Thursday, February 20, 2014

No. 32: More Comments from Readers about Universal Health Care

My blog post No. 12 is entitled "The Expanded and Improved Medicare For All Act of 2013" and also mentions the Patient Protection and Affordable Care Act of 2010 (PPACA). My blog post No. 18 shows comments by a reader who opposes universal health care, a reader who supports it, and a prominent Republican who supports it. In response to No. 18, I received comments from two other readers. One of them is Reginald L. Jensen, CLU, ChFC (Eugene, Oregon). He said:
Single payer, universal health care, and socialized medicine are three names for the same thing. The movement is based on the idea that health care is a "right." It is also a movement with an eye on controlling a lot of money. One advocate of single payer is Lewin Group, an Optum company, which in turn is owned by UnitedHealth Group, one of the largest health insurers in the U.S.
No one has a "right" to the time, work product, knowledge, or services of another. One must do whatever necessary to receive the professional help of another. We can give a waiver to those who simply do not have the capacity to help themselves, but that would not be an advance from provider to recipient. There is an answer.
Dr. Kenneth Cooper's Clinic in Dallas conducted a study covering 20 years and over 7,000 participants to see whether moderate daily exercise would reduce health care costs. The result was that costs can be reduced by up to 50% for those who engage in 30 minutes of daily exercise five days a week. A 30-minute walk would do it. We could set up a health care plan where those who exercise would have medical costs covered 100%, but those who do not would have medical costs covered only up to the same average dollar amount incurred by exercisers, with the non-exercisers paying the balance. Those not capable of exercising could be included in the exerciser group.
The other reader is G. James Blatt, Jr., CLU (Pittsford, New York). He said:
Universal health care is an absolute right for all our citizens. The primary obstacle is the obscene compensation of health insurance executives. They neither save lives nor improve health outcomes, but simply pay bills. We are further hampered by the archaic notion that health care should be provided through employers. Now, with an expanding population of individuals who cannot find employment, emergency departments are providing more expensive health care than ever. At least the PPACA takes a swing at changing that situation.
Health care in the U.S. is manipulated by a cabal of self-interest: AMA-controlled access to medical education; overpaid health insurance executives; a revolving-door relationship between insurance regulators and insurance companies; the compensation awarded by mutual health insurance company directors to themselves and their executives; a broken tort system; a conflict-of-interest relationship with the best politicians money can buy; and a willing media that reports negative outcomes supposedly connected to universal health care in other countries.
The only solution that would bring sanity to this picture is a single payer system. We do not even need a mandate. Just give everyone access to Medicare. That would be a nuclear bomb for the fat cats mentioned above.
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Saturday, February 15, 2014

No. 31: Phoenix Life's Legal Expenses

Over the past few years, I have written several articles about the extensive litigation involving the cost-of-insurance increases imposed by the operating subsidiaries of The Phoenix Companies, Inc. (NYSE:PNX) on the owners of universal life policies of the type used in stranger-originated life insurance (STOLI) transactions, as well as about Phoenix's many lawsuits seeking rescission of STOLI policies. Recently I began to wonder about how much the company pays to outside legal firms.

A source of such information is Schedule J in the New York Supplement to the statutory annual statement blank promulgated by the National Association of Insurance Commissioners (NAIC). The schedule is described as follows:
Showing all legal expenses paid during the year, other than the salaries of officers or employees. List individually all items of $500 or more.
For many years, Schedule J was in the NAIC's uniform annual statement blank, but it is one of several schedules the NAIC eliminated from the blank in recent years. Another schedule removed from the blank was Schedule K, which disclosed lobbying expenses.

Still another schedule removed from the NAIC blank, and from which for many years I obtained executive compensation data for my annual tabulations, was Schedule G. It was removed from the blank in 1986. NAIC officials with whom I discussed the matter at the time acknowledged the extensive public interest in the data, but said the data did not serve any useful regulatory purpose. (See "More Secrecy from the NAIC" in the January 1987 issue of The Insurance Forum.)

The New York State Department of Financial Services still believes that such information should be available to the public. For that reason, many of the schedules remain part of the New York Supplement.

Phoenix Life
The 2013 Schedule J will be available after March 1, 2014, when the 2013 statements are filed. Meanwhile, I obtained the 2012 Schedule J for Phoenix Life Insurance Company. The payments shown in the schedule totaled $20.3 million, of which $16.5 million, or 81 percent, went to five prominent law firms:

Edison McDowell & Hetherington
$8,155,005
JordenBurt
3,340,580
DeBevoise & Plimpton
2,632,208
Day Pitney
1,562,734
Dorsey & Whitney
832,272

There is no Schedule J for PHL Variable Insurance Company, an affiliate of Phoenix Life, because PHL is not licensed in New York. Since PHL is domiciled in Connecticut, I asked the Connecticut Insurance Department whether it has any breakdown of legal expenses incurred by PHL along the lines of the old Schedule J. A spokesperson said the department did not have such information. Based on other information in PHL's 2012 annual statement, I think it is likely the amounts paid by PHL to outside law firms are smaller than the amounts paid by Phoenix Life.

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Wednesday, February 12, 2014

No. 30: Another Court Setback for Life Partners

Life Partners, Inc. (Waco, TX) is an intermediary in the secondary market for life insurance policies and the operating subsidiary of Life Partners Holdings, Inc. (NASDAQ:LPHI). On February 3, 2014, as discussed in my blog post No. 29, a federal jury found LPHI and its two top officers guilty of some and not guilty of other civil securities violations. On February 6, in a separate case, a Texas appellate court reversed a state district court judgment and ruled that the life settlements offered by Life Partners are securities subject to regulation under the Texas Securities Act. The latest ruling, another setback for Life Partners, follows similar recent rulings by another Texas appellate court and a federal district court.

The State Lawsuit
On August 16, 2012, the Texas attorney general, on behalf of the state and at the request of the Texas securities commissioner, filed a lawsuit in a state district court against the Life Partners companies, their two top officers, and five "relief" (nominal) defendants. The state alleged, among other things, that the defendants orchestrated a fraudulent enterprise and manufactured the value of life settlements through artificially short life expectancies. The state requested, among other things, a temporary injunction and the appointment of a receiver.

On October 3, 2012, Judge Stephen Yelenosky ruled that the state had "failed to establish that the transactions at issue are securities under Texas law." He denied the state's requests. (State of Texas v. LPHI, District Court of Travis County, Texas, No. D-1-GV-12-001128.)

The State Appeal
The state appealed the denial. The appeal was heard by a panel consisting of Justices David Puryear, Jeff L. Rose, and Melissa Goodwin.

On February 6, 2014, the panel issued an opinion written by Justice Puryear unanimously reversing the district court judgment and ruling that "the life settlements offered by Life Partners are investment contracts and, therefore, qualify as securities subject to regulation under the [Texas] Securities Act." The panel sent the case back to the district court "for further proceedings consistent with this opinion." (State of Texas v. LPHI, Texas Court of Appeals, Third District at Austin, No. 03-13-00195-CV.)

Two Other Recent Court Rulings
On August 28, 2013, as discussed in the December 2013 issue of The Insurance Forum, a three-justice Texas appellate court panel unanimously reversed a district court decision. The panel ruled that "the viatical settlements sold by Life Partners are investment contracts, as a matter of law, under the Texas Securit[ies] Act and meet the definition of 'security.'" (Arnold v. Life Partners, Texas Court of Appeals, Fifth District at Dallas, No. 05-12-92-CV.)

On November 19, 2013, as discussed in my blog post No. 22, Senior U.S. District Judge James R. Nowlin issued an order denying LPHI's motion for partial summary judgment in the civil lawsuit the Securities and Exchange Commission (SEC) had filed against LPHI. Judge Nowlin ruled, among other points, that LPHI's life settlements are securities. (SEC v. LPHI, U.S. District Court, Western District of Texas, No. 1:12-cv-33.)

The Alexander Statement
Douglas W. Alexander is one of the attorneys who represented LPHI in the Texas appellate court case decided last week. According to the website of the Texas firm of Alexander DuBose Jefferson & Townsend LLP, Mr. Alexander "is widely regarded as one of the premier advocates specializing in practice before the Supreme Court of Texas."

An article by Mark Maremont in the February 6 online edition of The Wall Street Journal referred to a statement by Mr. Alexander. In response to my request, Mr. Alexander sent me this statement:
We are disappointed by the court of appeals' decision and we intend to timely pursue appellate review to the Texas Supreme Court. Two appellate courts have ruled that LPI's life settlements are not securities, and we continue to believe that those are the better reasoned decisions. [LPI is Life Partners, Inc.]
I asked Mr. Alexander what appellate decisions he had in mind. He said one was the 1996 ruling by the federal District of Columbia Circuit in SEC v. Life Partners. I first wrote about that ruling—a 2 to 1 decision where the dissenter wrote a lengthy opinion—in the March 1999 issue of The Insurance Forum. I also wrote about it in my blog post No. 22, where I mentioned Judge Nowlin's recent rejection of it.

The other decision to which Mr. Alexander referred was a 2004 ruling that he said "follows the D.C. Circuit's [1996] decision but also cites some Texas authorities." I checked on the 2004 ruling and found it was a 2 to 1 ruling in which the dissenter said: "I would find that the viatical settlement contracts and notes are securities under the Searsy-Howey four-pronged test and the Reves test." (Griffitts v. Life Partners, Texas Court of Appeals, Tenth District at Waco, No. 10-01-00271-CV).

I appreciate Mr. Alexander's prompt responses to my requests. Over the years, LPHI's officers and attorneys have ignored or brushed off my requests for information.

General Observations
The appellate ruling last week is the third recent ruling that LPHI's life settlements are securities. LPHI has said in public filings with the SEC that, if such a view should ever be finalized, "it would result in a material adverse effect on our operations and require substantial changes in our business model."

By the close of business on Monday, February 10, LPHI had not filed an 8-K (material event) report with the SEC about the February 6 ruling. On February 10, LPHI's shares closed at $2.45, down from Friday's $2.61 close on higher than average volume.

Because of the importance of the latest ruling, I am making it available as a four-page complimentary PDF. Send an e-mail to jmbelth@gmail.com and ask for the February 6 opinion relating to Life Partners.

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Monday, February 10, 2014

No. 29: A Federal Jury Finds Life Partners Holdings, Pardo, and Peden Guilty of Some and Not Guilty of Other Civil Securities Violations

Life Partners, Inc. (Waco, TX) is an intermediary in the secondary market for life insurance policies and the operating subsidiary of Life Partners Holdings, Inc. (NASDAQ:LPHI). On January 3, 2012, the Securities and Exchange Commission (SEC) filed a civil complaint in federal court alleging violations of federal securities laws. The defendants were LPHI and three top officers: Brian D. Pardo, chairman and chief executive officer; R. Scott Peden, general counsel; and David M. Martin, chief financial officer. On February 8, 2013, the SEC filed an amended complaint against the same defendants. On January 8, 2014, the SEC permanently dismissed the charges against Martin. On February 3, 2014, the jury found the remaining three defendants guilty of some and not guilty of other civil violations of federal securities laws and regulations.

Location of the Case
Initially the case was filed in the Waco Division of the Western District of Texas and assigned to U.S. District Judge Walter S. Smith, Jr., the only district judge in Waco. On January 11, 2012, Judge Smith recused himself because Pardo "has been a close personal friend of the undersigned for several years," and transferred the case to Senior U.S. District Judge James R. Nowlin in the Austin Division. (SEC v. LPHI, U.S. District Court, Western District of Texas, Case No. 1:12-cv-33.)

Trial and Verdict
On January 27, 2014, the four-day trial began. The SEC's witnesses were Akita Adkins, Kurt Carr (vice president of Life Partners and son-in-law of Pardo), Mark Embry (chief operations officer of Life Partners), Peden, Pardo, Nina Piper, Dr. Donald Cassidy (Reno physician and former provider of life expectancy estimates to Life Partners), Larry Rubin, and James Sundelius. The defendants' witnesses were LaDonna Johnson, Peden, Tim Harper, Harold E. Rafuse (member of LPHI board), and Tad M. Ballantyne (member of LPHI board).

On January 30, Judge Nowlin charged the jury with detailed instructions concerning the alleged violations of the Securities Exchange Act of 1934 and the Securities Act of 1933. The jury then deliberated for two days. On February 3, the jury made its findings by responding to 12 questions on the verdict form:

  1. Section 10(b) and Rule 10b-5 (securities fraud): LPHI, Pardo, and Peden not guilty. 
  2. Aiding and Abetting Violations of Section 10(b) and Rule 10b-5: Not answered because of not guilty finding on (1).
  3. Section 10(b) and Rule 10b-5 (insider trading): Pardo and Peden not guilty.
  4. Section 17(a) (securities fraud): LPHI, Pardo, and Peden guilty.
  5. Section 13(a) and Rules 12b-20, 13a-1, and 13a-13 (public filing violations): LPHI guilty.
  6. Aiding and Abetting Violations of Section 13(a) and Rules 12b-20, 13a-1, and 13a-13: Pardo and Peden guilty.
  7. Sections 13(b)(2)(A) and 13(b)(2)(B) (falsification of books and records): LPHI not guilty.
  8. Aiding and Abetting Violations of 13(b)(2)(A) and 13(b)(2)(B): Not answered because of not guilty finding on (7).
  9. Section 13(b)(5) and Rule 13b2-1 (falsification of books and records): Pardo and Peden not guilty.
  10. Rule 13b2-1 (falsification of books and records): Pardo and Peden not guilty.
  11. Rule 13b2-2 (misleading auditors): Pardo and Peden not guilty.
  12. Rule 13a-14 (false certifications): Pardo guilty. 

SEC Statement
On February 4, Andrew Ceresney, director of the SEC's division of enforcement, issued a statement on the verdict. He said:
We're very pleased the jury found Life Partners and its executives liable for knowingly or recklessly defrauding shareholders and filing false SEC filings. We're also pleased the jury found Pardo, Life Partners' CEO, responsible for falsely certifying that the company's public filings were accurate when they were not.
LPHI 8-K and Press Release
On February 4, LPHI filed an 8-K (material event) report with the SEC. The two-sentence text said nothing about the results of the trial. Instead, the 8-K merely referred to LPHI's press release, which was attached as an exhibit.

The press release was entitled "Life Partners Prevails in SEC Lawsuit." The body of the press release consisted of five paragraphs. The lead paragraph said "a federal jury has found that Life Partners did not commit fraud and its officers did not engage in insider trading." The fourth paragraph said the "jury did find for the SEC regarding its claim that Life Partners had misstated its revenue recognition policy." The fifth paragraph quoted Pardo as saying:
We are extremely pleased that the jury has exonerated our company, our business practices and the life settlement asset class itself. As we demonstrated to the jury, life settlements as transacted through Life Partners provide a valuable service to senior Americans who want to sell their unwanted life insurance policies and are a tremendous alternative asset class for accredited investors seeking to avoid the volatility of the stock market. We provide a win-win transaction for everyone involved and, when put to the test, the jury could see the SEC's allegations were not true.
Article in The Wall Street Journal
On February 5, The Wall Street Journal carried a 15-paragraph, 536-word article entitled "Mixed Verdict in Case Against Life Partners," by Mark Maremont. The lead paragraph said:
Both sides declared victory after jurors delivered a mixed verdict on a civil lawsuit brought by the Securities and Exchange Commission against Life Partners Holdings Inc., a Texas seller of life insurance investments.
The article quoted Thomas A. Gorman, a securities attorney at Dorsey & Whitney LLP in Washington, who was not involved in the case, as saying: "When you look at the crux of this case, the SEC took another loss." It also quoted Jay Ethington, an attorney for Pardo, as saying that the jurors "in effect endorsed the business model of Life Partners," and that the verdicts against his client were for "inadvertent technical violations." The article also quoted Mr. Ceresney of the SEC as saying: "We're proud of our record of success at trial and will continue to bring aggressive cases to protect investors and hold wrongdoers accountable."

An earlier online version of the article quoted Elizabeth Yingling, an attorney for LPHI, as saying: "It was a definite win for our client." It also quoted S. Cass Weiland, an attorney for Peden, as saying the verdict was a "resounding win for the company and the individuals." It also quoted a government attorney as saying that "we won on most of the claims," and that the civil fraud revenue recognition claim on which the jury found in the SEC's favor was a "lead claim" in the case.

Stock Prices
The prices of LPHI shares reflect many problems faced by the firm in recent years. From $16.63 per share on January 4, 2010, the price declined to $3.43 by June 30, 2011. The plunge was caused by a combination of critical articles in The Wall Street Journal, class action lawsuits against the company, resignation of the company's independent auditor, decertification of an earlier financial report by the company's previous independent auditor, lengthy delays in filing the company's financial reports with the SEC, the possibility of the delisting of the company's shares by NASDAQ, an investigation by the Texas securities commissioner, and the threat of civil action by the SEC. The price recovered somewhat when the company hired a new independent auditor, filed its overdue financial reports, and avoided the delisting of its shares by NASDAQ.

Just before the SEC filed its complaint in January 2012, the price of LPHI shares was $6.37. In the first week after the complaint, the price declined to $4.00 and continued to drift downward. The closing price on December 31, 2013, was $1.78. Recently the price rose slowly to $2.56 on February 3, 2014. The next day, when the jury verdict was announced, the price rose to $2.98 in the heaviest trading of the year. By February 7, the price was back down to $2.61.

General Observations
The trial transcript will become freely available to the public on April 30, 2014. I hope to review it and try to improve my understanding of what happened at the trial.

It remains to be seen what motions will now be submitted by the parties, and what appeals will be filed. Meanwhile, it seems that LPHI has won the public relations battle through the widespread circulation of its cleverly and falsely titled press release.

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Thursday, February 6, 2014

No. 28: Phoenix's Denial of a Suspicious Death Claim

PHL Variable Insurance Company and Phoenix Life Insurance Company are operating units of Phoenix Companies, Inc. (NYSE:PNX). In 2005, PHL issued a $1 million policy (No. 40048215) on the life of Ebrahim Alrwazek, who resided in Oakdale, Minnesota. The beneficiary is his spouse, Mounia Zerrhouni. The annual premium payable on November 26, 2011 was not paid. The insured reportedly died on October 12, 2011, in a terrorist car bombing in Baghdad, Iraq.

The Claim Denial
On November 7, 2011, a person who identified himself as Mohsen Noor, the insured's attorney, informed the company by telephone from Morocco that the insured was dead. The company sent claim forms to the beneficiary, who also was in Morocco, and sent follow-up letters in December 2011 and February 2012. On March 1, 2012, the attorney told the company by telephone that the beneficiary was working on the forms. The same day, the beneficiary told the company by e-mail that she had not received the forms. On March 12, 2012, the company sent the forms again by e-mail.

By April 27, 2012, the company had received no documents. On that date, Neal Regels, the company's claims director, wrote to the beneficiary. He denied the claim because of the lack of adequate proof of the insured's death. He also said that, if the insured died while the insurance was in force, the company would pay the death benefit.

On June 25 and August 1, 2012, the company received documents purportedly showing that the insured died on October 12, 2011. However, there was conflicting information about the date of death. Also, the company's investigator provided additional conflicting information.

On January 30, 2013, Regels wrote a two-page letter to the beneficiary. He listed the documents the company had received and described the conflicting information. He again denied the claim because of the lack of adequate proof of the insured's death.

On June 28, 2013, an attorney in New York representing the beneficiary wrote to Regels requesting a complete copy of the policy, including the application and the history of premium payments. The attorney did not receive a reply at that time.

The Lawsuits
On July 7, 2013, the beneficiary filed a lawsuit against Phoenix Life in a New York State trial court. She alleged breach of contract and fraud against a consumer. (Zerrhouni v. Phoenix Life, Supreme Court of New York, New York County, Index No. 652434/2013.)

On September 9, Phoenix Life filed a motion to dismiss the lawsuit on the grounds that PHL, not Phoenix Life, issued the policy. The motion included an affidavit from Regels that "PHL does not maintain in its records a copy of the actual Policy issued," and "a specimen of the Policy form" was attached to the affidavit. Also attached were incorporation papers showing that PHL and Phoenix Life are separate companies, and that the beneficiary therefore had sued the wrong company.

On September 16, the beneficiary filed a second state court lawsuit. This time PHL was the defendant. (Zerrhouni v. PHL, Supreme Court of New York, New York County, Index No. 653204/2013.)

On November 29, despite the fact that the wrong company had been sued, the judge in the first state court lawsuit denied Phoenix Life's motion to dismiss the complaint. The judge said in part:
Here, the four corners of the Complaint state a cause of action as against Defendant for breach of the subject Policy and consumer fraud under General Business Law, §349, and the documentary submissions submitted by Defendant do not flatly contradict the legal conclusions and factual allegations of the Complaint.
On October 9, PHL removed the second state court lawsuit to federal court on two grounds. First, the matter in controversy exceeds $75,000. Second, there is diversity of citizenship between the plaintiff and PHL; the plaintiff resides in Morocco, and PHL thinks she is not lawfully admitted for permanent residency in the U.S. (Zerrhouni v. PHL, U.S. District Court, Southern District of New York, Case No. 1:13-cv-7154.)

On November 22, in the federal court lawsuit, the parties filed a joint status report and discovery plan. The parties do not agree on the beneficiary's request that the court appoint appropriate experts to exhume the body and perform testing to determine whether the body is that of the insured. PHL says the request is premature because it is not clear at this stage of the litigation whether testing is needed. The joint discovery plan provides that the parties will complete discovery by July 2014.

On December 9, in the first state court lawsuit, Phoenix Life filed a motion for a stay. In support of the motion, Phoenix Life mentioned the second state court lawsuit, which PHL already had removed to federal court. Phoenix Life also said:
PHL's denial of the death claim is reasonable. As Zerrhouni is fully aware, PHL believes the insured is not dead and that it is the victim of a scam. PHL has evidence that this is a scam, it has presented some of that evidence to Zerrhouni, and it is developing additional evidence.
The January 30, 2013 letter from Regels to the beneficiary contains what may be the "some of that evidence" PHL presented to the beneficiary. It remains to be seen whether the public will ever see PHL's "additional evidence" that the insured is alive and that PHL is being scammed.

General Observations
The beneficiary's attorney requested a complete copy of the policy, including the application and the history of premium payments. PHL eventually provided only a specimen of the policy, saying the company did not maintain in its records a copy of the actual policy issued. It is hard to believe that the company does not maintain in its records at least the application for the policy and the record of premium payments.

I have long regarded the disappearance of an insured, combined with the problems involved in proving that an insured is in fact deceased, as a troublesome aspect of the life insurance business. For that reason, I think the suspicious death claim discussed here bears close watching.

Meanwhile, because the two-page letter of January 30, 2013 from Regels to the beneficiary contains considerable detail on the company's claims process, I am making it available as a complimentary PDF. Send an e-mail to jmbelth@gmail.com and ask for the Regels letter.

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Monday, February 3, 2014

No. 27: An Important Lawsuit Against Coventry First

Coventry First LLC (Fort Washington, PA) is an intermediary in the secondary market for life insurance. In 2010, Leonard T. Griswold (Erdenheim, PA) filed a class action lawsuit against Coventry. I think the case, which remains pending, is important.

Griswold's Policy
In January 2006, United of Omaha Life Insurance Company issued a flexible premium adjustable life policy to Griswold, who was aged 74 at the time. The applicant and owner of the policy was Griswold's irrevocable life insurance trust, which had been established in Georgia. The trustee was Wells Fargo Bank NA (Atlanta, GA). The beneficiary of the policy was Griswold's wife Jean. The death benefit of the policy was $8.4 million, and the annual premium was $737,000. The company issued the policy in the non-tobacco category, but in the 175 percent substandard class because of Griswold's cardiac condition. One agent was Kevin J. McGarrey (Exton, PA). The other agent was Mark T. Berlenbach (Sicklerville, NJ), against whom the Pennsylvania insurance department issued a related consent order in July 2010.

In March 2008, Coventry offered to buy the policy for $1,675,000, consisting of $1,530,000 for Griswold and a commission of $145,000 for McGarrey. Griswold did not learn of McGarrey's $145,000 commission until March 2010, when a Pennsylvania insurance department investigator informed him of it.

Griswold's Lawsuit
In October 2010, Griswold filed a class action lawsuit against Coventry in state court in Pennsylvania. Relying heavily on the findings of investigations of Coventry in 2006 by the New York Attorney General and the Florida Office of Insurance Regulation, Griswold alleged there was a bid-rigging scheme that resulted in his receiving substantially less than the fair market value of the policy. (I wrote about the New York and Florida investigations of Coventry in the January/February 2007, December 2007, and December 2009 issues of The Insurance Forum.)

The defendants in Griswold's lawsuit were Coventry, three affiliates of Coventry, and Reid S. Buerger, executive vice president of Coventry. Griswold alleged six counts: fraudulent viatical settlement acts and common law fraud, common law fraud, fraudulent concealment, aiding and abetting breach of fiduciary duty, conversion, and unjust enrichment. Griswold sought class certification, compensatory damages, punitive damages, disgorgement of profits, and injunctive relief. (Griswold v. Coventry, Court of Common Pleas, Montgomery County, Pennsylvania, Case No. 2010-29237-0.)

In November 2010, Coventry removed the case to federal court for three reasons: diversity, because at least one member of the class was a citizen of a state different from any defendant; the class consisted of more than 100 members; and the amount in controversy exceeded $5 million. The case was assigned to U.S. District Judge C. Darnell Jones II. (Griswold v. Coventry, U.S. District Court, Eastern District of Pennsylvania, Case No. 2:10-cv-5964.)

On December 6, 2010, in federal court, Griswold filed an amended complaint alleging the six counts in the original state court complaint and adding two others: conspiracy in restraint of trade, and RICO (Racketeer Influenced Corrupt Organizations Act). He sought the same five forms of relief sought in the original complaint.

Coventry's Motion to Dismiss
On December 23, 2010, Coventry filed a motion to dismiss the complaint or compel arbitration. Coventry argued the plaintiffs lacked standing, the arbitration clause in the purchase agreement required the plaintiffs to arbitrate claims on an individual basis rather than a class basis, the plaintiffs failed to state a RICO claim, and the plaintiffs failed to state an antitrust claim.

On June 26, 2011, Judge Jones conducted a hearing. He considered Coventry's motion to dismiss the complaint or compel arbitration, the opposition to the motion, the answer to the opposition, and the oral arguments at the hearing.

Denial of Coventry's Motion to Dismiss
On February 27, 2013, Judge Jones denied Coventry's motion to dismiss the complaint or compel arbitration. He ruled the plaintiffs have standing, denied the request to compel arbitration because the plaintiffs were not signatories to the agreement containing the arbitration clause, ruled the plaintiffs pled sufficient facts to establish a pattern of racketeering activity and more particularized information will be borne out through discovery, and ruled the plaintiffs pled sufficiently to confer standing with respect to the antitrust claims. 

Coventry's Appeal
Coventry appealed to the Third Circuit the denial of its motion to dismiss the complaint or compel arbitration. The appellate panel consists of Judges Thomas L. Ambro, Thomas M. Hardiman, and Joseph A. Greenaway Jr.

On January 14, 2014, after extensive briefing, the panel heard oral arguments. The parties discussed three matters at the hearing: the question of standing, because the trust that owned the policy before it was sold into the secondary market no longer exists; the question of whether arbitration can be applied in the case of a party that was not a signatory to the agreement providing for arbitration of disputes; and the question of individual versus class arbitration. A decision by the panel probably is months away. (Griswold v. Coventry, U.S. Court of Appeals, Third Circuit, Case No. 13-1879.)

Coventry's Producer Agreement
Recently, while reviewing Griswold's lawsuit, I saw a document I had not seen previously. It is a six-page producer agreement that Coventry uses. Section 2.3, entitled "Duties," requires the producer to "identify and submit to Coventry all Policies produced by Producer, in respect of which a Life Settlement is being sought by Seller." Section 2.4, entitled "Right of Counteroffer," reads:
If Producer receives a bona fide offer (a "Competing Offer") from any person or entity, other than Coventry, to consummate a Life Settlement with respect to any Policy submitted by Producer to Coventry pursuant to Section 2.3 above, Producer shall promptly, but in no event more than one business day after the receipt of such Competing Offer, notify Coventry in writing of all of the material terms, including price, of such Competing Offer and shall provide Coventry with such verification of the Competing Offer as Coventry shall reasonably require, and Coventry shall have a right to make a counteroffer to contract for a Life Settlement in respect of such Policy on terms that with respect to purchase price of the policy are more favorable to the seller than those set forth in the Competing Offer. If Coventry desires to exercise this right to make a counteroffer, it shall deliver written notice to such effect to Producer within three business days of Coventry's receipt of written notice of the Competing Offer and such verification of the Competing Offer as Coventry shall reasonably require.
According to public documents filed after the New York and Florida investigations, Coventry at that time used a "Right of Final Offer" clause in its producer agreement. I have not seen the wording of the "Right of Final Offer" clause. It is my understanding that the clause was changed to a "Right of Counteroffer" clause as a compromise with the regulators. I am making the current form of the producer agreement available as a complimentary PDF. Send an e-mail to jmbelth@gmail.com and ask for Coventry's producer agreement.

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Wednesday, January 29, 2014

No. 26: The Unsealing of Court Documents Relating to Phoenix's Cost-of-Insurance Increases

A federal judge recently ordered the unsealing of many court documents in several lawsuits over cost-of-insurance (COI) increases imposed on certain policyholders by Phoenix Life Insurance Company and its affiliate, PHL Variable Insurance Company (collectively, "Phoenix"). I have been trying for a long time, with little success, to obtain various documents under state open records laws. Now, at last, many of the documents are in the public domain.

Background
In 2010, Phoenix significantly increased COI charges on universal life policies of the type used in stranger-originated life insurance (STOLI) arrangements. To accomplish the increase, Phoenix created a separate class consisting of policies with face amounts of $1 million and up issued to insureds aged 68 and up. STOLI investors invariably pay as little premium as possible. Consequently, the policies do not develop any accumulation value. In 2011, after an investigation that arose from complaints by STOLI investors, what is now the New York Department of Financial Services directed Phoenix to rescind the 2010 increases on policies issued in New York, credit the refunds to the policies with interest, and refrain in the future from basing COI charges on the ratio of accumulation value to face amount (the "funding ratio"). Phoenix did as directed, and then instituted fresh increases (the "2011 increases") on New York policies using a different methodology. Phoenix maintained the 2010 increases on policies issued in other states.

STOLI investors filed several lawsuits in federal courts. Also, in addition to the New York investigation, regulators in Wisconsin and California initiated investigations after receiving complaints from STOLI investors. I obtained some documents from Wisconsin pursuant to its open records law. However, I was frustrated by sealed documents in the lawsuits, a denial of my open records request to California, and what is now a 17-month delay on my August 2012 open records request to New York. I wrote about Phoenix's COI increases in the October 2012, December 2012, and November 2013 issues of The Insurance Forum, and in blog post No. 9.

The Unsealing Order
U.S. District Judge Colleen McMahon of the Southern District of New York is handling four of the lawsuits. Until recently, the parties filed many documents under seal pursuant to protective orders. The cases are Fleisher v. Phoenix Life (11-cv-8405), Tiger Capital v. PHL (12-cv-2939), and two U.S. Bank N.A. v. PHL cases (12-cv-6811 and 13-cv-1580).

On January 15, 2014, Judge McMahon ordered that one category of material and one exhibit should remain under seal. She also said:
All other material filed in support of or in opposition to the pending motions for summary judgment must be publicly filed. Defendant's [Phoenix's] argument for why these materials—which consist almost entirely of outdated business information from more than five years ago—should be filed under seal is utterly unpersuasive.
Appropriate filings shall be made within three business days. The Clerk of the Court shall remove ALL pending motions (whether noticed motions or letter motions) seeking permission to file materials under seal from the court's list of outstanding motions. This constitutes the decision and order of the court.
The Unsealed Documents
A few of the newly unsealed documents are discussed here. They are listed chronologically. I edited some direct quotes for spelling, grammar, consistency, and readability. Brackets denote my comments.

New York Letter to Phoenix
On September 6, 2011, Michael Maffei, chief of the life bureau in the New York department, wrote a three-page letter to Kathleen A. McGah, vice president and counsel at Phoenix. He directed the company to rescind the 2010 increases, credit the refunds to the policies with interest, and refrain in the future from basing COI charges on the funding ratio. I obtained this letter earlier, and discussed it in blog post No. 9.

Phoenix Letter to New York
On November 15, 2011, McGah wrote an 11-page "inadmissible, confidential settlement communication" to Maffei in response to his September 6 letter. She explained why Phoenix believes that the 2010 increases did not violate New York law and were permitted by the policies. "However, to avoid the costs and uncertainty of administrative or adjudicatory action," Phoenix offered to "undo" the 2010 increases, credit the refunds to the policies with interest, and implement the 2011 increases as described in an October 21, 2011 letter. I have not seen the October 21 letter, but I saw an earlier letter saying the 2011 increases would be "applied as a level percentage to the current COI rate."

Another New York Letter to Phoenix
On November 16, 2011, Maffei wrote a one-page letter to McGah. He acknowledged that Phoenix does not agree with the department's September 6 determination. "Without prejudice to the Department's position," he said the department accepts the plan described in McGah's November 15 letter, and "we are closing our file."

Phoenix "Talking Points"
Phoenix prepared a five-page "Talking Points and Q&A" dated November 18, 2011 and effective January 1, 2012. Here are some of the talking points:
  • Phoenix resolved the 2010 increases on a small number of policies and is moving forward with a different methodology that the New York Department finds acceptable. 
  • Phoenix is reversing the 2010 increases for certain New York policies and applying different increases beginning January 1, 2012. [I call the "different increases" the "2011 increases" because Phoenix sent notification letters to policyholders in September 2011.] 
  • Phoenix continues to believe that the original methodology for the 2010 increases is consistent with the policy provisions, actuarially sound, fair and equitable, and in compliance with state laws and regulations. [Phoenix's position differs totally from that of insurance regulators in New York, Wisconsin, and California.] 
  • The change applies only to policies issued by Phoenix Life (sold in New York). It does not apply to policies issued by PHL (sold in other states). 
  • The 2011 increases will not vary based on the ratio of accumulation value to face amount but rather will apply as a level percentage to all policies subject to increases. [Prior to the recent unsealing of documents, I had not seen any reference to the methodology for the 2011 increases.]
Phoenix Letter to Wisconsin
On August 1, 2012, McGah wrote an eight-page letter to Janelle V. Dvorak, an insurance examiner in the Wisconsin Office of the Commissioner of Insurance. The letter was in response to a July 9, 2012 letter from Dvorak to Robert P. Mallick, second vice president and counsel at Phoenix.

I have not seen the Dvorak letter. However, the McGah letter describes the Dvorak letter, provides background and analysis, lists six questions Dvorak asked, and answers the questions. I think this sentence in the McGah letter warrants close attention:
PHL's use of the relationship between accumulation value and face amount (i.e., the net amount at risk) under a policy was in accordance with policy terms, as policy form 05PAUL identified "Net Amount at Risk" as a factor in determining the COI rates. ["05PAUL" is the "Phoenix Accumulator Universal Life" policy form that was introduced in 2005.]
The net amount at risk is the face amount minus the accumulation value, and the COI charge is the net amount at risk multiplied by the COI rate. However, that "relationship" is not the one Phoenix used in the 2010 increases. Rather, Phoenix based the 2010 increases on the ratio of the accumulation value to the face amount.

Wisconsin Letter to Phoenix
On December 4, 2012, Robin Jacobs, an attorney in the Wisconsin commissioner's office, wrote a three-page letter to McGah explaining why the 2010 increases are "inconsistent with Wisconsin insurance statutes and regulations, as both the policy and the advertising materials fail to sufficiently inform the consumer that actual premiums paid will impact PHL's charge for COI." Jacobs "requests" that Phoenix rescind the COI increase, credit the refunds to the policies, and refrain from imposing future increases that are inconsistent with Wisconsin insurance laws. Jacobs does not use the word "demands," and the word "requests" in the letter is underlined by hand, presumably by someone at Phoenix. As I reported in the November 2013 issue of The Insurance Forum, Phoenix denied the allegations and did not rescind the increases on Wisconsin policies. Wisconsin began an administrative proceeding. The administrative law judge ordered all pleadings to be filed by November 11, 2013, and scheduled a two-day hearing for March 24-25, 2014.

California Letter to Phoenix
On June 21, 2013, Fernando De La Merced, a senior insurance compliance officer in the California Department of Insurance, wrote a two-page letter to Mallick. De La Merced said a complaint the department had received "is justified because the COI rate increase is unfairly discriminatory in violation of California Insurance Code section 790.03f" and "the rate increase violates the express terms of the 05PAUL policy." De La Merced said Phoenix should rescind the increases and refrain from using the funding ratio in determining COI charges. Phoenix disagreed with the findings and did not rescind the increases on California policies. The department took no further action.

The Stern Report
On September 16, 2013, Larry N. Stern, FSA, MAAA, who was retained by the plaintiffs, submitted an 82-page "Expert Report." Here are two excerpts from the "Conclusions" section:
The methods used to determine the group of policies subjected to the COI rate increases, the basis for the need for the COI rate increases, and the methodology for imposing those COI rate increases were not "actuarially sound and fair"--words often used by Phoenix in communications internally and externally to regulators and policyholders. Since the entire block of PAUL policies exhibited different premium patterns from what Phoenix claimed was anticipated in original pricing, Phoenix should not have singled out the policies it subjected to the COI rate increases....
The COI rate increases were discriminatory and not applied uniformly for all insureds in the same class. The definition of "class" was not dependent on factors at issue but rather based on funding characteristics of policyholder behavior after issue. For the 2010 COI rate increases an individual policyholder could avoid being subjected to the COI rate increase by paying more premium. Thus at one point the individual was a member of the "class" and the next moment was not a member of the "class." The 2011 COI rate increases were targeted at those policyholders that were minimally funding, even though the policies had been designed for, and designed to be profitable in, the minimally-funding market and all policyholders had been granted the freedom under the policy to fund minimally. The use of the threshold method to determine which policy would experience a COI rate increase was discriminatory because the COI rate increase was not applied in a uniform manner to all insureds in the same class....
The Stern Rebuttal Report
On October 23, 2013, Stern submitted an eight-page "Rebuttal Expert Report" in response to an expert report by Douglas A. French, FSA, MAAA. I have not seen the report by French, who presumably was retained by the defendants.

Conclusion
Recently unsealed documents show that, for several years prior to the 2010 increases, Phoenix became increasingly concerned about the lack of profitability on universal life policies of $1 million and up issued to insureds aged 68 and up. STOLI investors invariably pay the minimum premiums necessary to cover mortality and expense charges. The policies therefore develop no accumulation value and have a zero funding ratio. That approach is called "ART funding" because universal life policies are thereby transformed into annual renewable term policies.

In 2010, Phoenix split the class of universal life policies, created a separate class of large policies issued on elderly insureds, and increased the COI charges substantially on the policies in the separate class. In 2011, in response to a demand by the New York department, Phoenix rescinded the increases for policies issued in New York, obtained the department's approval of 2011 increases using a different methodology, and maintained the 2010 increases on policies in other states despite findings by California and Wisconsin regulators that the 2010 increases were improper.

I am not surprised that regulators in New York, Wisconsin, and California found the 2010 increases improper. However, I am surprised that the New York department approved the 2011 increases. In my opinion, the 2010 increases and the 2011 increases are improper, because a company should not be allowed to split a class for pricing purposes years after the class is established.

It remains to be seen how Judge McMahon will rule on the parties' motions for summary judgment and what appeals arise from her rulings. I think the cases are far from resolution.

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