huge increases in Virginians' premiums for long term care." The article, by reporter Dave Ress, appeared in the March 17, 2019 issue of the Daily Press (Newport News, VA).

Nature of the Comments
Many of the comments focused on the financial problems consumers are confronting because of increasing LTC insurance premiums. Many said that, when they purchased the insurance, they were not told the premiums would increase. Many said they were told that, if there were premium increases, the increases would be small and infrequent. Many expressed displeasure about being forced to absorb increases that were not their fault, but rather were caused by the companies' pricing errors. A few comments were from insurance agents who were upset because they had misled policyholders who trusted them.

Companies Identified
Seventy of the public comments did not identify the company with which the writer of the letter is or was a policyholder. Here are the 13 companies identified in 107 of the public comments, with the number of comments in parentheses: CNA Financial (2), CUNA Mutual (3), General Electric Capital (4), Genworth (36), John Hancock (44), Kanawha Insurance (3), Lincoln Benefit Life (1), Massachusetts Mutual (5), MetLife (3), Penn Treaty (2), TPM Life (1), Trustmark (1), and Unum (2).

Among the public comments, several of those who identified John Hancock as their company said they have coverage offered through the group LTC insurance program for federal government employees. I think many of the others who identified John Hancock without mentioning the group plan also have their coverage through the group plan.

There were two public comments that identified the company as the Virginia Life, Accident, and Sickness Insurance Guaranty Association. Those comments were references to Penn Treaty, where a court-ordered liquidation brought the Virginia Insurance Guaranty Association into the picture.

Most of the comments appear to have been from consumers. However, there were a few from agents, groups of agents, and other individuals writing on behalf of policyholders.

The ACLI/AHIP Letter
There were no comments from insurance companies. Instead, as usual, the companies hid behind their trade associations.

The American Council of Life Insurers (ACLI) is a trade association with approximately 290 member companies. America's Health Insurance Plans (AHIP) is a national association whose members provide coverage for health care and related services. ACLI and AHIP filed a joint six-page letter for the hearing record. The letter is over the signatures of Chuck Piacentini of ACLI and Amanda Matthiesen of AHIP. The letter is in the complimentary package offered at the end of this post. Here are the "Recommendation" and "Conclusion" paragraphs of the letter:
To ensure a stable regulatory environment that provides Virginia consumers with choice, transparency and protections for LTC insurance, we encourage the Commission to approve pending actuarially justified rate increases. Additionally, we encourage the Department of Insurance to adopt the most recent changes to the NAIC [National Association of Insurance Commissioners] LTC Insurance Model Regulation (NAIC Model), as well as issue the NAIC LTC Insurance Rate Increase Model Bulletin on Alternative Filing Requirements for LTC Premium Rate Increases (NAIC Bulletin).
We appreciate the opportunity to provide this statement and look forward to working with the State Corporation Commission and the Department of Insurance on creating a regulatory environment that ensures a robust private LTC insurance market that provides consumers with a choice of solid and dependable coverage for their LTC needs. We are committed to ensuring that consumers continue to enjoy the greater piece of mind that comes with knowing their coverage will be there when and for as long as they need it.
General Observations
It is not surprising that ACLI and AHIP "encourage the Commission to approve pending actuarially justified rate increases." The associations represent the companies, and would not be expected to encourage the Commission to deny or reduce the size of the requested premium increases.

The words "actuarially justified" should have been omitted from the "Recommendation" paragraph in the ACLI/AHIP letter.  Those words falsely imply that some premium increase requests are not actuarially justified.  Because company actuaries sign off on all premium increase requests, there is no such thing as a request that is not actuarially justified.  However, it is possible that a Bureau actuary might disagree with a company actuary.

As indicated in No. 310, for many years I have expressed the belief that the problem of financing the LTC exposure cannot be solved through the mechanism of private insurance. I explained in detail the reasoning behind that belief in an article in the July 2008 issue of The Insurance Forum. The article is in the complimentary package offered at the end of this post.

Now LTC insurance companies and their regulators are trying to figure out how to address the intractable problems they have created. I believe that nothing significant will emerge from the latest NAIC task force. I think it will "kick the can down the road," as several task force predecessors have done.

Available Material
I am offering a complimentary 11-page PDF consisting of the ACLI/AHIP letter to the Bureau (6 pages) and the July 2008 Forum article (5 pages). Email and ask for the May 2019 LTC insurance package.


Wednesday, May 15, 2019

No. 312: Robert Caro's Magnificent Small Book

Robert A. Caro is one of my favorite authors. For his work he has received two Pulitzer Prizes and other major awards too numerous to count. His first book was his 1,246-page master work, The Power Broker: Robert Moses and the Fall of New York, published in 1974. For it he received his first Pulitzer Prize.

Robert Moses
Although I lived the first 25 years of my life in Syracuse, New York, I had only a vague knowledge of Robert Moses. When I read Caro's book many years ago, I came to understand the achievements of that unelected individual who had amassed enormous political power, and who, in exercising that power, had transformed not only New York City but also disrupted the lives of millions of people. Anyone who doubts that the acquisition of political power and the use of that power are Caro's lifetime focus need only note the titles of the last five of the seven major parts of The Power Broker: "The Rise to Power," The "Use of Power," "The Love of Power," "The Lust for Power," and "The Loss of Power."

Lyndon Johnson
Caro then turned to Lyndon Johnson, about whom he has written four volumes and is now working on the fifth and final volume. The 882-page first volume was The Years of Lyndon Johnson: The Path to Power, published in 1982. The 506-page second volume was The Years of Lyndon Johnson: Means of Ascent, published in 1990. The 1,167-page third volume was The Years of Lyndon Johnson: Master of the Senate, published in 2002, and for which he received his second Pulitzer Prize. The 752-page fourth volume was The Years of Lyndon Johnson: The Passage of Power, published in 2012. The fourth volume ends in the summer of 1964, during the first year of Johnson's presidency, after passage of the 1964 Civil Rights Act.

The fifth and final volume does not have a title or a publication date. Presumably it will cover Johnson's other "Great Society" achievements, including the 1965 Civil Rights Act, the 1965 Voting Rights Act, Medicare, and Medicaid. Presumably it will also cover the Vietnam War, Johnson's decision not to run for reelection, and his life after he left office.

Meanwhile, Caro has just come out with a magnificent 240-page book entitled Working: Researching, Interviewing, Writing, published in April 2019. It is a fascinating description of Caro's early life, how he got interested in Robert Moses and Lyndon Johnson, how his wife Ina serves as his principal helper, how they survived financially during the lean years when he was working on The Power Broker, how he does his research, how he conducts interviews, and how he writes. The book explains why he and Ina moved to the Hill Country of West Texas for three years, to get a feeling for the area where Johnson grew up, and to mingle with the people who knew Johnson and his family in the early years.

Theodore White's Views
In No. 307 (April 4, 2019), I quoted from a 1975 book entitled Breach of Faith: The Fall of Richard Nixon, by Theodore H. White. White died in 1986, but he remains one of my favorite authors. On the 1974 dust jacket of The Power Broker are ten strong endorsements from prominent authors and journalists. One of the endorsements was from White, who said this:
A masterpiece of American reporting. It's more than the story of a tragic figure or the exploitation of the unknown politics of our time. It's an elegantly written and enthralling work of art.
I agree with White. Caro's books are indeed works of art. Below I quote two paragraphs that appeared on page 6 of The Power Broker. They drew me in to read the entire book, and made me a Caro watcher.

The Paris Review Interview
The final section of Working is an interview with Caro entitled "The Art of Biography." It is reprinted from the Spring 2016 issue of The Paris Review. The interviewer is James Santel, whose sole function seems to have been to ask 14 brief questions and let Caro take it from there. In one of his responses, Caro quotes a portion of these two paragraphs from The Power Broker. They illustrate Caro's style and artistry:
Standing out from the map's delicate tracery of gridirons representing streets are heavy lines, lines girding the city or slashing across its expanses. These lines denote the major roads on which automobiles and trucks move, roads whose very location, moreover, does as much as any single factor to determine where and how a city's people live and work. With a single exception, the East River Drive, Robert Moses built every one of those roads. He built the Major Deegan Expressway, the Van Wyck Expressway, the Sheridan Expressway and the Bruckner Expressway. He built the Gowanus Expressway, the Prospect Expressway, the Whitestone Expressway, the Clearview Expressway and the Throgs Neck Expressway. He built the Cross-Bronx Expressway, the Brooklyn-Queens Expressway, the Nassau Expressway, the Staten Island Expressway and the Long Island Expressway. He built the Harlem River Drive and the West Side Highway.
Only one borough of New York City—the Bronx—is on the mainland of the United States, and bridges link the island boroughs that form metropolis. Since 1931, seven such bridges were built, immense structures, some of them anchored by towers as tall as seventy-story buildings, supported by cables made up of enough wire to drop a noose around the earth. Those bridges are the Triborough, the Verrazano, the Throgs Neck, the Marine, the Henry Hudson, the Cross Bay and the Bronx-Whitestone. Robert Moses built every one of those bridges.
Doing the Math
Caro watchers wonder whether Caro, now 83, will live long enough to finish the fifth and final volume on Johnson. Caro says they ask him to "do the math," and they wonder why he interrupted that effort to publish Working. He says he has done the math, there remain "several" more years of work on the fifth volume, and explains why he published Working now. Among elderly Caro watchers, there is the other math question of whether we will live long enough to read the fifth volume on Johnson.

For those who are not Caro watchers, I strongly recommend you read Working. I am confident you will find it enjoyable, and well worth the time. When you read it, you may join the ranks of Caro watchers.


Thursday, May 2, 2019

No. 311: Genworth Financial, China Oceanwide, the Delaware Department, and the Hindenburg Letter

On April 15, 2019, Genworth Financial, Inc. (Genworth) filed with the Securities and Exchange Commission (SEC) an amended 10-K report for the year ended December 31, 2018. Here I discuss the amended report and several other recent developments relating to the proposed merger agreement between Genworth and China Oceanwide.

The Amended 10-K Report
In its 2018 proxy statement, filed with the SEC on November 1, 2018, Genworth said it expected to hold its 2019 annual meeting on or about July 18, 2019. The amended 10-K report says that, because Genworth and China Oceanwide are still trying to satisfy the closing conditions under their proposed merger agreement, Genworth postponed the meeting and implied there may not be a 2019 annual meeting. If there is a 2019 annual meeting, Genworth will provide adequate notice to shareholders. The explanatory note in the amended 10-K report is in the complimentary package offered at the end of this post.

A Recent 8-K Report
On March 14, 2019, Genworth filed with the SEC an 8-K (significant event) report listing developments relating to the proposed merger with China Oceanwide. The original merger agreement was entered into on October 21, 2016. Since then, the parties entered into nine "waiver agreements" under which the parties extended the "end date" in the merger agreement. In the waiver agreements, the parties also waived the right to terminate the merger agreement and abandon the merger due to a failure to consummate the merger agreement on or before a specified date. The dates of the waiver agreements listed in the recent 8-K report are: August 21, 2017; November 29, 2017; February 23, 2018; March 27, 2018; June 28, 2018; August 14, 2018; November 30, 2018; January 30, 2019; and March 14, 2019. In the last of those waiver agreements, the parties extended the end date to April 30, 2019, and waived until that date the right to terminate the merger agreement and abandon the merger due to a failure of the merger to have been consummated on or before March 15, 2019.

Also attached to the recent 8-K report is a Genworth press release dated March 14, 2019. It discusses the last of the above waiver agreements, and says the closing of the merger agreement remains subject to the approval of regulators in Canada and China. The Genworth press release is in the complimentary package offered at the end of this post.

The Delaware Department
On November 8, 2018, the Delaware Department of Insurance (Department) issued a press release announcing a November 24 hearing to be held on China Oceanwide's application to acquire Genworth and certain affiliates. The Department said the hearing would be presided over by Stephen P. Lamb, a former Vice Chancellor of the Delaware Court of Chancery. Judge Lamb is now of counsel in the Corporate and Litigation Departments in the Wilmington, Delaware office of the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP. The Department's press release is in the package offered at the end of this post.

The Hindenburg Letter
On November 28, 2018, the Department held the hearing. The transcript mentioned a 13-page letter Hindenburg Research had submitted to the Department on November 20, 2018. Hindenburg, which was founded by Nathan Anderson, CFA, CAIA, engages in financial research. Hindenburg sometimes takes either a long position or a short position on the shares of public companies it examines. Hindenburg's name stems from what the firm describes as the "epitome of a totally man-made, totally avoidable disaster" where "Almost 100 people were loaded onto a balloon filled with the most flammable element in the universe."

In the Hindenburg letter, which is included in its entirety in the complimentary package offered at the end of this post, the firm discloses its short position on Genworth shares. The firm questions the ability of China Oceanwide to carry out its responsibilities under the merger agreement. Here are some of Hindenburg's comments:
  • China Oceanwide has consistently generated negative operating performance.
  • It has plugged its performance hole with borrowings, which have reached the point of clear unsustainability.
  • Rating agencies have downgraded its key operating subsidiaries, similarly citing their debt load as "unsustainable." Meanwhile, recent media reports have shown that operating subsidiaries are scrambling to sell assets to pay off debt.
  • When factoring in questionable "current" assets, the true working capital position of the conglomerate is impaired, and there are red flags in regard to related party receivables.
  • The conglomerate has used more short-term debt and unstable equity share pledges to sustain its operations.
One witness at the Department's hearing was Thomas J. McInerney, president, chief executive officer, and a director of Genworth. Another witness was Xiaoxia Zhao, a director of Oceanwide Holding Co., Ltd., and general manager and director of Asia Pacific Global Capital. Zhao is not a native English speaker, and testified through an interpreter. Both witnesses said they were aware of the Hindenburg letter and disagreed with the findings described in it.

Judge Lamb's Recommendations
On December 14, 2018, Judge Lamb submitted to the Department a 44-page letter including his recommendations and a proposed order approving the merger agreement. Here are some comments he provided (shown here without citations) about the Hindenburg letter:
8. The First Email, the Second Email and the Third Email all relate to articles published by Hindenburg Investment Research. Those articles and the Hindenburg Letter purport to raise concerns primarily related to the financial stability of the Applicants and, to a lesser degree, the financial stability of Genworth and the Domestic Insurer.
9. Regarding the financial stability of the Applicants, the conclusions drawn by Hindenburg are inconsistent with the results of the due diligence conducted by Genworth and its outside financial advisors, and the sworn testimony of Mr. Zhao on behalf of the Applicants.
10. Given the analysis conducted by Genworth, the Department and their experts, there is sufficient evidence that the concerns raised by Hindenburg, insofar as such concerns relate to Section 5003(d)(1)(c) regarding the financial condition of any acquiring party being such as might jeopardize the financial stability of the insurer, or prejudice the interests of its policyholders, have been sufficiently addressed.
11. Genworth and the Department have both concluded and the evidence supports the conclusion, that the financial condition of the Applicants is not such as would jeopardize the financial stability of the Domestic Insurer or prejudice the interest of its policyholders.
17. Hindenburg states that it has a short position on shares of Genworth, essentially betting against the success of Genworth and the Proposed Acquisition. Based on this conflicting financial interest, the statements made by Hindenburg in its articles and the Hindenburg Letter should be viewed with skepticism.
The above five comments are from a subsection entitled "Public Comments" in Judge Lamb's letter. The full subsection is in the complimentary package offered at the end of this post.

The Department's Approval
On December 21, 2018, the Department issued a press release announcing Delaware Insurance Commissioner Trinidad Navarro's four-page Final Order and Decision approving the merger agreement between Genworth and China Oceanwide. The press release is in the complimentary package offered at the end of this post.

A Recent Press Release
On April 29, 2019, Genworth issued a press release announcing the parties' tenth waiver agreement. The parties extended the end date to June 30, 2019, and waived until that date the right to terminate the merger agreement and abandon the merger due to a failure of the merger to have been consummated on or before April 30, 2019. The press release is included in the complimentary package offered at the end of this post.

A Recent Article
Also on April 29, Best's Insurance News & Analysis posted an article entitled "Policyholders, Agents Allege Genworth Stripped $410 Million From Long-Term Care Unit." The article, by reporter Frank Klimko, discussed a lawsuit filed in Delaware state court, and said Genworth has filed a motion to dismiss the lawsuit.

General Observations
I have written extensively about long-term care (LTC) insurance in general and about Genworth in particular, but have never tried to evaluate the proposed merger agreement between Genworth and China Oceanwide. Thus I cannot comment about the likelihood of success for the merger. However, after reading the Hindenburg letter, I am concerned about the merger. I am also disturbed, for two reasons, by the manner in which the Department brushed off the letter.

First, I am troubled by McInerney's reference, in his testimony at the hearing, to allegations in a then-pending lawsuit filed in state court in New York against Hindenburg and others. On March 12, 2019 (3½ months after the hearing), the judge in the New York case granted the defendants' motion to dismiss the complaint. The judge ruled, among other matters, that statements the defendants made about the plaintiff were protected expressions of opinion and were not defamatory. (See Eros International v. Mangrove Partners et al., Supreme Court of the State of New York, New York County, Index No. 653096/2017.)

Second, I am troubled by Judge Lamb's assertion that "the Hindenburg Letter should be viewed with skepticism" because of a "conflicting financial interest." Judge Lamb made the statement without acknowledging that the companies' executives, attorneys, accountants, investment consultants, and other advisors have "conflicting financial interests." In due course we will see whether the merger agreement is consummated, and if so, its impact on Genworth's policyholders.

Available Material
I am offering a complimentary 28-page PDF consisting of the explanatory note in Genworth's amended 10-K report (1 page), Genworth's March 14, 2019 press release (3 pages), the Department's November 8, 2018 press release (2 pages), the Hindenburg letter (13 pages), a subsection of Judge Lamb's December 14, 2018 letter (5 pages), the Department's December 21, 2018 press release (2 pages), and Genworth's April 29, 2019 press release (2 pages). Email and ask for the May 2019 Genworth package.