No. 214: Cost-of-Insurance Increases and the New York Department of Financial Services

For many years, life insurance companies have been imposing substantial cost-of-insurance (COI) increases on the owners of universal life and variable universal life insurance policies. Many of the COI increases have prompted class action lawsuits against the companies.

In No. 212 (posted April 7, 2017), I wrote about the consolidation of four class action lawsuits filed recently in federal court in Philadelphia against Lincoln National Life Insurance Company. The lawsuits relate to COI increases that Lincoln imposed in October 2016 on owners of certain universal life insurance policies. One of my readers—an insurance agent in New York—shared with me a pair of letters that prompted this follow-up post.

Lincoln's May 2016 Letter
In early May 2016, Lincoln Life & Annuity Company of New York sent letters to agents on the subject of "Cost of Insurance Increase—Effective June 1, 2016." The opening sentence said the purpose of the letter was "to provide you with important information regarding your client's life insurance policy so that you are able to help ensure they continue to receive the coverage they need." Here are the next two paragraphs of the letter:

Effective June 1, 2016, current cost of insurance (COI) rates will increase on some UL and VUL policies. Lincoln is the administrative agent and reinsurer for the policies, which were issued by Aetna Life Insurance and Annuity Company (now Voya Retirement Insurance and Annuity Company). Lincoln will implement these changes as a matter of prudent risk and financial management.

These adjustments are based on material changes in future expectations of key cost factors associated with providing this coverage, including lower investment income and higher reinsurance costs. The changes are not taken lightly and are being made only after an in-depth actuarial analysis along with a rigorous review process, including thoughtful consideration of the effect on the policyholders and our distribution partners.

Lincoln went on to describe the situation in more detail. The company enclosed a sample of the letter to be sent to policyholders and "Advisor Questions" consisting of 17 questions and answers.

Lincoln's August 2016 Letter
In early August 2016, Lincoln sent follow-up letters to agents on the subject of "Cost of Insurance Increase." The opening sentence said the purpose of the letter was "to provide you with important information to help you stay informed regarding your client's policy." Here are the next two paragraphs of the letter (the second of the two paragraphs was emphasized in the original):

You recently received a letter advising that effective June 1, 2016, the cost of insurance (COI) rates were increasing on some UL and VUL policies issued by Aetna Life Insurance and Annuity Company (now Voya Retirement Insurance and Annuity Company).

We are notifying you of a temporary postponement of the COI rate change for policies issued in the state of New York. Until further notice, your client's policy will continue to receive the previous COI rates. We will notify you of any change by letter.

Lincoln went on to apologize for any inconvenience to the agent or client. The company also provided contact information for questions the agent might have.

New York's Proposed Regulation
On November 17, 2016, the New York Department of Financial Services (DFS) issued a press release entitled "DFS Proposes New Regulation to Protect New Yorkers from Unjustified Life Insurance Premium Increases" and subtitled "The proposed regulation requires life insurers to notify DFS at least 120 days prior to an adverse change in non-guaranteed elements of an existing life insurance or annuity policy." The proposal is "Insurance Regulation 210" entitled "Life Insurance and Annuity Non-Guaranteed Elements."

According to the press release, "In response to consumer complaints, a DFS review found that some insurers have not been implementing these increases in accordance with DFS approved policy provisions and the relevant provisions of the New York Insurance Law." The press release said the proposed rule was subject to a 45-day comment period beginning November 30. During the comment period, the life insurance industry probably inundated DFS with negative comments about the proposed regulation. Although the comment period ended in mid-January 2017, DFS has not promulgated the rule. DFS may issue the rule in its original form, may issue a revised rule reflecting comments received, may issue a revised rule subject to another comment period, or may not issue a rule.

On November 18, The Wall Street Journal carried an article entitled "Life Insurers Face Heat in New York." The proposed rule applies only to insurance companies operating in New York, but the reporter speculated that it could be copied in other states to address a major problem that many middle-class retirees face.

My Documents Request
On April 10, 2017, I filed with DFS a request pursuant to the New York Freedom of Information Law (FOIL). I mentioned Lincoln's postponement of the COI increase, said I assumed DFS has conducted an investigation of the increase, and asked for the DFS file on the investigation. DFS confirmed receipt of my request.

I probably will not receive documents from DFS in response to my FOIL request any time soon. Under FOIL, if DFS should decide to provide documents to me, Lincoln would have to be notified and given the opportunity to object to release of the documents. Also under FOIL, if Lincoln objects to release of the documents, and if DFS overrules Lincoln, the company would have to be given an opportunity to seek court review of the DFS ruling. In short, if Lincoln decides to do so, the company would be able to delay release of the documents for months or even years.

General Observations
Numerous class action lawsuits filed in recent years provide ample evidence of the problems that life insurance policyholders are facing because of COI increases. Yet state insurance regulators have shown no interest in addressing the problems. The exception is the proposed New York regulation discussed above. Even if the regulation is adopted, I believe that few if any other states will follow New York's lead. I hope I am wrong in that belief.

Available Material
I am offering a complimentary 16-page PDF consisting of Lincoln's May 2016 letter including the sample notification letter and the Q&A (5 pages), Lincoln's August 2016 letter (1 page), the November 2016 DFS press release (1 page), and the DFS proposed Regulation 210 (9 pages). Email jmbelth@gmail.com and ask for the April 2017 package about the New York developments relating to COI increases.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 213: Donald Trump and Alleged Violations of the Constitution's Foreign Emoluments Clause

Prior to his inauguration as President of the United States, Donald J. Trump was the subject of allegations that unless he took drastic steps he would be in violation of the Foreign Emoluments Clause of the U.S. Constitution the moment he took his oath of office. He did not take those steps, and he was inaugurated on Friday, January 20, 2017. On Monday morning, January 23, Citizens for Responsibility and Ethics in Washington (CREW) filed a two-count complaint. (See CREW v. Trump, U.S. District Court, Southern District of New York, Case No. 1:17-cv-458.)

The case was assigned to U.S. District Judge Ronnie Abrams. President Obama nominated her in July 2011, and the Senate confirmed her in March 2012 by a 96-2 vote.

The Plaintiff
CREW is a 501(c)(3) nonprofit, nonpartisan corporation. It is "committed to protecting the rights of citizens to be informed about the activities of government officials, ensuring the integrity of government officials, protecting our political system against corruption, and reducing the influence of money in politics."

The plaintiff's attorneys are Norman L. Eisen, Richard W. Painter, Noah Bookbinder, Adam J. Rappaport, and Stuart C. McPhail of CREW; Deepak Gupta, Jonathan E. Taylor, Rachel S. Bloomekatz, and Matthew Spurlock of Gupta Wessler PLLC; Daniel A. Small, Joseph M. Sellers, and Robert Abraham Braun of Cohen, Millstein, Hausfeld & Toll PLLC; Lawrence H. Tribe of the Harvard Law School; Erwin Chemerinsky of the School of Law at the University of California, Irvine; and Zephyr Teachout of the Fordham Law School.

The Defendant
Donald J. Trump is the President of the United States. He is sued in his official capacity as President.

The defendant's attorneys, all associated with the Civil Division of the U.S. Department of Justice, are Chad A. Readler, Jennifer D. Ricketts, Anthony J. Coppolino, Jean Lin, and James R. Powers.

The Foreign Emoluments Clause
The "Legal Background" section of CREW's complaint describes the nature and background of the U.S. Constitution's Foreign Emoluments Clause. Here is the opening paragraph of that section:

Article I, Section 9, Clause 8 of the U.S. Constitution provides as follows: "No Title of Nobility shall be granted by the United States: And no Person holding any Office of Profit or Trust under them, shall, without the consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State."

The Complaint
CREW alleges that Trump has violated the Foreign Emoluments Clause in various ways. Here is the opening paragraph of the complaint:

Never before have the people of the United States elected a President with business interests as vast, complicated, and secret as those of Donald J. Trump. Now that he has been sworn in as the 45th President of the United States, those business interests are creating countless conflicts of interest, as well as unprecedented influence by foreign governments, and have resulted and will further result in numerous violations of Article I, Section 9, Clause 8 of the United States Constitution, the "Foreign Emoluments Clause."

In the "Relevant Facts" section of the complaint, CREW alleges numerous violations of the Foreign Emoluments Clause. Here is the opening paragraph of that section:

Defendant owns and controls hundreds of businesses throughout the world, including hotels and other properties. His business empire is made up of hundreds of different corporations, limited-liability companies, limited partnerships, and other entities that he owns or controls, in whole or in part, operating in the United States and 20 or more foreign countries. Defendant's businesses are loosely organized under an umbrella known as the "Trump Organization." However, Defendant's interests include not only Trump Organization LLC d/b/a The Trump Organization and The Trump Organization, Inc., both of which are owned solely by Defendant, but also scores of other entities not directly owned by either "Trump Organization" entity but that Defendant personally owns, owns through other entities, and/or controls. Defendant also has several licensing agreements that provide streams of income that continue over time. Through these entities and agreements, Defendant personally benefits from business dealings, and Defendant is or will be enriched by any business in which they engage with foreign governments and officials.

Subsections of the "Relevant Facts" section are New York's Trump Tower; Washington, D.C.'s Trump International Hotel; Other Domestic and International Properties and Businesses; International Versions and Distribution of "The Apprentice" and Its Spinoffs; and Other Foreign Connections, Properties, and Businesses. Countries discussed in the last of the preceding subsections are China, India, United Arab Emirates, Indonesia, Turkey, Scotland, Philippines, Russia, Saudi Arabia, and Taiwan. Another subsection alleges that many of those business interests are likely to cause violations of the "Domestic Emoluments Clause," which is Article II, Section 1, Clause 7 of the Constitution.

The plaintiff seeks court declarations about the meaning of certain words and phrases in the Foreign Emoluments Clause, and an injunction barring the defendant from violating the Foreign Emoluments Clause. The plaintiff also seeks reasonable attorneys' fees and costs.

Early Developments
On January 23, Judge Abrams ordered the parties to submit a joint letter advising of contemplated motions and proposing a briefing schedule. On February 17, the parties filed the joint letter, which the judge endorsed the same day. Trump's answer and any dispositive motions are due April 21, responses are due June 2, and replies are due June 30. The joint letter includes this sentence:

Because the Defendant expects that his dispositive motion, if any, will raise only legal issues pursuant to Federal Civil Rule of Procedure 12(b), the parties have agreed to postpone discussing any discovery schedule in this action until the dispositive motion is adjudicated.

A Related Case
On February 10, William R. Weinstein filed a class action complaint against Trump on behalf of himself and the U.S. people. He filed an amended complaint on March 7. He is a citizen of the United States and of New York State, resides in the Southern District of New York, is an attorney, represents himself, and is counsel for a proposed class. The parties have agreed on initial briefing dates in May, June, and July. Judge Abrams accepted the case as related to the CREW case. (See Weinstein v. Trump, U.S. District Court, Southern District of New York, Case No. 1:17-cv-1018.)

An Amicus Brief
On February 27, Mark Richards, a U.S. citizen, filed an amicus brief in support of Trump. Richards represents himself. He describes the CREW complaint as a "distraction" and calls the claims "frivolous and vexatious."

General Observations
The complaint mentions some intriguing statements in which the defendant denies the existence of conflicts of interest. On November 22, 2016, in an interview with The New York Times, he said "the law is totally on my side, meaning, the president can't have a conflict of interest." On January 11, 2017, at a press conference, he said "I have a no-conflict situation because I'm president" and "I have a no conflict of interest provision as president." By contrast, the plaintiff says: "There is no law or constitutional provision that exempts the President from the Foreign Emoluments Clause."

Rule 12(b), which is referred to under "Early Developments" above, refers to defenses such as lack-of-subject-matter jurisdiction, lack of personal jurisdiction, improper venue, and failure to state a claim upon which relief can be granted. I think it is likely that Trump's attorneys will file a motion to dismiss CREW's complaint using one or more of the above defenses. To say that the case bears close watching is an understatement.

Available Material
I am offering a complimentary 42-page PDF consisting of CREW's complaint (39 pages), the judge's January 23 order (1 page), and the parties' February 17 joint letter endorsed by the judge (2 pages). Email jmbelth@gmail.com and ask for the April 2017 package relating to the CREW/Trump emoluments case.

===================================

Email:jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 212: Lincoln National and Consolidation of Four Cost-of-Insurance Class Action Lawsuits

Lincoln National Life Insurance Company (Fort Wayne, IN) acquired Jefferson-Pilot Life Insurance Company (Greensboro, NC) in 2006. Lincoln's parent company, Lincoln Financial Group, is based in Radnor, Pennsylvania, a Philadelphia suburb.

In September 2016, Lincoln wrote to owners of "Legend series" universal life insurance policies that Jefferson-Pilot issued in and around 2002. The letters notified the policyholders that Lincoln was implementing cost-of-insurance (COI) increases effective in October 2016. Since the notification, affected policyholders have filed four COI class action lawsuits against Lincoln in the federal court in Philadelphia. (See Bharwani v. Lincoln, Mukamal v. Lincoln, US Life v. Lincoln, and Rauch v. Lincoln, U.S. District Court, Eastern District of Pennsylvania, Case Nos. 16-cv-6605, 17-cv-234, 17-cv-307, and 17-cv-837.)

The cases have been assigned to U.S. District Judge Gerald J. Pappert. President Obama nominated him in June 2014, and the Senate confirmed him in December 2014.

Sequence of Events
The plaintiffs filed their complaints on December 23, 2016, January 17, 2017, January 20, 2017, and February 22, 2017. In January, the plaintiffs in the first three cases filed motions for an order consolidating the cases. On March 13, after discussions with Lincoln about the terms of a consolidation order, the plaintiffs in the four cases filed an unopposed motion for a consolidation order. On the same day, Lincoln filed a statement that it does not oppose a consolidation order.

On March 20, 2017, Judge Pappert issued an order consolidating the cases. He appointed four law firms (one from each case) as interim class counsel and as a plaintiffs' steering committee, named one of the law firms in the first case to chair the steering committee, and listed the responsibilities of the steering committee. He ordered the interim class counsel to file a consolidated class action complaint within 30 days of the order. He said that, pending the filing of the consolidated complaint, Lincoln will not be required to respond to any of the four complaints or any other related complaints that may be filed. He said the order applies to any related cases that may be filed subsequently in the same court.

I considered waiting until the consolidated complaint is filed to discuss the cases. However, I decided to describe them here in general terms and write a follow-up after the consolidated complaint is filed.

General Comments about the Cases
Some of the named plaintiffs are individuals and some are trustees of trusts that own the policies. The insureds are residents of states such as New Jersey, New York, and North Carolina. Some of the insureds are now elderly—in their 80s or 90s. The COI increases are large, resulting in large increases in the monthly COI deductions from the account values. The COI increases also result in large increases in the premiums that policyholders would have to pay to prevent rapid depletion of the account values, early lapsation of the policies, and early termination of the death benefits.

The notifications are form letters that say nothing about the size of the COI increases or the size of the premiums that would be necessary to prevent rapid depletion of the account values. Instead, the letters mention that policyholders may request in-force illustrations. For those who request illustrations, their complexity makes it difficult for policyholders to understand the size and the full implications of the COI increases.

The "Cost of Insurance Rates" provision in the policies raises serious questions that are discussed in the complaints. As has happened in other COI cases, there probably will be a major controversy over the precise meaning of the provision. It reads:

The monthly cost of insurance rates are determined by Us. Rates will be based on Our expectation of future mortality, interest, expenses, and lapses. Any change in the monthly cost of insurance rates used will be on a uniform basis for Insureds of the same rate class. Rates will never be larger than the maximum rates shown on page 11. The maximum rates are based on the mortality table shown on page 4.

An Earlier Lawsuit against Lincoln
In No. 157 (posted April 20, 2016), I wrote about an earlier COI class action lawsuit against Lincoln. The plaintiff, who owned an "Ensemble II" Lincoln variable universal life insurance policy, filed his complaint in an Indiana state court in 2014. He alleged three counts of breach of contract. The judge denied Lincoln's motion to dismiss the complaint. After the plaintiff's motion for class certification, the judge ruled in favor of Lincoln on the first two counts and in favor of the plaintiff on the third count.

Lincoln appealed the class certification on the third count, and the plaintiff cross-appealed the denial of class certification on the first two counts. In June 2015, a three-judge Indiana appellate court panel ruled unanimously that class certification was proper for all three counts. The panel sent the case back to the trial court for further proceedings. The panel's 26-page ruling included these comments:

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.]

Lincoln petitioned the Indiana Supreme Court to hear an appeal. The Indiana Supreme Court granted the petition. By that time, however, the plaintiff and Lincoln, following intensive negotiations and with the participation of a mediator, had entered into a settlement agreement that resolved the claims of a class of more than 78,000 policyholders. Lincoln agreed to provide some level term life insurance coverage to each member of the class without cost and without underwriting. The trial court approved the settlement and permanently dismissed the case.

General Observations
It is too early to speculate on what will happen in this litigation, which began only a few months ago. At this stage, however, I have four general comments. First, it is important to determine whether Lincoln's COI increases are for the purpose of recouping losses caused by low market interest rates during the past decade. I mention this because it is my understanding that COI increases are not supposed to be used to recoup past losses. Second, it is important to determine whether the company took improvements in mortality experience into account. Third, it is important to determine whether the COI increases undermine the guaranteed interest rate of 4 percent in the policies. Fourth, it is important to determine whether the company implemented the COI increases to induce elderly insureds to surrender their policies shortly before their deaths and thereby forfeit the death benefits. I plan to post a follow-up after the plaintiffs file their consolidated complaint.

Available Material
I am offering a complimentary 23-page PDF consisting of a sample of Lincoln's notification letter to policyholders including frequently asked questions (3 pages), a sample of Lincoln's in-force illustrations sent to policyholders who request them (9 pages), the plaintiffs' unopposed motion for a consolidation order (4 pages), Lincoln's statement of no opposition to a consolidation order (3 pages), and Judge Pappert's consolidation order (4 pages). Email jmbelth@gmail.com and ask for the April 2017 package relating to the COI complaints against Lincoln.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 211: Donald Trump's "America First" and Lynne Olson's Books

When I heard Donald Trump use his "America First" slogan during his campaign, it rang a bell. I was not alone. The expression drew criticism from many major media outlets. The Anti-Defamation League urged Trump not to use the slogan, but he continued to use it. In his inauguration speech, he said: "From this day forward, it's going to be only America first, America first."

Lynne Olson's Two Recent Books
Readers of The Insurance Forum over the years and readers of this blog know I enjoy reading political biographies and histories, especially those about the United States. Recently I read two superb books by Lynne Olson, an acclaimed World War II historian. One is Citizens of London: The Americans Who Stood with Britain in Its Darkest, Finest Hour (2010). The other is Those Angry Days: Roosevelt, Lindbergh, and America's Fight Over World War II, 1939-1941 (2013). Her books are a delight to read; her writing style, character development, and story telling skill make her books page turners.

Olson's next book is Last Hope Island: Britain, Occupied Europe, and the Brotherhood That Helped Turn the Tide of War. It is to be published April 25, 2017.

Citizens of London
Citizens of London is about the many Americans who stood by Britain. Olson focuses on three in particular. One is John Gilbert Winant; he succeeded Joseph P. Kennedy as U.S. Ambassador to Britain and served in that position from March 1941 to April 1946. Another is Edward R. Murrow, the legendary broadcaster; he arrived in London in 1937 and served there until March 1946. Still another is W. Averell Harriman; he arrived in London shortly after Winant to administer U.S. Lend-Lease aid to Britain. Harriman later succeeded Winant as ambassador, and still later President Harry Truman sent him to disburse billions in Marshall Plan aid to the devastated European countries.

Those Angry Days
Those Angry Days is about the battle between isolationists and interventionists. Another battle was between strong interventionists who felt we should enter the war to save Britain from the Nazis, and moderate interventionists who felt we should help Britain only in other ways.

Olson focuses attention on American aviation hero Charles Lindbergh and his role as an outspoken isolationist. In that role, he associated with some long-time U.S. senators who, two decades earlier, had blocked President Woodrow Wilson's efforts to build the League of Nations. They thought we had been tricked into entering the Great War, and we should avoid being dragged into another world conflagration.

Olson also discusses Anne Lindbergh, who herself was an acclaimed author. Anne seems to have been trapped between her husband's views and her apparent leanings toward interventionism.

Olson describes an isolationist organization called the "America First Committee," with which Lindbergh worked closely. The organization collapsed immediately after the Japanese attack on Pearl Harbor. After the attack, Lindbergh threw himself into the American effort to win the war.

Olson mentions strong concerns in Britain during the first few days after the attack on Pearl Harbor. In President Franklin Roosevelt's "date which will live in infamy" speech, he asked Congress to declare war against Japan. Congress did so. At that point Britain feared American resources would be diverted to a Pacific war and away from support for Britain. However, Hitler came to Britain's rescue by declaring war against the United States. Congress then declared war against Germany.

Olson's Blog Post
On January 30, 2017, ten days after Trump's inauguration, Olson posted on her blog an eight-paragraph item entitled "America First: A Bad Idea Then—and Now." The post is at lynneolson.com/america-first-bad-idea-now. Here are the second and seventh paragraphs:

As Trump is well aware, America First was the name of a notorious organization that crusaded for America's isolationism in World War II. In his channeling of that group, our new president aims to turn the United States into Fortress America, closing its borders, walling it off from the rest of the world, and focusing entirely on its own self-interest—as he defines it.

Now, under Trump, we are going back in time, "embarking," as the conservative columnist Charles Krauthammer has noted, "upon insularity and smallness." Although I usually don't agree with Krauthammer's views, I think he's spot on when he says, "Global leadership is what made America great. We abandon it at our peril."

I question five of Olson's words: "As Trump is well aware." He reportedly does not read books, and he was born after World War II. For those reasons I consider it likely he is not fully aware of the America First Committee and its major role in "those angry days."

I am reminded of the aphorism by philosopher George Santayana: "Those who cannot remember the past are condemned to repeat it." I first saw it more than 50 years ago, when I read William Shirer's towering 1,200-page 1959 masterpiece, The Rise and Fall of the Third Reich.

Personal Comment
My paternal and maternal grandparents immigrated to the United States from eastern Europe through Ellis Island around 1900. I often think about what they endured so that their descendants could live in our magnificent country.

On December 7, 1941, I was 12 years old and living with my family in Syracuse, New York. Early that fateful Sunday afternoon (Syracuse time), over the RCA radio at the north end of our living room, I learned about the attack on Pearl Harbor.

Conclusion
I hope Trump's focus on "America First" does not lead to the kind of disastrous consequences caused by the America First Committee. However, I am apprehensive about the anti-art, anti-immigrant, anti-intellectual, anti-judiciary, anti-media, anti-Muslim, anti-refugee, anti-regulation, anti-science, egotistical, ignorant, isolationist, paranoid, selfish, untruthful, vengeful, wall-building Trump/Bannon administration.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 210: Halali and Others in a Federal Criminal Case Involving Phony Life Insurance Policies—An Update

In No. 149 (posted March 14, 2016), I discussed a criminal case filed in federal court in San Francisco against five defendants and involving the issuance of phony life insurance policies. Here I provide an update on the case. (See U.S. v. Halali, U.S. District Court, Northern District of California, Case No. 3:14-cr-627.)

Background
In December 2014, the U.S. Attorney's office in San Francisco filed the indictment. The case was assigned to U.S. Senior District Judge Susan Illston. In February 2016, the judge denied a motion to dismiss filed by four of the defendants and set the case for trial early in 2017.

The defendants are Behnam Halali, Ernesto Magat, Kraig Jilge, Karen Gagarin, and Alomkone Soundara. They worked for several years as independent contractors selling life insurance for American Income Life Insurance Company. The indictment alleges that the defendants engaged in wrongdoing that caused the company to pay more than $2.5 million in commissions and bonuses.

In No. 149, I described the allegations in some detail. The essence of the allegations is that the defendants 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, in some cases created fraudulent drivers' licenses, opened hundreds of bank accounts from which to pay premiums, typically paid one to four months of premiums before allowing the policies to lapse, returned verification calls to the company purporting to be the applicants, used phony addresses on many applications in an effort to avoid detection, and fabricated the names of policy beneficiaries.

The indictment charged each defendant with one count of conspiracy to commit wire fraud, 14 counts of wire fraud, and one count of aggravated identity theft. The indictment also charged three of the defendants with money laundering: three counts against Magat, two counts against Jilge, and one count against Halali.

Recent Developments
On December 19, 2016, Soundara pled guilty to all 16 counts against him, and he agreed to testify for the government. On January 11, 2017, the government filed a trial memorandum describing the charges and the evidence. On January 18, the judge filed an order that the trial was to begin on February 13, that Jilge intended to plead guilty on January 25, and that the trial defendants were Halali, Magat, and Gagarin.

On January 25, Jilge pled guilty to the conspiracy charge, the 14 wire fraud charges, and the identity theft charge, but he did not plead guilty to the two money laundering charges against him. The judge vacated the trial as to Jilge.

The trial began on February 15. It consisted of 14 trial days and ended on March 13. The jury found Halali, Magat, and Gagarin guilty on the conspiracy charge, the 14 wire fraud charges, and one money laundering charge. The judge said the defendants' motion for a new trial was due April 14, the government's opposition was due May 5, and the defendants' reply was due May 19. She set sentencing for July 21.

The Plea Agreements
Plea agreements often contain important information I share with readers. In this case, I have not yet seen the two plea agreements. They were filed in open court, are listed on the case docket, and are not marked as sealed. However, when I sought them, the message in each instance was: "You do not have permission to view this document." I asked a government attorney for either the documents or an explanation, but he did not reply. I think the problem is that the documents contain information prejudicial to the remaining defendants in any motion for a new trial, or in any appeal. I hope to see the plea agreements after the case is closed.

General Observations
When I wrote about this case in No. 149, I felt that the allegations revealed brazen behavior by the defendants, and that the evidence against them was overwhelming. That is why I expressed the belief that the case would not go to trial, and that the defendants would enter into plea agreements. As it turned out, I was partly right and partly wrong; two defendants pled guilty and three went to trial. I plan to report on any motion for a new trial, any appeals, and any sentencing.

Available Material
I am offering a complimentary 46-page PDF consisting of the indictment (19 pages), the denial of the motion to dismiss (8 pages), the government's trial memorandum (5 pages), the scheduling order (7 pages), and the jury's verdict form (7 pages). Email jmbelth@gmail.com and ask for the March 2017 package about the Halali case.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 209: Senior Health Insurance Company of Pennsylvania, a Long-Term Care Insurance Company in Runoff, Faces Increasingly Serious Financial Trouble

Senior Health Insurance Company of Pennsylvania (SHIP) is running off the long-term care (LTC) insurance business of the former Conseco Senior Health Insurance Company. I wrote three major articles about SHIP in The Insurance Forum in 2008 and 2009, and posted several items on my blog in recent years. On March 1, 2017, SHIP filed in a timely manner its 230-page statutory financial statement for the year ended December 31, 2016. Here I discuss the increasingly serious financial trouble the company is facing, as reflected in that financial statement.

Selected Financial Numbers
SHIP's total assets declined from $2.9 billion at the end of 2015 to $2.7 billion at the end of 2016. Total liabilities declined from $2.8 billion at the end of 2015 to $2.7 billion at the end of 2016. Total surplus declined from $55.8 million at the end of 2015 to $28.3 million at the end of 2016. Net income declined from a net loss of $9 million in 2015 to a net loss of $39 million in 2016.

SHIP's total surplus at the end of 2015 and at the end of 2016 included a $50 million surplus note, which is discussed later. Without the surplus note, the company would have been barely solvent at the end of 2015 and would have been insolvent at the end of 2016.

SHIP's risk-based capital (RBC) ratio, where the denominator is company action level RBC, increased from 80 percent at the end of 2015 to 82 percent at the end of 2016. Those ratios are below company action level RBC of 100 percent, and above regulatory action level RBC of 75 percent. Without the surplus note, the ratio would have been 37 percent at the end of 2015, below authorized control level RBC of 50 percent, and 14 percent at the end of 2016, below mandatory control level RBC of 35 percent.

The Surplus Note
When a company issues a surplus note, the company borrows from the buyer of the surplus note. State surplus note laws allow a company to treat the borrowed money as an asset, do not require the company to establish a liability for the borrowed money, and thus allow the company to include the borrowed money as part of surplus. Payments of interest and principal on the borrowed money are not guaranteed, and the debt is subordinate to the claims of policyholders and all other creditors of the company. A company that issues a surplus note must obtain prior approval from its domiciliary regulator (the Pennsylvania insurance commissioner in the case of SHIP) before issuing the surplus note, and must obtain prior approval of the regulator before the company can make interest or principal payments on the borrowed money.

SHIP issued a $50 million surplus note on February 19, 2015, between the end of 2014 and the March 1, 2015 filing of its financial statement for the year ended December 31, 2014. The Pennsylvania insurance commissioner allowed SHIP to reflect the borrowed money as a backdated contribution to surplus in the 2014 statement. The surplus note matures on April 1, 2020. The interest rate is 6 percent, probably payable at 3 percent semiannually. According to SHIP's latest financial statement, the "unapproved" and therefore unpaid interest as of December 31, 2016, was $5.55 million.

SHIP issued the surplus note to (borrowed money from) Beechwood Re Investments, LLC. The latest financial statement says SHIP received the $50 million in cash, but the schedule of "all other long-term investments owned" at the end of 2016 shows that SHIP acquired $50 million (at a cost of about $50.2 million) of Beechwood investment offerings on February 19, 2015, the very day SHIP issued the $50 million surplus note to Beechwood (and thereby borrowed $50 million from Beechwood). As of December 31, 2016, the Beechwood investments had an adjusted carrying value of about $37.6 million.

Investments in Platinum Partners
Beechwood is closely related to Platinum Partners, a hedge fund in serious financial and legal trouble. It is my understanding that SHIP, when it issued the surplus note to Beechwood in February 2015, was not aware of that close relationship. The latest financial statement shows that SHIP owned about $53.8 million fair value of Platinum investment offerings at the end of 2016, and at that time the Platinum investment offerings had an adjusted carrying value of about $39.3 million.

SHIP's latest financial statement shows that during 2016 SHIP acquired Platinum investment offerings at a cost of about $32.9 million. The financial statement also shows that during 2016 SHIP disposed of Platinum investment offerings for consideration of about $28.3 million.

Reinsurance with Roebling Re
Reinsurance exhibits in SHIP's latest financial statement show that SHIP took credit for about $1.2 billion of LTC insurance reserve liabilities ceded to Roebling Re (Barbados), a company created in August 2016. SHIP's latest financial statement says Roebling is not authorized, is a non-U S. reinsurer, and is not affiliated with SHIP. I have tried without success to find information about Roebling, such as the name of its owner, the names of its senior officers, and its financial condition.

Executives
Several years ago I met personally with two top officers of SHIP: President and Chief Executive Officer Brian Wegner and General Counsel Patrick Carmody. During the past year, each has left SHIP. I do not know the circumstances surrounding their departures. Recently my inquiries about SHIP have been referred to a spokesman at a public relations firm in New York. The spokesman has provided answers to some of my questions, but most recently has not been able to provide responses.

General Observations
With regard to the $50 million, 6 percent, approximately five-year surplus note that SHIP issued to Beechwood in February 2015, I believe that, because of SHIP's fragile financial condition, the company will not be able to obtain permission from the commissioner to pay interest or principal on the surplus note. In other words, I believe that the purchase of the surplus note will turn out to have been an outright gift from Beechwood to SHIP.

In public documents Conseco filed in 2008 about the transfer of what is now SHIP to an independent trust in Pennsylvania, Conseco said any assets left over after the LTC insurance business runs off would be donated to charity. However, Conseco said nothing about what would happen if SHIP becomes insolvent before the business runs off. I inquired at the time about that point, and the Pennsylvania Insurance Department said insolvency would be handled in accordance with Pennsylvania law. See No. 208 (posted March 13, 2017) for a discussion of Penn Treaty Network America Insurance Company, a Pennsylvania-domiciled LTC insurance Company which has been in rehabilitation since 2009 and is now in liquidation.

The public documents Conseco filed in 2008 in the SHIP case said Milliman, an actuarial consulting firm, concluded in a financial report that SHIP will have sufficient assets to run off the business. To see how Milliman reached that conclusion, I asked for the report. Conseco and the Pennsylvania Insurance Department said the report was confidential. I had a hunch in 2008, and I believe now, that SHIP will not remain solvent long enough to run off the LTC insurance business. If SHIP has a losing year in 2017 similar to or worse than in 2016, and if SHIP and the commissioner cannot devise a plan to improve the company's financial situation, I think the commissioner would have to petition the court to allow the company to be placed in rehabilitation or liquidation.

Available Material
I am offering a complimentary 36-page PDF consisting of my articles about SHIP in the November 2008, January 2009, and June 2009 issues of The Insurance Forum (9 pages), and 27 selected pages from SHIP's statutory financial statement for the year ended December 31, 2016. The selected pages are those from which I drew much of the data for this post. Email jmbelth@gmail.com and ask for the March 2017 SHIP package.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 208: Long-Term Care Insurer Penn Treaty Enters Court-Ordered Liquidation

On March 1, 2017, President Judge Mary Hannah Leavitt of the Commonwealth Court of Pennsylvania ordered Penn Treaty Network America Insurance Company (Allentown, PA) and its subsidiary, American Network Insurance Company (collectively, Penn Treaty), into liquidation. (Judge Leavitt became President Judge in January 2012.) On the same day, Teresa Miller, the Pennsylvania insurance commissioner, issued a press release and a "commissioner's statement." Penn Treaty was prominent in the long-term care (LTC) insurance business.

Background
In January 2009, Penn Treaty became insolvent. Joel Ario, then the Pennsylvania insurance commissioner, petitioned the court to place the company in rehabilitation. In April 2009, the court granted the petition. In October 2009, Ario petitioned the court to place the company in liquidation, but a top Penn Treaty official opposed the petition. Under Pennsylvania law, in a liquidation proceeding, the rehabilitator (the insurance commissioner) has the burden of proving that continuing the rehabilitation would substantially increase the risk to creditors, policyholders, and the public, or would be futile.

During 2010, the parties tried unsuccessfully to reach a settlement. A bench trial before Judge Leavitt began in January 2011. The trial was suspended while the parties tried again, unsuccessfully, to reach a settlement. The trial resumed in October 2011, lasted 30 trial days, and ended in February 2012.

On May 3, 2012, Judge Leavitt handed down a 162-page opinion and a brief order. She ruled that the rehabilitator (by then Michael Consedine was the insurance commissioner) had failed to meet his burden of proof. The judge denied the liquidation petition and ordered Consedine to develop a rehabilitation plan. Consedine did so, and the judge approved it. Since then the rehabilitation plan has been amended twice. Now it has been converted into a liquidation plan under the current commissioner.

The Liquidation Orders
In the orders Judge Leavitt issued recently to the two Penn Treaty companies, she terminated the rehabilitations of the companies, declared them insolvent, ordered them liquidated, and appointed Miller (and any successor commissioner) the liquidator. The judge vested the liquidator with title to the companies' assets, specified the procedures to be followed in the liquidation, and transferred the companies' policy obligations to the state guaranty associations (GAs).

Information about the liquidation is on the Penn Treaty website (www.penntreaty.com). One item there is a listing of the LTC insurance limit for each of the GAs. The limits are $300,000 for most GAs. The exceptions are California ($554,556), Connecticut ($500,000), Louisiana ($500,000), Minnesota ($410,000), Missouri ($100,000), New Jersey (unlimited, subject to policy and statutory provisions and exclusions), Oregon ($100,000), Puerto Rico (no coverage for LTC insurance), Utah ($250,000), and Washington State ($500,000). In other words, after Penn Treaty's assets are exhausted, and after the GA limit is reached, a policyholder would not be entitled to further payments.

Assessments
GAs have no funds. Instead, state GA laws provide for surviving insurance companies to compensate, through assessments, for the inadequacy of the assets of the company being liquidated. Virtually all of Penn Treaty's business was LTC insurance.

I have not examined the various state GA laws. However, I have six understandings about which companies will be assessed in the Penn Treaty failure and the amounts those companies will be assessed. First, LTC insurance is part of the health insurance industry, and therefore surviving health insurance companies (even those which have never sold LTC insurance) will be assessed. Second, the amounts assessed will be based on each surviving company's health insurance premiums. Third, there are upper limits on the amount that can be assessed against each company. Fourth, each assessed company can recover the amount assessed through future state tax credits, thus shifting the burden of the liquidation on to state taxpayers. Fifth, some health insurance companies have argued that the burden of the Penn Treaty failure should be spread more broadly to include life insurance companies. Sixth, amending all the state GA laws to make such a change would be controversial, would require years to complete, and might never be completed.

My NOLHGA Inquiry
Because the National Organization of Life and Health Guaranty Associations (NOLHGA) is coordinating the Penn Treaty liquidation, I asked NOLHGA for a list of companies that will be assessed and the amount that each company will be assessed. A spokesman for NOLHGA said the data I asked for is not yet available. He said that a "company's assessment responsibility to a GA for Penn Treaty will be roughly proportionate to its share of the health premiums reported by all of that GA's member companies."

The NOLHGA spokesman sent me a memorandum dated June 16, 2016 from Long Term Care Group, Inc. (LTCG), which is an LTC insurance administration firm. LTCG is working with Commissioner Miller, NOLHGA, and the GAs on the Penn Treaty case. The LTCG memorandum alludes to a "Common Interest and Confidentiality Agreement," which probably is the secret agreement to which I referred in No. 200 (posted January 27, 2017). Included in the LTCG memorandum is a tabulation showing for each state, and for each of the two Penn Treaty companies separately, estimates of the number of policies, the gross liabilities, the assets, and the net liabilities. The total number of policies was 78,661, gross liabilities were about $3.0 billion, assets were about $434 million, and net liabilities were about $2.6 billion. Regarding the tabulation, the spokesman said:

Please note that the estimates are based on year-end 2015 information. We expect the results of ongoing claim payments over 2016 and the first two months of 2017 will have a significant impact on the final liquidation date projections.

My Survey of Companies
I asked several shareholder-owned companies for their estimates of the amounts they will be assessed in connection with the Penn Treaty liquidation. Several referred me to their 10-K reports filed with the Securities and Exchange Commission (SEC) for the year ended December 31, 2016. Some also said they will comment further in their 10-Q reports filed with the SEC for the quarter ended March 31, 2017. I reviewed the 10-K reports of those companies and those of several other shareholder-owned companies. Here are the results of my survey:

Aetna: $230 million.
AFLAC: $10 million to $20 million.
Anthem: $190 million to $220 million.
Centene: Nothing found in 10-K.
CIGNA: $85 million after tax.
CNO Financial: Nothing found in 10-K.
Genworth: Referred me to the 10-K, in which the company said in part: "[W]e have not established any accruals for guaranty fund assessments associated with Penn Treaty as of December 31, 2016. We will continue to monitor the situation and may record a liability and expense in future reporting periods."
Humana: $30 million.
Manulife: The Canadian parent of John Hancock. Manulife did not respond to my inquiry, and the relevant financial statement for the year ended December 31, 2016 has not yet been filed with the SEC.
MetLife: A spokesman said there is no estimate yet.
Prudential: $47.9 million for Penn Treaty, Executive Life, and Lincoln Memorial combined.
UnitedHealth: $350 million.
Unum: $12 million to $15 million after tax.

Three Other Inquiries
I wrote to New York Life, a mutual company that is in the LTC insurance business. A spokesman said there is no schedule or general interrogatory in the statutory financial statement requiring the company to disclose this detail. He said that, if it were material, the company would disclose it in the company's audited financial statement and potentially in a footnote in the company's statutory financial statement.

I wrote to Northwestern Mutual Life, which has a subsidiary (Northwestern Long Term Care) in the LTC insurance business. A spokeswoman said the company reports the total liability for assessments by all GAs as a "reserve for guaranty fund" write-in for line 25 on page 3 (the liability page) of the statutory financial statement. The figures in the two companies' statutory financial statements as of December 31, 2016 are $33.5 million for the parent company and $5.9 million for the subsidiary.

I wrote to a spokesman for Senior Health Insurance Company of Pennsylvania (SHIP), an LTC insurance company in runoff. I have written extensively about SHIP. The company does not file reports with the SEC. SHIP's spokesman was unable to obtain a response to my inquiry, and there is no relevant write-in for line 25 on page 3 of SHIP's statutory financial statement for the year ended December 31, 2016.

General Observations
I think the lack of a requirement in statutory financial statements for disclosure of the magnitude of the assessments against surviving insurance companies in the Penn Treaty case is unfortunate. I also think the lack of such a disclosure requirement is an example of the difference between the disclosure imposed by federal securities regulators on shareholder-owned insurance companies and the less rigorous disclosure imposed by state insurance regulators on mutual insurance companies.

The failure of Penn Treaty is one of the largest in American insurance history. I fear that the "hole" is so large that many Penn Treaty policyholders will not receive all the benefits they have been promised. I am also concerned that the Penn Treaty liquidation will adversely affect the public perception of the financial stability of not only LTC insurance, but also health insurance generally and even life insurance.

Available Material
I am offering a complimentary 21-page PDF consisting of Commissioner Miller's press release (2 pages), her commissioner's statement (3 pages), the liquidation order for Penn Treaty (6 pages), the liquidation order for American Network (6 pages), and the LTCG memorandum NOLHGA sent me (4 pages). Email jmbelth@gmail.com and ask for the March 2017 package relating to Penn Treaty.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com