Wednesday, April 27, 2016

No. 159: Unclaimed and Unpaid Death Benefits—"60 Minutes" Criticizes Life Insurance Companies

CBS's "60 Minutes," in its lead segment on April 17, 2016 ("the segment"), criticized life insurance companies for not paying billions of dollars in death benefits, and for systematically destroying the equity that many policyholders had built up in their policies. The segment was entitled "Not Paid," Rich Bonin was the producer, and Lesley Stahl was the on-air correspondent.

The subject of unclaimed and unpaid death benefits is complex, and has a long and tortuous history that dates to the beginning of life insurance in this country. My primary concern about the segment is that it is impossible to provide, in 14 minutes, the background necessary for viewers to understand the subject. Here is some of the background.

The Insuring Agreement
The insuring agreement is the heart of any insurance contract. In a life insurance policy, the insuring agreement says the insurance company will pay the death benefit to the beneficiary upon receipt of proof of the insured person's death; that is, upon receipt of a death claim normally accompanied by a death certificate. (Similarly, in a fire insurance policy, the property owner must file a claim for fire damage to the insured property.) The insuring agreement has been approved by state insurance regulators and has long been required by state insurance laws. The segment did not mention the insuring agreement.

State Unclaimed Property Laws
State unclaimed property laws, called "escheat" laws, require financial institutions, including life insurance companies, to turn over (escheat) to the state property that has been unclaimed by its owner for a period such as three years. Each state has an unclaimed property agency, which is under the auspices of the state treasurer or other state official. Usually the unclaimed property agency publishes in newspapers, once or twice a year, names of owners (but not amounts) of unclaimed property. The agencies also operate websites. Owners are urged to contact the agency and follow the steps necessary to retrieve the unclaimed property.

Most unclaimed property is never claimed and therefore is kept by the states in perpetuity. Thus states facing financial problems have an incentive to make sure all unclaimed property is turned over to them. The segment did not mention state unclaimed property agencies, despite the fact that some of the investigations to which the segment referred were initiated by those agencies. Major articles about unclaimed property were in the October 2010 and November 2010 issues of The Insurance Forum.

The Lost Policy Problem
The lost policy problem is as old as life insurance itself. A "lost policy," in this context, is a policy that a beneficiary "thinks" existed on the life of a deceased person, but the beneficiary does not know the name of the insurance company and has no significant information about the policy. The first article about lost policies in The Insurance Forum was in the August 1980 issue. The article mentioned a "lost policy search" service that had been operated for several years by the Institute of Life Insurance, a trade association, but the service was discontinued because of budget constraints and a low success rate.

Later a service was established by what is now the American Council of Life Insurers (ACLI), a life insurance company trade association. The ACLI service involved sending lists periodically (often once a month) to all ACLI member companies showing the information that purported beneficiaries had provided to the ACLI. When the ACLI service was mentioned in a popular consumer finance magazine, the ACLI was inundated with requests. ACLI's member companies protested because of the expense of the large number of searches and the small number of "matches." The ACLI eventually discontinued the service. The segment did not mention the lost policy problem.

Nonforfeiture Options
Nonforfeiture laws first came on the scene in the middle of the 19th century. Their purpose was to protect policyholders who discontinued their level-premium life insurance policies from forfeiting the equity built up in those policies. In the early days, the only nonforfeiture option was a reduced amount of paid-up life insurance. If premiums were not paid, the paid-up insurance eventually would become payable when the insured person died, or when the insured person reached the end of the mortality table on which the policy was based.

Cash values were added later, along with extended term insurance, as additional nonforfeiture options. In those policies, paid-up insurance was usually the automatic option. Therefore, if premiums were not paid, the paid-up insurance eventually would become payable.

In the 1940s, state insurance regulators instituted a significant change by making extended term insurance the automatic option. The change had the advantage that, if a premium was not paid, the full amount of life insurance (rather than a reduced amount) would remain in effect, but only for a limited period of time. Thus the change meant that the extended term insurance would expire without value at the end of the term period. Because of the change, it was possible for a company to assume that the insured person survived the term period, that no benefit was payable, and that the company would never have to turn over anything to state unclaimed property agencies. The segment did not mention nonforfeiture options.

Automatic Premium Loans
Around the middle of the 20th century, automatic premium loan (APL) provisions became what amounted to another nonforfeiture option. They were popular and widely used. When a life insurance policy has a cash value, and therefore a loan value, and when a premium is not paid, the company pays the premium automatically by lending the money to the policyholder under the loan clause. The idea is to prevent the policy from lapsing, on the theory that the policyholder's failure to pay the premium may have been inadvertent.

APL was usually inserted in a policy only at the request of the policyholder, and usually was requested in the policy application. Also, some APL provisions said the company would not pay more than one or a few consecutive premiums by APL. Today companies often pay premiums by APL continuously until the cash value is exhausted. The segment did not mention APL; indeed, the segment made it sound as though the companies were stealing money from their policyholders.

The Demutualization Phenomenon
During the late years of the 20th century and the early years of the 21st century, many mutual life insurance companies went through a process called "demutualization." In that process, a mutual company, which is owned by its policyholders, converts itself into a stock company, which is owned by its shareholders. State demutualization laws require the mutual company to obtain the permission of its policyholders (a majority of those voting). Also, to purchase the ownership interests of the mutual company's policyholders, the mutual company must pay them cash and/or give them shares of stock in the new stock company.

To obtain the permission of the policyholders to demutualize, and to pay them for their ownership interests, converting companies had to contact the policyholders by mail. When the companies sent the mail, huge numbers of mailings were returned by the postal service as undeliverable. In other words, the mutual companies had lost contact with millions of policyholders who had discontinued the payment of premiums.

In an interesting twist, the agencies who initially became most interested in the problem of lost policyholders were the state unclaimed property agencies rather than the state insurance regulators. Eventually, after publicity about the problem, state insurance regulators took an interest in the problem.

In the segment, one interviewee, when asked for names of insurance companies involved, mentioned John Hancock, Metropolitan Life, and Prudential as examples. Those three giant companies grew up in the so-called industrial life insurance business, which involved small policies and premiums collected weekly or monthly by agents going door to door. All three of those companies demtualized and found they had huge numbers of lost policyholders. John Hancock received a large amount of adverse publicity that caught the attention of the unclaimed property agency in John Hancock's home state of Massachusetts. The segment did not mention the connection between demutualization and lost policyholders.

The Investigations
Most of those interviewed in the segment have been investigating the practices of life insurance companies related to unclaimed and unpaid death benefits. The investigations have been and are being conducted on behalf of state unclaimed property agencies and state insurance regulators.

The first person interviewed in the segment was Kevin McCarty, the Florida insurance commissioner. He chaired the committee of the National Association of Insurance Commissioners (NAIC) that investigated unclaimed benefits. Also featured in the segment was Jeff Atwater, the Florida chief financial officer. He oversees the Florida unclaimed property agency and other state agencies. In the segment, both McCarty and Atwater criticized insurance companies who apparently knew some insured persons had died but had not paid the death benefits.

Verus Financial LLC (Waterbury, CT) is an auditing firm that has been retained by state unclaimed property agencies and the NAIC to investigate the practices of life insurance companies relating to unclaimed benefits. The segment featured two Verus investigators.

The Death Master File
The U.S. Social Security Administration maintains a Death Master File (DMF) that supposedly lists all deceased persons in the U.S. I have never seen the DMF and know little about it. However, life insurance companies apparently have been able to access it. I do not know the cost of access to the DMF or the terms to which a company must agree in order to use it. The segment mentioned the DMF prominently.

Life Annuities
A life annuity is a contract between a life insurance company and an annuitant under which the company promises to make periodic payments (usually monthly) to the annuitant for as long as the annuitant lives. Apparently some life insurance companies have long used the DMF in an effort to learn of deceased annuitants, so that the companies can stop sending payments to those annuitants. Companies undoubtedly were concerned that they were not being notified of annuitant deaths and that survivors were stealing annuity benefits. Indeed, criminal actions have been taken against some annuitant survivors.

Several years ago there was some embarrassing publicity about the fact that life insurance companies were using the DMF to stop life annuity payments, but were not using the DMF to find insured persons who had died and whose beneficiaries might have been eligible for life insurance benefits that had not been claimed. The inconsistent use of the DMF struck a raw nerve for many observers who viewed it as evidence of unfair and self-serving activity by life insurance companies. I think those revelations prompted state insurance regulators to start investigating the problem of unclaimed benefits several years after state unclaimed property agencies began investigating the problem. The segment mentioned annuities.

The Settlements
Several major life insurance companies have entered into settlement agreements with regulators. Under those settlements, the companies agree to use the DMF routinely to search for the deaths of insured persons whose beneficiaries have failed to file death claims and where death benefits consequently have not been paid. As a result of the agreements, some beneficiaries have been located, and some death benefits have been paid that otherwise would not have been paid. Several other companies remain under investigation and have not yet entered into settlements with the regulators. The segment mentioned the settlement agreements.

The Kemper Lawsuit
In No. 133 (posted December 16, 2015), I discussed three members of the Kemper group of insurance companies who filed a lawsuit in an Illinois state court against Verus Financial, the investigating firm, and against the Illinois state treasurer, who operates the Illinois unclaimed property agency. Two of the several allegations are that Kemper has no legal obligation to search the DMF for deceased policyholders, and that Verus and the state treasurer do not have the legal right to force Kemper to search the DMF. Kemper filed the complaint in October 2015. Thus far there have been no significant developments in the case.

The Industry's Response
I have not seen any response to the segment by any life insurance company. However, I have seen comments from the ACLI and the NAIC.

The segment said no life insurance companies contacted would make anyone available for an interview. However, the segment did not mention that the ACLI arranged for Mary Jo Hudson, former Ohio insurance commissioner and currently an ACLI consultant on unclaimed death benefits, to be interviewed. Stahl interviewed Hudson by telephone on February 12, but "60 Minutes" chose not to interview her on camera.

After the segment aired, I obtained from the ACLI a statement it released on February 23 on unclaimed benefits, and a statement it released on April 18 after the segment aired. The April 18 statement does not mention the segment. Here are excerpts from the April 18 statement:
The life insurance industry is proud of its long history of honoring its obligations to policyholders. In the past ten years alone, insurers have paid more than $600 billion to beneficiaries of life insurance policies....
In a small percentage of cases, life insurance benefits go unclaimed because family members are unaware that they are listed as beneficiaries in existing policies. Life insurers want everyone to receive the benefits to which they are entitled rather than paying unpaid benefits to state governments. That is why the American Council of Life Insurers has advocated since 2012 for state legislatures to adopt a national standard on the issue. Twenty states have enacted laws based on this standard that requires all life insurers to use new technologies to identify policyholders who have died but whose beneficiaries have yet to make a claim. ACLI is urging all states to adopt this standard no later than the end of 2017.... [Underlining in original.]
I also obtained a statement issued on April 20 by John M. Huff, president of the NAIC and Missouri director of insurance. It does not mention the segment. Here is an excerpt:
State insurance regulators are coordinating to address the issue of unclaimed life insurance policy benefits, ensuring beneficiaries receive the benefits to which they are entitled. Coordinated through the NAIC, these efforts have so far resulted in $7.5 billion in benefits returned to consumers, clearing a backlog of unclaimed policies. Regulators continue to work on setting an appropriate and consistent standard regarding the fair treatment of insurance policyholders and beneficiaries. Additionally, the NAIC is currently working on a national system to help consumers locate lost insurance policies....
General Observations
I think it was the Kemper lawsuit against Verus and the Illinois treasurer that brought the subject of unclaimed death benefits to the attention of "60 Minutes." It remains to be seen what happens in the case.

On the positive side, the segment provided a public service by calling attention to the problems of lost policies and unclaimed and unpaid death benefits. On the negative side, the segment was slanted to shine an undeservedly harsh light on life insurance companies.

I have seen no mention of the segment in any major media outlet or in the insurance trade press. Thus the segment's impact, if there will be any impact, remains to be seen.

A Personal Anecdote
My keen interest in the subject of lost policies dates back to the early 1950s, when I was a life insurance agent in Syracuse, New York. One day I was out making cold calls in farm country near Syracuse. I told one farmer who answered my knock on the door that I would like to speak with him about life insurance. He said he would never consider life insurance. When I asked why, he invited me in to explain. He said he had bought a $1,000 policy on the life of his son when the son was born. He paid the premiums for several years, until he encountered hard times and could no longer pay the premiums. Years later his son died, and the farmer said the insurance company did not pay him a dime. I asked if he had filed a claim. He said he had not, because obviously the policy was worthless. I asked him to show me the policy. He said he had long ago thrown it in the incinerator. I asked the name of the company. He did not remember, but he did recall there was a picture of a rock on it. I said it must have been Prudential, and he said that was right. I obtained the necessary information about names and dates, and I wrote to Prudential. The company located the policy. It was for $500, not $1,000. When the policy lapsed, it went on extended term. The term expired a few years before the farmer's son died. I was disappointed, because I had envisioned great publicity by handing the farmer a belated check, including interest from the date of death.

Available Material
I am making available a complimentary 23-page PDF containing the following: the articles in the August 1980, October 2010, and November 2010 issues of The Insurance Forum, the February 23 ACLI statement, a February 24 email to Bonin from an ACLI spokesman, a transcript of the April 17 segment, the April 18 ACLI statement, and the April 20 NAIC statement. Send an email to jmbelth@gmail.com and ask for the April 2016 package relating to the "60 Minutes" segment.

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Friday, April 22, 2016

No. 158: E. Sydney Jackson—A Memorial Tribute

E. Sydney Jackson
E. Sydney Jackson, retired chairman and chief executive officer of Manulife, died April 10, 2016, at age 93. Syd was born, raised, and educated in Regina, Saskatchewan. He served as an officer in the Canadian Army during World War II. He graduated in 1947 from the University of Manitoba, and joined Manulife's actuarial department in 1948.

I met Syd about 45 years ago during a trip to Toronto to visit Manulife's home office. At that time, as I recall, he was executive vice president of the company. I remember the meeting because of his friendliness and his willingness to discuss openly the issues of the day.

Syd and I kept in touch for many years, but I lost track of him after he retired from the company. His retirement occurred around the same time that I retired from active teaching at Indiana University. I was gratified to learn from the obituary in the Toronto Star that he remained victorious in competitive bridge and cribbage until his final weeks.

What impressed me most about Syd was his integrity and his sincerity. I regret that we did not remain in contact after his retirement.

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Wednesday, April 20, 2016

No. 157: Lincoln National Life's Cost-of-Insurance Charges and the Settlement of an Indiana State Court Lawsuit

On June 2, 2015, a three-judge panel of the Indiana Court of Appeals handed down a unanimous ruling against Lincoln National Life Insurance Company (Fort Wayne, IN) in a class action lawsuit relating to cost-of-insurance (COI) charges. I learned of the case only recently, after the trial court approved the final settlement of the case.

COI Charges
The amount of protection in any given month of a universal life policy is the death benefit minus the account value. The COI charge in any given month is the COI rate per $1,000 per month multiplied by the amount of protection in thousands of dollars. The policy specifies a guaranteed maximum COI rate for each age of the insured, and the company is free to use COI rates below the maximum rates. The lawsuits involving COI charges allege that the companies increased COI charges in a manner that violated the provisions of the policies.

The Lincoln Policy
From 1986 to 2008, Lincoln sold a variable universal life policy called the "Ensemble II." Peter S. Bezich bought such a policy in 1996. With regard to the charges assessed against the policy each month, the policy says:
The monthly deduction for a policy month shall be equal to (1) plus (2), where: (1) is the cost of insurance ... [and] (2) is a monthly administrative charge. This charge is equal to $6.00 per month in each policy year.
The Bezich Lawsuit
In June 2009, Bezich filed a class action lawsuit in state court alleging that Lincoln had imposed COI charges in excess of those permitted in the policy. In July 2009, Lincoln removed the case to federal court. Bezich sought to move the case back to state court. In June 2010, after a long dispute, the federal court moved the case back to state court.

In July 2012, after extensive discovery, Bezich filed an amended complaint. He alleged three counts of breach of contract: that Lincoln had (1) included non-mortality factors in determining the COI rate, (2) loaded administrative fees and expenses into the COI rate, and (3) failed to reduce the COI rate in response to improving mortality rates.

In August 2012, Lincoln filed a motion to dismiss the complaint. The trial court denied the motion as to all three counts.

In September 2013, Bezich filed a motion to certify a national class of Ensemble II policyholders. In February 2014, the trial court held a one-day evidentiary hearing on the motion. In June 2014, the trial court denied class certification on Counts One and Two, and granted class certification on Count Three. (See Bezich v. Lincoln, Allen County Circuit Court, State of Indiana, Case No. 02C01-0906-PL-73.)

The Indiana Court of Appeals
Lincoln appealed the class certification on Count Three, and Bezich cross-appealed the denial of certification on Counts One and Two. On June 2, 2015, a three-judge appellate panel ruled that class certification was proper for all three of Bezich's claims. Thus the panel reversed the trial court ruling on Counts One and Two, and affirmed the trial court ruling on Count Three. The panel sent the case back to the trial court for further proceedings. In its discussion of Count Three, the panel said:
Finally, we cannot help but comment upon the absurdity of Lincoln's own interpretation of the COI rate provision, which is that the Ensemble II allows Lincoln to unilaterally increase rates on customers to reflect a change in mortality factors but offers no parallel commitment to decrease rates despite an overwhelming improvement in mortality. We have grave doubts that any policyholder of average intelligence would read the COI rate provision to confer on Lincoln that sort of "heads we win, tails you lose" power. [Italics in original.]
The panel's decision was written by Judge Margret G. Robb. Judges L. Mark Bailey and Elaine B. Brown concurred. (See Lincoln v. Bezich, Indiana Court of Appeals, Cause No. 02A04-1407-P-319.)

The Indiana Supreme Court
In July 2014, Lincoln petitioned to transfer the appeal to the Indiana Supreme Court. In September 2015, the Indiana Supreme Court granted the petition to transfer. By that time, however, the parties had essentially completed their settlement negotiations.

The Settlement
After lengthy and intensive negotiations, including the participation of a mediator, Bezich and Lincoln entered into a settlement agreement that resolved the claims of a class of more than 78,000 policyholders. Lincoln agreed to provide level term life insurance coverage to each member of the class without cost and without underwriting.

The amount of term coverage for in-force policies ranged from 14.5 percent of the face amount of the original policy for insureds up to attained age 40 down to 11.75 percent for insureds over 65. The amount of term coverage for terminated policies ranged from 11 percent for insureds up to age 40 down to 9 percent for insureds over 65. The period of term coverage for in-force policies and terminated policies ranged from six years for insureds up to age 40 down to two years for insureds over 65.

The actuarial estimate of the value of the settlement was not less than $171.8 million. The estimated aggregate face amount of term coverage was $2.25 billion, with face amounts ranging from about $1,000 to $3.75 million, and an average face amount of $28,660.

On October 25, 2015, in the trial court, Bezich filed an unopposed motion for class certification and for preliminary approval of the settlement. On November 15, the trial court granted preliminary approval and ordered the parties to disseminate the class notice.

On February 4, 2016, after the settlement hearing, and after the filing of a motion for final approval, the trial court issued an order granting final approval of the settlement. The order included a finding that the requested plaintiffs' attorney fees of $24 million plus expenses of about $419,000 were "fair and reasonable." The trial court entered final judgment and dismissed the case with prejudice (permanently).

General Observations
The Bezich class action lawsuit ended in a long, hard-fought partial victory for the policyholders. Although the lawsuit did not go to trial, I think Lincoln saw the handwriting on the wall and decided to settle the case after the Indiana Appellate Court panel's unanimous ruling on the class certification issue.

Nonetheless, it should be recognized that the case depended heavily on the wording of the policy's COI clause. Life insurance companies have learned the hard way that the wording of the clause is critical. Thus the companies have rewritten COI clauses in more recently issued policies to provide the companies with maximum flexibility on the imposition of COI charges, while at the same time trying to minimize the likelihood of a successful legal challenge.

Available Material
I am making available a complimentary 26-page PDF containing the Indiana Court of Appeals decision. Email jmbelth@gmail.com and ask for the June 2015 appellate decision in the case of Bezich v. Lincoln.

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Friday, April 15, 2016

No. 156: Life Partners—Trustee Moran, Unsecured Creditors, and Class Action Plaintiffs File Joint Motion to Settle Bankruptcy Case

Life Partners Holdings Inc. (LPHI) and its subsidiaries Life Partners Inc. (LPI) and LPI Financial Services Inc. (LPIFS) participated for years in the secondary market for life insurance. On January 20, 2015, LPHI filed for protection under Chapter 11 of the federal bankruptcy law. On January 30, the U.S. Trustee appointed an Official Committee of Unsecured Creditors (committee) to represent investors in fractional interests in life settlements that LPI had sold. (See In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, Case No. 15-40289.)

Other Developments Early in 2015
On March 13, the U.S. Trustee appointed H. Thomas Moran II as Chapter 11 Trustee. On March 19, the bankruptcy court judge approved Moran's appointment. On April 7, the judge allowed Moran to expand the bankruptcy filing to include LPI and LPIFS. On May 20, Moran filed a declaration containing a preliminary report of his investigation of the alleged fraudulent activities of the debtors (LPHI, LPI, and LPIFS) and their top officers that preceded the bankruptcy filing.

Recent Developments
On November 28, 2015, Moran and the committee filed a Plan of Reorganization. On January 19, 2016, they filed an Amended Plan of Reorganization. On March 24, they filed a Second Amended Plan of Reorganization.

The Joint Motion
On April 1, 2016, Moran, the committee, and the plaintiffs in a recently consolidated class action lawsuit filed a 44-page "Joint Motion to Compromise Class Action Controversies, to Approve Plan Support Agreement, and for Related Relief." The joint motion, which grew in part out of the previously mentioned Second Amended Plan of Reorganization, is a proposal to settle the bankruptcy case. (For the recent class action lawsuit, see Garner v. LPI, U.S. Bankruptcy Court, Northern District of Texas, Case No. 15-04061.)

The parties to the joint motion say "the proposed settlement is fair and equitable," is "in the best interests of the estates of the Debtors," resolves "pending disputes," and provides "meaningful compensation and recovery to approximately 22,000 investors ... who have been so grievously damaged by the Debtors' pre-petition activities." The parties to the joint motion also believe that the proposed settlement enables the unsecured creditors to "recover more than they are likely to recover under any realistic alternative scenario."

The joint motion describes the bankruptcy case, the class action lawsuits that were instituted before and after the bankruptcy filing, a recently consolidated class action lawsuit, and the "ownership issue." In the bankruptcy case, Moran had taken the position that LPI (and therefore Moran) owned the life insurance policies underlying the life settlements. In the consolidated class action lawsuit, however, the plaintiffs had taken the position that the class members owned the policies. The proposed settlement sidesteps and thereby resolves the ownership issue.

The joint motion also describes "complex and protracted discussions" that preceded the filing of the joint motion. Also, in a section entitled "The Proposed Settlement Is Truly the Product of Arm's-Length Bargaining and Not of Fraud or Collusion," the joint motion says:
It would be an understatement to suggest the Settlement Agreement was the product of anything other than hard fought and contentious negotiations. Through months of extensive good-faith and arm's-length bargaining, including two days of mediation with retired [federal] bankruptcy Judge Richard Schmidt, the Parties have reached a resolution they believe minimizes the potential damage and risk to all parties and maximizes value for the Settlement Class Members and the Debtors' estates and their creditors.
Attorneys' Fees
The joint motion describes the agreed-upon attorneys' fees (agreed fee) and calls the agreed fee "fair and reasonable." The parties say they negotiated the agreed fee "only after the parties reached agreement on the essential terms of the settlement." The agreed fee is $33 million, which will be paid over many years. The estimated present value of the agreed fee is about $5.2 million, depending on certain assumptions. Also, the agreed fee is 2.57 percent of the "common fund" of about $1.28 billion that was calculated in a lawsuit heard earlier by the Texas Supreme Court.

The Settlement Agreement
The 60-page settlement agreement itself is an appendix to the joint motion. It provides for the unsecured creditors to be divided into classes and subclasses that have differing options from which to choose. The settlement agreement discusses, among other things, the court approval process, a stipulation to class certification, equitable relief, and the release of claims.

The parties to the joint motion plan to file soon a motion seeking the bankruptcy court judge's preliminary approval of the settlement agreement. If the judge grants the motion, the parties would send the unsecured creditors a class notice of the proposed settlement.

An Alternative Settlement Proposal
To my knowledge, only one other proposal has been filed as an alternative to the settlement proposal in the joint motion. On April 5, 2016, Vida Capital (Austin, TX) filed an alternative plan. Vida, which was founded in 2009, describes itself as
an institutional asset manager focused exclusively on providing longevity-contingent investment solutions to institutions and individual investors. Vida specializes in the structuring, servicing, financing and management of life settlements, synthetic products, annuities, notes, and structured settlements.
In 2010, Vida acquired Magna Life Settlements, a life settlement provider. Magna, which has been in the life settlement business since 2004, is licensed in 37 states and the District of Columbia.

ASM Capital's Offer
ASM Capital (Woodbury, NY) is a firm that invests in obligations of companies in bankruptcy. As I reported in No. 138 (posted January 11, 2016), ASM sent a letter on December 22, 2015 to LPI fractional interest investors who have a "matured fund interest." That expression refers to a fractional interest in a policy on the life of an insured person who has died. ASM offered to pay 75 percent of the matured fund interest promptly in cash to each investor who would transfer to ASM the rights to the matured fund interest. Some LPI investors have accepted the offer. For example, a document filed with the bankruptcy court on April 7, 2016 lists 72 transfers of ownership to ASM.

General Observations
The settlement proposal presented in the joint motion is complex. I have attempted here to describe a few key elements of the proposal. It represents a difficult "compromise," a word that appears in the title of the joint motion, especially with regard to the important ownership issue relating to the fractional interests.

I think the parties to the joint motion have forged a satisfactory settlement. Further, I think the settlement would bring closure to the bankruptcy case in a relatively short time, thereby avoiding long delays and the huge expenses associated with dragged-out legal proceedings.

It remains to be seen how the bankruptcy court judge will rule on the upcoming motion for preliminary approval of the settlement. Also, it will be interesting to see whether the parties are able to provide, as part of the class notice, a reasonably brief and understandable explanation of the complex settlement proposal. Finally, it remains to be seen whether Vida's alternative proposal gains traction.

Available Material
I am making available a complimentary 44-page PDF containing the joint motion. Email jmbelth@gmail.com and ask for the April 2016 joint settlement motion in the Life Partners bankruptcy case.

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Wednesday, April 13, 2016

No. 155: Genworth's Long-Term Care Insurance—Correction of an Error in the Preceding Post

On April 7, 2016, I posted No. 154 entitled "Genworth's Long-Term Care Insurance and the Company's Destacking Plan." When I sent the item to Genworth that day, President and Chief Executive Officer Thomas J. McInerney brought an error to my attention.

In the section entitled "The Reinsurance Repatriation," I mentioned Brookfield Life and Annuity Insurance Company (BLAIC), Genworth's primary Bermuda domiciled captive reinsurance subsidiary. I said that half the long-term care insurance business of Genworth Life Insurance Company (GLIC) has been ceded to BLAIC, and I said incorrectly that the reinsurance involves $1 billion of reserve liabilities. The correct figure is $10 billion.

I took the incorrect figure from Schedule S, Part 3, Section 1, on page 43.2 of GLIC's 2015 statutory financial statement. The correct figure is in Schedule S, Part 4, on page 45. Also, a discussion of the matter is in the "Notes to the Financial Statements" on pages 19.31 and 19.32. The discussion says that the $10 billion of reserve liabilities ceded to BLAIC relate to long-term care insurance, and that the $1 billion figure relates to fixed deferred annuities.

I regret the error. So that readers can see the statement pages to which I refer in this correction, I am making available a complimentary four-page PDF containing pages 19.31, 19.32, 43.2, and 45 of GLIC's 2015 statutory statement. Email jmbelth@gmail.com and ask for the four pages from GLIC's 2015 statutory statement.
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Thursday, April 7, 2016

No. 154: Genworth's Long-Term Care Insurance and the Company's Destacking Plan

In No. 144 (posted February 16, 2016), I discussed a news release issued by Genworth Financial, Inc. (NYSE:GNW) that mentioned a "strategic update." The release, filed as an exhibit to an 8-K (material event) report filed with the Securities and Exchange Commission (SEC) on February 4, said the company's planned actions are "aimed at separating and isolating its LTC [long-term care insurance] business."

The announcement triggered significant reductions in the financial strength ratings of Genworth's life insurance subsidiaries, mostly into the vulnerable (or below-investment-grade) range. The announcement also caused a sharp decline in the company's share prices. Here I discuss the "destacking" plan at the heart of the company's strategic update.

The Current Situation
Genworth's life insurance business consists of three operating subsidiaries: Genworth Life Insurance Company (GLIC), domiciled in Delaware; Genworth Life and Annuity Insurance Company (GLAIC), domiciled in Virginia; and Genworth Life Insurance Company of New York (GLICNY), domiciled in New York. The two subsidiaries most affected by the destacking plan are GLIC, primarily a long-term care insurance company; and GLAIC, primarily a life insurance and annuity company.

The long-term care insurance business of GLIC is financially troubled, while the life insurance and annuity business of GLAIC is financially sound. At present, Genworth, GLIC, and GLAIC are "stacked." That means Genworth is the parent of GLIC, and GLIC is the parent of GLAIC. Thus GLAIC is an asset of GLIC.

As of December 31, 2015, the statutory net worth of GLAIC is $1.7 billion, and the statutory net worth of GLIC is $2.7 billion. Because GLAIC represents more than 60 percent of GLIC's net worth ($1.7 divided by $2.7), GLAIC provides significant value and protection to GLIC and its long-term care insurance policyholders.

The Destacking Plan
Under the proposed "destacking" plan, GLAIC would be moved from GLIC to Genworth. In other words, GLIC and GLAIC would become sister subsidiaries of Genworth, and GLAIC, with its $1.7 billion of net worth, would no longer be an asset of GLIC. Under the proposed plan, Genworth would contribute $200 million to the net worth of GLIC. A major question is whether that amount is adequate compensation for GLIC and its long-term care insurance policyholders for the loss of GLAIC's $1.7 billion of net worth.

Genworth says the proposed destacking plan is subject to the approval of various state insurance regulators. An important question is whether the insurance commissioner in Delaware, where GLIC is domiciled, will approve the removal of a $1.7 billion asset from GLIC in exchange for a contribution of $200 million.

Genworth has not yet formally submitted the destacking plan to Delaware for approval. It remains to be seen whether the proposal will be available to the public when Genworth submits it, and whether the commissioner will conduct a public hearing on it.

The Note Indentures
Another dimension of the destacking plan relates to Genworth's eight issues of outstanding notes with principal amounts totaling $3.8 billion. The maturity dates of the notes range from 2018 to 2066. The note indentures provide that the "disposition" of a "significant subsidiary" might constitute an "event of default," thereby causing the notes to become due and payable immediately.

On March 4, Genworth asked the noteholders to consent to changes in the indentures to eliminate certain subsidiaries, including GLIC, from the definition of "significant subsidiary." To compensate noteholders for consenting to the changes in the indentures, Genworth offered consent fees ranging from $6.25 per $1,000 of principal amount for the short duration notes to $15 per $1,000 of principal amount for the long duration notes. The aggregate amount of the consent fees was $44 million, provided all the noteholders consented.

On March 22, Genworth announced it had received the required number of consents in order to effectuate the changes in the note indentures. The changes mean that the "disposition" of GLIC, through a sale or even an insolvency, would not be an "event of default" under the note indentures. The changes in the indentures remove a major potential obstacle to the implementation of the destacking plan.

The Reinsurance Repatriation
Brookfield Life and Annuity Insurance Company Limited (BLAIC) is Genworth's primary Bermuda domiciled captive reinsurance subsidiary. Half of GLIC's long-term care insurance business, involving about $1 billion of reserve liabilities, has been ceded to BLAIC. As part of the strategic update, and subject to regulatory approvals, Genworth plans to "repatriate" ("unwind") all the reinsurance its insurance subsidiaries have ceded to BLAIC. After the repatriation, which is expected to occur in 2016, Genworth plans to dissolve BLAIC.

Genworth's 2015 10-K report discloses that the company has been using various accounting practices that are permitted by Delaware and Vermont insurance regulators but that deviate from accounting practices permitted by the National Association of Insurance Commissioners. For more on such practices, see No. 153 (posted March 31, 2016).

General Observations
My initial reaction to the destacking plan was that Genworth might be considering the sale of GLIC. However, the questions that naturally follow such a reaction are "To whom?" and "At what price?" I think no reputable company would want to take over GLIC's large and troubled block of long-term care insurance policies at any price.

GLIC has been asking state insurance regulators to approve substantial premium increases on long-term care insurance policies. The company calls them "actuarially justified" premium increases, but the words "actuarially justified" are not necessary. I think GLIC or any other reputable company would refrain from seeking premium increases that are not actuarially justified.

The requests for premium increases create a dilemma for state insurance regulators. Disapproving the requests might force GLIC into insolvency. Approving the requests, on the other hand, increases the financial burdens faced by elderly long-term care insurance policyholders. Although policyholders may be offered the opportunity to avoid the premium increases by accepting reduced benefits, or to pay no further premiums by accepting even lower "paid-up" benefits, the financial burdens on those vulnerable policyholders remain.

I think the survival of GLIC is open to question. In the event of its insolvency, the changes in the note indentures protect Genworth's noteholders, Genworth's shareholders, and Genworth itself. However, the changes do not protect GLIC's long-term care insurance policyholders. Nor do they protect state guaranty associations or insurance companies that would be subjected to assessments. The Delaware commissioner and the other regulators who will be asked to approve the destacking plan are the only ones who can protect policyholders, state guaranty associations, and insurance companies that would be assessed.

Available Material
I am making available a complimentary 16-page PDF ("April 2016 Genworth package") consisting of selected pages from Genworth's filings with the SEC about the strategic update, the destacking plan, the consent solicitation, the results of the consent solicitation, and the repatriation of the Bermuda reinsurance. Also, the complimentary 31-page PDF ("February 2016 Genworth package") offered in No. 144 remains available. Email jmbelth@gmail.com and ask for the April 2016 Genworth package and/or the February 2016 Genworth package.

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Thursday, March 31, 2016

No. 153: Vermont's Frightening Accounting Rules and the Secrecy Surrounding Them

Primerica Life Insurance Company is domiciled for regulatory purposes in Massachusetts and headquartered in Georgia. It is a wholly owned operating subsidiary of Primerica, Inc. (NYSE:PRI). The Primerica organization is the successor to the A. L. Williams organization (ALW). My first article about ALW was in the April 1981 issue of The Insurance Forum, and later I wrote 50 other articles in the Forum about ALW.

Recently I reviewed the two most recent 10-K annual reports filed by Primerica, Inc. with the Securities and Exchange Commission (SEC). The reports illustrate the contrast between the strong disclosure requirements imposed by federal securities regulators and the weak disclosure requirements imposed by state insurance regulators. Here I describe information from various reports about the accounting practices of one of Primerica Life's captive reinsurance companies.

Peach Re
Peach Re, Inc., which is wholly owned by Primerica Life, is a special purpose captive reinsurance company domiciled in Vermont. Thus Peach Re is regulated by the Vermont Department of Financial Regulation. Primerica, Inc. refers to it in 10-K reports as the "Vermont DOI," but I refer to it as the "Vermont DFR."

When Primerica Life formed Peach Re in 2012, the Vermont DFR issued a "licensing order" that explicitly permits Peach Re to treat a letter of credit (LOC) as an admitted asset. Thus Peach Re accepts reserve liabilities transferred to it from its parent, Primerica Life, and the Vermont DFR permits Peach Re to offset those liabilities in large part with an LOC that Peach Re treats as an admitted asset on its balance sheet.

It is important to understand that accounting rules adopted by the National Association of Insurance Commissioners (NAIC) prohibit companies from treating LOCs as admitted assets. The Vermont DFR, however, deviates from those accounting rules by permitting captive reinsurance companies domiciled in Vermont to treat LOCs as admitted assets. Primerica says in its 10-K reports that this accounting practice permitted by the Vermont DFR "was critical to the organization and operational plans of Peach Re."

Primerica says in its 10-K reports that Peach Re's statutory financial statements "are prepared in accordance with statutory accounting practices prescribed or permitted by the NAIC and the Vermont DOI." The word "and" implies that the practices are permitted by both the NAIC and Vermont. That implication is false because the NAIC prohibits treating LOCs as admitted assets. The problem could be avoided by saying the practices are permitted by the NAIC "or" the Vermont DFR.

Peach Re's LOC
The 10-K reports provide information about Peach Re's LOC. Effective March 31, 2012, Peach Re entered into an agreement with Deutsche Bank. The purpose of the agreement was to support reserve liabilities associated with level premium term life insurance policies that Primerica Life ceded to Peach Re through reinsurance. Primerica Life has issued many such term life policies, which are subject to enhanced reserve liability requirements imposed by state insurance regulators.

Under the agreement, Deutsche issued an LOC in the initial amount of $450 million with a term of about 14 years. The LOC amount may be increased to a maximum of about $507 million. The LOC is for the benefit of Primerica Life. If Primerica Life should draw from the LOC, Peach Re would be obligated, with limitations, to reimburse Deutsche, with interest. Peach Re collateralized its obligations to Deutsche by granting Deutsche a security interest in all of Peach Re's assets, with exceptions.

Peach Re's LOC and Primerica's Risk-Based Capital
An insurance company's risk-based capital (RBC) ratio is total adjusted capital divided by company action level RBC, with the quotient expressed as a percentage. At the end of 2015, Primerica Life's total adjusted capital was $576.8 million, company action level RBC was $127.3 million, and the RBC ratio was 453 percent ($576.8 divided by $127.3).

Because Peach Re is a wholly owned subsidiary of Primerica Life, an admitted asset of Peach Re is reflected directly in the admitted assets and total adjusted capital of Primerica Life. The LOC amount at the end of 2015 was $455.7 million. Therefore, if Peach Re was not permitted to treat the LOC as an admitted asset, the total adjusted capital of Primerica Life would have been $121.1 million ($576.8 minus $455.7), and the RBC ratio would have been 95 percent ($121.1 divided by $127.3), or 358 percentage points below the RBC ratio including the LOC amount (453 minus 95).

The impact of the LOC on Primerica Life's RBC data was more severe in 2014, when the LOC amount was $507 million. Primerica Life's total adjusted capital was $515.4 million, company action level RBC was $127.6 million, and the RBC ratio was 404 percent ($515.4 divided by $127.6). Without the $507 million LOC amount, Primerica Life's total adjusted capital would have been only $8.4 million ($515.4 minus $507). Total adjusted capital of $8.4 million would have been far below all the RBC levels, including mandatory control level RBC.

Peach Re's LOC and Primerica's Financial Strength Ratings
Primerica Life has high financial strength ratings: A+ (superior) from A. M. Best, A2 (upper medium grade) from Moody's Investors Service, and AA– (very strong) from Standard & Poor's. All three ratings have a stable outlook. It is not clear to what extent the ratings take into account the questionable nature of the LOC as an admitted asset.

Regulatory Triggers
The 10-K reports mention "minimum statutory capital and surplus" that might "trigger a regulatory action event" at Primerica Life. For example, the 2014 10-K report mentions a trigger of $79.3 million. The 2015 10-K report alludes to the subject, but does not mention a number.

In an effort to understand precisely what "regulatory action event" is referred to in the 10-K reports, I calculated the RBC levels for 2014 from data shown in Primerica Life's statutory statement. For example, regulatory action level RBC was $95.7 million, and authorized control level RBC was $63.8 million. Thus the trigger of $79.3 million mentioned in the 2014 10-K report was about halfway between regulatory action level RBC and authorized control level RBC. When this blog item is posted, I will ask Primerica, Inc. how it calculates the triggers.

Consequences of the Triggers
In its 10-K reports, Primerica, Inc. mentions the significance of the regulatory triggers discussed above. Here are comments in the 2014 10-K report and the less informative comments in the 2015 10-K report:

  • [2014 10-K] As of December 31, 2014, if Peach Re had not been permitted to include the letter of credit as an admitted asset, Primerica Life would have been below the minimum statutory capital and surplus level of approximately $79.3 million that triggers a regulatory action event. However, if Peach Re had not been permitted to include the letter of credit as an admitted asset in its statutory capital and surplus, Primerica Life would not have paid the ordinary dividends to the Parent Company that were paid in 2014.
  • [2015 10-K] As of December 31, 2015, even if Peach Re had not been permitted to include the letter of credit as an admitted asset, Primerica Life would not have been below the minimum statutory capital and surplus level that triggers a regulatory action event. [Blogger's note: This assertion is questionable. As I mentioned earlier, Primerica Life's RBC ratio would have been 95 percent. That figure is between company action level RBC and regulatory action level RBC. The situation would have required the company to file an RBC report with its domiciliary regulator, and possibly take further action to deal with the low RBC ratio.]

The Capital Maintenance Agreement
The 10-K reports mention a "capital maintenance agreement" with Peach Re. It requires Primerica, Inc. to make capital contributions to Peach Re to assure that Peach Re's regulatory account as defined in the reinsurance with Primerica Life will not be less than $20 million. The regulatory account will only be used to satisfy obligations under the reinsurance with Primerica Life after all other assets have been used, including the LOC issued by Deutsche.

My Public Records Request to Vermont
On March 21, 2016, I sent a public records request to Commissioner Susan L. Donegan of the Vermont DFR. I quoted from the 2015 10-K report of Primerica, Inc. and requested copies of four items: the licensing order, the LOC, the capital maintenance agreement, and the 2015 statutory financial statement of Peach Re. I asked, if the request is denied in whole or in part, that DFR cite the statutes or regulations on which the denial is based. On March 22, a DFR staff person said:
By statute the information you have requested is confidential, however, we would be happy to pass along your request to the appropriate management company, who would be more likely to answer your questions. I won't take further action unless you authorize.
I responded by repeating my request for the relevant statutes or regulations. I also said I would prefer to contact the appropriate person at the management company directly, and requested contact information for that person. On March 24, David F. Provost, DFR's deputy commissioner for captive insurance, said:
The information you requested in your letter of March 21, 2016 contains information proprietary to the operations of Primerica and is held confidential pursuant to 8 V.S.A. §§ 6002 and 6007 and is exempt from public records request pursuant to 1 V.S.A. §317(c). Pursuant to 1 V.S.A. §318(a)(2), you have a right to appeal any determination regarding exemptions under 1 V.S.A. §317(c) to Commissioner Donegan.
Deputy Commissioner Provost also gave me contact information for the appropriate person at the management company: Edward F. Precourt, senior vice president of Marsh Management Services, Inc. in Burlington. I wrote to him but have not yet received a reply.

My Public Records Request to Massachusetts
On March 21, 2016, I sent a public records request to the Massachusetts Division of Insurance (MDOI), which is Primerica Life's domiciliary regulator. I mentioned the comment in the 2015 10-K report of Primerica Life's parent that Peach Re's statement is filed with Primerica Life's statement. On March 29, I received from the MDOI an 84-page PDF containing Peach Re's 2015 statutory financial statement. Some information as of December 31, 2015 is shown here. Dollar figures are to the nearest tenth of a million, except where billions are indicated.

The balance sheet shows that total net admitted assets were $582.6, of which the LOC amount was $455.7. Most of the remainder was $44.4 of bonds and $51.2 of funds held by or deposited with reinsured companies. Total liabilities were $506.7, of which $498.9 was aggregate reserve for life contracts. Surplus was $75.9.

The summary of operations shows total income was $107.3, of which $104.7 was premiums and annuity considerations for life and accident and health contracts. Total expenses were $50.9, of which $32.0 were death benefits. Net income was $55.6. Dividends to stockholders were minus $60.4. Surplus adjustment for letter of credit was minus $51.3.

The notes to the financial statements include a discussion of the LOC. Among other comments, the notes say:
The LOC is not included as a risk-based asset in our risk-based capital calculation. As of December 31, 2015, had we not been permitted to include the LOC as an admitted asset, our NAIC risk-based capital would have been below the NAIC mandatory control level.
The notes also indicate that the surplus on the Vermont basis was $75.9, and on the NAIC basis was minus $379.8 ($75.9 minus $455.7). In 2015 Peach Re paid a dividend of $60.4 to Primerica Life with the approval of the Vermont DFR.

The Atlanta office of KPMG LLP conducts the annual audit. Daniel B. Settle, FSA, MAAA, executive vice president and chief actuary of Primerica Life and Peach Re, provides the actuarial opinion.

From the statement I derived RBC data for the end of 2015. Total adjusted capital was $76.1, company action level RBC was $10.5, and the RBC ratio was 725 percent ($76.1 divided by $10.5). The exhibit of reinsurance assumed shows that Peach Re assumed $498.9 of reserve liabilities from Primerica Life on policies whose total amount in force was $11.8 billion.

General Observations
No justification exists for the secrecy surrounding admitted assets that captive reinsurance companies carry on their statutory balance sheets. I refer to LOCs, parental guarantees, contingent notes, variable funding notes, credit linked notes, note guarantees, and other questionable financial instruments. Nor is there justification for the secrecy surrounding licensing orders, capital maintenance agreements, statutory financial statements of captive reinsurance companies, valuation actuary reports, and independent auditor reports. The response by the MDOI to my request for Peach Re's 2015 statutory financial statement clearly demonstrates the lack of justification for secrecy surrounding such statements.

The fact that statutes and regulations shroud such documents in secrecy does not justify the secrecy. Statutes are drafted by those who want documents kept secret, and friendly state legislators enact the statutes without public input. Regulations are drafted by those who want documents kept secret, and friendly state insurance regulators adopt the regulations without public input. In short, at no time during the process of enacting the statutes and adopting the regulations are those desiring secrecy required to provide the public with justification for the secrecy.

I challenge those who favor secrecy in this area to explain why they favor secrecy. I plan to report on the responses to this challenge.

Available Material
I am making available a complimentary 19-page PDF containing selected excerpts from the 2014 and 2015 10-K reports filed with the SEC by Primerica, Inc., RBC data derived from the 2015 statutory financial statement filed with state insurance regulators by Primerica Life, and selected pages from the 2015 statutory financial statement filed with the MDOI by Peach Re. Email jmbelth@gmail.com and ask for the March 30, 2016 excerpts from Primerica filings.

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Friday, March 25, 2016

No. 152: Captive Reinsurers—A Brief Released by the Office of Financial Research in the U.S. Department of the Treasury

In No. 135 (posted December 28, 2015), I discussed the first Financial Stability Report issued by the Office of Financial Research (OFR), an independent bureau within the U.S. Department of the Treasury. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established the OFR, which issues periodic reports. The OFR also issues "briefs" on various topics.

Brief No. 16-02
On March 17, 2016, the OFR issued Brief No. 16-02 entitled "Mind the Gaps: What Do New Disclosures Tell Us About Life Insurers' Use of Off-Balance-Sheet Captives?" The authors of the brief are four members of the OFR staff: Jill Cetina, Arthur Fliegelman, Jonathan Glicoes, and Ruth Leung. Here is the abstract of the ten-page brief:
Some U.S. life insurance companies use wholly owned captive reinsurers to transfer risk and reduce regulatory requirements. Since 2002, such transfers have increased rapidly, and they now exceed $200 billion in reserve credit. This brief discusses recent policy measures and the data that insurers began reporting in 2015 about their captive transactions. Publicly available data are insufficient to analyze fully the risks from captives and the impact on insurers' financial condition. Regulators have revised reporting standards to improve the public data, but gaps remain. Because life insurers are a material part of the financial system, these gaps may mask financial stability vulnerabilities.
Background
The authors of the brief explain that the ceding of reserve liabilities to captive reinsurers to reduce the liabilities of the parent ceding companies began about 15 years ago, after state insurance regulators had increased reserve requirements for term life policies and for universal life policies with secondary guarantees (ULSG). The problem is that the captive reinsurers are permitted by some state insurance regulators to treat as admitted assets what the authors of the brief refer to as "nontraditional" items such as letters of credit and parental guarantees, despite the fact that accounting rules adopted by the National Association of Insurance Commissioners do not permit such items to be treated as admitted assets.

Some of the Data
The brief contains a considerable amount of information based on year-end 2014 data. (Year-end 2015 data were not available when the brief was being prepared.) The 2014 data show that the use of captives by U.S. life insurers totaled $213.4 billion in reserve credit. The authors of the brief point out that, because of exemptions, ceding insurers disclosed the quality of the assets for only 55 percent of the assets of term life and ULSG captives. The authors of the brief also point out that, for the 2014 data, there were no requirements for disclosure of the impact of the use of captives on the risk-based capital ratios of the ceding insurers.

General Observations
This is not the first time OFR has expressed concern about captive reinsurers. Earlier expressions of concern were in OFR's 2014 Annual Report and 2015 Financial Stability Report. I think the recent OFR brief should be studied carefully by persons interested in the welfare of life insurance companies and policyholders.

Perhaps the most detailed official expression of concern about captive reinsurers was a 24-page report entitled "Shining a Light on Shadow Insurance." The report was issued in June 2013 by the New York Department of Financial Services (NYDFS) during the tenure of Benjamin M. Lawsky, the former NYDFS superintendent.

Today, almost three years after issuance of the NYDFS report, we still have very little disclosure of the details of captive reinsurance transactions. In my view, the central problem is the secrecy surrounding what the authors of the OFR brief refer to as "nontraditional" admitted assets carried on the balance sheets of captive reinsurers. I think of those assets as "toxic," and I have referred to their use as a "shell game" that would collapse if the details of those assets were clearly disclosed.

Available Material
I am making available two complimentary PDFs. One is the recent ten-page OFR brief. The other is the 24-page NYDFS report released in 2013. Email jmbelth@gmail.com and ask for the March 2016 OFR brief and/or the June 2013 NYDFS report on shadow insurance.

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Friday, March 18, 2016

No. 151: Life Partners—Trustee Moran Files 17 Adversary Proceedings in the Bankruptcy Case

H. Thomas Moran II is the chapter 11 trustee in the Life Partners Holdings Inc. (LPHI) bankruptcy case. On March 5, 2016, as I reported in No. 150 (posted March 16), Moran filed an extensive report describing the results of his investigation of the allegedly fraudulent business conduct that preceded the January 2015 bankruptcy filing. (See In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, Case No. 15-40289.)

Adversary Proceedings
During the period from March 11 to March 13, a week after filing his extensive report, Moran filed 17 adversary proceedings. As I explained in Nos. 117 and 126 (posted September 21 and November 12, 2015), an "adversary proceeding" is a lawsuit filed within a bankruptcy case and assigned its own case number. In the above 2015 posts, I mentioned a pair of adversary proceedings that Moran had filed earlier: one against Brian D. Pardo, former chief executive officer and controlling shareholder of LPHI, and one against former licensees.

The 17 new adversary proceedings include several complaints against former licensees, a complaint against the former outside directors of LPHI, a complaint against former LPHI life expectancy estimator Dr. Donald T. Cassidy, a complaint against former shareholders who received dividends from LPHI, a complaint against former LPHI employees, several complaints against transferees who received funds from LPHI, and several complaints against local and national charities that received donations from Pardo. Here is a list, in numerical order, showing case numbers, abbreviated case names, and types of defendants:
16-04022: Moran v. A. Chris Ostler (Licensees)
16-04024: Moran v. Happy Endings Dog Rescue (Charity)
16-04025: Moran v. Jonathan Brooks (Licensee)
16-04026: Moran v. Argentus Securities LLC (Licensees)
16-04027: Moran v. ESP Communications Inc. (Transferee)
16-04028: Moran v. American Heart Association (Charities)
16-04029: Moran v. Funds for Life Ministries (Charities)
16-04030: Moran v. Andrea Atwell (Employees)
16-04031: Moran v. Blanc & Otus (Transferees)
16-04032: Moran v. Averitt & Associates (Transferees)
16-04033: Moran v. Donald T. Cassidy (Life Expectancy Estimator)
16-04034: Moran v. Robin Rock Ltd. (
Transferees)
16-04035: Moran v. 72 Vest Level Three LLC (Licensees)
16-04036: Moran v. James Alexander (Shareholders)
16-04037: Moran v. Garnet F. Coleman (Transferees)
16-04038: Moran v. A Roger O. Whitley Group Inc. (Licensees)
16-04039: Moran v. Tad Ballantyne (Outside Directors)
Complaint against Ballantyne
As an example of the 17 complaints, I selected the complaint against the outside members of LPHI's board of directors: Tad M. Ballantyne (Racine, WI), Fred Dewald (Woodway, TX), and Harold E. Rafuse (Crawford, TX). The "Factual Background" section describes the procedural history of the bankruptcy case, the overall scheme to defraud, and LPHI's insolvency. That section also includes a 23-page, 19-part description of the involvement of the three outside directors.

The complaint contains 12 counts: one count of breaches of fiduciary duty, three counts of violations of securities laws, two counts of actual fraudulent transfers, two counts of constructive fraudulent transfers, one count of preferences, one count of unjust enrichment and constructive trust, one count of disallowance of defendants' claims, and one count of equitable subordination. The concluding section of the complaint reads:
WHEREFORE, the Plaintiffs request that the Outside Directors each be ordered to return all funds received from Life Partners to the Debtor's Estate as a result of the conduct described herein, and that judgment be entered against them and in favor of Plaintiffs for the total amount transferred to Defendants. Plaintiffs request actual and consequential damages as determined at a trial on the merits, as well as exemplary damages where warranted. In the case that the funds were spent to acquire any real or personal property, Plaintiffs request that a constructive trust be imposed upon the property, and an order that such property must immediately be turned over to Plaintiffs. Plaintiffs ask for pre-judgment and post-judgment interest at the highest rates allowed by law. Further, Plaintiffs request recovery of their attorneys' fees and costs, and that they be granted any other relief, both special and general, to which they may be justly entitled.
General Observations
Through these adversary proceedings, Moran is attempting to claw back as much money as possible for the benefit of those victimized by allegedly fraudulent business conduct over the years, especially for the benefit of investors in fractional interests in life settlements marketed by LPHI. He has cast a wide net; however, to what extent he will succeed in the effort remains to be seen. I plan to continue watching the progress of the case and reporting significant developments.

Available Material
I am making available as a complimentary 46-page PDF the complaint against the three former outside members of LPHI's board of directors. Email jmbelth@gmail.com and ask for the March 2016 Moran complaint against Ballantyne.

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Wednesday, March 16, 2016

No. 150: Life Partners—The Trustee's Report on Allegedly Fraudulent Business Conduct Preceding the Bankruptcy Filing

Life Partners Holdings, Inc. (LPHI), led by controlling shareholder and chief executive officer Brian D. Pardo, participated for many years in the secondary market for life insurance. On January 20, 2015, the Waco, Texas-based company filed for protection under chapter 11 of the federal bankruptcy law. On March 19, 2015, the bankruptcy court judge approved the appointment of H. Thomas Moran II as chapter 11 trustee. On May 20, 2015, Moran reported the preliminary results of his investigation of the allegedly fraudulent business conduct that preceded LPHI's bankruptcy filing. On March 5, 2016, Moran filed a follow-up report on the results of his investigation. (See In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, Case No. 15-40289, Document No. 1584.)

The Recent Moran Report
The text of the recent Moran report consists of 89 pages. The report has ten attachments showing 158 exhibits and covering 2,048 pages. The exhibits include internal emails, deposition transcripts, and other documents that are now in the public domain. Among the transcripts, for example, are excerpts from depositions given by Pardo in April 2011 and May 2015, by longtime LPHI executive R. Scott Peden in April 2011, and by longtime LPHI life expectancy estimator Dr. Donald T. Cassidy in September 2012. The attorneys involved in the preparation of the report were David M. Bennett, Richard Roper, Katharine Battaia Clark, and Jennifer R. Eklund of the Dallas firm of Thompson & Knight LLP. The concluding section of the text of the report reads:
Life Partners, Pardo, and others acting in concert, executed a wide-ranging, long-term scheme to defraud Investors, which (as described in detail above) occurred in a number of ways, including but not limited to the following:
  • Use of unreasonably short LEs [life expectancies] in the sale of its so-called "fractional" investments;
  • Material misrepresentation of the returns Investors could expect;
  • Misrepresentations regarding whether policies had lapsed and resale of lapsed positions;
  • Charging massive, undisclosed fees and commissions, the total amount of which, in many cases, exceeded the purchase price of the policies themselves;
  • Repeated misrepresentation of Life Partners' business practices in order to maneuver around securities regulatory regimes;
  • Egregious and continuous self dealing by insiders and their accomplices;
  • Failure to disclose cash surrender value;
  • Forcing Investors to abandon contract positions, many of which were then resold for personal gain;
  • Systematic financial mismanagement, including improper payment of dividends;
  • Faulty and inconsistent record keeping, including with respect to the escrow companies and purported "trusts";
  • Commingling and unauthorized use of Investor monies;
  • The offer and sale of unregistered securities; and
  • Implying the investment structure was a permissible investment for an IRA [individual retirement account], and failing to disclose the risks if it was not.
In 2004, in an attempt to sell Life Partners and its underwriting compared to others in the business, Brian Pardo stated: "What you have to do is explain that there is never a good defense against fraud." Ironically, Pardo and his company committed the same violations of trust he evidently ascribed to others in the business, misleading his Investors at every turn and seeking to profit himself and his family above all else. As a result of Pardo's fraud, thousands of individual Investors lost hundreds of millions of dollars.
And when the scheme as originally conceived and implemented began to collapse, they simply morphed their conduct and found new ways to reap a profit on the backs of their Investors. One fraud was layered upon another.
The financial devastation as of the bankruptcy petition date to the Investors was massive and continuing to grow. It will be decades before all of the policies in the Life Partners portfolio mature, and tens of millions of dollars in additional premiums will have to be expended in that time to preserve those policies. The Life Partners fraud deserves a place in Texas history as one of the largest and longest-standing fraud schemes ever perpetrated in this State. The scheme has already cost thousands of innocent Investors hundreds of millions of dollars, which in many cases represented a material portion of, or their entire, life savings.
General Observations
Earlier documents filed by the Securities and Exchange Commission (SEC), by the federal district court judge who handled the recent SEC lawsuit against Life Partners, and by Moran also contained criticism of the pre-bankruptcy business conduct of Life Partners, Pardo, and others. The recent Moran report, however, is more powerful. The text is carefully written, the language is strong, and the attachments provide a huge amount of material that had not been easily available. I think the report is devastating for Life Partners and Pardo.

Most of the so-called responses by Pardo and others to the criticism leveled at them have been ad hominem attacks on Moran, on the SEC attorneys, and on the federal district court judge. Stated another way, Pardo and others have criticized those individuals personally rather than addressing the concerns expressed. I think the Moran report undercuts such personal attacks.

Available Material
I am making available a complimentary 96-page PDF. It contains the 89-page text of the Moran report and a 7-page list that briefly identifies the 158 exhibits included in the attachments to the report. Email jmbelth@gmail.com and ask for the March 2016 Moran report package.

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Monday, March 14, 2016

No. 149: Phony Life Insurance Policies Cause Federal Criminal Charges against Five Defendants

On December 16, 2014, the U.S. Attorney in the Northern District of California (San Francisco) filed under seal a grand jury indictment against five individuals in a case involving phony life insurance policies. The indictment was unsealed the next day, after arrest warrants had been executed. The case was assigned to U.S. Senior District Judge Susan Illston, a 1995 Clinton appointee who acquired senior status in 2013. (See U.S. v. Halali, U.S. District Court, Northern District of California, Case No. 3:14-cr-627.)

The Indictment
The defendants are Behnam Halali, Ernesto Magat, Kraig Jilge, Karen Gagarin, and Alomkone (also known as Alex) Soundara. Each defendant was charged with one count of conspiracy to commit wire fraud, 14 counts of wire fraud, and one count of aggravated identity theft. Three of the defendants were also charged with money laundering: three counts against Magat, two counts against Jilge, and one count against Halali. The indictment also mentions unnamed co-conspirators.

The defendants worked for several years as independent contractors selling life insurance for Texas-based American Income Life Insurance Company (AIL). They resigned or were fired in 2012.

The indictment alleges that the defendants and their co-conspirators engaged in wrongdoing that caused AIL to pay more than $2.5 million in commissions and bonuses. The indictment includes a forfeiture allegation that would require the defendants, upon conviction, to forfeit property derived from their wrongdoing. The following list is a paraphrase of the allegations against the defendants and their co-conspirators:
  • Paid recruiters to find individuals willing to take a medical examination in exchange for about $100.
  • Took personal information and submitted applications for life insurance, in many cases without the individual's knowledge.
  • Paid individuals to participate in a fictitious survey of a medical examination company, and then took the personal information and submitted applications for life insurance, in many cases without the individual's knowledge.
  • Solicited family and friends to submit applications for life insurance, and told them they would receive free life insurance for several months, after which the policies would be canceled.
  • In some cases created fraudulent drivers' licenses so they could take medical examinations purporting to be the individuals in the applications.
  • Opened hundreds of bank accounts from which to pay premiums, and typically paid one to four months of premiums before allowing the policies to lapse.
  • Purchased prepaid telephones and Google Voice telephone numbers that were listed on the applications.
  • Returned verification calls to AIL purporting to be the applicants, and confirmed the information in the applications.
  • Listed addresses of gas stations and apartment complexes on many applications in an effort to avoid detection, and fabricated the names of beneficiaries of the policies.
  • Exchanged emails in which they tracked telephone numbers and bank accounts associated with the policies.
Other Developments
The defendants are free on bond. Halali, Magat, Jilge, and Soundara are represented by four different private attorneys. Gagarin is represented by a federal pubic defender.

On December 21, 2015, Magat filed a "motion to dismiss counts of the indictment for insufficiency." On February 18, 2016, Gagarin, Halali, and Jilge filed motions for joinder in Magat's motion.

On February 19, Judge Illston issued an order denying Magat's motion. On February 22, she issued an order scheduling a jury trial for January 30, 2017.

General Observations
Life insurance performs important social functions, not the least of which is providing financial protection for widows and orphans. Yet, as it is often said, life insurance is sold rather than bought. For that reason, it is necessary to pay commissions to agents who perform the many functions associated with the sale of life insurance, including what I have called the antiprocrastination function. It is regrettable when agents, motivated by the lure of those commissions, engage in unacceptable and even allegedly criminal behavior in an effort to enhance their sales results.

I believe that the Halali case will not go to trial, and that the defendants will enter into plea agreements with the federal prosecutors. Nonetheless, I think it is appropriate to discuss the case because of the brazen nature of the defendants' alleged criminal behavior.

Available Material
I am offering a complimentary 27-page PDF containing the indictment and Judge Illston's order denying Magat's motion. Email jmbelth@gmail.com and ask for the package relating to the Halali case.

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Friday, March 11, 2016

No. 148: AIG's War against Coventry First and the Buerger Family Ends with a Confidential Peace Treaty

In No. 67 (posted September 16, 2014), I wrote about a lawsuit that Lavastone Capital, an affiliate of American International Group (AIG), filed on September 5, 2014, against Coventry First, an intermediary in the secondary market for life insurance. The complaint consisted of a 151-page text and an 89-page appendix. Among the defendants were Coventry; several affiliates of Coventry; Alan Buerger, chief executive officer of Coventry; and several members of Buerger's family. I expressed the belief that the lawsuit was an effort to destroy Coventry and the Buerger family. (Lavastone v. Coventry, U.S. District Court, Southern District of New York, Case No. 1:14-cv-7139.)

The Trial
In No. 114 (posted August 31, 2015), I reported that a bench (non-jury) trial began on August 27, 2015 before U.S. District Judge Jed S. Rakoff. The 23-day trial ended on October 26.

The Settlement
On February 29, 2016, before Judge Rakoff handed down his decision, AIG and Coventry jointly filed in court a one-sentence "stipulation of dismissal with prejudice" concerning the settlement. The stipulation, on which Judge Rakoff immediately signed off, reads:
IT IS HEREBY STIPULATED AND AGREED, between and among the undersigned parties to this action, pursuant to Federal Rule of Civil Procedure 41(a)(1)(A)(ii), by and through their respective counsel, that this action, and all claims and counterclaims asserted therein, shall be dismissed with prejudice [permanently] pursuant to the terms of the parties' confidential settlement agreement.
The Joint Statement
On the same day, AIG and Coventry issued a three-sentence joint statement entitled "AIG and Coventry First Settle Dispute." It reads:
Lavastone Capital LLC, an affiliate of American International Group, Inc. (NYSE:AIG), and Coventry First LLC today announced that they have entered into an agreement to resolve their disputes. Among the terms of the confidential agreement, Lavastone will be able to transfer Coventry's servicing of AIG's life settlements portfolio to another party, and Lavastone will be able to freely market or sell policies that were originated by Coventry. Lavastone and Coventry are pleased to have achieved a satisfactory resolution of their dispute.
Media Coverage
On the same day, a 577-word article by reporter Leslie Scism appeared online in The Wall Street Journal, but the article did not appear in the print version of the newspaper. The headline reads: "AIG Says It Settled Legal Dispute Over 'Life Settlements'; End of Coventry First Dispute May Pave Way for Insurer to Sell $3.6 Billion Portfolio." The opening sentence reads: "American International Group Inc. said it has resolved a legal dispute with a firm that helped it amass a large investment portfolio of 'life settlements' in the 2000s."

I found nothing about the settlement in The New York Times. However, Reuters carried short articles, and the settlement was mentioned widely in the insurance trade press.

General Observations
The case had not been going well for Coventry. Judge Rakoff had denied Coventry's motion to dismiss the case. He had also dismissed a few of AIG's charges, but had left many to be resolved at trial. He had also ruled against Coventry on AIG's breach-of-contract charge, but had left the amount of damages to be determined at trial.

I expressed the opinion that the case was one of the most important in the history of the secondary market for life insurance. I think Coventry was under intense pressure to reach a settlement, because the amount it stood to lose could have been staggering and could have forced Coventry into bankruptcy. Because of the confidential nature of the agreement, we may never know the financial dimensions of the settlement.

Available Material
I am not offering any additional material. However, persons interested in details of the case may still obtain the complimentary packages offered in Nos. 67 and 114, which are mentioned at the beginning of this post.

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Monday, March 7, 2016

No. 147: Medical Education of Resident Physicians—A Shocking Scandal Relating to a Pair of Clinical Trials

Public Citizen is a public interest organization that Ralph Nader and Dr. Sidney Wolfe founded in 1971. For many years, Dr. Wolfe headed Health Research Group (HRG), a unit of Public Citizen. I have long admired the important service HRG renders to the public.

HRG Press Release
On November 19, 2015, HRG issued a 19-paragraph press release entitled "Unethical Trials Force Hundreds of Resident Doctors Nationwide to Work Dangerously Long Shifts, Placing Them and Their Patients at Risk of Serious Harm," and subtitled "Public Citizen and American Medical Student Association [AMSA] Call on Federal Regulators to Investigate and Immediately Stop Research, Urge Accrediting Body to Reinstate Work-Hour Limits for All Resident Doctors." The fifth paragraph of the press release reads:
The primary goal of the two trials is to determine whether the rates of death and serious complications for the patients unwittingly enrolled in the trials at the hospitals where first-year residents are forced to work significantly longer work shifts (28 or more hours) than permitted under current ACGME [Accreditation Council for Graduate Medical Education] rules (the experimental group) are higher than the rates of death and serious complications in patients enrolled at hospitals where residents' work shifts comply with the ACGME limit of 16 consecutive hours (the control group). The investigators have not obtained the voluntary informed consent of the medical residents or their patients.
HRG/AMSA Letter to ACGME
On the same day, HRG and AMSA sent a four-page letter to ACGME. They sent copies of the letter to senior officials in the U.S. Department of Health and Human Services (DHHS).  They also sent the DHHS officials lengthy letters elaborating on the concerns. HRG and AMSA strongly urged ACGME "to immediately rescind the organization's waivers of most of its 2011 duty-hour standards for internal medicine and general surgery training programs randomly assigned to the experimental groups" in one ongoing trial and one recently completed trial. The final substantive paragraph of the HRG/AMSA letter reads:
In closing, it is imperative that the ACGME immediately rescind the waivers of most of its 2011 duty-hour standards for the internal medicine and general surgery residency training programs randomly assigned to the experimental groups in the [two trials]. Furthermore, in light of all the concerns highlighted above and in our letters to [DHHS], an independent body needs to investigate the process that allowed these inappropriate waivers to be granted in the first place, in the face of the strong evidence of resident and patient harm that caused ACGME to issue the duty-hour standards in 2011.
ACGME Letter to HRG/AMSA
On December 7, 2015, ACGME sent a nine-paragraph letter to HRG and AMSA. The first two and last two paragraphs of the letter read:
This letter is in response to your November 19, 2015 correspondence regarding the [two] trials. The [ACGME] is committed to ongoing assessments of our requirements based on the most up-to-date evidence to foster a safe learning environment serving the best interests of patients, residents, and fellows.
The ACGME's support of the two large, multicenter clinical trials to investigate the impact of duty hour standards on patient safety and resident education will be elements of the ACGME's scheduled five-year review of whether the Institutional and Program Requirements are achieving their intended goals to foster a safe learning environment.
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The ACGME was not involved in the design and implementation of the [two] trials beyond the waiver requirements, and will not be involved in the interpretation of their results. Nevertheless, the ACGME understands that both duty hour study protocols were reviewed by the Institutional Review Board (IRB) of the institution affiliated with each principal investigator. The ACGME also understands that the [second] trial was funded by the National Institutes of Health (NIH).
The ACGME is committed to the highest quality of patient care and resident/fellow learning. Wherever possible, the ACGME will continue to support and facilitate well designed, IRB-reviewed, multicenter educational trials with aims to scientifically test elements of the educational process that have the potential to enhance the quality and effectiveness of graduate medical education programs, and the safety and quality of care rendered to our patients today, and tomorrow.
HRG/AMSA Follow-up Letter to DHHS
On February 11, 2016, HRG and AMSA sent a ten-page follow-up letter to DHHS. The final substantive paragraph of the letter reads:
Finally, we are troubled by [the DHHS] failure so far to take these requested actions. It has now been 12 weeks since our initial complaint letter was submitted to your office. Resident and unwitting patient subjects continue to be forced to participate in greater-than-minimal-risk research without their voluntary informed consent. Your continued inaction makes [DHHS] a culpable party in this unethical research.
General Observations
A combination of three aspects of the scandal prompted me to write about it. First, it is outrageous that residents and patients included in the trials are not given an opportunity to provide voluntary informed consent to their inclusion in the trials. Carrying out such trials without the voluntary informed consent of the residents and patients violates fundamental rules governing the use of human subjects in research.

Second, what purported to be a response from ACGME was not a response. ACGME merely brushed off the serious concerns expressed by HRG and AMSA.

Third, the absence of major media coverage of the scandal is disappointing. The story warrants prominent coverage by outlets such as The New York Times, The Wall Street Journal, The Washington Post, Bloomberg News, and the major television networks.

Available Material
I am making available a complimentary 20-page PDF consisting of the HRG press release (it contains links providing access to other documents, such as the lengthy HRG/AMSA letters to DHHS officials and the lists of the many hospitals engaged in the trials), the HRG/AMSA letter to ACGME, the ACGME purported response to HRG/AMSA, and the HRG/AMSA follow-up letter to DHHS officials. Email jmbelth@gmail.com and ask for the HRG/AMSA March 2016 package.

Blogger's Notes
Readers of this blog and my other writings may think this post is outside my areas of interest. They are right. However, I was so outraged by the scandal HRG has exposed that I decided to write about it anyway.

Also, in the interest of full disclosure, I am deeply indebted to Public Citizen Litigation Group (PCLG), another unit of Public Citizen. PCLG represented me on a pro bono basis several times over the years. Three important examples of PCLG's work on my behalf are discussed in chapters 5, 7, and 23 of my 2015 book, The Insurance Forum: A Memoir. The book is available from Amazon. It is also available from us; ordering instructions are on our website at www.theinsuranceforum.com, and I will autograph it upon request.

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Thursday, February 25, 2016

No. 146: Eugene R. Anderson—A Memorial Tribute

Eugene R. Anderson
The late Eugene R. Anderson is often referred to as the "Dean of Policyholders' Attorneys." Gene was a longtime close friend of mine. Shortly after he died on July 30, 2010 at age 82, I dedicated the October 2010 issue of The Insurance Forum to his memory. A recent newsletter distributed by his firm brought memories of Gene flooding back, and I decided to expand a bit on my 2010 tribute to that great man.

Background
According to an obituary by Mary Williams Walsh in the August 2, 2010 issue of The New York Times, Gene was born in 1927 in Oregon and grew up in poverty during the Great Depression. He worked his way through college, eventually graduating from the University of California at Los Angeles. While hitchhiking across the country, he got a ride from an attorney who later helped Gene get admitted to the Harvard Law School. 

Gene served for a time as an Assistant U.S. Attorney in the office of Robert M. Morgenthau, the U.S. Attorney for the Southern District of New York. In 1969 he cofounded a law firm that is now Anderson Kill P.C.

The Keene Case
Gene was heavily involved in a famous liability insurance lawsuit involving Keene Corporation, a manufacturer of building materials that contained asbestos, and several major insurance companies that had sold comprehensive general liability policies to Keene at various times. Each company took the position that its insurance did not apply because it was not in effect when the injury occurred. An important appellate decision in the case was handed down in 1981. (See Keene Corp. v. Insurance Company of North America, U.S. Court of Appeals, District of Columbia Circuit, 667 F.2d 1034.)

Gene argued that all the companies were correct—about the others' policies—as to the coverage trigger. Gene was credited with developing what became known as the "triple trigger" theory—that coverage was triggered when the victim inhaled asbestos fibers, or when the illness manifested itself, or when the victim sought compensation. The beginning of the lengthy appellate ruling describes the nature of the case:
This case arises out of the growing volume of litigation centering upon manufacturers' liability for disease caused by asbestos products. In this action, Keene Corporation seeks a declaratory judgment of the rights and obligations of the parties under the comprehensive general liability policies that the defendants issued to Keene or its predecessors from 1961 to 1980. Specifically, Keene seeks a determination of the extent to which each policy covers its liability for asbestos-related diseases.
Between the years 1948 and 1972, Keene manufactured thermal insulation products that contained asbestos. As a result, Keene has been named as a codefendant with several other companies in over 6,000 lawsuits alleging injury caused by exposure to Keene's asbestos products. Those cases typically involve insulation installers or their survivors alleging personal injury, or wrongful death, as a result of inhaling asbestos fibers over the course of many years. The plaintiffs in the underlying suits allege that they contracted asbestosis, mesothelioma, and/or lung cancer as a result of such inhalation.
From 1961 to the present, Insurance Company of North America, Liberty Mutual Insurance Company, Aetna Casualty and Surety Company, and Hartford Accident and Indemnity Company issued comprehensive general liability insurance policies to Keene. From December 31, 1961 through August 23, 1967, INA insured Keene; from August 23, 1967 through August 23, 1968, Liberty insured Keene; from August 23, 1968 through August 23, 1971, Aetna insured Keene; from August 23, 1971 through October 1, 1974, Hartford insured Keene; and from October 1, 1974 through October 1, 1980, Liberty insured Keene. The policies that these companies issued to Keene were identical in all relevant respects....
The Recent Newsletter
Anderson Kill publishes Policyholder Advisor, a bimonthly newsletter. The lead article in the January/February 2016 issue is entitled "Your Insurance Company's Duty to Settle." The two authors are members of the firm: Robert M. Horkovich cochairs the insurance recovery group, and Anna M. Piazza specializes in insurance recovery and commercial litigation.

The article deals with the situation where the policyholder's liability has become fairly clear, the policyholder wants to settle within the policy's upper limit, and the policyholder's liability insurance company decides to "roll the dice" by going to trial. Should the verdict exceed the policy limit, the insurance company might be held liable for the full verdict even though it exceeds the policy limit.

General Observations
Seeing the recent article was reminiscent of the type of work in which Gene engaged throughout his distinguished legal career. The article shows that Gene's firm still engages in the work Gene loved—pressing insurance companies to honor their obligations to their policyholders.

Gene and I met face-to-face only once, for an enjoyable private lunch near his office in New York. However, we spoke frequently by telephone. Some of those calls were originated by Gene, and some by me. Gene was a mind reader, because he seemed to know exactly what matters would be of interest to me. He was squarely on target every time. I sorely miss him personally and professionally, and I cherish his memory.

Available Material
I am offering, with Anderson Kill's permission, a four-page complimentary PDF containing the recent newsletter. Send an email to jmbelth@gmail.com and ask for the January/February 2016 issue of the Anderson Kill newsletter.

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Monday, February 22, 2016

No. 145: Cost-of-Insurance Charges and an Unusual Type of Lawsuit against John Hancock

On December 22, 2015, a policyholder filed an unusual type of cost-of-insurance (COI) class action lawsuit against John Hancock Life Insurance Company USA. The case is unusual because, rather than alleging unlawful increases in COI charges, it alleges an unlawful failure to decrease COI charges in response to decreasing mortality rates. It also alleges unlawful charges for a certain rider. (See 37 Besen Parkway v. John Hancock, U.S. District Court, Southern District of New York, Case No. 1:15-cv-9924.)

The Policy
The plaintiff owns a survivorship universal life policy on the lives of a husband and wife. John Hancock issued the policy on June 1, 2000. The husband was 70 at the time, and the wife was 65. One spouse is now deceased, but the policy remains in force on the life of the other. The current face amount is $1.445 million. The plaintiff says there have been no COI decreases despite the company's improving mortality experience.

The COI Decrease Class
The plaintiff seeks to represent two classes of policyholders, one of which is the "COI Decrease Class." It consists of policyholders who allegedly paid "unlawful and excessive" COI charges. The allegations are based on this policy provision relating to "Applied Monthly Rates," which are used to calculate monthly COI charges:
The Applied Monthly Rates will be based on our expectations of future mortality experience. They will be reviewed at least once every 5 Policy Years. Any change in Applied Monthly Rates will be made on a uniform basis for Insureds of the same sex, Issue Age, and Premium Class, including tobacco user status, and whose policies have been in force for the same length of time.
The COI Decrease Class includes owners of survivorship universal life and other survivorship policies. It also includes owners of individual universal life, variable life, and variable universal life policies.

The plaintiff alleges that John Hancock did not reduce COI charges despite improvement in the company's mortality experience. In its initial answer, filed January 13, 2016, the company says that "nationwide mortality rates as a whole have generally decreased over the last several decades." However, the company denies that the case "can properly be pursued or maintained as a class action," that "the Plaintiff is a qualified class representative," or that "class relief is available from John Hancock."

The Rider Overcharge Class
The other class is the "Rider Overcharge Class," which consists of policyholders who allegedly were charged "unlawful and excessive premiums" for the "Age 100 Waiver of Charges Rider." The rider provides that the company will waive certain charges, including COI charges, after the younger insured attains or would have attained age 100.

The policy attached to the complaint as an exhibit contains what may be a drafting error that prompted this aspect of the lawsuit. The rider includes a "Table of Monthly Rates per thousand of Net Amount at Risk." The table has two columns: "Age," which refers to the age of the younger insured, and "Age 100 Waiver Monthly Rate," which is multiplied by the net amount at risk to determine the monthly COI charge for the rider. The "Age" column runs only from 1 to 32. The "Age 100 Waiver Monthly Rate" column shows 0.0000 for each age from 1 through 5, and 0.0533 for each age from 6 through 32. Paragraph 13 of the complaint reads:
Notwithstanding the plain language of the policy, John Hancock charged plaintiff additional premiums for the Age 100 Rider even though the insureds were older than 32 years old. This action therefore seeks monetary relief for these impermissible additional premiums charged by John Hancock and paid by plaintiff and other similarly situated policyholders.
In its initial answer, John Hancock does not address the matter directly. Here is the answer to paragraph 13 of the complaint:
John Hancock refers to the Plaintiff's policy and to the individual policies of each purported class member for their respective true, complete and accurate terms. John Hancock denies the remaining allegations in paragraph 13.
Later in its initial answer, John Hancock asserts that the copy of the policy attached to the complaint as an exhibit "is not a full, accurate, and complete copy" of the policy. The answer provides no explanation for that assertion. It remains to be seen whether "a full, accurate, and complete copy" will be filed later in the proceedings.

General Observations
The policy language focusing solely on mortality experience as a basis for changing COI rates is unusual. It is more common for a policy to allow changes in COI rates for any reason, including changes in investment experience, expense experience, or mortality experience. I have seen cases where plaintiffs had success with the "mortality experience only" language, but awards to those plaintiffs were refunds after COI charges were increased without adverse mortality experience. I have never before seen a case involving a claim for failure to decrease COI charges after improvement in mortality experience. This case warrants close attention.

Available Material
I am making available a complimentary 66-page PDF consisting of the 19-page complaint, the 33-page policy attached to the complaint as an exhibit, and the company's 14-page initial answer to the complaint. Email jmbelth@gmail.com and ask for the February 2016 COI/John Hancock package.

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