No. 348: Long-Term Care Insurance—Updates on the Lawsuit Against the California Public Employees' Retirement System

In No. 227 (July 27, 2017) and No. 325 (August 5, 2019), I discussed a class action lawsuit filed more than six years ago against the California Public Employees' Retirement System (CalPERS), a unit of the California state government. The case relates to large premium increases CalPERS imposed on owners of long-term care (LTC) insurance policies. Here I show two updates on the case. (See Wedding v. CalPERS, Superior Court of California, County of Los Angeles, Case No. BC51744.)

Background

In August 2013, several plaintiffs filed their original complaint after CalPERS notified them of an 85 percent increase in the premiums for their LTC insurance policies. In March 2017, CalPERS filed a motion for summary judgment or, in the alternative, summary adjudication. In June 2017, the judge then handling the case denied the motion for summary judgment but granted the motion for summary adjudication. She allowed the case to proceed with three of the original causes of action. The trial was set to begin early in 2018, but it did not. The next judge in the case set the trial to begin in October 2019, but it did not. The trial is now set to begin in April 2020.

The October 2019 Update

The website www.calpersclassactionlawsuit.com provides interested parties with information about the case. The two-paragraph October 2019 update reads:

Plaintiffs and Plaintiffs' counsel attended the first scheduled mediation session on September 4, 2019 with Judge Layn Phillips, retired U.S. Attorney and a former federal judge from Oklahoma. He is one of the most sought after mediators in the nation and is known for his success in resolving highly complex cases. The mediation was attended by Plaintiffs' counsel Gretchen Nelson, Stu Talley, Greg Bentley and Steve Schuetze and the Plaintiffs, Holly Wedding, Eileen and Richard Lodyga. CalPERS was represented by its General Counsel, Matt Jacobs along with outside counsel, Daralyn Durie, Ragesh Tangri, Michael Proctor and Allyson Bennett of the Durie/Tangri law firm. In addition, Plaintiffs and CalPERS each had their respective actuary experts either present in person or telephonically to assist in answering questions that arose during the mediation. The negotiations were complicated since a potential resolution will likely require assessments as to the potential effect on the Long Term Care Fund, if, for example, there is a roll back of premiums or restoration of benefits to policyholders.

On October 7, 2019, we attended a second mediation session with Judge Phillips where further discussions were held as to various methods for achieving a resolution and ultimately it was agreed to have another mediation session in November, either on November 12 or November 14. The trial has been continued to April 13, 2020 to provide the parties with sufficient time to continue their discussions.

The December 2019 Update

The case website also provides a three-paragraph December 2019 update. It reads:

In the CalPERS Long Term Care Class Action matter, the parties have now attended three mediation sessions before the Hon. Layn Phillips (Ret.) and his associate Michelle Yoshida, Esq. The third mediation session occurred on Thursday, November 14, 2019, and attorneys Michael J. Bidart, Greg Bentley, and Stuart Talley appeared for the class, and Daralyn Durie, Ragesh Tangri, Michael Proctor, and Allyson Bennett appeared for CalPERS along with CalPERS's actuaries. Both sides have been working diligently on attempting to reach a resolution, and the parties' actuaries have been conferring to reach a consensus as to the potential cost to the Fund of various measures in connection with the parties' settlement efforts.

The class is comprised of persons who either paid the 85% premium increase, or reduced their benefits and dropped inflation protection and/or lifetime coverage in lieu of paying the 85% increase. A third group is comprised of policyholders who dropped their long-term coverage altogether. On behalf of the portion of the class who paid the 85% increase we are seeking to reach a settlement where those persons would have a portion of that increase rolled back both in the past and the future. For those who reduced their coverage in lieu of paying 85% we are seeking to obtain a partial restoration of benefits at no additional premium increase. Those who dropped coverage have different considerations and any settlement would likely involve some monetary compensation. The additional cost to the LTC Fund is significant, and any settlement requires additional funding from the State.

The parties have agreed that Judge Phillips can be appointed as Special Master who, in coordination with the Court, can directly contact the necessary State officials in an attempt to work toward a resolution.

General Observations

In No. 346 (December 20, 2019), I wrote about an LTC insurance premium increase class action lawsuit in which the settlement involved attorneys' fees and expenses that dwarfed the benefits provided for the victimized policyholders. I fear that the CalPERS case may be headed for a similar result. I plan to write further about developments in this case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 347: 403(b) Retirement Plans for Teachers: An Investigation by the New York Department of Financial Services

The Journal Articles

On October 2, 2019, The Wall Street Journal (Journal) carried online an 816-word article entitled "New York State Officials Open Probe on 403(b) Sales to Teachers; Officials concerned about annuity fees and disclosures to teachers." The reporters were Leslie Scism and Anne Tergesen. Here are the first two sentences:

New York Department of Financial Services Superintendent Linda Lacewell wants to ensure teachers are properly informed about the costs of so-called 403(b) retirement-savings programs. New York's top financial-services watchdog on Tuesday dispatched letters to a dozen major insurers seeking details on how they market retirement-income products to teachers, opening a probe of industry practices, according to people familiar with the matter.

On November 16, the Journal carried a 454-word article entitled "SEC Chairman Warns on Teacher Retirement Plans." The reporter was Dave Michaels. Here are the first two sentences:

A sweeping federal enforcement initiative aimed at sales practices related to retirement savings for teachers began after town halls across the country where the nation's top securities regulator heard things that worried him. Securities and Exchange Commission (SEC) Chairman Jay Clayton said Thursday that interactions with everyday investors convinced him teachers and other government workers were especially vulnerable to biased financial advice.

On December 11, the Journal carried a 1,318-word article entitled "Costly Plans Dent Teachers' Nest Eggs." The reporters were Gretchen Morgenson and Tergensen. Here are the first two sentences:

Hidden financial ties exist between some administrators hired by school districts for their teacher retirement plans and the companies whose investment products those administrators promote, The Wall Street Journal found. The ties can encourage administrators to promote higher-fee investments that leave teachers with smaller nest eggs than they might otherwise have had.

On December 19, the Journal carried a 1,912-word front-page article entitled "Unions' Tactics Hurt Teachers' Nest Eggs—They get paid to endorse providers of investments, including ones with high fees." The reporters were Tergensen and Morgenson. Here are the first three sentences:

The pitch from the president of the Indian River County teachers union couldn't have been clearer. Liz Cannon, who heads the Indian River chapter of the Florida Education Association, urged union members to buy retirement investments from Valic Financial Advisors Inc. through a firm owned by the union. That way "we also make money," she said in a November 2017 newsletter, through regular dividends. What Ms. Cannon didn't mention was that investments from Valic, a unit of giant insurance company American International Group Inc., can carry high costs that may translate to a smaller nest egg when teachers retire.

My FOIL Request

On November 5, I submitted to the New York State Department of Financial Services (NYDFS) a request pursuant to the New York State Freedom of Information Law (FOIL). I asked for a sample copy of the request letter that NYDFS had sent to the insurance companies.  On December 12, the agency said that it

requires additional time to respond to your request because the potentially responsive records contain highly sensitive information and require specialized review. DFS will endeavor to make its determination of your FOIL request by February 7, 2020. We appreciate your continued patience. Thank you.

The NYDFS Requests

Instead of waiting until February, I made other efforts to learn about the NYDFS requests. I learned the letters went to several major insurers by email in early October on the subject of "Request for a Special Report Pursuant to New York Insurance Law §308." NYDFS asked the companies for the production of information and supporting documentation in connection with its inquiry into annuity contracts offered through 403(b) retirement plans in New York State or to New York residents. NYDFS directed the companies to provide the information and the documents within three weeks.

The NYDFS request letters consisted of 15 numbered points. They are in the complimentary package offered at the end of this post.

My Second FOIL Request

On December 20, because the companies' responses apparently had already been received, I submitted to NYDFS a second FOIL request asking for the responses. On December 23, NYDFS denied my second FOIL request. The denial letter is in the complimentary package offered at the end of this post. I do not plan to appeal the denial of my second FOIL request. I still await a response to my first FOIL request.

General Observations

The NYDFS requests for information from the companies were so extensive that I think the companies must have been under severe pressure to respond in only three weeks. Also, it is my understanding that buyers and owners of 403(b) retirement plans do not enjoy the protections afforded by the Employee Retirement Income Security Act of 1974. If that is the case, the NYDFS and SEC investigations would assume special importance. I hope those agencies will make the results of their investigations available to the public as soon as possible.

Available Material

I am offering a complimentary 5-page PDF consisting of the 15 numbered points in the NYDFS requests to the companies (4 pages) and the NYDFS letter denying my second FOIL request (1 page). Email jmbelth@gmail.com and ask for the January 2020 package about the NYDFS investigation of 403(b) retirement plans for teachers.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 346: Long-Term Care Insurance—The Pending Settlement of the Newman Lawsuit Against Metropolitan Life

In No. 253 (February 15, 2018) and No. 336 (October 10, 2019), I wrote about a class action lawsuit filed by Margery Newman, an Illinois resident, against Metropolitan Life Insurance Company relating to long-term care (LTC) insurance. Recently the judge granted preliminary approval to a settlement of the case. Here I discuss the settlement. (See Newman v. Metropolitan, U.S. District Court, Northern District of Illinois, Case No. 1:16-cv-3530.)

Background
Newman was 56 when she bought an "LTC Premier" policy in September 2004. It included a "reduced-pay at 65 option," which Metropolitan had described as follows in a marketing brochure:

By paying more than the regular annual premium amount you would pay each year up to the Policy Anniversary on or after your 65th birthday, you pay half the amount of your pre-age 65 premiums thereafter.

In her March 2016 complaint and June 2016 amended complaint, Newman alleged breach of contract, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, fraud, and fraudulent concealment. In July 2016 Metropolitan filed a motion to dismiss the complaint for failure to state a claim.

In March 2017 the judge dismissed the complaint without prejudice. In April 2017, in accordance with the judge's ruling, Newman filed a motion for leave to file a second amended complaint and attached a proposed second amended complaint. Five days later, at a hearing, the judge denied the motion and dismissed the case with prejudice.

Newman appealed to the Seventh Circuit. In February 2018 a three-judge panel unanimously reversed the district court's ruling and sent the case back to the district court for further proceedings. (See Newman v. Metropolitan, U.S. Court of Appeals for the Seventh Circuit, Case No. 17-1844.)

Metropolitan petitioned for a rehearing by the full appellate court. Newman opposed the petition. The panel denied the petition and filed a slightly amended ruling. Here is the final paragraph of the panel's amended ruling:

Newman asserts that Metropolitan lured her into a policy by promising a trade of short-term expense for long-term stability. She took the deal and spent nine years investing in a plan, only to have Metropolitan pull the rug out from under her. Neither Metropolitan's brochure nor the terms of the policy forecast this possibility. These allegations were enough to state a claim under the theories Newman presented. We therefore REVERSE the district court's grant of Metropolitan's motion to dismiss and REMAND for further proceedings.

Back in the district court, the case dragged on for more than a year. The deliberations included mediation discussions and actions by several plaintiff-intervenors. Finally, on November 7, 2019, the judge granted preliminary approval to a settlement of the case.

The Settlement
The judge named Newman and three plaintiff-intervenors as class representatives. For the purposes of the settlement only, the judge conditionally certified the following class:

All individuals who purchased from Metropolitan Life Insurance Company a Long-Term Care Insurance Policy with the Reduced-Pay at 65 Option, which is either still in-force as of October 24, 2019, or which lapsed within ninety (90) days of their receipt of notice of a premium increase after they had attained the age of 65. Notwithstanding the foregoing, the Settlement Class does not include persons whose policies lapsed before receiving notice of a premium rate increase.

The judge set the fairness hearing for February 20, 2020. Class members who wish to be excluded from the settlement must file their requests for exclusion not later than 30 days before the fairness hearing. Objections to the settlement must be postmarked not later than 30 days before the fairness hearing.

Under the heading "What Does the Settlement Provide?," the class notice includes one paragraph. It reads:

The Settlement will result in cash refunds totaling approximately $1,300,000 to: (i) Class Members who have already been subjected to a premium rate increase after they turned 65; (ii) Class Members who reduced the amount of their coverage in order to avoid a premium rate increase after they had turned 65; and (iii) Class Members who had LTC policies that lapsed within 90 days of a post-age 65 premium increase. In addition, Metropolitan has agreed not to increase premiums on any Class Member in the future who is or becomes 65 or older after such person reaches age 65. For those Class Members who were already subject to one or more post-age 65 premium increases, Metropolitan has agreed not to collect any premium amounts above 50% of each such Class Member's last pre-age 65 premium amount. The Settlement also includes Metropolitan's payment of attorneys' fees as approved by the Court up to $5,000,000, the reimbursement of certain expenses not to exceed $80,000 incurred by Class Counsel, incentive awards not to exceed $20,000 in total to Plaintiff and other parties, and the costs of the administration of the Settlement.

Under the heading "How Will the Lawyers Be Paid?," the class notice includes three paragraphs. They read:

• Class Counsel will ask the Court for attorneys' fees not to exceed $5,000,000. Metropolitan shall pay such sums for attorneys' fees and expenses as may be approved by the Court. Class Members are not personally liable for any such fees or expenses.
• The attorneys' fees and expenses requested will be the only payment to Class Counsel for their efforts in achieving this Settlement and for their risk in undertaking this representation on a wholly contingent basis. Since the case began in 2016, Counsel has conducted all of the investigation, briefing and motions practice necessary to prepare the case for trial. To date, Counsel has not been paid for their services, nor reimbursed their expenses. Class Counsel has expended significant hours of attorney time in prosecuting the Class's claims and will ask the Court for certain expenses incurred in prosecuting the Litigation to be paid by Metropolitan in an amount not to exceed $80,000.
• Class Counsel shall file a formal motion with the Court for approval of the Settlement and their request for attorneys' fees and reimbursement of expenses not later than 30 days prior to the Fairness Hearing.

General Observations
Attorneys' fees and expenses in this case far exceed amounts to be paid to class members. I believe there are three primary reasons for that result. First, the policies involved—those containing the "reduced-pay at 65 option"—probably represent a small portion of Metropolitan's LTC insurance offerings. Second, the granting of Metropolitan's motion to dismiss, requiring the class's attorneys to appeal the ruling, probably enlarged the efforts needed by them. Third, the long delays in the district court after the appellate ruling probably enlarged the efforts needed by them. In my opinion the large ratio of attorneys' fees and expenses to class members' benefits is justified.

Available Material
I am offering a complimentary 20-page PDF consisting of the judge's November 2019 preliminary approval of the settlement, which includes the notice to be sent to class members. Send an email to jmbelth@gmail.com and ask for the December 2019 package about Newman v. Metropolitan.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 345: Transamerica is the Defendant in a New Individual Lawsuit Relating to Cost-of-Insurance Increases

On this blog I have posted many items relating to cost-of-insurance (COI) lawsuits against Iowa-based Transamerica Life Insurance Company (Transamerica). The most recent post was No. 333 (September 20, 2019).

Background on the Terry Lawsuit

Angela Terry, a California resident, is trustee for and beneficiary of the Frank Irrevocable Trust (Trust) created in January 2000. In May 2000 the Trust purchased from a Transamerica predecessor a $1 million second-to-die universal life policy on the lives of Jeanine and Ronald Frank. In February 2019, after instituting a COI rate increase beginning in May 2018, Transamerica informed the Trust that a 39 percent COI rate increase had been imposed as of May 2018, and that further COI rate increases of 39 percent each would be imposed in May 2019 and May 2020. The compound amount of the three increases was 169 percent. The Trust thereupon surrendered the policy.

The Terry Complaint

On October 23, 2019, the Trust filed an individual lawsuit against Transamerica. Here are three of the first four paragraphs in the "Nature of the Action" section of the complaint:

1. This case arises from substantial cost of insurance increases on Transamerica's TransSurvivor 115 universal life insurance policies that started in 2017 and continue to the present. Transamerica breached the express and implied terms of the policies, violated other relevant law, and falsely and misleadingly stated that the cost increases were permitted due to a change in Transamerica's future cost expectations.

3. From the 1980s to the 2000s, Transamerica sold hundreds of millions of dollars in universal life insurance policies requiring it to credit interest on policyholders' accumulation accounts at guaranteed rates ranging between 4.0% and 5.5%, including the TransSurvivor 115 universal life insurance policies purchased by Ms. Terry and thousands of others. Ms. Terry purchased a TransSurvivor 115 policy so that her family would be protected as Jeanine and Ronald H. Frank (the joint insureds) entered their senior years and in the event of their death. However, beginning in 2017, Transamerica substantially increased the cost of insurance withdrawn from the policies' accumulation accounts, deceptively stating the increases were permitted by the terms of the policies "based on ... current expectations about ... future costs for providing coverage."

4. Despite its representations, Transamerica's expectations about the future costs for providing coverage under the policies could not have materially changed for the worse in 2017, particularly changes that would justify Transamerica's exorbitant cost increases (in some instances exceeding 168 percent). Since the TransSurvivor 115 policies were issued in the late 1990s to the 2000s, the factors that form the basis of Transamerica's cost of insurance rate have only improved, contractually precluding a cost of insurance increase entirely, but especially in 2017 when Transamerica knew that it was lowering the costs of administering its business between $70-100 million and that it was receiving hundreds of millions of dollars in prospective tax benefits under the Tax Cut and Jobs Act of 2017.

The complaint contains five counts: (1) breach of contract, including breach of the implied covenant of good faith and fair dealing; (2) tortious breach of the implied covenant of good faith and fair dealing; (3) violation of the California Business and Professions Code, Sections 17200 et seq.; (4) intentional, or in the alternative, negligent misrepresentation; and (5) declaratory relief. The full complaint is in the complimentary package offered at the end of this post. (See Terry v. Transamerica, U.S. District Court, Northern District of Iowa, Case No. 1:19-cv-118.)

Transamerica's Answer to the Complaint

On November 25, 2019, Transamerica filed an answer to the Terry complaint, including the standard "admits," "denies," and "lacks knowledge" language. It also includes ten affirmative defenses: (1) no duty to disclose, (2) failure to mitigate, (3) no punitive damages, (4) ratification, (5) illegality, (6) release, (7) genuine dispute doctrine, (8) reasonableness and good faith, (9) waiver, and (10) estoppel. The full answer is in the complimentary package offered at the end of this post.

The NYDFS Consent Order

Paragraphs 104 and 105 in the Terry complaint were my first knowledge that Transamerica Financial Life Insurance Company (TFLIC), a New York-domiciled subsidiary of Transamerica, entered into a consent order with the New York Department of Financial Services (NYDFS) on July 2, 2018. The consent order grew out of NYDFS financial and market conduct examinations of TFLIC for the periods 2006-2009 and 2010-2014. The examinations identified four violations during the 2006-2009 period and eleven violations during the 2010-2014 period. NYDFS ordered TFLIC to pay a civil monetary penalty of $762,700 in addition to restitution to policyholders and beneficiaries. The consent order is in the complimentary package offered at the end of this post.

The NYDFS consent order directed at TFLIC prompted me to visit the website of the Iowa Insurance Division, Transamerica's domiciliary regulator. I found no consent orders there directed at Transamerica.

General Observations

The Terry case is in its early stages, and I do not know what will happen as the case progresses. I plan to follow the case and report on significant developments.

Available Material

I am offering a complimentary 76-page PDF consisting of the Terry complaint (49 pages), the Transamerica answer (19 pages), and the NYDFS/TFLIC consent order (8 pages). Email jmbelth@gmail.com and ask for the December 2019 package about Terry v. Transamerica.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 344: Long-Term Care Insurance—More on the Insolvency of Senior Health Insurance Company of Pennsylvania

Senior Health Insurance Company of Pennsylvania (SHIP) is based in Pennsylvania and is regulated primarily by the Pennsylvania Insurance Department (Department). SHIP has been running off the long-term care (LTC) insurance business of Conseco Senior Health Insurance Company (CSHI) since 2008. The CSHI LTC insurance business was in runoff for five years before SHIP took over the business. In No. 308 (April 11, 2019) and No. 342 (November 25, 2019), I wrote about the insolvency of SHIP. Here I discuss my correspondence with the Department and with the National Organization of Life and Health Guaranty Associations (NOLHGA) after No. 342 was posted.

Correspondence with the Department

In No. 342 I said I would send it to the Department upon posting, mention my plan to post a follow-up, and request from the Department a statement about SHIP in a form suitable for inclusion in the follow-up. When No. 342 was posted, I forwarded it to Joseph DiMemmo, CPA. He is the Department's Deputy Insurance Commissioner for Corporate and Financial Regulation of Insurance Companies. I imposed no length limit, and said this in the email:

Below is No. 342, which was posted this morning. As indicated, I hereby request a statement regarding SHIP from the Pennsylvania Insurance Department. I need the statement by 5:00 p.m. Eastern time on Monday, December 16, 2019. Please acknowledge receipt of this email. Thank you.

An hour later he sent a two-word reply: "As requested." He attached the 51-page SHIP statutory statement for the quarter ended September 30, 2019. An hour later I said:

Thank you for SHIP's statutory statement for the quarter ended September 30, 2019. As pointed out in No. 342, I already had that statement. Is the Pennsylvania Insurance Department planning to comply with my request for a statement about SHIP by December 16?

The next day I asked him whether I may anticipate a statement about SHIP from the Department by December 16. He replied a day later:

The Department is aware of the issues raised in your article and does not comment on the financial affairs of insurers beyond what is public information. Other regulators are also aware of the issues raised and understand we are working with the company to address them. Thank you for your interest.

Correspondence with NOLHGA

On November 26 I forwarded No. 342 to NOLHGA. The next day I informed NOLHGA of the Department's comments, and said:

I hereby request a statement regarding SHIP from NOLHGA by 5:00 p.m. Eastern time on Monday, December 16, in a form suitable for publication in my follow-up blog post. Please acknowledge receipt of this email and indicate whether I may anticipate a statement from you. Thank you for your assistance.

Half an hour later a NOLHGA spokesperson provided a one-sentence response: "We defer to the Pennsylvania Department, but thank you for checking with us."

The Penn Treaty Case

Penn Treaty Network America Insurance Company and its subsidiary American Network Insurance Company (together, "Penn Treaty") are LTC insurance companies based in Pennsylvania and regulated primarily by the Department there. In 2009 the Department petitioned a state court to liquidate Penn Treaty. After a long dispute, including a trial, the court denied the petition and ordered Penn Treaty to be placed in rehabilitation. The rehabilitation failed. On March 1, 2017, the court ordered the Department to place Penn Treaty in liquidation. NOLHGA and the state guaranty associations are now involved.

Penn Treaty's website (penntreaty.com) and NOLHGA's website (nolhga.com) provide extensive information about Penn Treaty's liquidation. By contrast, SHIP's website (shipltc.com) and NOLHGA's website say nothing about SHIP's insolvency. As for the Department's website (insurance.pa.gov), some information about SHIP may be found through a search (I provided some of that information in a complimentary package offered in No. 342), but SHIP's policyholders and claimants have no means—other than through lengthy, complex, and hard-to-obtain statutory statements—by which to learn the company is insolvent.

General Observations

When No. 342 was posted, a reader asked what I thought should be done about SHIP. In response, I pointed out that I had said the Department should require SHIP to send annual reports to policyholders and claimants. I made the suggestion because I think policyholders and claimants have a right to know the company is insolvent. Such reports should not only mention the insolvency but also should include more than a mere indication that SHIP is working with the Department to address the problem. I recognize that disclosure of SHIP's insolvency to its policyholders and claimants may hasten the doomsday scenario I mentioned in No. 342, where the company's assets run out. However, I see no way for SHIP and the Department to address the company's insolvency without obtaining court authorization to place the company in liquidation, thus bringing NOLHGA and the state guaranty associations into the process.

I plan to post another follow-up in March 2020, after I see SHIP's statutory statement for the year ended December 31, 2019. However, I may post a follow-up sooner if I learn of any important developments.

Available Material

In No. 342 I offered a complimentary 49-page PDF consisting of four articles in The Insurance Forum about the creation of SHIP, selected pages from SHIP's statutory statement for the quarter ended September 30, 2019 (6 pages), a limited-scope examination report on SHIP as of year-end 2016 (6 pages), and a market conduct examination report on SHIP as of April 2019 (27 pages). The package is still available. Email jmbelth@gmail.com and ask for the December 2019 SHIP package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 343: Long-Term Care Insurance—A Complaint by a Policyholder Relating to a Genworth Premium Increase

On this blog I have posted several items about class action lawsuits against Genworth Financial, Inc. (Genworth) relating to premium increases on long-term care (LTC) insurance policies. The two most recent are No. 334 (9/26/19) and No. 337 (10/17/19). Here I discuss an individual consumer's complaint to a state insurance regulator relating to a Genworth premium increase, and an ironic incident that occurred more than 20 years ago.

The Genworth Notification

The consumer purchased the policy in 1996. Genworth recently notified the consumer of an 80 percent premium increase. The letter, with the emphasis in the original and over the signature of a senior company officer, reads:

Thank you for choosing Genworth for your long term care insurance needs. We value your business and are committed to providing quality service and being here when you need us the most.

This letter is to inform you that, as a result of higher than expected aggregate policyholder claims costs, the premium on your current long term care coverage will increase from ––– to ––– beginning on your next billing anniversary date, –––. Please refer to the enclosed Coverage Options page and Important information page for more details. Please note that this increase is not due to a change in your health, age, or claims history.

We appreciate the financial difficulty premium increases can cause. That is why we are offering coverage adjustment options to help you manage your premium cost while still maintaining important coverage. The enclosed pages outline these options along with your personalized information. We encourage you to discuss your options with your financial advisor or a member of our Customer Service Team by calling (877) 710-0817 before making a decision. For additional information regarding premium increases, we encourage you to visit www.genworth.com/ltcpremiums.

Once again, thank you for being a Genworth policyholder.

The Consumer Complaint

The consumer filed a complaint with the regulator in the state where the consumer resides. The complaint reads:

I have had this Long Term Care Insurance since 1996 and have diligently paid over $27,000 of premiums. Having this Long Term Care Insurance was a key component of my plan to ensure I had adequate care as I aged. Now as I am entering a time of my life when I could very well need this insurance, Genworth has increased the quarterly premium from ––– to ––– (+80%!) which I cannot afford on my very limited budget. They have offered alternative plans however all these options reduce the benefits drastically to the point where I may not have adequate long term care as planned for 23 years ago. I feel this is very unfair and unjustified.

It is clear that Genworth is no longer a reliable and trusted Long Term Care Insurer. Genworth has found a path forward which maximizes its profits but leaves me highly exposed to Long Term Care costs. I feel that they should honor their policy with an immediate payout of the maximum benefit currently contained in my policy ($314,000). This would allow me the chance to live out my life in good care and Genworth to sever its relationship with me as a good corporate citizen.

The Regulatory Reply

A rate review policy analyst in the state insurance department responded to the consumer complaint. The letter reads:

Thank you for taking the time to send in your complaint regarding your long term care policy with Genworth. After a thorough actuarial review, [we] did approve a rate increase for Genworth long term care policies. The current policies in place are not generating sufficient premium to pay future claims to policyholders. This is a common problem for a number of insurers nationwide because policyholders are keeping their policies longer than expected and are living longer than projected, thus using more benefits than the company anticipated when the policies were originally sold. Additionally, the cost of providing long-term care is increasing at a rate much higher than anticipated.

[We] do not have the authority to require the company to take the action you have requested. However, the company has provided several options to mitigate the rate increase.

I know this is not the information you were hoping to receive but I hope it's at least helpful. Please let us know if you have any further questions. Thank you.

An Ironic Incident

My first article about LTC insurance was in the February 1988 issue of The Insurance Forum, the monthly newsletter I edited for 40 years until I shut it down in 2013 and started my blog. In the May 1997 issue I wrote about a promotional letter I had just received concerning guaranteed renewable LTC insurance offered by General Electric Capital Assurance Company, a predecessor of Genworth. The letter included this sentence, with this underlining: "Your premiums will never increase because of your age or any changes in your health." I wrote the company expressing concern that the sentence, although technically correct, was deceptive. I said the promotional letter should make clear that the company has the right to increase premiums on a class basis.

The company officer who had signed the promotional letter responded. He defended the sentence by saying, among other things, that the company had never raised rates on existing policyholders and had an "internal commitment to rate stability." Nonetheless, and without telling me, the company removed the deceptive sentence from its promotional letters. I wrote about the incident in the May 1997 and February 1998 issues of the Forum. Those articles are in the complimentary package offered at the end of this post.

The Genworth 2019 Annual Meeting

In the above mentioned No. 334, I discussed the annual meeting of Genworth's shareholders to be held on December 12, 2019, if the long-delayed merger agreement with China Oceanwide has not been completed by that date. On November 1, 2019, Genworth circulated proxy materials related to the 2019 annual meeting, and indicated that the merger has not yet been completed. Readers interested in the proxy materials may access them here.

General Observations

During the six years I have been blogging, I have received many emails from individuals concerning problems with LTC insurance. Some related to claims practices, and some related to premium increases. It pained me to tell them I am neither an attorney nor a consultant, and am not in a position to comment beyond what I have written. However, I did try to make sure they knew how to find my blog posts on LTC insurance, and some of the email exchanges led to further posts.

For many years I have said that the LTC exposure violates several important insurance principles, and for that reason the problem of financing the LTC exposure cannot be solved through the mechanism of private insurance. I explained the situation in an article in the July 2008 issue of the Forum. That article is in the complimentary package offered at the end of this post.

I have also said that even the federal government cannot solve the problem of financing the LTC exposure through a voluntary system. Rather, it can be solved by the government only through a mandatory system that is part of a mandatory, single-payer system of universal health care. I discussed this matter in No. 310 (April 22, 2019) in the section entitled "General Observations."

In Chapter 18 of my 2015 book, The Insurance Forum: A Memoir, I summarized my experiences with LTC insurance. The chapter is in the complimentary package offered at the end of this post. The book is available for purchase at www.theinsuranceforum.com.

Available Material

I am offering an 18-page complimentary package consisting of the May 1997, February 1998, and July 2008 Forum articles (9 pages) and Chapter 18 of the Memoir (9 pages). Send an email to jmbelth@gmail.com and ask for the December 2019 package about LTC insurance.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 342: Long-Term Care Insurance and the Expanding Insolvency of Senior Health Insurance Company of Pennsylvania

Senior Health Insurance Company of Pennsylvania (SHIP), which is domiciled in Pennsylvania, has been running off the long-term care (LTC) insurance business of Conseco Senior Health Insurance Company (CSHI) since 2008. I wrote four articles in The Insurance Forum about the transfer of CSHI's LTC insurance business to SHIP. (The four articles are in the complimentary package offered at the end of this post.)

In No. 308 (April 11, 2019), I said SHIP was insolvent by $447 million. According to the company's financial statement for the year ended December 31, 2018 (filed March 1, 2019), total liabilities of $2.653 billion exceeded total assets of $2.206 billion. Here I report that the deficit has been expanding in 2019. I also discuss a few related matters.

Quarterly Data in 2019
According to SHIP's financial statement for the quarter ended March 31, 2019 (filed May 15), the deficit had grown to $462 million. According to the statement for the quarter ended June 30, 2019 (filed August 15), the deficit had grown to $477 million. According to the statement for the quarter ended September 30, 2019 (filed November 15, 2019), the deficit had grown to $524 million. (Six selected pages from the latest quarterly statement are in the complimentary package offered at the end of this post.)

RBC Data
The numerator of a risk-based capital (RBC) ratio is "total adjusted capital," the denominator is "company action level," and the quotient is the RBC ratio. According to SHIP's financial statement for the year ended December 31, 2018, total adjusted capital was minus $467 million, company action level was $102 million, and the RBC ratio was minus 458 percent. RBC data do not appear in quarterly statements, but the RBC ratios are negative because total adjusted capital is negative.

According to state RBC laws, when a company's RBC ratio falls below 35 percent, the company is in the "mandatory control zone," and the primary regulator—the Pennsylvania Insurance Department (Department) in this instance—is required to seek state court permission to seize control of the company. Yet the Department has not done so. I asked the National Organization of Life and Health Guaranty Associations (NOLHGA) about SHIP. NOLHGA referred me to the Department. I asked the Department about SHIP, but received no reply.

In SHIP's statement for the year ended December 31, 2018, this sentence appears: "There is not substantial doubt about the Company's ability to continue as a going concern." I do not know how a company deep in the mandatory control zone can justify that assertion. In SHIP's three quarterly statements in 2019, these two sentences appear:

The Company has suffered recurring losses from operations and has a net capital and surplus deficit. The Company is actively working with the Pennsylvania Insurance Department to develop a corrective action plan.

The Limited-Scope Examination
On the Department's website, I recently found a "Report of Limited-Scope Examination" of SHIP as of December 31, 2016. The "Conclusion" of the report contains these comments (the full report is in the complimentary package offered at the end of this post):

Although each of the Consulting Actuary's scenarios produce less favorable results than the Company's base scenario, and indicate material reserve deficiencies, the Department is making no recommendation to change the financial statement at this time.

The Company has agreed to consider several long-term monitoring suggestions from the Consulting Actuary and incorporate those monitoring suggestions as needed into future reserve studies. The Department will continue to closely monitor the Company's financial condition and operating results.

The next regularly scheduled financial condition examination of the Company will cover the five-year period ending December 31, 2018.

I asked the Department when the examination for the five-year period ending December 31, 2018 will be available. I received no reply.

The Market Conduct Examination Report
On the Department's website, I recently found a "Market Conduct Examination Report" of SHIP as of April 24, 2019. The report includes a detailed history of the company, refers to a third-party administration agreement with Long Term Care Group (LTCG), and contains the company's response. Here are two of several recommendations (the full report is in the complimentary package offered at the end of this post):

The Company must review and revise internal control procedures to ensure compliance with claims handling requirements, so that the violations relating to claim acknowledgment, status letters, acceptance or denials, and payments as noted in the Examination Report, do not occur in the future.

The Company must ensure LTCG representatives are trained to fully disclose to first-party claimants the benefits, coverages, alternative plans of care, or other provisions of the insurance policy or insurance contract when the benefits, coverages or other provisions are pertinent to a claim.

Licensing
According to SHIP's financial statements, the company remains licensed in all U.S. jurisdictions except Connecticut, New York, Rhode Island, Vermont, American Samoa, Guam, Puerto Rico, and Northern Mariana Islands. In reply to my inquiries, a few of those eight jurisdictions said they have no record of the company ever being licensed there.

General Observations
Normally, when an insurance company is in financial trouble, the primary regulator seeks state court permission to seize control of the company and place it in rehabilitation or liquidation. (Liquidation would trigger state guaranty association coverage.) In this instance, however, SHIP and its predecessor, CSHI, have been in runoff mode since 2003. Because the company does not sell new policies, perhaps the thinking is that there is no need for the Department to take formal control of the company. In the absence of straight answers from the Department and NOLHGA, it appears that the Department has effectively taken control of SHIP without a court order. Stated another way, it appears that the company is "in limbo" without disclosure of the situation to the premium-paying policyholders and the recipients of benefits. To my knowledge SHIP provides no annual reports to policyholders and claimants. I think the Department should require SHIP to do so.

There is another way to look at this highly unusual regulatory procedure. The "in limbo" status of SHIP's policyholders and claimants may continue for many years—probably decades—until the assets run out. At that point the company would have to close down, cancel the policies, and stop benefit payments to claimants. The situation raises important questions: when and how should the company's status be disclosed to (1) premium-paying policyholders that they likely will not receive the benefits promised under their policies, and (2) claimants that their benefit payments likely will stop. This doomsday scenario is the result of "kicking the can down the road" and leaving the problem in the hands of a future generation of regulators.

When this item is posted, I will send it to the Department. I will say I plan to write a follow-up, and will ask the Department for a statement about SHIP in a form suitable for inclusion in the follow-up. I will impose no limitation on the length of the statement, but will ask the Department to provide the statement within three weeks.

Available Material

I am offering a complimentary 49-page PDF consisting of the four Forum articles (10 pages), selected pages from the latest quarterly statement (6 pages), the limited-scope examination report (6 pages), and the market conduct examination report (27 pages). Email jmbelth@gmail.com and ask for the December 2019 SHIP package.

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No. 341: The Age 100 Problem—Another Update on the Lebbin Lawsuit Against Transamerica

In No. 331 (September 6, 2019), I posted an update about a 2017 lawsuit by Gary H. Lebbin—at the time he was almost 100—and the Lebbin-Spector Family Trust ("Trust"). The trustees of the Trust are Gary's two children. The defendant is Transamerica Life Insurance Company. Here I provide another update. (See Lebbin v. Transamerica, U.S. District Court, Southern District of Florida, Case No. 9:18-cv-80558.)

Recent Developments

On February 5, 2019, by which time Gary was afflicted with dementia, Transamerica settled with him for $10,000. On February 22 the Trust filed an amended complaint that omitted Gary as a plaintiff, leaving the Trust as the only plaintiff. The amended complaint included five counts: declaratory relief, breach of contract, breach of the covenant of good faith and fair dealing, reformation, and rescission. On July 19 the judge granted the Trust's claim for breach of contract. The other four counts were denied by the judge or withdrawn by the Trust.

On July 30 the judge canceled the trial, which had been set for August 5. The parties said they had agreed to resolve the case, but they had not agreed on the damages for the Trust's breach-of-contract claim. The damages thus became the only remaining issue in the case. Had there been a trial, it would have been interesting to see what the jury would have said about the amount of damages. The judge set a briefing schedule under which the Trust was required to file its motion for summary judgment (MSJ) on damages by August 30.

The Trust's MSJ on Damages

On that date the Trust filed its MSJ on damages. The Trust requested a return of all premiums paid to Transamerica—a total of $1,670,140.91 plus prejudgment interest. The prejudgment interest rates the Trust suggested are the Florida statutory rates at the time of each premium payment. The Trust said it would provide the interest figure prior to the entry of final judgment.

Transamerica's Response

The briefing schedule required Transamerica to file its response to the Trust's MSJ by October 10. On that date the company filed a massive amount of material, including a document opposing the Trust's MSJ, a cross-motion for summary judgment, a memorandum of law, a response to the Trust's statement of undisputed material facts, 48 exhibits, and three supplemental declarations in opposition to the Trust's MSJ. Here is the first paragraph of Transamerica's opposition document. (The full opposition document is in the complimentary package offered at the end of this post.) It is important for the reader of the paragraph to understand that each of the two policies was a second-to-die universal life policy.

The result sought by Plaintiffs in this case would turn fundamental principles of insurance law and justice on their head. Gary Lebbin purchased two life insurance Policies insuring himself and his wife with a total death benefit of $3.2 million. Mr. Lebbin was fully aware that the Policies provided that, if both insureds died before each was 100 years old, the Policies would pay the death benefit. If either insured lived to be 100, the Policies would terminate and instead pay any cash value. Mr. Lebbin was a very sophisticated businessman who worked with expert brokers in purchasing these Policies, and personally managed them for 24 years. His management fully and repeatedly comported with and ratified this understanding of the Policies. In managing the Policies, Mr. Lebbin could either pay just enough premium to maintain the Policies to age 100, or he could pay sufficient premiums to build a cash value upon termination. He paid only the minimum premium because he believed he would not live to be 100, and he wanted the least expensive insurance.

The Trust's Reply

The briefing schedule required the Trust to reply to Transamerica's response by November 8. On that date the Trust filed its reply in support of its MSJ for damages, its response to Transamerica's cross-motion for summary judgment, and a motion to strike or disregard the supplemental declarations. Here, without citations, is the first paragraph of the Trust's reply in support of its MSJ for damages (the full reply document is in the complimentary package offered at the end of this post):

Transamerica argues that, regardless of the measure of damages the Court selects for Transamerica's wrongful termination of the Policies, Plaintiffs should not be compensated in any fashion for Transamerica's breach of contract. According to Transamerica's concept of "insurance law and justice," a life insurance company can breach its life insurance policies by improperly terminating them and yet retain millions of dollars in premium, interest, investment gains, profits, and reserved death benefits. Transamerica asks the Court to put Transamerica in a better position than if it had performed under the Policies, notwithstanding that the Policies have been adjudged so "incomprehensible" as to be "rendered ambiguous." [Emphasis in original.]

General Observations

The briefing schedule on damages requires Transamerica to file any response to the Trust's reply by November 25. As I understand it, after briefing is completed, the judge will rule on the damages for the Trust's breach-of-contract claim. I plan to prepare yet another update on this case after the judge rules on the damages.

Available Material

My previous posts about the Lebbin case, in addition to the above-mentioned No. 331, are Nos. 226, 241, 269, and 327. In each of those posts, I offered a complimentary package containing additional material. Those packages are still available.

Now I am offering a complimentary 55-page package consisting of Transamerica's October 10 opposition document (28 pages) and the Trust's November 8 reply document (27 pages). Email jmbelth@gmail.com and ask for the November 2019 package about Lebbin v. Transamerica.

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Blog: www.josephmbelth.com

No. 340: The Markopolos Book about the Madoff Ponzi Scheme

In No. 329 (August 28, 2019), I wrote about a whistleblower report by Harry M. Markopolos alleging that General Electric Company (GE) is a "Bigger fraud than Enron" and is "headed toward bankruptcy." One part of the report relates to GE's accounting for its long-term care (LTC) insurance legacy problem, a subject that has been of great interest to me for a long time.

In that post I mentioned a 2010 book entitled No One Would Listen: A True Financial Thriller, a personal account by Markopolos of his efforts to expose the massive Ponzi scheme Bernard Madoff operated for many years. When I wrote that post, I had not read the Markopolos book. I have now read it, and it is excellent.

The Markopolos Book

The 354-page Markopolos book consists of nine chapters following the front matter, and also includes an epilogue, three appendixes, a note on sources, acknowledgments, biographical information about the author, and an index. The entire book is a good read, but the most interesting section begins with Chapter 7 entitled "More Red Flags Than the Soviet Union" and ends with the collapse of Madoff's scheme. The first two paragraphs of Chapter 1 illustrate the author's writing style:

On the morning of December 11, 2008, a New York real estate developer on a JetBlue flight from New York to Los Angeles was watching CNBC on the small back-seat television. A crawl across the bottom of the screen reported that Bernard Madoff, a legendary Wall Street figure and the former chairman of NASDAQ had been arrested for running the largest Ponzi scheme in history. The developer sat silently for several seconds, absorbing that news. No, that couldn't be right, he thought, but the message streamed across the screen again. Turning to his wife, he said that he knew that she wasn't going to believe what he was about to tell her, but apparently Bernie Madoff was a crook and the millions of dollars that they had invested with him were lost. He was right—she didn't believe him. Instead, she waved off the thought. "That's not possible," she said, and returned to the magazine she was reading.

The stunned developer stood up and walked to the rear of the plane, where the flight attendants had gathered in the galley. "Excuse me," he said politely, "but I'm going to be leaving now. So would you please open the door for me? And don't worry—I won't need a parachute."

The Report of the SEC OIG

On December 11, 2008, Madoff confessed and was arrested. The Securities and Exchange Commission (SEC) charged him with securities fraud for a multi-billion dollar Ponzi scheme he had perpetrated on clients of his firm, and the U.S. Attorney in the Southern District of New York indicted him on criminal charges.

On December 18, 2008, the SEC Office of Inspector General (OIG) issued a document preservation notice to the entire SEC. On March 12, 2009, Madoff pled guilty to all charges. On June 29, 2009, he was sentenced to serve 150 years in prison.

On August 31, 2009, H. David Kotz, the inspector general of the SEC, issued a major report. The complimentary package offered at the end of this post includes the entire public version of the report. Here is the first paragraph in the concluding section of the report:

The OIG investigation found that the SEC received numerous substantive complaints since 1992 that raised significant red flags concerning Madoff's hedge fund operations and should have led to questions about whether Madoff was actually engaged in trading and should have led to a thorough examination and/or investigation of the possibility that Madoff was operating a Ponzi scheme. However, the OIG found that although the SEC conducted five examinations and investigations of Madoff based upon these substantive complaints, they never took the necessary and basic steps to determine if Madoff was misrepresenting his trading. We also found that had these efforts been made with appropriate follow-up, the SEC could have uncovered the Ponzi scheme well before Madoff confessed.

The Recent GE 10-Q Report

On October 30, 2019, GE filed its 10-Q report for the quarter ended September 30, 2019. The report contains information about GE's legacy LTC insurance business. The information is on pages 27-31 and 65-66 of the report. Those pages are in the complimentary package offered at the end of this post.

General Observations

In the above mentioned No. 329, I expressed the opinion that the ad hominem attack against Markopolos in GE's initial response to the release of the Markopolos report was unfortunate. The 11th edition of Merriam-Webster's Collegiate Dictionary defines "ad hominem" as "marked by or being an attack on an opponent's character rather than by an answer to the contentions made." After reading the Markopolos book, I feel more strongly about GE's initial response to the Markopolos report.

Available Material

In the above mentioned No. 329, I offered a complimentary 20-page package containing some information about the Markopolos report on GE. That package is still available.

Now I offer a complimentary 484-page PDF consisting of excerpts from GE's recent 10-Q report (7 pages) and the full 2009 SEC OIG report on Madoff (477 pages). Email jmbelth@gmail.com and ask for the November 2019 package about the 2010 Markopolos book.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 339: The House Judiciary Committee Wins a Major Court Victory

On July 26, 2019, the House Judiciary Committee (HJC) filed in federal court an application for an order authorizing release to HJC of certain grand jury materials. On September 13 the Department of Justice (DOJ) responded to the application. On October 3 Doug Collins, the ranking minority member of HJC, filed an amicus brief arguing that the court should deny the application without prejudice because, among other reasons, the House has not authorized HJC to open an impeachment proceeding.

On October 25 Chief Judge Beryl A. Howell of the U.S. District Court for the District of Columbia handed down a lengthy opinion and a brief order granting HJC's application. DOJ had redacted certain material from the report filed in March 2019 by Special Counsel Robert S. Mueller III. (See In re Application of HJC for an order authorizing release of certain grand jury materials, U.S. District Court. District of Columbia, Grand Jury Action No. 19-48.)

Excerpts from the Opinion
The opinion includes a one-page table of contents and 74 pages of text. Here (without citations) are the first three paragraphs and the concluding two paragraphs of the opinion (the full opinion and the order are in the complimentary package offered at the end of this post):

In March 2019, Special Counsel Robert S. Mueller III ended his 22-month investigation and issued a two-volume report summarizing his investigative findings and declining either to exonerate the President from having committed a crime or to decide that he did. The Special Counsel explained that bringing federal criminal charges against the President would "potentially preempt constitutional processes for addressing presidential misconduct." With this Statement, the Special Counsel signaled his view that Congress, as the federal branch of government tasked with presidential impeachment duty under the U.S. Constitution, was the appropriate body to resume where the Special Counsel left off.

The Speaker of the House of Representatives has announced an official impeachment inquiry, and the House Judiciary Committee ("HJC"), in exercising Congress's "sole Power of Impeachment," is reviewing the evidence set out in the Mueller Report. As part of this due diligence, HJC is gathering and assessing all relevant evidence, but one critical subset of information is currently off limits to HJC: information in and underlying the Mueller Report that was presented to a grand jury and withheld from Congress by the Attorney General.

The Department of Justice ("DOJ") claims that existing law bars disclosure to the Congress of grand jury information. DOJ is wrong. In carrying out the weighty constitutional duty of determining whether impeachment of the President is warranted, Congress need not redo the nearly two years of effort spent on the Special Counsel's investigation, nor risk being misled by witnesses, who may have provided information to the grand jury and the Special Counsel that varies from what they tell HJC. As explained in more detail below, HJC's application for an order authorizing the release to HJC of certain grand jury materials related to the Special Counsel investigation is granted....

For the foregoing reasons, HJC's application is granted. Consequently, DOJ is ordered to provide promptly, by October 30, 2019, to HJC all portions of the Mueller Report that were redacted pursuant to Rule 6(e) and any underlying transcripts or exhibits referenced in the portions of the Mueller Report that were redacted pursuant to Rule 6(e). HJC is permitted to file further requests articulating its particularized needs for additional grand jury information requested in the initial application.

An appropriate Order accompanies this Memorandum Opinion.

The Order
The "final and appealable" order grants HJC's application and orders DOJ to disclose to HJC, by October 30, certain material from the Mueller Report. It also says HJC may submit further requests for material in addition to the material requested in the application.

General Observations
At this writing I do not know whether DOJ will comply with the order. Recent press reports say DOJ is studying the ruling and considering its options. Meanwhile, I strongly recommend you read the entire opinion, whether or not you have read the Mueller Report. The early sections of the opinion include an interesting summary of the Mueller report.

In No. 295 (November 9, 2018), I wrote about the "Road Map" the Watergate Grand Jury transmitted under seal to HJC in 1974. HJC used the Road Map in developing articles of impeachment against President Richard Nixon. On September 14, 2018, three individuals petitioned for an order to unseal the Road Map. On October 11, 2018, Chief Judge Howell granted the petition.

Available Material
In the above mentioned No. 295, I offered a complimentary 68-page package containing the Road Map. That package is still available.

Now I am offering a complimentary 77-page PDF consisting of Chief Judge Howell's opinion (75 pages) and her order (2 pages). Email jmbelth@gmail.com and ask for the October 2019 package relating to Chief Judge Howell's ruling on the HJC application.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 338: Greg Lindberg—An Update

In No. 309 (April 17, 2019), I discussed the indictment of Greg E. Lindberg and three others by a federal grand jury in North Carolina. In No. 320 (July 1, 2019), I provided an update, including a discussion of the placement of four Lindberg insurance companies into court-ordered rehabilitation at the request of the North Carolina insurance commissioner. Here I provide a further update. (See U.S.A. v. Lindberg, U.S. District Court, Western District of North Carolina, Case No. 5-19-cr-22.)

The Lindberg Motion to Dismiss

On September 18, 2019, Lindberg filed a motion to dismiss the indictment for failure to state an offense. Here (without citations) are the first two paragraphs of the supporting memorandum (the motion and the full supporting memorandum are in the complimentary package offered at the end of this post):

The government's entire case against Greg E. Lindberg turns on a legally flawed understanding of what constitutes an "official act." According to the government, requesting a personnel move is an official act giving rise to federal criminal liability even when the defendant in no way requested an ultimate outcome on any matter or proceeding that may in the future be pending before the government.

The government's theory is foreclosed by the logic of two recent decisions of the Supreme Court: McDonnell v. U.S. and Skilling v. U.S. And the government's theory raises the full range of constitutional issues that the Court identified in those decisions. Most notably, prosecutions of this nature will inhibit the rights of all Americans to make demands of their elected representatives—and vote and contribute accordingly. Because the charges against Mr. Lindberg are legally infirm, this Court can—and should—dismiss the indictment against him.

The Government Opposition

On September 25 the U.S. Attorney filed an opposition to the Lindberg motion to dismiss the indictment. Here (without citations) is the three-paragraph introduction to the opposition (the full opposition is in the complimentary package offered at the end of this post):

Decisions to hire, fire, assign, and reassign government employees are core official acts under McDonnell v. U.S. The Bill of Indictment charges the defendant, a wealthy insurance executive, with offering a $2 million bribe to the top ranking insurance official in North Carolina to remove a subordinate regulator the defendant did not like, and replace her with one of the defendant's co-conspirators or another individual of his choosing. The defendant's argument that he could do this as long as he did not explicitly request an "ultimate outcome" rests upon a misreading of McDonnell, which nowhere applies an "ultimate outcome" test. Instead, as McDonnell and the courts that have subsequently interpreted that decision have made clear, the removal of the disfavored regulator—and her replacement by a regulator of the defendant's choosing—were themselves "official acts." This Court should reject the defendant's novel and erroneous interpretation of McDonnell.

Similarly, the defendant's argument that Skilling v. U.S. imposed a new requirement that the government must prove a personal financial benefit to a bribe payor is unsupported by any authority, including the Skilling decision itself. A bribe is a bribe, regardless of the payor's motive or realization of profit.

Finally, the defendant's constitutional concerns—regarding the First Amendment's alleged protection of the exchange of campaign contributions for specific action—are unfounded, and have already been addressed by the Supreme Court. When a campaign contribution is conditioned on specific official action it constitutes a bribe and is not protected by the First Amendment. McCormick v. U.S.

The Lindberg Reply

On October 2 Lindberg filed a reply to the government's opposition to the motion to dismiss the indictment. Here is the first paragraph of the argument in the reply (the full reply is in the complimentary package offered at the end of this post):

The government is incorrect that the jury, rather than the Court, must decide the legal definition of "official act." Before trial, a defendant may move to dismiss an indictment for failure to state an offense. And the Court must grant the motion if the "indictment fails to allege facts which constitute a prosecutable offense." Thus, where there is "an infirmity of law in the prosecution" contained in the indictment, a case should not reach a jury. That is the situation here. Because Mr. Lindberg's indictment fails to allege either an official act—a required element of all charges against him—or a bribery scheme that benefitted him, the Court must dismiss the indictment.

The Hayes Guilty Plea

Robert Cannon Hayes is one of Lindberg's four co-defendants named in the indictment. He was charged with five criminal counts: one count of conspiracy to commit honest services wire fraud, one count of bribery concerning programs receiving federal funds and aiding and abetting, and three counts of false statements.

On September 27 Hayes pleaded guilty to one count of false statements. The plea agreement is not publicly available. What is publicly available is a document called "entry and acceptance of guilty plea." It lists 39 questions the magistrate judge asked Hayes, and shows the answers given by Hayes. It also includes the magistrate judge's acceptance of the guilty plea on October 2. The document is in the complimentary package offered at the end of this post.

The Journal Article

On October 4 the print edition of The Wall Street Journal carried a 2,540-word front-page article entitled "Indicted Executive Used Operatives To Spy on Women—Insurance tycoon's surveillance included GPS trackers, secret photos, dossiers." The reporters were Mark Maremont and Leslie Scism. Here are the first few sentences of the article:

Federal investigators were closing in on Greg Lindberg. FBI agents confronted the North Carolina insurance tycoon last year as they probed whether he tried to bribe a state regulator. In March, officials obtained a sealed warrant for his arrest. His attorneys were negotiating his surrender.

Mr. Lindberg also had something else on his mind—the comings and goings of a number of women he was dating, interested in dating, or, in at least one case, cultivating as an egg donor for his future offspring.

Mr. Lindberg paid for dozens of surveillance operatives to tail the women up to 24 hours a day, taking surreptitious photos and sometimes putting GPS trackers on their vehicles, according to former security staffers and copies of internal reports produced by these operatives that were reviewed by The Wall Street Journal.

General Observations

As indicated in No. 320, I think the federal criminal case against Lindberg and his four associates will be lengthy. I plan to report further developments.

I found the Journal article shocking. I have no idea where it might lead, and will not speculate on what if anything will happen as a result of the findings in the article.

Available Material

The complimentary packages offered in Nos. 309 and 320 are still available. Now I am offering a complimentary 62-page PDF consisting of the Lindberg motion to dismiss the indictment (27 pages), the government's opposition to the motion to dismiss (16 pages), Lindberg's reply to the opposition (15 pages), and the material relating to the guilty plea by Hayes (4 pages). Email jmbelth@gmail.com and ask for the October 2019 Lindberg package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 337: Long-Term Care Insurance—Another Class Action Lawsuit Against Genworth

On September 21, 2018, Richard F. Burkhart and four other individuals filed a class action lawsuit against Genworth Financial, Inc. (Genworth) and four affiliates relating to long-term care (LTC) insurance. The plaintiffs filed the lawsuit in state court in Delaware, where Genworth and several of its affiliates were organized. On January 29, 2019, according to the docket, the plaintiffs filed a confidential, unredacted version of an amended complaint, which I have not seen. On February 5, 2019, the plaintiffs filed a redacted version of the amended complaint, which I discuss in this post. (See Burkhart v. Genworth, Court of Chancery, State of Delaware, Case No. 2018-0691.)

The Parties

Three plaintiffs are Massachusetts residents and two are Connecticut residents. Three of them bought LTC insurance policies during the 2002-2004 period from General Electric Capital Assurance Company, a predecessor of Genworth Life Insurance Company (GLIC). One bought an LTC insurance policy in 2013 from GLIC. One is an agent who sold LTC insurance policies and other policies issued by GLIC. The defendants are Genworth, GLIC, and three other Genworth affiliates.

The Amended Complaint

The amended complaint describes how Genworth and its affiliates allegedly reduced GLIC's capital to the detriment of policyholders and agents. Here is the first paragraph of the introduction (the amended complaint is in the complimentary package offered at the end of this post):

This action challenges a deliberate, long-term scheme by defendant Genworth, an insurance holding company, and by its affiliated defendants, to bleed capital from GLIC, a wholly-owned insurance subsidiary of Genworth upon which over a million policyholders depend for long-term care insurance benefits in the event that they become disabled. This conduct has profoundly harmed and will continue to harm GLIC policyholders and the agents through whom such policyholders purchased insurance. Absent injunctive and other equitable relief, defendants' conduct will leave the policyholders at critical risk at the point in their lives when they have greatest need for the benefits provided by the policies.

The amended complaint describes how Genworth allegedly used fraudulent transfers to remove assets and capital support from GLIC for the benefit of other Genworth companies, shareholders, bondholders, and management, to the detriment of GLIC, its policyholders, and its agents. Among the allegedly fraudulent transfers are substantial dividends, the termination of a reinsurance transaction, and the proposed merger with China Oceanwide. The amended complaint includes four counts: (1) Intentional Fraudulent Transfer—Payment of GLIC Dividends, (2) Constructive Fraudulent Transfer—Payment of GLIC Dividends, (3) Intentional Fraudulent Transfer—Reinsurance Termination, and (4) Constructive Fraudulent Transfer—Reinsurance Termination. The plaintiffs seek, among other things, an unwinding of the reinsurance termination, an unwinding of the GLIC dividends, attorney fees, and costs.

The Redactions

The redactions are three paragraphs (24 lines) in the amended complaint. Here are four paragraphs preceding and four paragraphs following the redactions:

60. There is substantial evidence that was not known or discoverable by Plaintiffs at the time the GLIC dividends were paid that demonstrates that Genworth knew full well that GLIC's DLR [disabled life/claim reserve] was inadequate long before it corrected the DLR in November 2014 and again in 2016, and rather than correct the inaccuracies in the Statutory Financial Statements filed with the [Delaware] Department, Genworth suppressed the adverse information.

61. In January 2014, Genworth hired James Boyle as the CEO of its U.S. Life Insurance Division ("Division"), which included the long-term care business of GLIC. Shortly thereafter, Lynne Patterson was hired as the Division's interim CFO. In May 2014, Patterson began a review and investigation of the underlying actuarial assumptions for long-term care reserves.

62. On information and belief, in early June 2014, following a series of meetings with the actuaries involved in developing the reserves, Patterson discovered that the assumptions the actuaries were using to develop the reserves had been "back-fitted" to meet the demands of senior management and were unreliable. Boyle and Patterson shared their concerns with Genworth's CFO, Martin Klein, on June 16, 2014.

63. On July 16, 2014, Boyle advised Genworth's Audit Committee: that John Nigh, the Division's chief actuary, and Loida Abraham, a supervising actuary, had attempted to manipulate actuarial assumptions to reduce long-term care claim reserves; that Genworth's chief actuary, Robert Vrolyk, on June 6, 2014, had admitted to Boyle that based on independent work Vrolyk had performed, there may have been an error in Genworth's long-term care claim reserve calculations of as much as 20%, or approximately $500-600 million; that three in-house actuaries overseen by Patterson to prepare a new "clean-slate" estimate of long-term care claim reserves using actual claims experience had arrived at a claim reserve that was $800 million higher than previously stated; that assumptions underlying the long-term care claim reserve announced in December 2013 had not been properly peer-reviewed, and that the documentation needed to support the claim reserve announced in December 2013 was incomplete or missing; and that Boyle and Patterson were being isolated and that efforts were being made to slow down a final conclusion regarding the claim reserve's adequacy and amount. Those efforts included directions to Milliman, an independent actuarial firm that Genworth had retained, to eliminate its validation of the proposed $800 million claim reserve adjustment.

64. Five lines redacted.

65. Seven lines redacted.

66. Five lines redacted.

67. Seven lines redacted.

68. On information and belief, in or around mid-July 2014, Boyle gave a "red alert" warning to Genworth's Board of Directors.

69. Less than two weeks later, on July 28, 2014, Boyle and Patterson resigned, about six months after joining the company. Genworth issued a press release stating that Thomas J. McInerney, Genworth's CEO, would also assume the duties of CEO of the Division effective immediately.

70. Immediately following the resignation of Boyle and Patterson, on a July 30, 2014 investor conference call, McInerney, who was now CEO of both Genworth and the Division, revealed that Genworth would be conducting a detailed review of its DLR assumptions, methodology and process, and that changes to the assumptions for the DLR could be required as a result.

71. On November 6, 2014, Genworth's management disclosed during an earnings call with investors that the DLR for its long-term care policies had been understated by $589 million in the Statutory Financial Statements filed with the [Delaware] Department, resulting in a reserve restatement in that amount (the "2014 DLR Restatement"). During that call, Klein, Genworth's CFO, stated that approximately half of this overall increase in the DLR was attributable to "updating" assumptions regarding claim termination rates, including adjusting the average length of claim assumption to reflect Genworth's actual experience between 2010 and 2013, the period during which the GLIC Dividends were paid.

The Motion to Dismiss

On March 13, 2019, Genworth filed a motion to dismiss. Here is the first paragraph of the summary (the full motion to dismiss is in the complimentary package offered at the end of this post):

The named plaintiffs in this purported nationwide class action are long term care ("LTC") insurance policyholders of defendant Genworth Life Insurance Company ("GLIC") and agents who sold LTC policies for GLIC. The policyholder Plaintiffs have been insured continuously since they bought their policies. Not one alleges to have ever made an LTC policy claim, let alone that a claim has gone unpaid. The agent Plaintiffs are compensated through commissions paid each time an annual premium is paid on an LTC policy they sold; they also do not allege that GLIC has ever failed to pay them a commission they are owed. Plaintiffs nonetheless ask this Court to reverse GLIC's payment of $410 million in dividends between 2012 and 2015 to its corporate shareholder parent and to unwind a 2016 merger of subsidiaries because, at some unspecified point in the distant future, GLIC might have insufficient assets to pay their possible LTC claims and commissions. Plaintiffs assert that these were fraudulent transfers of GLIC's assets to other Genworth affiliates. This action should be dismissed in its entirety because Plaintiffs fail to allege an actual or imminent injury sufficient to confer standing in this Court.

The Opposition to the Motion to Dismiss

On April 26, 2019, the plaintiffs filed an opposition to the motion to dismiss. Here is the first paragraph (the full opposition is in the complimentary package offered at the end of this post):

In their Motion to Dismiss, Defendants posit a classic Catch-22. They argue first that Plaintiffs sued too soon, because Defendant Genworth Life Insurance Company ("GLIC") has not (yet) defaulted on the relevant insurance policies. At the same time, Defendants argue Plaintiffs sued too late, because the challenged transfers cannot be avoided more than four years after they were made. That is, Plaintiffs must wait decades until they are infirm and GLIC collapses, at which point they will be told it is too late to avoid the challenged transfers. Catch-22. [Emphasis in original.]

The Reply to the Opposition to the Motion to Dismiss

On June 14, 2019, Genworth filed a reply to the opposition to the motion to dismiss. Here, without citations, is the first paragraph of the summary (the full reply is in the complimentary package offered at the end of this post):

Plaintiffs assert repeatedly that Defendants' 2012-2015 dividend payments and purported "Reinsurance Termination" caused them "injury," but Plaintiffs do not plead facts demonstrating that any such injury is actual or imminent. Their Answering Brief admits that "GLIC has not yet defaulted" on any obligations to Plaintiffs. Their Amended Complaint can only conclusorily [sic] speculate that GLIC "will likely become unable to pay its policyholders and agents in full" at some indeterminate point in the far future. And Plaintiffs also admit that "the maturity date and scope of any particular policyholder's claim is unknowable."

General Observations

Oral argument on Genworth's motion to dismiss is scheduled for October 21, 2019. It will be interesting to see the judge's ruling on the motion to dismiss.

With regard to the redactions in the amended complaint, they probably reflect Milliman's findings, which Milliman probably submitted to Genworth on a confidential basis. I have been through this before.

In 2008, when Conseco transferred its LTC insurance company to a trust that would own Senior Health Insurance Company of Pennsylvania (SHIP), Conseco told the Pennsylvania Insurance Department that Milliman had prepared a report saying the assets transferred would be sufficient to run off all of SHIP's LTC insurance business. I tried to obtain the Milliman report, but Conseco and the Department said it was confidential. As I reported in No. 308 (April 11, 2019), SHIP's liabilities of $2.653 billion at the end of 2018 exceeded its assets of $2.206 billion, leaving the company insolvent by $447 million. The deficit was $481 million as of March 31, 2019, and $496 million as of June 30, 2019. Many years remain before all of SHIP's LTC insurance business runs off.

As a layman—I am not an attorney—I read the documents in this case. In my opinion, the arguments advanced by the plaintiffs are stronger than those advanced by the defendants, although others who read the documents may feel differently. If the lawsuit survives the motion to dismiss, the case should be followed closely. However, like other such lawsuits, the case is likely to be settled before trial. I plan to report further developments.

Available Material

I am offering a complimentary 227-page PDF consisting of the amended complaint (65 pages), the motion to dismiss the amended complaint (60 pages), the opposition to the motion to dismiss the amended complaint (64 pages), and the reply to the opposition to the motion to dismiss the amended complaint (38 pages). Email jmbelth@gmail.com and ask for the October 2019 package relating to Burkhart v. Genworth.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 336: Long-Term Care Insurance—An Update on the Newman Lawsuit Against Metropolitan Life

In No. 253 (February 15, 2018), I wrote about a class action lawsuit filed in March 2016 by Margery Newman, an Illinois resident, against Metropolitan Life Insurance Company relating to long-term care (LTC) insurance. She was 56 when she bought an "LTC Premier" policy in September 2004. The policy included a "reduced-pay at 65 option," which Metropolitan had described as follows in a marketing brochure:

By paying more than the regular annual premium amount you would pay each year up to the Policy Anniversary on or after your 65th birthday, you pay half the amount of your pre-age 65 premiums thereafter.

Before Newman turned 65, the semiannual premium was $3,813.68. In September 2012 the semiannual premium declined by 50 percent, to $1,906.84. In March 2015, Metropolitan increased the semiannual premium by 102 percent, to $3,851.81.

The Complaint

In her March 2016 complaint and June 2016 amended complaint, Newman alleged breach of contract, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, fraud, and fraudulent concealment. In July 2016 Metropolitan filed a motion to dismiss the complaint for failure to state a claim. In March 2017 U.S. District Court Judge Thomas A. Durkin dismissed the complaint without prejudice. His ruling is in the complimentary package, which is still available, offered at the end of the above-mentioned No. 253.

In April 2017, in accordance with the judge's ruling, Newman filed a motion for leave to file a second amended complaint and attached a proposed second amended complaint. The judge denied the motion and dismissed the case with prejudice. (See Newman v. Metropolitan, U.S. District Court, Northern District of Illinois, Case No. 1:16-cv-3530.)

The Appeal

Newman appealed to the Seventh Circuit, and the case was assigned to a three-judge panel. On February 6, 2018, the panel unanimously reversed the district court's action and sent the case back to the district court for further proceedings. Here is the final paragraph of the panel's ruling (the full ruling is in the complimentary package, which is still available, offered at the end of the above-mentioned No. 253):

Newman asserts that MetLife lured her into a policy by promising a trade of short-term expense for long-term stability. She took the deal and spent nine years investing in a plan, only to have MetLife pull the rug out from under her. Neither MetLife's brochure nor the terms of the policy forecast this possibility. These allegations were enough to entitle her to prevail on the liability phase of her contract claim, and they are enough to permit her to go forward on her other theories. We therefore REVERSE the district court's grant of MetLife's motion to dismiss and REMAND for further proceedings.

On February 20, 2018, Metropolitan petitioned for a rehearing by the full appellate court. On March 7 Newman opposed the petition. On March 22 the panel denied the petition and filed an amended ruling. There were only a few changes from the panel's original ruling. One of the changes was in the next-to-the-last sentence of the final paragraph quoted above. That sentence in the amended ruling reads: "These allegations were enough to state a claim under the theories Newman presented." The amended 17-page appellate ruling is in the complimentary package offered at the end of this post. (See Newman v. Metropolitan, U.S. Court of Appeals for the Seventh Circuit, Case No. 17-1844.)

Recent Developments in the District Court

On April 18, 2018, Metropolitan filed an answer to Newman's complaint. During the next few months several individuals sought to intervene in the case, and three were allowed to do so. During that time, there were also discussions of mediation with the goal of settling the case. In August 2018 the parties held a settlement conference. In November the judge held a telephone conference to discuss settlement issues, but the parties were not able to reach a settlement. In December the judge ordered the parties to submit a proposed discovery plan for class certification.

On January 3, 2019, the parties submitted a proposed discovery plan for class certification. On January 24 the parties said settlement discussions were ongoing. On January 27 the parties said they have agreed to private mediation. On March 5 Newman filed a motion for a stay pending the outcome of the private mediation. On March 12 the judge granted the motion. On April 25 the parties said they are proceeding with private mediation.

On September 24, I emailed an attorney on each side asking whether they think the private mediation eventually will succeed or whether they think the case will go to trial. One acknowledged the email but declined to comment. The other did not acknowledge the email.

General Observations

Newman is an interesting case. However, I will not speculate on whether the private mediation will succeed, or whether the case will go to trial. I plan to report significant further developments in the case.

Available Material

I am offering a complimentary 17-page PDF consisting of the March 22, 2018 appellate panel's amended ruling. Email jmbelth@gmail.com and ask for the October 2019 package relating to Newman v. Metropolitan.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com