Friday, January 13, 2017

No. 197: Genworth Financial—A New Class Action Lawsuit Filed by Three Long-Term Care Insurance Policyholders

On December 28, 2016, three long-term care (LTC) insurance policyholders filed a class action complaint against Genworth Financial, Inc. (GFI), two subsidiaries, and four executives. The general nature of the lawsuit may be gleaned from these two paragraphs in the 22-paragraph introductory section of the complaint:
1. This case concerns the financial harm caused to millions of current and former policyholders of Genworth long term care ("LTC") insurance policies, as a direct result of Defendants' deliberate misconduct in wrongfully depleting needed policy reserves—which is the portion of an insurer's revenue held aside to pay future claims.
6. Defendants executed an undisclosed scheme from 2010 until late 2014 to buoy Genworth's stock price and enrich themselves by diverting hundreds of millions of dollars of policyholders' premium payments away from Genworth's reserve funds and into their own pockets and the coffers of GFI and its investors.
The case was assigned to U.S. District Judge John A. Gibney, Jr. President Obama nominated him in April 2010 and the Senate confirmed him in December 2010. (See Leifer v. Genworth, U.S. District Court, Eastern District of Virginia, Case No. 3:16-cv-1008).

The Plaintiffs
Erika Leifer, now 65 and a New York City resident, purchased an LTC insurance policy from Genworth Life Insurance Company of New York (GLICNY) in 2002. She purchased a second LTC insurance policy from GLICNY in 2004. In February 2016, GLICNY informed her by letter that the premiums on both policies would be increasing by 60 percent, and that "it is possible that your premium will increase again in the future."

Saul Jacobs, now 65 and a Pennsylvania resident, purchased an LTC insurance policy from a predecessor of Genworth Life Insurance Company (GLIC) in 2003. In March 2016, GLIC informed him by letter that the premiums on his policy would be increasing by 20 percent, and that "it is possible that your premium will increase again in the future."

Helene Wenzel, now 72 and a San Francisco resident, purchased an LTC insurance policy from a predecessor of GLIC in 2003. In December 2016, GLIC informed her by letter that the premiums on her policy would be increasing by 26 percent in phases over the next three years, and that "it is possible that your premium will increase again in the future."

The Defendants
The corporate defendants are GFI, GLIC, and GLICNY. The individual defendants are Michael D. Frazier, chairman, president, and chief executive officer from May 2004 until May 2012; Thomas J. McInerney, president and chief executive officer since January 2013 and head of the LTC insurance business since July 2014; Patrick B. Kelleher, chief financial officer from 2007 through 2011, and executive vice president from January 2011 through December 2013; and Martin P. Klein, chief financial officer from May 2011 through October 2015, and acting president and acting chief executive officer from May 2012 through December 2012.

The Class
The plaintiffs bring the action on behalf of a class of Genworth LTC insurance policyholders. The class consists of:
All persons residing in the United States who, at any time prior to November 5, 2014 (the "Class Period"), purchased LTC insurance from Genworth Life Insurance Company or Genworth Life Insurance Company of New York.
The "class period" referred to in the above description of the class ends on the day the plaintiffs allege that "the truth became known when Defendants finally admitted that Genworth had not properly accounted for its reserves, and those reserves were now underfunded by more than half a billion dollars." There are three subclasses consisting of New York State policyholders, Pennsylvania policyholders, and California policyholders.

The Allegations
The "factual background" section of the complaint identifies several allegations including these four: (1) Genworth claimed to buck industry trends and set itself apart from the rest of the LTC insurance market, (2) Genworth repeatedly assured its policyholders and potential insureds that its reserves were more than adequate, (3) Genworth's false statements allowed it to divert hundreds of millions of dollars from its reserves and into the coffers of its holding company and the pockets of its senior executives, and (4) Genworth and the individual defendants had various and powerful motives to commit fraud.

The "claims for relief" section of the complaint includes these six counts: (1) breach of the implied covenant of good faith and fair dealing, (2) violation of a section of the New York Insurance Law, (3) violation of a section of the New York General Business Law, (4) violation of several sections of the California Unfair Competition Law, (5) violation of a section of the Pennsylvania Insurance Bad Faith Law, and (6) unjust enrichment. The plaintiffs seek certification as a class action, a declaratory judgment, statutory damages, restitution, injunctive relief, costs, pre- and post-judgment interest, and attorney fees.

I requested from Genworth a brief statement suitable for inclusion in this post. A spokeswoman said the company's policy is not to comment on matters in litigation.

General Observations
This is an important case, but it has a long way to go. If it gets to a jury, it would be necessary for the discovery process to have turned up sufficient evidence to support the allegations under the "preponderance of the evidence" standard that is needed for plaintiffs to prevail in civil lawsuits. Although the allegations in the complaint appear strong, I believe that the case will end with a settlement, assuming it survives the inevitable motion to dismiss the complaint.

In that regard, it is helpful to consider another recent class action lawsuit against Genworth. The complaint was filed in October 2014, around the time that Genworth announced the need to increase reserves significantly. The plaintiffs were shareholders rather than policyholders. The case was filed in the same court as the Leifer case discussed above, and was reassigned to Judge Gibney after originally having been assigned to another judge. The lead plaintiffs were Her Majesty The Queen In Right Of Alberta, Fresno County Employees' Retirement Association, and City of Pontiac General Employees' Retirement System. The defendants were GFI, McInerney, and Klein. It was a hard fought case. A trial was set for May 2016. In March 2016, however, the parties informed Judge Gibney that they had reached a $219 million settlement. They filed it in April 2016, and the judge preliminarily approved it. He held a fairness hearing in July 2016, and gave his final approval in September 2016. The last court document filed in the case was the judge's order awarding the plaintiffs' attorneys about $61 million in legal fees (28 percent of the $219 million settlement fund), and about $3.8 million in reimbursement of litigation expenses. (See In re Genworth Financial, Inc. Securities Litigation, U.S. District Court, Eastern District of Virginia, Case No. 3:14-cv-682.)

Available Material
I am offering a complimentary 66-page PDF containing the Leifer policyholder class action complaint (61 pages) and the last court document filed in the earlier shareholder class action lawsuit (5 pages). Email jmbelth@gmail.com and ask for the January 2017 package relating to the class action lawsuits against Genworth.

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Monday, January 9, 2017

No. 196: New York State's Insurance Regulator Orders Columbian Mutual Life to Pay Certain Death Benefits and a Fine

On December 21, 2016, the New York State Department of Financial Services (DFS) ordered Columbian Mutual Life Insurance Company (Binghamton, NY), a small company, to pay death benefits to the beneficiaries of 257 deceased policyholders, and to pay a fine of $257,000. According to the consent order, Columbian wrongly denied coverage and rescinded policies.

Columbian and Unity
Columbian began operations as a charitable and benevolent association in 1883, became a mutual life insurance company in 1952, and acquired Unity Mutual Life Insurance Company (Syracuse, NY), a small company, in 2011. Columbian is licensed in all states, but the bulk of its business is sold in New York and New Jersey.

The Investigation
After a routine examination, DFS began an investigation of Columbian's and Unity's contestable claims practices from 2006 through 2015. During that period, Columbian, using simplified issue with limited underwriting, sold small face amount policies to low- and middle-income consumers to cover funeral and other final expenses. From 2006 through 2011, Unity sold similar policies with limited underwriting.

DFS found that Columbian and Unity, without proving policyholders had made material misrepresentations in applications, wrongfully denied coverage and unilaterally rescinded policies when policyholders died within the two-year contestability period. Here are the six paragraphs under the heading "New York contestable claims" in the consent order:
23. During the Relevant Period, Unity had 60 contestable claims with a face amount of $361,962 in New York State in which the claims were closed without payment or remained pending because Unity did not receive a death certificate or medical records. In 2010 and 2011, Unity returned $1,872 in premiums to beneficiaries for 6 of these contestable claims.
24. Starting in 2010, Unity also unilaterally rescinded 35 contestable claims with a face amount totaling $300,620 based on alleged material misrepresentations. During the Relevant Period, Unity returned $25,465 in premiums to beneficiaries for these claims.
25. During the Relevant Period, Columbian had 123 contestable claims in New York State with a face value totaling $1,106,642 where Columbian closed claims or unilaterally rescinded policies because it did not receive a death certificate or medical records.
26. Columbian also unilaterally rescinded 39 contestable claims with a face amount of $322,699 based on alleged material misrepresentation.
27. During the Relevant Period, Columbian paid $70,447 in returned premiums to claimants in connection with 123 of the 162 contestable claims that it rescinded.
28. The face amount of Unity's and Columbian's 257 contestable claims is $2,091,923.
Restitution and Fine
Columbian agreed to select an independent third party administrator to oversee the restitution process. Columbian also agreed to pay the face amount, plus interest from the date of death to the date of payment, on each policy that had been closed without payment or had been unilaterally rescinded, unless the administrator determines that the insured made a material misrepresentation in the application. Columbian also agreed to pay a fine of $257,000, or $1,000 for each of 257 policies.

General Observations
This is a strange case. I do not recall having heard of companies brushing off small death claims or rescinding small policies where deaths occurred during the contestability period. Limited underwriting might include one or two general health questions, but I believe that, in many such cases, it would be difficult to mount a successful challenge based on the answers to such questions.

DFS has not yet made public the report of the routine examination that prompted the investigation of contestable claims. It is my understanding that the report may not be made public for some time. When I see the report, and if it contains any further information I consider significant, I will post a follow-up.

Available Material
I am offering a complimentary 21-page PDF containing the DFS press release (2 pages) and the DFS consent order directed at Columbian (19 pages). Email jmbelth@gmail.com and ask for the January 2017 package relating to Columbian.

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Tuesday, January 3, 2017

No. 195: Platinum Partners—Criminal and Civil Charges Filed Against Seven Individuals

On December 14, 2016, U.S. Attorney Robert L. Capers of the Eastern District of New York filed a 49-page indictment charging seven current and former principals of Platinum Partners, a hedge fund, with criminal activity. The indictment was filed under seal. A magistrate judge unsealed the indictment two days later, after the defendants were arrested. The case was assigned to U.S. District Court Chief Judge Dora Lizette Irizarry. President George W. Bush nominated her, and the Senate confirmed her in June 2004. She became Chief Judge in April 2016. (See U.S.A. v. Nordlicht, U.S. District Court, Eastern District of New York, Case No. 1:16-cr-640.)

On December 19, the Securities and Exchange Commission (SEC) filed a 60-page civil complaint against two Platinum units and the same seven individuals. The case was assigned initially to U.S. District Court Judge Kiyo A. Matsumoto. President George W. Bush nominated her, and the Senate confirmed her in July 2008. (See SEC v. Platinum, U.S. District Court, Eastern District of New York, Case No. 1:16-cv-6848.)

The Defendants
The two Platinum units that are defendants in the SEC civil complaint are Platinum Management (NY) LLC and Platinum Credit Management LP. The seven individual defendants in both cases are Mark Nordlicht, one of Platinum's founders and its chief investment officer; David Levy, Platinum's co-chief investment officer; Uri Landesman, former managing partner and president of Platinum; Joseph Sanfilippo, chief financial officer of a Platinum unit; Joseph Mann, a member of Platinum's investor relations and finance departments; Daniel Small, a former managing director and co-portfolio manager of Platinum; and Jeffrey Shulse, former chief executive officer and chief financial officer of a Platinum unit.

The Indictment
The indictment includes eight counts: one count of conspiracy to commit securities fraud and investment adviser fraud, one count of conspiracy to commit securities fraud, three counts of securities fraud, one count of investment adviser fraud, and two counts of conspiracy to commit wire fraud. Nordlicht and Levy are charged with all eight counts; Landesman, Sanfilippo, and Mann with five counts; and Small and Shulse with three counts.

On December 19, six of the seven defendants pleaded not guilty on all counts, and were released on bond. Nordlicht's bond was set at $5 million, Levy's at $2 million, Landesman's at $2 million, Sanfilippo's at $2 million, Mann's at $1 million, and Small's at $600,000. I believe that Shulse will enter a plea soon, and that Small may change his plea.

The SEC Civil Complaint
The SEC civil complaint includes 11 claims for relief: three claims of violations of the Advisers Act, two claims of aiding and abetting violations of the Advisers Act, two claims of violations of the Securities Act, one claim of aiding and abetting violations of the Securities Act, two claims of violations of the Exchange Act, and one claim of aiding and abetting violations of the Exchange Act. Platinum Management is charged with five claims, Platinum Credit with four claims, Nordlicht with seven claims, Landesman and Sanfilippo with five claims, Levy with four claims, Mann and Small with three claims, and Shulse with two claims.

On December 19, Judge Matsumoto held a show cause hearing at which the parties agreed to a temporary restraining order and the appointment of Bart Schwartz as receiver. The purposes of these actions were to prevent violations of securities and other laws, prevent bankruptcy filings, prevent destruction or alteration of documents, and grant expedited discovery in preparation for a preliminary injunction hearing.

On December 22, the case was reassigned to Chief Judge Irizarry. A preliminary injunction hearing is scheduled for January 6, 2017.

The Press Release
On December 19, U.S. Attorney Capers issued a five-page press release, and he announced at a press conference the unsealing of the indictment. Representatives of the Federal Bureau of Investigation and the U.S. Postal Inspection Service accompanied him.

Capers said: "If convicted, each of the defendants faces a maximum sentence of 20 years' imprisonment." He also said:
As alleged, Nordlicht and his cohorts engaged in one of the largest and most brazen investment frauds perpetrated on the investing public, earning Platinum more than $100 million in fees during the charged conspiracy. Platinum Partners purported to be a standard bearer in the hedge fund industry, reporting average annual returns of more than 17 percent since inception in 2003. In reality, their returns were the result of overvaluation of their largest assets, which eventually led to Nordlicht and his co-conspirators operating Platinum like a Ponzi scheme, where they used loans and new investor funds to pay off existing investors. The charges and arrests announced today reflect our steadfast commitment to holding accountable hedge funds on Wall Street who rip off investors for personal gain.
The Expression "Ponzi Scheme"
A dictionary definition of "Ponzi scheme" is "an investment scheme in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks." The scheme perpetrated by swindler Charles Ponzi collapsed in 1920. Ponzi schemes always collapse; the only question is how long they last before they unravel.

Neither the indictment nor the SEC civil complaint used the word "Ponzi." However, Capers used the expression "like a Ponzi scheme" in his press release, as quoted above. One of the news articles about the case was entitled "A 'Ponzi-esque' Scheme That Came Undone." Another news article called the scheme "one of the largest such fraud cases since Bernard L. Madoff's investment firm unraveled in 2008."

It is difficult to resist using the word "Ponzi," given statements in the court filings. For example, on page 18 of the indictment, it says: "Platinum never disclosed to investors and prospective investors that it was using new investments to pay redemptions..." Similarly, on page 2 of the SEC civil complaint, it says: "Internal documents discussing redemptions are replete with references such as 'Hail Mary time,' and of hoping that new subscriptions would prove sufficient to pay current redemptions."

An Earlier Development
In No. 180 (posted September 9, 2016), I discussed an earlier federal criminal action relating to Platinum Partners. Norman Seabrook is a former official of New York City's Correction Officers Benevolent Association (COBA). Murray Huberfeld is one of the founders of Platinum Partners. On July 7, 2016, U.S. Attorney Preet Bharara of the Southern District of New York filed an indictment charging Seabrook and Huberfeld with one count of conspiracy to commit honest services wire fraud and one count of honest services wire fraud. The indictment alleges that a "kickback scheme" deprived COBA members of Seabrook's "honest services" when COBA's annuity fund and COBA's general fund invested in Platinum offerings. A status conference is scheduled for January 6, 2017. (See U.S.A. v. Seabrook, U.S. District Court, Southern District of New York, Case No. 1:16-cr-467.)

Another Earlier Development
In No. 182 (posted October 7, 2016), I discussed an earlier civil lawsuit that two subsidiaries of CNO Financial Group filed on September 29, 2016 against three individuals associated with Platinum. The CNO subsidiaries had transferred their long-term care (LTC) insurance liabilities through reinsurance arrangements with an entity that had close ties to Platinum. The CNO subsidiaries alleged they had been misled when they entered into the reinsurance arrangements. The lawsuit remains pending. (See Bankers Conseco Life v. Feuer, U.S. District Court, Southern District of New York, Case No. 1:16-cv-76436.)

I also discussed demand letters that the CNO subsidiaries received from their state insurance regulators, who had found the reinsurance arrangements unacceptable. The subsidiaries recaptured the reinsurance.

General Observations
Readers may wonder why I am posting this item about the Platinum cases, since they are about investments rather than insurance. The answer is that Platinum is at the center of several criminal and civil lawsuits related to insurance. For example, I mentioned Platinum in earlier posts relating to LTC insurance at CNO (formerly Conseco) and at Senior Health Insurance Company of Pennsylvania, a former Conseco subsidiary. In addition to Nos. 180 and 182 mentioned earlier, see Nos. 174 (August 11, 2016), 175 (August 18, 2016), 183 (October 19, 2016), and 185 (November 4, 2016).

I believe that the criminal and civil charges against the defendants are serious, and that the evidence against the defendants is strong. I plan to report further developments in the two cases.

Available Material
I am offering a complimentary 114-page PDF consisting of the Capers press release (5 pages), the indictment (49 pages), and the SEC civil complaint (60 pages). Email jmbelth@gmail.com and ask for the January 2017 package relating to the Platinum cases.

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Tuesday, December 27, 2016

No. 194: Life Partners—The Bankruptcy Court Approves a Reorganization Plan

On November 1, 2016, U.S. Bankruptcy Court Judge Russell F. Nelms, who is handling the Life Partners case, approved a reorganization plan. On the same day, the law firm representing the bankruptcy trustee issued a two-page press release about the approval. On the next day, the bankruptcy trustee sent a two-page letter about the approval to investors who had bought fractional interests in life settlements from Life Partners.

Over the years I wrote many articles in The Insurance Forum about Life Partners. I also posted many blog items before and after the initial bankruptcy filing. The three most recent posts were No. 150 (March 16, 2016), No. 151 (March 18, 2016), and No. 156 (April 15, 2016).

Developments in 2015
Life Partners Holdings, Inc. (LPHI) and its subsidiaries Life Partners, Inc. (LPI) and LPI Financial Services, Inc. (LPIFS) participated for many years in the secondary market for life insurance policies. On January 20, 2015, LPHI filed for protection under Chapter 11 of the federal bankruptcy law. On January 30, the U.S. Trustee appointed an Official Committee of Unsecured Creditors (Committee) to represent investors who had bought fractional interests in life settlements from Life Partners. On March 19, Judge Nelms approved appointment of H. Thomas Moran II as Chapter 11 Trustee. On April 7, the judge allowed Moran to expand the bankruptcy filing to include LPI and LPIFS. On May 20, Moran reported on the preliminary results of his investigation of the allegedly fraudulent business conduct that preceded the bankruptcy filing. On November 28, Moran and the Committee filed a Joint Plan of Reorganization. (See In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, Case No. 15-40289.)

Developments in 2016
On January 19, 2016, Moran and the Committee filed an Amended Joint Plan of Reorganization. On March 5, Moran filed a follow-up report on the results of his investigation of allegedly fraudulent conduct that preceded the bankruptcy filing. On March 24, Moran and the Committee filed a Second Amended Joint Plan of Reorganization. On June 21, they filed a Third Amended Joint Plan of Reorganization. On November 1, after many developments, including an evidentiary hearing spread over five weeks, Judge Nelms issued a complex order approving the Third Amended Joint Plan of Reorganization.

The Order
The 50-page order includes many references to the "effective date" of the reorganization plan. On November 2, in his letter to investors about the order, Moran indicated that the effective date had not yet been determined, but that it was estimated to be November 30. The effective date turned out to be December 9. Here is the operative paragraph of the order, which begins at the bottom of page 5:
Accordingly, the Third Amended Plan, as revised at Docket No. 3427 (the "Plan") pursuant to the stipulations of certain parties, including but not limited to the Term Sheet filed at Dkt. No. 3422 and the term sheet admitted into evidence at the Confirmation Hearing as Shamrock Life Settlements et al. Exhibit 8, and in accordance with the Court's October 7 Findings and Conclusions, and inclusive of the Plan Documents, is confirmed as provided in this order (the "Confirmation Order"). [Blogger's note: Shamrock, which is mentioned elsewhere in the order, is one of several entities that had filed objections to the reorganization plan.]
The Exhibit
Attached to the order is a 70-page exhibit listing affected policies. It shows policy number, name of issuing insurance company, and face value. It includes 3,418 policies, arranged alphabetically by name of company. Here are the 11 companies (including affiliates) with at least 100 policies on the list (numbers of policies in parentheses):
Aetna Life Ins Co (108)
American General Life Ins Co (174)
Hartford Life Ins Co (104)
John Hancock Life Ins Co (131)
Lincoln National Life Ins Co (179)
Metropolitan Life Ins Co (310)
New York Life Ins Co (103)
Prudential Ins Co of America (183)
ReliaStar Life Ins Co (132)
Transamerica Life Ins Co (179)
Unum Life Insurance Co of America (169)
General Observations
Court approval of the reorganization plan is a major step toward resolving the Life Partners bankruptcy. The proceedings are now in the hands of parties such as a "Position Holder Trust," a "Creditors' Trust," an "IRA Partnership," and an "Advisory Committee." Judge Nelms has retained jurisdiction.

I would have preferred to provide more information about the order approving the reorganization plan. However, my practice is to refrain from writing about topics I do not understand well enough to be comfortable writing about them. In this instance, I do not understand the complex order well enough to discuss it. Instead, as indicated below, I am making the order available to readers who want to read it for themselves.

Available Material
I am offering a complimentary 124-page PDF consisting of the Moran letter to investors (2 pages), the law firm's press release (2 pages), the text of the order approving the reorganization plan (50 pages), and the exhibit attached to the order (70 pages). Email jmbelth@gmail.com and ask for the December 2016 package relating to Life Partners.

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Monday, December 19, 2016

No. 193: Prudential Suspends Life Insurance Sales in Wells Fargo Branches

On December 12, 2016, Prudential Financial, Inc. (NYSE:PRU), parent of New Jersey-based Prudential Insurance Company of America, announced it has suspended sales of life insurance through branches of California-based Wells Fargo Bank pending the results of Prudential's internal investigation of how Wells Fargo sold the policies. I learned of the announcement from an online article in The New York Times that day. An expanded version of the article appeared in the print edition the next day. The story has been reported in other outlets, including a December 12 online article in The Wall Street Journal. Two lawsuits have been filed against Prudential. California and New Jersey insurance regulators are investigating. A U.S. Senate committee is investigating.

Background on Wells Fargo
On September 8, 2016, the Consumer Financial Protection Bureau (CFPB) issued a consent order directed at Wells Fargo. The order said in part:
[CFPB] has reviewed the sales practices of Wells Fargo, N.A. and determined that it has engaged in the following acts and practices: (1) opened unauthorized deposit accounts for existing customers and transferred funds to those accounts from their owners' other accounts, all without their customers' knowledge or consent; (2) submitted applications for credit cards in consumers' names using consumers' information without their knowledge or consent; (3) enrolled consumers in online-banking services that they did not request; and (4) ordered and activated debit cards using consumers' information without their knowledge or consent....
[Wells Fargo's] employees engaged in "simulated funding." To qualify for incentives that rewarded bankers for opening new accounts that were funded shortly after opening, [Wells Fargo's] employees opened deposit accounts without consumers' knowledge or consent and then transferred funds from consumers' authorized accounts to temporarily fund the unauthorized accounts in a manner sufficient for the employee to obtain credit under the incentive-compensation program....
[Wells Fargo's] analysis concluded that its employees opened 1,534,280 deposit accounts that may not have been authorized and that may have been funded through simulated funding, or transferring funds from consumers' existing accounts without their knowledge or consent...and that its employees submitted applications for 565,443 credit-card accounts that may not have been authorized using consumers' information without their knowledge or consent....
Wells Fargo agreed to pay a civil monetary penalty of $100 million to CFPB, and up to $5 million in redress to consumers. It also agreed to, among other things, retention of an independent consultant, oversight by the Wells Fargo board of directors, reporting and record keeping requirements, and cooperation with CFPB. (See In the Matter of Wells Fargo Bank, N.A., Administrative Proceeding 2016-CFPB-0015.)

Prudential's "MyTerm" Life Insurance
The product at the center of the current story is "MyTerm." In its December 12 announcement, Prudential said it launched the product in 2007, entered into a distribution agreement with Wells Fargo in June 2014, and said the product "was created to give customers greater choice and access to life insurance through a self-assisted, technology-enabled application process." The announcement attributed this statement to Stephen Pelletier, executive vice president and chief operating officer of Prudential's U.S. businesses:
We stand behind the MyTerm product but have decided to suspend sales of that product through Wells Fargo's retail banking franchise until we have all the facts about whether it is being distributed properly and in the best interest of customers. While our review is ongoing, Prudential remains squarely focused on doing what is right for our customers. If any Wells Fargo MYTerm customers have concerns about the way in which the product was purchased, we will reimburse the full amount of the premiums they paid and cancel the policy. We have also set up a toll-free hotline [1-877-291-7193] for these customers.
The Broderick Lawsuit
On December 6, six days before Prudential's announcement, three individuals who claim they were "wrongfully terminated" filed a lawsuit in New Jersey state court. The case was assigned to Superior Court Judge L. Grace Spencer. Governor Christie nominated her in May 2016, and the New Jersey Senate confirmed her. She received her law degree from the Rutgers University Law School. (See Broderick v. Prudential, Superior Court, Essex County, New Jersey, Docket No. ESX-L-8348-16.)

The plaintiffs and their positions prior to their termination are Julie Han Broderick, vice president, corporate counsel and co-head of the Corporate Investigations Division (CID); Darron Smith, director of CID; and Thomas Schreck, director of CID. The defendants are Prudential; Deborah Bello, chief regulatory officer; and Jane and John Doe, currently unknown Prudential "supervisors who actively and intentionally engaged in retaliatory conduct against Plaintiffs."

According to the complaint, by January 2015 Prudential had learned that MyTerm policies sold through Wells Fargo had a high lapse rate. Prudential sent a survey to MyTerm clients in an effort to determine the cause. More than 700 emails were returned as undeliverable, 12 clients did not understand the policy or know about the premiums, and at least one client complained of high pressure tactics used in an attempt to sell insurance to an individual who did not need insurance. The plaintiffs allege that Prudential took no action in response to the survey results.

In or about September 2016, Prudential conducted an inquiry into whether a fraud scheme similar to that involving Wells Fargo bank accounts could occur with regard to MyTerm policies. The review found, among other things, a 70 percent lapse rate among MyTerm policies sold in 2014, sales spikes near the end of each quarter, and sales predominately to individuals with Hispanic sounding last names concentrated in the southern portions of Arizona, California, Florida, and Texas. Steps were taken to review the results further.

At about the same time, CID received a call on its fraud hotline from a client who said he had never authorized the purchase of a policy and was trying to cancel the policy before the next premium due date. CID learned that the money to start the policy had come from the client's small and unused savings account.

CID investigated further and found many clients with similar experiences. Many did not speak English, and needed an interpreter. The complaint describes developments in October and November 2016, when CID officials were pushing for strong measures and Prudential officials senior to them disagreed on how to proceed. The complaint says the plaintiffs eventually were escorted out of the building in a kind of "perp walk," and later were "wrongfully terminated."

The complaint contains two counts of alleged violations of New Jersey's Conscientious Employee Protection Act. The plaintiffs seek, among other things, back pay, compensatory and punitive damages, attorney fees, and costs.

According to the December 12 article in the Journal, Pelletier also sent a letter to employees that day. A Prudential spokesman did not respond to my email request for a copy of the letter. According to the Journal, Pelletier said the three individuals who filed a wrongful-dismissal lawsuit in state court in New Jersey had been "brought in after the review was already under way to assist in gathering facts, and that review continues." According to the Journal, Pelletier added that "these employees were dismissed in response to an entirely unrelated ethics complaint filed against them by individuals who were in no way involved in the Wells Fargo review."

The Perea Lawsuit
On December 12, the day Prudential issued its announcement, Alex Perea filed a class action lawsuit against Prudential in federal court in New Jersey. The case was assigned to U.S. District Judge John Michael Vazquez. President Obama nominated him in March 2015, and the Senate confirmed him in January 2016. He received his law degree summa cum laude from the Seton Hall Law School. (See Perea v. Prudential, U.S. District Court, District of New Jersey, Case No. 2:16-cv-9134.)

The plaintiff, an Arizona resident, held and still holds a Wells Fargo bank account he opened in 2010. Around October 2016, he received a past due letter from Prudential for MyTerm life insurance. The complaint alleges that at no time did he approve, sign up for, or enter into an agreement for such a policy. The defendants are Prudential, Pruco Life Insurance Company of New Jersey, and Pruco Life Insurance Company.

Perea alleges that Prudential authorized Wells Fargo employees to sell MyTerm policies to Wells Fargo banking customers and set up an incentive ("kick back") program for Wells Fargo agents based on the volume of MyTerm sales. He also alleges that the program "permitted and encouraged wide-scale cheating whereby Wells Fargo employees established and 'sold' MyTerm policies to Wells Fargo banking customers without their consent." The complaint includes allegations similar to some of those in the Broderick case. The plaintiff seeks to certify a nationwide class consisting of all persons in the U.S. who were Wells Fargo banking customers and were enrolled in MyTerm policies without their knowledge or consent.

The complaint includes two claims. One is for violation of the Racketeer Influenced and Corrupt Organizations Act (RICO). The other is for violation of the New Jersey Consumer Fraud Act. The plaintiff seeks class certification; a declaratory judgment; injunctive relief; compensatory, exemplary, and statutory penalties, including treble damages and interest; return of unauthorized premiums; and attorney fees and costs.

The California and New Jersey Investigations
On December 12, the California Department of Insurance issued a press release announcing it was launching an investigation into the allegations made by former Prudential employees about Wells Fargo employees signing up consumers for Prudential policies without authorization. According to the press release, the investigation will be in collaboration with the New Jersey Division of Insurance, which is also investigating the matter.

The Cummings-Warren Investigation
U.S. Senator Elijah E. Cummings (D-MD) is the Ranking Member of the Committee on Oversight and Government Reform. On December 13, 2016, he and U.S. Senator Elizabeth Warren (D-MA) sent a letter to John R. Strangfeld, chairman and chief executive officer of Prudential Financial.

Cummings and Warren asked Strangfeld to provide, by January 13, 2017, documents relating to: (1) Prudential's investigations of Wells Fargo's practices in selling Prudential policies at Wells Fargo branches; (2) contracts between Prudential and Wells Fargo authorizing sale of Prudential policies at Wells Fargo branches or kiosks; (3) marketing and promotion of Prudential policies sold at Wells Fargo branches; (4) notification to Prudential employees of alleged fraudulent activity in the sale of Prudential policies at Wells Fargo branches; (5) how and when Prudential management first became aware of improper sales tactics used in the sale of Prudential policies at Wells Fargo branches; (6) income and profit derived by Prudential from the sale of its policies at Wells Fargo branches; (7) Prudential surveys of customers' experiences with Prudential policies sold at Wells Fargo branches; and (8) rates of complaints from customers regarding Prudential policies sold at Wells Fargo branches.

General Observations
There has been very little discussion of the Perea class action lawsuit. The Broderick case has been described as a "whistle blower" lawsuit and as a "wrongful termination" lawsuit. I think either description is accurate. I think it is possible that the Broderick case prompted Prudential's December 12 announcement, which in turn led to the media coverage and the investigations.

I believe that Prudential's entanglement in the Wells Fargo scandal relating to bank accounts is a major embarrassment for Prudential. I also think it is a development that may have an impact on the sale of life insurance and annuities through banks, credit unions, and other financial institutions. The results of the investigations should be watched closely.

Available Material
I am offering a complimentary 79-page PDF containing six items: the Prudential December 12 announcement (1 page), the California Department of Insurance December 12 press release (1 page), the Cummings-Warren December 13 letter to Strangfeld (3 pages), the Broderick December 6 complaint (21 pages). the Perea December 12 complaint (27 pages), and the CFPB September 2016 consent order directed at Wells Fargo (26 pages). Email jmbelth@gmail.com and ask for the December 2016 package relating to Prudential and Wells Fargo.

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Wednesday, December 14, 2016

No. 192: The U.S. Department of Labor Wins A Pyrrhic Victory in Another Lawsuit Challenging Its New Fiduciary Rule

In No. 188 (posted November 15, 2016), I discussed a lawsuit filed by the National Association of Fixed Annuities (NAFA) challenging the new fiduciary rule promulgated in April 2016 by the U.S. Department of Labor (DOL). I characterized the lawsuit as a win for DOL, because the judge denied the plaintiff's motion for a preliminary injunction and for summary judgment, and granted DOL's cross-motion for summary judgment.

Now we have a second win for DOL, in a lawsuit filed by Market Synergy Group, Inc. (MSG). The judge denied MSG's motion for a preliminary injunction to prevent implementation of the rule.

The MSG Lawsuit
On June 8, 2016, MSG filed a complaint against DOL, and on June 17 filed a motion for a preliminary injunction. The case was assigned to U.S. District Judge Daniel D. Crabtree. President Obama nominated him in August 2013, and the Senate confirmed him in April 2014.

On July 22, DOL opposed the motion for a preliminary injunction. On August 5, MSG responded. On September 28, DOL commented further.

The Court Ruling
On November 28, Judge Crabtree filed a memorandum and order. He concluded that MSG is not likely to succeed on the merits of its claim, and that MSG therefore is not entitled to injunctive relief. Consequently he denied MSG's motion for a preliminary injunction. (See MSG v. DOL, U.S. District Court, District of Kansas, Case No. 5:16-cv-4083.)

The Plaintiff
To understand this case, it is helpful to know about MSG, the plaintiff. Here is how Judge Crabtree describes MSG in his order:
Plaintiff is a Kansas Corporation and a licensed insurance agency based in Topeka, Kansas. Plaintiff works with insurance companies to develop specialized, proprietary FIAs [fixed index annuities] and other insurance products for exclusive distribution. It partners with IMOs [independent marketing organizations] to distribute these products. About 3,000 agents and other financial professionals sell proprietary products developed through plaintiff's relationships with insurance companies.
Plaintiff also conducts market research and provides training and product support for IMO network members and the independent insurance agents who IMOs recruit. Plaintiff describes its business as dependent upon the viability of the IMO/independent insurance agent distribution channel for sales of FIAs and other fixed insurance products.
Plaintiff distributes FIAs and other insurance products through 11 IMO network members. These IMO network members are independently owned insurance wholesalers that assist independent agents and financial advisers who aspire to increase their life insurance and annuity business. About 20,000 individual agents work with the 11 IMOs in plaintiff's network. In 2015, plaintiff and its network members collectively generated about $15 billion of FIA sales, measured by premiums paid. Nationwide, about 80,000 independent insurance agents are engaged in the sale of FIAs.
The Parties' Contentions
Judge Crabtree describes the contrasting views of MSG and DOL in his order. Here are his two paragraphs about MSG's views and one paragraph about DOL's views:
Plaintiff asserts that the rule change will have grave consequences for its business. Plaintiff describes its business model as one depending heavily on its ability to receive compensation generated from FIA sales. Plaintiff estimates that its revenue will decline by almost 80% under the amended version of PTE [prohibited transaction exemption] 84-24 because the rule change prohibits plaintiff and others affiliated with it from receiving third-party compensation for FIA sales. Plaintiff also anticipates that the IMOs and insurance agents that it works with to distribute FIAs will experience significant revenue losses. And, plaintiff forecasts that more than 20,000 independent insurance agents will exit the marketplace if the rule change takes effect.
Plaintiff also complains that the DOL lacked a sufficient basis to remove FIAs from the exemption in PTE 84-24 when it allowed other types of fixed annuities to remain under the exemption. Plaintiff contends that other types of transactions that still enjoy exemption under the amended version of PTE 84-24 are indistinguishable from FIAs and present no different risks of conflicts of interest compared to FIAs.
The DOL responds that the rule change is necessary to protect consumers. The DOL asserts that FIAs are complex transactions that involve significant conflicts of interest at the point of sale. Because of these characteristics, the DOL contends that FIA sales require more stringent rules governing the payment of third-party compensation, and thus should not enjoy exemption under PTE 84-24.
General Observations
The NAFA and MSG cases are Pyrrhic victories for DOL because the expense associated with the lawsuits may be wasted. Although the DOL rule is scheduled to go into effect in April 2017, it is likely that President-elect Donald Trump's incoming Secretary of Labor will withdraw the rule.

Available Material
I am offering a complimentary 63-page PDF containing Judge Crabtree's memorandum and order. Email jmbelth@gmail.com and ask for the November 2016 Crabtree order in the MSG/DOL case.

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Friday, December 9, 2016

No. 191: Long-Term Care Insurance—A Looming Catastrophe

Long-term care (LTC) insurance came on the scene in the 1970s, and by the early 2000s more than one hundred companies were offering it. Now the number is down to a dozen. Two related LTC insurance companies may be liquidated in 2017. In that case, the excess of estimated liabilities over assets would make it the largest failure in the insurance industry since the collapse of Executive Life in 1991.

Here I address some recent events that provide at least a partial explanation of how we reached this point, and describe the failure of the insurance industry and state insurance regulators to address the problem. I also identify what I see as a solution to the problem, but I acknowledge that the solution may not be feasible from a political standpoint.

My first article about long-term care (LTC) insurance appeared in the February 1988 issue of The Insurance Forum. Since then I have written many additional articles on the subject in the Forum, posted several items on my blog, and included a chapter on the subject in my 2015 book entitled The Insurance Forum: A Memoir.

I have repeatedly expressed the opinion that the financing of LTC, although a very serious problem, cannot be solved through the mechanism of private insurance because the LTC exposure violates several important insurance principles. One of those principles is that the probability of loss should be low, but the probability of loss in LTC is high. Another of those principles is that the likelihood of dispute over whether there has been a loss covered by the insurance should be small, but the likelihood of dispute in LTC is large. I first mentioned such principles in the August 1991 issue of the Forum, and I elaborated on them and other principles in the July 2008 issue.

Penn Treaty
Penn Treaty Network America Insurance Company and its affiliated American Network Insurance Company (collectively "Penn Treaty") are LTC insurance companies based in Pennsylvania. In 2009 they became insolvent. The Pennsylvania insurance commissioner filed in state court a petition to liquidate the company. Penn Treaty's parent company opposed the petition. In May 2012, after lengthy delays and a bench trial, the court denied the liquidation petition and ordered the commissioner to develop a rehabilitation plan. The commissioner recently petitioned to convert the rehabilitation into a liquidation.

On September 23, 2016, the court issued an order approving a settlement involving the commissioner, Penn Treaty, and Penn Treaty's parent company. The settlement provides for Penn Treaty to be placed in liquidation. The court overruled objections of agents who would suffer commission losses, and objections of health insurance companies who would be assessed by state guaranty associations to address part of the shortfall involved in the liquidation. The agents and health insurance companies said they will appeal the ruling.

On November 9, 2016, the court held a hearing on the proposed settlement. It is my understanding that, at the hearing, the court said it would rule on the matter after January 1, 2017. If the court allows the liquidation, the effect would be to trigger coverage by state guaranty associations, who would then impose assessments on surviving health insurance companies. The "hole" is huge. Penn Treaty's assets are about $700 million, its liabilities are estimated to be up to about $4 billion, and its policyholders are likely to suffer significant losses even after the involvement of state guaranty associations.

Northwestern Mutual's Premium Increase Requests
Northwestern Long Term Care Insurance Company, a wholly owned subsidiary of Northwestern Mutual Life Insurance Company, recently announced it was seeking regulatory approval of LTC insurance premium increases for the first time in its history. I requested a statement from the company. A spokeswoman said:
Our filings contain proposed rate increases for several of our inforce LTC insurance blocks of business. These guaranteed renewable products include lifetime pay and limited pay premiums with benefit period offerings of three years, six years, and lifetime.
This is the first time we have raised rates on inforce policies and we don't make this decision lightly. However, we believe that in the best interest of all of our policyowners, this action is prudent to sustain the financial well-being of the product line, and to strengthen our ability to pay future claims.
The requested rate increase, on average, for these policy forms is 27 percent of premium. It ranges from 10 percent to 30 percent depending on the policy features. The amounts and timing of actual increases will vary by state, as they are subject to state insurance department approval. While we expect some states to approve our proposed increase, other states may approve a lower amount. Some may approve in stages, and still others may insist on a higher rate increase. The requested rate increase is due to people living longer, holding on to their policies longer, going on claim more frequently, and staying on claim longer than originally assumed.
I was surprised by Northwestern's action. I thought the company, unlike other companies, used extremely conservative assumptions in pricing its LTC insurance, and therefore charged premiums much higher than those of other companies. Thus I thought the company's LTC insurance premiums would not have to be increased. The company's need to increase premiums supports my view that the problem of financing LTC cannot be solved through private insurance.

The FIO Report
In November 2016 the Federal Insurance Office (FIO) of the U.S. Department of the Treasury issued a Report on Protection of Insurance Consumers and Access to Insurance. The report includes a section on LTC insurance. That section includes a subsection entitled "Failure in the Long-Term Care Insurance Market," which reads:
The number of insurers offering individual LTC insurance declined from more than 100 in the early 2000s to only 12 as of year-end 2015. From 2013 through 2015, LTC insurance annual new premiums fell from $403 million to $261 million, and new lives covered fell from 171,000 to 104,000. In the employer-sponsored LTC insurance market, the number of participants added to group plans dropped by 65 percent between 2013 and 2014, and by another 55 percent in 2015.
Insurers continuing in the LTC insurance market have tightened underwriting standards and are offering new products with fewer benefits at higher prices. These changes likely dampen demand for LTC insurance. In addition, publicity regarding financial difficulties at several major LTC insurers adds to the constriction of the market.
Another subsection, entitled "The Path Forward," says the "social need for LTC is significant and growing." It mentions "aging of the U.S. population" and "increased longevity." It also says:
Consumers, care providers, social services networks, LTC insurance providers, and others in the private sector, as well as regulators and policymakers, should collaborate to develop innovative approaches to lowering LTC costs and promoting the viability of existing and new payment sources. State policymakers and insurance regulators should address the lack of regulatory uniformity that has exacerbated the inherent challenges of the LTC insurance market. The challenges in providing LTC are of acute national interest, and extend far beyond the insurance sector. For that reason, collaboration between federal and state officials is essential—all must work together and embrace the challenge of financing LTC.
The FIO report does not say what "innovative approaches" might emerge from such "collaboration." Nor does the report mention the closed (by invitation only) three-hour LTC insurance "roundtable" that the FIO convened in Washington, D.C. on August 4, 2016. The roundtable, held in the wake of a substantial increase in LTC insurance premiums for federal employees, was attended by insurance companies, insurance regulators, insurance trade and professional organizations, federal agencies, and nonprofit organizations. Discussions of "collaboration" may have occurred, but I do not know what specific suggestions were made. There has not been and apparently never will be a transcript of what was said at the roundtable.

While working on a blog item about the roundtable, I tried without success to obtain from some of the participants the statements they made there. Some did not respond to my request. Others informed me that, when they were invited to participate, they were asked verbally (not in writing) to refrain from circulating their statements because it was important to encourage candor.

After I posted the blog item about the roundtable, I was flattered to receive an invitation to attend a follow-up session. I declined for two reasons. First, I cannot travel long distances because I no longer fly. Second, as a matter of principle, I will not attend a closed session or agree not to circulate any statement that I or others might make. In other words, I will not tolerate censorship.

John Hancock
John Hancock Life & Health Insurance Company is a wholly owned subsidiary of Canada-based Manulife Financial Corporation. On November 10, 2016, Manulife announced financial results for the third quarter of 2016. Here are two separate paragraphs from Manulife's press release:
We completed our annual review of actuarial methods and assumptions in the third quarter, resulting in a net reserve strengthening of $455 million. This amount included updates to policyholder assumptions across a number of products, including LTC insurance in the U.S., as well as a charge of $313 million related to a proactive 10 basis point downward revision to our ultimate reinvestment rate assumptions.....
In response to industry trends and stagnant consumer demand, we are also announcing that we will discontinue new sales of our stand-alone individual LTC insurance product. This decision will not have a material impact on our on-going earnings (see "Caution regarding forward-looking statements"). We are committed to serving our existing customers and honoring our obligations to our over 1.2 million LTC insurance policyholders. We intend to continue to offer LTC insurance coverage as an accelerated benefit rider to our wide range of life insurance products, as this has become an increasingly popular alternative to stand-alone LTC insurance policies in recent years.
John Hancock is the underwriter of the LTC insurance program for federal employees, and was the only bidder when the program was renewed in 2016 for seven years. Now that the company is ending the sale of stand-alone LTC insurance policies, it is not clear what will happen to the program in 2023 if John Hancock does not submit a bid and if there are no other bidders.

Although combining LTC insurance and life insurance into the same package may be "popular," I think it is a frightening idea. Life insurance has proven to be a durable financial instrument in developed countries for centuries. In the U.S., for example, life insurance dates to the first half of the 19th century. However, I have said—and experience has shown—that the problem of financing LTC cannot be solved through private insurance.

I believe that the inevitable result of combining unworkable LTC insurance with tried and proven life insurance will be the destruction of life insurance. "Hybrid" policies containing LTC insurance provisions inevitably will require premium increases, benefit reductions, or both. The reputation of life insurance for reliability will be shattered, with disastrous consequences for the industry.

The Congressional Hearing
On November 30, 2016, the Subcommittee on Government Operations of the Committee on Oversight and Government Reform of the U.S. House of Representatives held a 90-minute hearing entitled "Federal Long Term Care Insurance Program: Examining Premium Increases." The hearing was held four months after the sharp premium increases that John Hancock, with the involvement of the U.S. Office of Personnel Management (OPM), imposed on participants in the federal LTC insurance program. Included among the participants are some members of Congress.

I reviewed the prepared statements of the five witnesses and watched the video of the hearing. The witnesses were a representative of John Hancock, the underwriter of the LTC insurance program for federal employees; OPM, which was charged by Congress with administering the federal statute that created the LTC insurance program for federal employees; the American Academy of Actuaries, on behalf of actuaries who were accused of making faulty assumptions in pricing LTC insurance; and the National Active and Retired Federal Employees Association, which was outraged by the recent premium increases. The other witness was a gerontology professor who is also a consultant to LTC insurance companies.

The chairman and ranking member of the subcommittee made opening statements, and each witness gave a five-minute summary of his or her prepared testimony. Then subcommittee members directed questions at the witnesses for the remainder of the hearing. There was harsh criticism leveled at the OPM representative for not coming to the hearing with recommendations on how to prevent the problem from happening again; however, it is unclear whether that is OPM's responsibility. There was strong criticism directed at actuaries; however, I question whether they should shoulder the primary responsibility for the problems in LTC insurance. Marketing executives and other senior executives who outrank the actuaries surely bear some responsibility for LTC insurance problems.

This sentence in the testimony of the gerontology professor relating to "Long-Term Services and Supports" (LTSS) caught my eye: "Despite private sector challenges insuring this risk, LTSS has all the characteristics of an insurable risk." I disagree. As I have indicated, I believe that the LTC exposure violates important insurance principles, and that the problem of financing LTC cannot be solved through private insurance.

There were suggestions about the concept of private insurance companies providing basic coverage and the federal government serving as a backstop to provide broader coverage. Flood insurance was mentioned as an analogy, although there are major differences between flood exposure and LTC exposure. There were also references to tying LTC insurance to life insurance through hybrid policies.

General Observations
I have said the problem of financing LTC cannot be solved through private insurance. That observation leaves open the question of how the problem should be solved. In my opinion, the only way to address the problem is through the inclusion of LTC benefits as part of a mandatory U.S. government system of national (universal) health insurance (NHI). NHI has been a controversial political issue in the U.S. since 1916. Interestingly, an early supporter was the American Medical Association, which later became a strong opponent. Also interestingly, an early opponent was organized labor, which later became a strong supporter.

NHI is not part of Social Security because President Franklin Roosevelt considered it so controversial that it might jeopardize enactment of Social Security. President Harry Truman advocated NHI but did not have adequate political support for it. Medicare, which I consider a political miracle, was enacted during the tenure of President Lyndon Johnson. The Affordable Care Act passed during the tenure of President Obama is a compromise measure lacking important characteristics of NHI. Today the U.S. remains the only developed nation in the world without NHI. Opponents label NHI (or "Medicare for all") as socialistic, which it is; however, it is also the only way to get everyone insured.

Available Material
I am offering a complimentary 25-page PDF containing these items: the agenda for the FIO "roundtable" and the names of those invited to attend (8 pages); the section of the FIO report relating to LTC insurance (8 pages), and the articles in the February 1988, August 1991, and July 2008 issues of The Insurance Forum (9 pages). Email jmbelth@gmail.com and ask for the December 2016 package relating to LTC insurance.

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