Monday, February 15, 2016

No. 143: Cost-of-Insurance Charges and a Lawsuit against AXA Equitable for Alleged Inequitable Treatment of Policyholders

On February 1, 2016, a policyholder filed a cost-of-insurance (COI) class action lawsuit against AXA Equitable Life Insurance Company alleging inequitable treatment of certain policyholders. The case resembles lawsuits filed several years ago against operating subsidiaries of Phoenix Companies, Inc., relating to stranger-originated life insurance (STOLI) transactions. The current case focuses on AXA Equitable's singling out of certain policyholders for substantial COI increases and alleges breach of contract. (See Brach Family Foundation v. AXA Equitable, U.S. District Court, Southern District of New York, Case No. 1:16-cv-740.)

The Policy
According to the complaint, the plaintiff is a family foundation and not-for-profit corporation. The plaintiff owns a flexible premium universal life insurance policy on the life of a woman who was 81 when AXA Equitable issued the policy on May 21, 2007. The policy remains in force. The face amount is $20 million. The policy, including the application for the policy, is attached to the complaint as an exhibit.

The rating class was standard non-tobacco user. The minimum initial premium payment, due on or before delivery of the policy, was about $145,000. The planned periodic annual premium was about $930,000. The surrender charge at the beginning of the first policy year was about the same as the first-year planned annual premium. The surrender charges, which decline steadily, will be zero after 15 policy years.

The Application for the Policy
Part 1 of the application for the policy had personal information redacted (blacked out). Part 2, the paramedical or medical examination, was redacted in its entirety.

The unredacted portion of Part 1 showed the application was dated April 30, 2007, in Brooklyn, New York. Joel Berger of JB Brokerage Corp. was the "licensed financial professional/insurance broker" who signed the application. The owner of the policy was shown as the primary beneficiary and there was no contingent beneficiary. The owner's name and street address were redacted, but it was located in Brooklyn. The owner was described as a trust under a trust agreement dated April 1, 2007, although, as mentioned earlier, the complaint described the owner as a family foundation and not-for-profit corporation. The application showed the insured as having annual earned income of $80,000 and annual rental income of $2 million. The application said the face amount was determined by the family and its legal advisers. No cash accompanied the application, but the application said the premium was to be paid in cash and there was no intent to "finance any of the premium required to pay for this policy through a financing or loan agreement." An important item in the application—"Please state the reason you are purchasing this policy (e.g., estate planning, business insurance, etc.)"—was not answered.

The Allegation
The plaintiff alleges in the complaint that certain policyholders will be subjected to "unlawful and excessive" COI increases that the company announced in October 2015 to take effect in March 2016. The plaintiff seeks to represent a class of policyholders who own policies that allow policyholders to pay the minimum premiums needed to keep the policies in force by covering the COI charges and certain other expenses. Any premiums paid above those minimum premiums are added to the account values of the policies.

The plaintiff alleges that AXA Equitable is increasing COI charges on almost 1,700 policies selected in part for the pattern of premium payments. The allegation is based on press reports. Thus the plaintiff alleges that the company is targeting policyholders who minimize their premiums to keep account values as small as possible, despite the fact that the policies expressly allow policyholders to do so. The policy paragraph entitled "Changes in Policy Cost Factors" reads:
Changes in policy cost factors (interest rates we credit, cost of insurance deductions and expense charges) will be on a basis that is equitable to all policyholders of a given class, and will be determined based on reasonable assumptions as to expenses, mortality, policy and contract claims, taxes, investment income, and lapses. Any change in policy cost factors will never result in an interest crediting rate that is lower than that guaranteed in the policy, or policy charges that exceed the maximum policy charges guaranteed in the policy. Any change in policy cost factors will be determined in accordance with procedures and standards on file, if required, with the insurance supervisory official of the jurisdiction in which this policy is delivered.
General Observations
This case presents a crucial unanswered question. What precisely is the meaning of the word "class" that appears in the policy provision quoted above? That question was at the heart of years of legal proceedings in the Phoenix COI cases, and I think it is at the heart of this case also.

The question can be asked in another way. Is it fair and equitable to treat those paying minimum premiums—to keep flexible premium universal life policies in force—as a separate class for pricing purposes, or should policies be classified in the traditional manner by such variables as age, gender, occupation, and health status? The question was not answered in the Phoenix cases, because the cases were settled and not adjudicated.

On a separate matter, and for various reasons, I think the policy owned by the plaintiff in this case may be viewed as the result of a STOLI transaction, despite the fact that there is no mention of the policy having been resold in the secondary market. The nature of the insurable interest of the owner/beneficiary/applicant (the trust or family foundation) in the life of the insured is unclear, as is the relationship between the amount of insurance and the financial status of the insured. The application did not explain how the amount of insurance was determined and did not indicate the purpose of the insurance, although it is possible that the broker provided that information to the company in a separate communication. The policy was issued in 2007, during the STOLI heyday before most life insurance companies tightened their underwriting practices.

Available Material
I am making available a 49-page PDF consisting of the 18-page complaint and the 31-page exhibit containing the policy and the application. Email and ask for the February 2016 Brach/AXA Equitable package.


Monday, February 8, 2016

No. 142: Imperial Holdings, Emergent Capital, and the End of a Criminal Investigation into STOLI Premium Financing

On January 4, 2016, Emergent Capital (Boca Raton, FL), formerly Imperial Holdings, announced the end of a criminal investigation into premium financing of stranger-originated life insurance (STOLI). The investigation, led by the U.S. Attorney's Office in New Hampshire (USAO), became public in 2011 when federal agents raided the company's headquarters. I wrote about the investigation in the May 2012, July 2012, and October 2013 issues of The Insurance Forum, and in No. 132 (posted December 11, 2015).

On September 27, 2011, federal agents conducted a surprise raid at Imperial's headquarters in Boca Raton. The same day, the company issued a press release saying some of its employees were under investigation regarding the company's life insurance premium financing business.

On April 30, 2012, Imperial and the USAO entered into a non-prosecution agreement under which Imperial terminated its life insurance premium financing business, terminated its employees involved in that business, admitted to and accepted responsibility for certain improper conduct, and paid a civil penalty of $8 million. Also, Jonathan Neuman, Imperial's president and chief operating officer, resigned.

On October 31, 2012, the USAO charged Robert Wertheim with one criminal count of conspiracy to commit mail fraud and wire fraud. Wertheim was one of two co-founders of a company named Premium Finance Group. (See U.S. v. Wertheim, U.S. District Court, District of New Hampshire, Case No. 1:12-cr-136.)

On February 20, 2013, the USAO charged two brothers—Abraham and Maurice Kirschenbaum—with one criminal count of conspiracy to commit mail fraud and wire fraud. They were tax advisers. The USAO said the investigation into others was ongoing.

On February 26, 2013, Wertheim pleaded guilty to the criminal charge and entered into a plea agreement with the USAO. On March 7, 2013, the Kirschenbaums pleaded guilty to the criminal charge and entered into plea agreements with the USAO. Wertheim said he had been working with Imperial, he had recruited the Kirschenbaums to identify prospects for the STOLI scheme, and he and his associates had made false statements in life insurance applications.

May 2015 Developments
On May 22, 2015, the USAO filed a motion to dismiss the criminal charge against Maurice Kirschenbaum. He had been diagnosed with cancer in March 2014, his condition had become more serious by March 2015, and he was undergoing aggressive treatment. Attached to the motion was a deferred prosecution agreement that said the USAO could refile the criminal charge at its discretion within five years. The judge granted the motion to dismiss the charge.

On May 27, 2015, the judge held separate, back-to-back, 55-minute sentencing hearings for Wertheim and Abraham Kirschenbaum, including sealed discussions of the ongoing investigation in which Wertheim and Abraham Kirschenbaum were cooperating. USAO sought probation and small fines for those two defendants. Among the USAO's arguments were the promptness with which the two defendants had pleaded guilty, their remorse, and their assistance in prosecuting others who might be charged.

The judge, however, felt that Wertheim and Abraham Kirschenbaum should serve at least some prison time. He deviated downward from the sentencing guidelines and ordered each of them to serve 18 months in a federal minimum-security facility, followed by two years of supervised release. The judge fined each of them $7,500, and Abraham Kirschenbaum forfeited $1 million. The judge left open the possibility that the USAO and/or the two defendants would refile within a year for a further reduction in, or elimination of, prison time as a result of their continuing cooperation in the ongoing investigation. Therefore the judge allowed them to postpone reporting to prison until May 27, 2016.

Recent Developments
On December 31, 2015, the USAO sent Emergent's attorney a letter saying the investigation is over, the company fully complied with the terms of the April 2012 non-prosecution agreement, and all obligations imposed on the company by the agreement are satisfied. Emergent attached the letter to an 8-K (material event) report filed with the Securities and Exchange Commission on January 4, 2016.

As for the investigation of former Imperial employees, the USAO required civil forfeiture and did not file criminal charges. The ongoing investigation had focused on three individuals who left Imperial in 2011: Jonathan Neuman, Jonathan Moulton, and James Purdy.

On December 31, 2015, the USAO filed a civil forfeiture complaint relating to each individual. However, instead of naming an individual as the defendant, each complaint names a dollar amount as the defendant. The complaints call for civil forfeitures for alleged mail fraud. Each complaint is an "in rem proceeding," which is a legal action directed at property instead of a person. The effect of such a proceeding is to eliminate the person's name from the case name, although the person's name appears in the text of the complaint. [See U.S. v. $5,000,000, U.S. v. $750,000, and U.S. v. $750,000, U.S. District Court, District of New Hampshire, Case Nos. 1:15-cv-526 (relating to Neuman), 1:15-cv-527 (relating to Moulton), and 1:15-cv-528 (relating to Purdy).]

The civil forfeiture complaints relating to the three former Imperial employees are similar in their descriptions of the alleged wrongdoing. For example, here are five paragraphs from the 19-paragraph "Facts" section of the complaint relating to Neuman:
At all relevant times, certain insurance companies required that a prospective insured, and sometimes the Imperial internal life agent, applying for a life insurance policy disclose information relating to premium financing on applications for life insurance policies. These questions typically required the prospective insured to disclose if he or she was using premium financing in connection with the policy.
In certain instances, Neuman knew that answering insurance application questions to indicate that the potential insured was not using premium financing to pay the premiums increased the likelihood that an insurance company would issue the policy. The issuance of a policy, in turn, offered Imperial the opportunity to make a premium finance loan and thereby make a profit.
It was therefore in Imperial's interest that these prospective insureds in the retail non-seminar business indicated on applications that they were not using premium financing to pay insurance premiums. However, in certain instances, such answers were false because the insureds were interested in a life insurance policy only on the condition that the premiums would be financed.
At Neuman's direction, in certain instances, Imperial internal life agents facilitated and/or made misrepresentations on insurance applications that the prospective insureds in the retail non-seminar business were not using premium financing to pay premiums when the insurance carrier was likely to deny the policy on the basis of premium financing.
Neuman profited from this fraudulent scheme by receiving compensation from Imperial in excess of $5,000,000.00. After a discussion with counsel for the government, during which counsel for Neuman was given wire transfer instructions, counsel for Neuman advised in writing that he had arranged for a voluntary payment of the defendant in rem, $5,000,000, to be made to the United States Secret Service on December 30, 2015, and that an agreement has been reached to waive notification of this Complaint under Rule G(4) of the Supplemental Rules for Admiralty Or Maritime Claims And Asset Forfeiture Actions, as well as to allow the United States to move immediately for a Final Order of Forfeiture in this matter.
On January 7, 2016, the USAO filed motions seeking a final order of forfeiture in each of the three cases. The motions refer to the amounts as "voluntary payments" that were made "without admitting liability." On January 8, the judge issued final orders of forfeiture relating to Neuman and Purdy. The judge has not yet issued a final order of forfeiture relating to Moulton.

General Observations
Imperial was required to pay a civil penalty of $8 million and shut down its life insurance premium financing business. Neuman, Moulton, and Purdy lost their jobs but avoided criminal charges. Wertheim and Abraham Kirschenbaum were criminally charged, pleaded guilty, entered into plea agreements with the USAO, and face the possibility of 18-month prison terms that are currently set to begin on May 27, 2016.

It is ironic that headquarters employees who developed the scheme escaped criminal charges, while others pleaded guilty to criminal charges. I believe that the decision not to pursue criminal charges against the former Imperial employees was prompted by the USAO's concern that it might not be able to meet the tough standards of proof that are required to obtain criminal convictions.

Available Material
I am making available a 25-page complimentary PDF consisting of the three articles in The Insurance Forum, three court documents relating to Neuman (the civil forfeiture complaint, the motion for final order of forfeiture, and the final order of forfeiture), and the 8-K report. Email and ask for the February 2016 Imperial package.


Monday, February 1, 2016

No. 141: The Age 100 Problem in Cash-Value Life Insurance

The two most important income tax benefits enjoyed by owners of cash value, whole life insurance policies are (1) the inside interest is income tax deferred and (2) the death benefit is income tax exempt. Also, the policyholder's ability to fold the income tax deferred inside interest into the income tax exempt death benefit may be considered a third income tax benefit of life insurance. Almost always missing from discussions of the income tax treatment of life insurance is "the age 100 problem," which I believe has not been resolved.

The Terminal Age
The pricing of a life insurance policy is based in part on a mortality table, which shows death rates (probabilities of death) by age. The terminal age of a mortality table is the age at which the table shows no survivors among those insured. Stated another way, the death rate in the year prior to the terminal age is 1 (or 100 percent, or 1,000 per 1,000).

Five mortality tables have been widely used during the history of the life insurance business in the U.S. They are the American Experience, the 1941 Commissioners' Standard Ordinary (CSO), the 1958 CSO, the 1980 CSO, and the 2001 CSO tables. The terminal age is 96 in the American Experience table, 100 in the 1941 CSO, 1958 CSO, and 1980 CSO tables, and 121 in the 2001 CSO table.

An Example of the Problem
Alfred "Alf" Landon was born on September 9, 1887. He served as governor of Kansas from 1933 to 1937. He won only Maine and Vermont when he ran against President Franklin Delano Roosevelt in 1936. (The saying that grew out of that election was "As Maine goes, so goes Vermont." I was seven years old at the time. My father disliked FDR, probably voted for Landon, and probably persuaded my mother to do so.)

Landon's name appeared in an Associated Press story on September 8, 1983, the day before his 96th birthday. The story also appeared in The New York Times the next day. The headline was "Alf Landon, at 96, Eligible to Collect Life Insurance." Undoubtedly his policy was based on the American Experience mortality table. John Caspari, who was in the advertising department at Northwestern Mutual, was quoted as saying: "It is unusual for someone to outlive the mortality tables." The story said that Landon was eligible to collect $33,156 on his 96th birthday, but that he "planned to allow the sum to continue earning interest." (Caspari, with whom I occasionally spoke, retired in 2002 and died in 2012 at age 69.)

I was intrigued by the story, because I thought Landon might have an income tax problem whether he took the money at age 96 or not. If he asked Northwestern to hold the money until his death, I thought it could be argued that he had constructive receipt of the money for income tax purposes when he asked the company to defer payment until his death. He died on October 12, 1987, about a month after turning 100. I do not know whether Landon and his beneficiaries avoided the income tax problem.

Articles about the Problem
I wrote two articles about the age 100 problem; they are in the January 2001 and May 2001 issues of The Insurance Forum. They were prompted by two unsolicited letters I received. One was from a man who expressed the startling belief that an insured who reaches the terminal age would receive nothing.

The other letter was from a man who said he was in his upper 80s, was in excellent health, expected to live to the terminal age, and had policies in two companies totaling $5 million. He wanted his beneficiaries to receive the money income tax exempt after his death, but he feared he would have taxable income if he survived to the terminal age. He asked the companies how he could avoid the income tax problem, but he did not get straight answers.

In the January 2001 article, I explained the problem. I also said I planned to conduct a survey of major companies.

In the May 2001 article, I reported on the survey. I asked 20 companies to confirm they would pay the death benefit at the terminal age, and I asked them how the insured could avoid the income tax problem. Only three companies responded. They confirmed they would pay the death benefit. They also said the policyholder could elect to postpone the payment until the insured's death, but they did not mention the issue of constructive receipt. The low response rate was my first knowledge that most companies were reluctant to talk about the age 100 problem.

Recent Exploration of the Problem
Recently I have been exploring the age 100 problem for the first time since I wrote those articles in 2001. Everything I have found thus far relates to the definition of life insurance in the Internal Revenue Code and in pronouncements by the Internal Revenue Service (IRS).

The need to define life insurance for income tax purposes grew out of abuses by life insurance marketers who figured out clever ways to use the favorable income tax treatment of life insurance as a sales promotion device. One example was the "minimum deposit plan." (It should have been called the "maximum commission plan.") The policyholder would borrow as much as possible each year under the policy's loan clause, and pay as little as possible each year to cover the loan interest and keep the policy in force. The policyholder would then take an income tax deduction for the loan interest. The plan was promoted as a method by which to change nondeductible life insurance premiums into deductible loan interest payments. It also had the effect of changing a level premium, level death benefit whole life policy into an increasing premium, decreasing death benefit, one-year renewable term policy. Also, the plan allowed agents to collect commissions for a whole life policy rather than the relatively small commissions for a one-year renewable term policy.

Another example of the abuses grew out of the development of universal life insurance. The policyholder would buy a policy with a small amount of life insurance protection and put large amounts into the savings component to take advantage of the favorable income tax treatment of the inside interest.

Variable Universal Life Prospectuses
I am not aware of anything in life insurance policies about the age 100 problem, but the problem is mentioned in prospectuses for variable universal life policies. Those discussions illustrate the difference between the weak disclosure requirements imposed by insurance regulators and the strong disclosure requirements imposed by securities regulators.

A current prospectus issued by New York Life Insurance and Annuity Corporation (NYLIAC), for example, mentions the availability of a "life extension benefit rider" that would extend the policy beyond the terminal age. However, it warns that the policyholder "may be subject to adverse tax consequences" and "a tax advisor should be consulted."

Also, an IRS revenue procedure became effective August 23, 2010 (Rev. Proc. 2010-28). The IRS had issued a notice in 2009 inviting comments. Here is one of the questions the IRS asked in the notice:
If a preexisting contract actually matures at age 100, such that the cash surrender value and death benefit under the contract are the same, is the insured taxed at that time on the maturity value of the contract under the doctrine of constructive receipt?
The IRS received numerous comments, one of which was a 22-page letter from the American Council of Life Insurers (ACLI). The ACLI included, on pages 17-19 of the letter, a discussion of the doctrine of constructive receipt. The ACLI cited, among other things, a Treasury regulation about the doctrine. The ACLI pointed out that, at age 100, there would be no constructive receipt because the policyholder would forfeit a number of "valuable rights," such as "the forfeiture of annuity purchase rate guarantees." The ACLI expressed the opinion that it would not be appropriate to impose requirements "to address a concern that may exist under the constructive receipt doctrine."

In the adopted revenue procedure, the IRS alludes to the question it had asked about constructive receipt. However, the adopted procedure does not appear to address it.

General Observations
In its comment letter, the ACLI explains why it believes that the doctrine of constructive receipt does not apply when the insured reaches age 100. I am not convinced by the ACLI's arguments.

Undoubtedly many whole life policies are in force today based on the American Experience mortality table with its terminal age of 96. And undoubtedly huge numbers of policies are in force with a terminal age of 100. (We are a long way from having policies approaching the terminal age of 121 in the 2001 CSO table.) In short, I still do not know what the ubiquitous "tax advisor" could tell a policyholder who inquires about how to avoid a potentially devastating income tax problem at age 96 or 100.

My wife and I are in our 80s. All the policies on our lives have a terminal age of 100. They are whole life, do not define "life," and say nothing about the age 100 problem. In late January we wrote to the four companies about the problem. We hope to receive "straight answers." I plan a follow-up to describe what we learn from the companies.

Available Material
I am offering a complimentary 37-page PDF consisting of the two-page January 2001 article, the two-page May 2001 article, one page of excerpts from a current NYLIAC prospectus, the 8-page IRS request for comments in 2009, the 22-page comment letter from ACLI in 2009, and the two-page IRS Revenue Procedure 2010-28. Email and ask for the February 1, 2016 package about the age 100 problem.


Monday, January 25, 2016

No. 140: Senator Elizabeth Warren and the Insurance Company Letters to Her about Annuity Sales Incentives

On April 28, 2015, U.S. Senator Elizabeth Warren (D-MA), the Ranking Member of the Subcommittee on Economic Policy of the Committee on Banking, Housing, and Urban Affairs, wrote to 15 major issuers of annuities seeking "information on rewards and incentives offered by your company to brokers and dealers who sell annuities to families and small investors." I discussed Senator Warren's investigation in No. 97 (May 4, 2015) and in a follow-up in No. 124 (November 2, 2015). This is a second follow-up.

My Request to Senator Warren's Office
Shortly after the May 11, 2015 response date in Senator Warren's letters to the companies, I submitted to her office, pursuant to the U.S. Freedom of Information Act, a request for copies of the companies' response letters. Her office denied my request.

My Request to New York
The New York Department of Financial Services (DFS) asked the companies for copies of their letters to Senator Warren. On May 29, I submitted to DFS, pursuant to the New York Freedom of Information Law (FOIL), a request for copies of the letters. DFS acknowledged the request promptly, but said there would be a delay in responding.

On November 24 DFS sent me the 15 letters. The letter from Prudential is marked confidential, includes a request for confidentiality under the FOIL exemption for trade secrets and confidential financial information, and has portions redacted (blacked out) pursuant to that exemption. The letters from Allianz Life and Jackson National are unredacted. The other 12 letters are not marked confidential but contain redactions made by DFS.

My Requests to the Companies
On January 4, 2016, I wrote by regular mail to the 13 companies whose letters contain redactions. I enclosed a copy of the letter showing the redactions, and asked each company to send me—by January 15—an unredacted copy of its letter. I did not write to Allianz Life or Jackson National because their letters are unredacted.

Responses to My Requests
In response to my requests, Lincoln Financial, New York Life, and Pacific Life sent me their unredacted letters. AXA Equitable Life and Athene Annuity and Life acknowledged my request but declined to send their unredacted letters. The other eight companies did not acknowledge my request: American International Group, American Equity Investment Life, MetLife, Nationwide Life, Prudential, RiverSource Life, TIAA-CREF, and Transamerica.

Redactions by Regulators
Members of the public do not often have the opportunity to evaluate the redactions made by insurance regulators when they respond to requests pursuant to public records laws. Such an opportunity arose in connection with the company responses to Senator Warren's investigation of annuity incentives. That is why I decided, with regard to companies for which I have the unredacted and redacted versions of their letters, to include both versions in the package I am offering. By comparing the two versions, readers can judge for themselves the reasonableness of the redactions.

A similar opportunity arose in connection with the 1986 testimony of four officials of Executive Life Insurance Company of New York during a reinsurance investigation by what was then the New York Department of Insurance. I was able to identify a substantial amount of material that the company wanted redacted and that the Department did not redact. The incident is described briefly on pages 85-88 in my new book, The Insurance Forum: A Memoir, and the full details are in the October 1988 issue of The Insurance Forum.

General Observations
When I compared the unredacted letters with the redacted versions, I was surprised by some of the redactions that DFS made. Here, as examples, are three sentences that DFS redacted but that I think do not warrant trade secret protection:
  • Lincoln uses an independent model to distribute our annuity products, which are sold through affiliated and non-affiliated channels.
  • New York Life does not sponsor trips, contests, or prizes for third party distributors.
  • Registered representatives and producers must be state insurance licensed and appointed by Pacific Life in each state where they sell Pacific Life annuities.
I have said on previous occasions that the life insurance industry is built on the nondisclosure of information that is vital to life insurance consumers. Regrettably, state insurance regulators aid and abet such nondisclosure through their redaction practices in response to requests pursuant to public records laws.

Available Material
I am offering a complimentary 78-page PDF consisting of a one-page cover note listing the contents of the PDF, a sample of Senator Warren's five-page request letter to the companies, and all the unredacted and redacted company response letters I have. Email and ask for the January 2016 Warren/DFS package.


Tuesday, January 19, 2016

No. 139: Stephen Hilbert Returns to the Insurance Business

On January 7, 2016, BestDay carried an article entitled "Former Conseco CEO Hilbert Makes Return to Life Insurance Business as CEO of Sterling Investors Life." That was my first knowledge that Stephen Calvert Hilbert, who will turn 70 on January 23, is returning to the insurance business. When I sought more information, I found other articles about him, including in The New York Times on May 20, 2000, The Indianapolis Star on November 13, 2013, and the Indianapolis Business Journal on September 12, 2015.

In 1979 Hilbert co-founded Security National of Indiana, which later became Conseco. The other co-founder was David Deeds, who soon left the company. They started with $10,000. As chairman, president, and chief executive officer, Hilbert built Conseco into a company with $100 billion of assets under management, and he became one of the highest paid executives in the insurance business. Much of the growth was through acquiring companies, but some of the acquisitions turned out badly. In retrospect, the worst was Green Tree Financial, a subprime mobile home mortgage lender later renamed Conseco Finance. Thus Hilbert was prominent in subprime residential mortgage lending years before it became a major cause of the 2008 crash. In 2000, because of severe losses at Conseco Finance, Hilbert was forced out of Conseco (he uses the word "retired"). Conseco filed for bankruptcy protection in 2002, emerged from bankruptcy in 2003, and changed its name to CNO Financial Group.

Hilbert also has engaged in philanthropic activities. For example, the Circle Theater in downtown Indianapolis is the home of the Indianapolis Symphony Orchestra. In 1996 it was renamed Hilbert Circle Theater after Hilbert and his wife Tomisue Tomlinson Hilbert.

Hilbert has long been associated with Donald Trump. In 1998, for example, Conseco and Trump bought the General Motors Building in New York City. They sold it in 2003.

The Hilberts have been prominent in thoroughbred racing. In 1999, for example, their horse Stephen Got Even finished 14th in the Kentucky Derby, 4th in the Preakness Stakes, and 5th in the Belmont Stakes.

In 1999 the home of the Indiana Pacers became Conseco Fieldhouse. In 2011 CNO Financial renamed it Bankers Life Fieldhouse after Bankers Life and Casualty Company, a CNO subsidiary.

In 2005 Hilbert joined with John Menard, a wealthy hardware store owner, to form MH Private Equity, a money management company. Later Menard and Hilbert had a bitter quarrel that led to litigation in 2011. The litigation remains ongoing.

In September 2008 Hilbert's mother-in-law, Germaine Tomlinson, died as the result of either an accident or foul play. American General Life Insurance Company had issued a $15 million stranger-originated life insurance policy on her life in January 2006. Although the policy was beyond the two-year period of contestability when she died, the company filed a lawsuit against Tomlinson's insurance trust in December 2008 asking the court to declare the policy null and void from inception for lack of insurable interest. The case was settled on confidential terms. (I discussed the case in the April 2009 issue of The Insurance Forum.)

The Formation of SILAC
In April 2015 Hilbert formed SILAC LLC, a Delaware limited liability company, to acquire Sterling Investors Life Insurance Company, a small company domiciled in Georgia, and to redomesticate it (change its state of domicile) from Georgia to Indiana. I think SILAC stands for Sterling Investors Life Acquisition Corporation. SILAC assembled about $10.5 million of capital. It proposed to buy Sterling for about $7.2 million, with some adjustments. It may add some additional capital to Sterling, and may acquire other companies in the business of life insurance, health insurance, and annuities.

SILAC's inside investors are the Hilbert Joint Trust, James Adams, Scott Matthews, and William Stone. SILAC has two outside investors. One is Great American Life Insurance Company. The other is Rollin Dick, according to one document, and JLT PR LLC, an Indiana limited liability company, according to another document. I think Dick and JLT PR LLC are connected.

Sterling, which was owned by a company in Texas, was involved only in running off its existing business. It will focus on working, middle class consumers. It is licensed in all but a few states, but at the outset will concentrate on only eight states. It will offer life insurance and annuities.

According to its statutory quarterly statement as of June 30, 2015, Sterling had net admitted assets of $15.8 million, capital and surplus of $6.5 million, and virtually no net income. It was rated B (Fair) by A. M. Best Company from 2009 to 2013. In 2014 Best withdrew the rating at Sterling's request.

The Form A
On August 17, 2015, SILAC filed a Form A with the Indiana Department of Insurance seeking approval of the acquisition and redomestication of Sterling. The Form A was signed by Hilbert as chairman and chief executive officer of SILAC, and by Matthews as secretary. The "public copy" of the Form A consists of only 13 pages.

The Hearing
On August 26, eight business days after receiving the Form A, the Department held a so-called public hearing. I say "so-called" because no one attended other than representatives of the Department and SILAC. Stephen Robertson, the Indiana insurance commissioner, recused himself because for many years he had been a Conseco executive under Hilbert. He directed Doug Webber, chief of staff in the Department, to conduct the hearing as administrative law judge (ALJ) and issue the necessary order after the hearing.

The public notice of the hearing appeared in The Indianapolis Star on August 19, only one week before the hearing. The notice said the hearing was to begin at 1:30 p.m. However, it did not begin until 1:55 p.m. The delay, according to the transcript of the hearing, "was at the request of counsel for a conference" (in other words, an off-the-record, confidential conference). The ALJ repeatedly expressed satisfaction that Sterling was not going to offer long-term care insurance. The hearing ended at 4:34 p.m.

Attorneys for SILAC, attorneys for the Department, and several other staff members of the Department attended the hearing. The witnesses were Hilbert and Adams. Matthews and Tomisue Hilbert also attended. Absent from the hearing were Stone and three officers who had been with Sterling and were to remain with the company after the acquisition.

Confidential Documents
A substantial amount of material was withheld from the public in accordance with Indiana's holding company law. It exempts from public disclosure many documents filed with the Department in the course of an investigation of transactions such as the one in this case. Here is the relevant exchange reflected in the hearing transcript (Brent Coudron is a Department attorney, and Derrick Smith is a SILAC attorney):
ALJ: I strongly favor as much transparency as you can have. Have you been through that and are there statutory reasons that support why those documents are being held as confidential?
Coudron: Yes, I believe there is.
ALJ: Okay. Mr. Smith, I take it that you feel likewise?
Smith: Yes, Your Honor.
ALJ: Okay. All right.
In response to my request, the Department promptly provided the public copy of Form A, the hearing transcript, the ALJ's order, and two affidavits—by Hilbert and Adams—that were offered in evidence at the hearing. However, the Department denied my request for the biographical affidavits of the four principals—Hilbert, Adams, Matthews, and Stone. The Department said the biographical affidavits are exempt from disclosure in their entirety.

The Form A contains an interesting statement about the biographical affidavits of the four principals. Here is the language:
No such person has been convicted in a criminal proceeding (excluding minor traffic violations) during the past ten years. No such person has been the subject of any disciplinary proceedings with respect to a license or registration with any federal, state or municipal government agency, during the past ten years.
I think the second sentence of the above statement is incorrect. Adams was the subject of disciplinary proceedings in July 2006, nine years and one month before the filing of the Form A in August 2015. The matter began on March 10, 2004, when the Securities and Exchange Commission (SEC) filed a civil lawsuit against Adams, a certified public accountant (CPA), who had been the chief accounting officer of Conseco. Another defendant was Rollin Dick, who had been the chief financial officer of Conseco, and who is an outside investor in the SILAC acquisition of Sterling. The SEC alleged that Conseco and Conseco Finance, in filings with the SEC and in public statements, had made false and misleading statements about their earnings, overstating their results by hundreds of millions of dollars. The lawsuit ended on July 3, 2006, with judgments under which Dick and Adams paid to the SEC civil penalties of $110,000 and $90,000, respectively. Each was barred for five years from acting as an officer or director of a publicly held company. They consented to the judgments without admitting or denying the allegations in the complaint. Adams was also barred from appearing or practicing before the SEC as an accountant. He could have applied for reinstatement after five years, but has not done so, according to the transcript of the August 2015 hearing. Also, effective March 31, 2011, Adams' membership in the American Institute of Certified Public Accountants was terminated following an indefinite suspension of his CPA license by the Indiana Board of Accountancy in connection with his suspension from practice as an accountant before the SEC. The information in this paragraph is from documents in the public domain. Presumably the information is disclosed in Adams' biographical affidavit, which the Indiana Department of Insurance says is confidential. (See, for example, SEC v. Dick and Adams, U.S. District Court, Southern District of Indiana, Case No. 1:04-cv-457; SEC Litigation Release No. 19756, July 7, 2006; and SEC Accounting and Auditing Enforcement Release No. 2466, July 25, 2006.)

The Order
On August 26, the very day of the hearing that ended at 4:34 p.m., the ALJ signed and filed his 16-page order containing findings of fact and conclusions of law. The order grants, with conditions, final approval of the acquisition and redomestication of Sterling. Among the conditions, for example, on page 15 of the order is a requirement that a conflict-of-interest policy be prepared "specifically disqualifying Stephen Hilbert and Tomisue Hilbert from participating in votes [by Sterling's board of directors] relating to their compensation, benefits, and related party agreements."

General Observations
The approval of the acquisition and redomestication of Sterling was the result of an expedited process. Only eight business days elapsed between SILAC's filing of the Form A on Monday, August 17, 2015, and the ALJ's filing of his order on Wednesday, August 26. Regrettably, it seems to be fairly standard practice for a state insurance department to prepare an order in advance of a perfunctory hearing and file the order immediately after the hearing. Finally, I think it is wrong for biographical information about the principals in an acquisition and/or redomestication to be withheld from public scrutiny.

Available Material
I am making available a complimentary 48-page PDF consisting of the 13-page Form A SILAC filed, the 11-page combination of the Adams and Hilbert affidavits submitted in evidence at the hearing, the 16-page order the ALJ filed the day of the hearing, and the 8-page July 2006 federal court judgment against Adams. Email and ask for the January 2016 Hilbert package.


Monday, January 11, 2016

No. 138: The Life Partners Bankruptcy and an Offer from ASM Capital to Investors with Matured Fractional Interests

Life Partners Holdings, Inc. (LPHI) is the parent of Life Partners, Inc. (LPI), which was a participant in the secondary market for life insurance policies. On January 20, 2015, as discussed in No. 81 (posted January 22, 2015), LPHI filed for protection under Chapter 11 of the federal bankruptcy law. LPI later became a part of the bankruptcy court proceedings. H. Thomas Moran II is the Chapter 11 Trustee appointed by the bankruptcy court. Among those with an interest in the bankruptcy court proceedings are those who invested in fractional interests in the life settlements marketed by LPI. (See In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, Case No. 15-40289.)

The Preliminary Letter
ASM Capital (Woodbury, NY) is a firm that invests in the obligations of companies in bankruptcy. On or about December 1, 2015, ASM sent a one-page letter to a small sample of 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 who has died. ASM asked the investor to contact ASM if the investor was interested in selling his or her claim in exchange for a prompt cash payment. Based in part on responses to the preliminary letter, ASM moved to the next step.

The Offer Letter
On December 22, ASM sent a one-page letter to each LPI fractional interest investor with a matured fund interest. The top of the letter shows the name and address of the owner of the matured fund interest. Just below that is the policy number, the policy face value, and the percentage owned by the investor. In the body of the letter are three items:
  • The "payout amount" is the policy face value multiplied by the percentage owned.
  • The "purchase percentage" is the percentage of the payout amount that ASM will pay to the investor.
  • The "ASM purchase price" is the payout amount multiplied by the purchase percentage.
Consider an example. Suppose the policy face value is $5 million and the percentage owned by the investor is one-third of 1 percent. The payout amount would be $16,666.65 ($5 million multiplied by 0.00333333). Suppose the purchase percentage is 75 percent. The ASM purchase price would be $12,499.99 ($16,666.65 multiplied by 0.75).

The Purchase Agreement
Enclosed with the offer letter was a two-page, small-print "matured funds purchase agreement." ASM asks the investor, if he or she wants to receive the ASM purchase price, to sign, date, and send the agreement to ASM, which will send payment within three to five business days provided everything is in order.

The matured funds purchase agreement consists of ten paragraphs. The titles of the ten paragraphs, along with the full text of the "Indemnification" paragraph, are as follows:
  • Purchase of Matured Funds.
  • Representations; Warranties and Covenants.
  • Execution of Agreement.
  • Consent and Waiver.
  • Matured Fund Interest or Recovery Impaired or paid on an Amount Less than the Payout Amount.
  • Notices (including Voting Ballots) Received by Seller; Further Cooperation.
  • Recovery (including Cure Payments) Received or Delayed by Seller.
  • Governing Law, Personal Jurisdiction and Service of Process.
  • Indemnification. Seller further agrees to reimburse Purchaser for all losses, costs and expenses, including reasonable legal fees at the trial and appellate levels incurred by Purchaser as a result of, in connection with, or related to any (a) impairment, (b) Seller's breach of this Agreement, including without limitation any misrepresentation by Seller, and/or (c) litigation arising out of or in connection with this Agreement or in order to enforce any provision of this Agreement.
  • Miscellaneous.
Below those ten paragraphs is the execution section of the agreement. The "Seller" (the investor) signs and dates the agreement, and the "Purchaser" (ASM) later signs and dates the agreement.

My Contact with ASM
I learned of the ASM offer when a reader sent me a copy of the offer letter and the agreement. The agreement was virtually unreadable. I contacted ASM and requested a good copy. ASM promptly provided a generic John Doe offer letter and the agreement. In the course of conversation, I learned of the preliminary letter and ASM provided a generic copy of that letter as well.

The only problem with the generic letters is that they are dated January 6, 2016, the date ASM prepared them for me. It is my understanding that the preliminary letters were dated around December 1, and that the actual offer letters were dated December 22.

General Observations
The Chapter 11 Trustee has a website at I have not yet seen anything on that website concerning the ASM offer. I doubt that the Trustee will offer what would amount to legal advice about the ASM offer to investors with matured fund interests, although he might indicate that it is usually a good idea to obtain legal advice from an attorney before entering into a complex legal agreement.  Nor will I offer advice, because I am not an attorney, a consultant, or a financial adviser.

Available Material
I am making available a complimentary four-page PDF consisting of the generic forms of the ASM preliminary letter, the ASM offer letter, and the matured funds purchase agreement. Send an email to and ask for the December 2015 ASM/Life Partners package.


Monday, January 4, 2016

No. 137: The Consumer Financial Protection Bureau and the Business of Insurance

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 provided for the creation of the Consumer Financial Protection Bureau (CFPB). Two years ago, Alan Press and I submitted to CFPB a complaint involving an insurance matter. CFPB immediately brushed off the complaint because it related to insurance. We asked CFPB to show us the statutory basis for its rejection of the complaint, but we received no reply. Recently I explored the massive Dodd-Frank Act in an effort to identify the statutory basis for CFPB's rejection of the complaint.

Our Complaint to the CFPB

Alan Press, CLU, is a retired general agent in New York City for Guardian Life Insurance Company of America, a past president of what is now the National Association of Insurance and Financial Advisors, and the recipient of several prestigious insurance industry awards. Press and I have been good friends for many years.

Press was familiar with the mission statement of Primerica Life Insurance Company. In January 2014, he saw CFPB's mission statement. Here are the two statements:

Primerica: Our mission is to serve middle income families by helping them to make informed financial decisions and providing them with a strategy and means to gain financial independence.... Our clients are generally middle income consumers, which we define as households with $30,000 to $100,000 of annual income.
CFPB: Our mission is to make markets for consumer financial products and services work for Americans—whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products. Above all, this means ... no provider should be able to use unfair, deceptive, or abusive practices.
Press called CFPB's whistleblower number. He asked whether CFPB would be interested in information about a life insurance company that imposes undisclosed charges equivalent to an unfair, deceptive, and abusive annual percentage rate (APR) of 29.7 percent on millions of policyholders who pay premiums monthly (rather than annually) through preauthorized withdrawals from checking accounts. The CFPB person who answered the telephone encouraged Press to file a complaint.

Press was aware of my extensive writings about fractional (modal) premium charges imposed on policyholders who pay premiums more often than once a year, and he contacted me. We assembled a 52-page PDF and submitted the complaint to CFPB by email at 8:45 a.m. on February 12, 2014. The package consisted of a two-page explanatory cover letter, brief biographical sketches of the two of us, an article Press had written, and seven articles I had written. The complaint described the unconscionable 29.7 percent APR Primerica imposed and still imposes on buyers of life insurance who pay premiums monthly with preauthorized checks.

In the cover letter we quoted the mission statements of Primerica and CFPB. Several of my articles in the package described in great detail how state insurance regulators not only have refused to require APR disclosure of fractional premium charges but also have fought to prevent consumer access to such information. At 11:34 a.m. the same day, CFPB rejected the complaint with this email:

Thank you for your information that was sent to Consumer Financial Protection Bureau's whistleblower email address. The Bureau has authority to investigate possible violations of Federal consumer financial laws, and to enforce such statutes. These matters typically involve mortgages, student loans, credit cards, payday loans, and auto finance. The Bureau generally does not have jurisdiction over matters involving life insurance or securities. We therefore are not able to investigate your allegations relating to an insurance matter.
We asked CFPB to send us the statutory language prohibiting CFPB from investigating harmful practices that insurance companies perpetrate against consumers. We also asked CFPB to explain why its mission statement refers to "any number of other consumer financial products" and fails to warn the reader that CFPB is barred from investigating harmful insurance practices. Finally, we asked that CFPB staff members read the complaint and reconsider their rejection of it. We received no further reply.

The Dodd-Frank Act

The version of the Dodd-Frank Act that I examined is an 848-page PDF posted on the website of the Securities and Exchange Commission. The page numbers mentioned later in this blog post are page numbers of that PDF. The Dodd-Frank Act consists of these 16 titles:
I Financial Stability
II Orderly Liquidation Authority
III Transfer of Powers to the Comptroller of the Currency, the [Federal Deposit Insurance] Corporation, and the [Federal Reserve] Board of Governors
IV Regulation of Advisers to Hedge Funds and Others
V Insurance
VI Improvements to Regulation of Bank and Savings Association Holding Companies and Depository Institutions
VII Wall Street Transparency and Accountability
VIII Payment, Clearing, and Settlement Supervision
IX Investor Protections and Improvements to the Regulation of Securities
X Bureau of Consumer Financial Protection
XI Federal Reserve System Provisions
XII Improving Access to Mainstream Financial Institutions
XIII Pay It Back Act
XIV Mortgage Reform and Anti-Predatory Lending Act
XV Miscellaneous Provisions
XVI Section 1256 Contracts
Title V on insurance deals with such matters as nonadmitted insurance and reinsurance. That title is not relevant to the CFPB matter discussed in this blog post.

Title X
The Dodd-Frank Act's Title X, which begins on page 580, provides for the creation of CFPB. On the same page, "business of insurance" is defined as follows:
The term "business of insurance" means the writing of insurance or the reinsuring of risks by an insurer, including all acts necessary to such writing or reinsuring and the activities relating to the writing of insurance or the reinsuring of risks conducted by persons who act as, or are, officers, directors, agents, or employees of insurers or who are other persons authorized to act on behalf of such persons.
Beginning on page 582, there is a lengthy section in which the term "financial product or service" is defined. The following brief exclusion is on page 585, near the end of that section:
The term "financial product or service" does not include the business of insurance.
General Observations
I have long been impressed by the ability of the insurance industry to lobby successfully for enactment of laws that allow insurance companies to harm consumers with "unfair, deceptive, or abusive practices." One of my early experiences in that regard was the enactment of federal legislation in 1979 prohibiting the Federal Trade Commission from taking action against insurance companies and from even investigating insurance companies without a formal request from a congressional committee. I discussed the matter on pages 78-79 in my new book, The Insurance Forum: A Memoir, where I showed the current language of the relevant federal statute.

Now we have the Dodd-Frank Act prohibiting CFPB from doing anything about insurance. The combination of the definition of "business of insurance" and the exclusion of insurance from the definition of "financial product or service" allows insurance companies to engage in practices harmful to insurance consumers, given the industry's success in preventing state insurance regulators from taking effective action against such practices. As an example, the complaint we submitted to CFPB includes detailed discussions of how state insurance regulators opposed a potential requirement that insurance companies disclose APRs associated with fractional premium charges.

Available Material
I am making available as a complimentary 52-page PDF the complaint Press and I submitted to CFPB. My primary reasons for offering the package are to allow readers to see the discussions of the significance of APR disclosure of fractional premium charges and how state insurance regulators opposed that important form of consumer protection. Email and ask for the Press/Belth 2014 complaint to CFPB.