Monday, March 27, 2017

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

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

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

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

In No. 149, I described the allegations in some detail. The essence of the allegations is that the defendants paid recruiters to find individuals willing to take a medical examination in exchange for about $100, took personal information and submitted applications for life insurance in many cases without the individual's knowledge, in some cases created fraudulent drivers' licenses, opened hundreds of bank accounts from which to pay premiums, typically paid one to four months of premiums before allowing the policies to lapse, returned verification calls to the company purporting to be the applicants, used phony addresses on many applications in an effort to avoid detection, and fabricated the names of policy beneficiaries.

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

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

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

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

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

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

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


Monday, March 20, 2017

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Monday, March 13, 2017

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

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

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

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

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

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

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

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

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

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

The NOLHGA spokesman sent me a memorandum dated June 16, 2016 from Long Term Care Group, Inc. (LTCG), which is an LTC insurance administration firm. LTCG is working with Commissioner Miller, NOLHGA, and the GAs on the Penn Treaty case. The LTCG memorandum alludes to a "Common Interest and Confidentiality Agreement," which probably is the secret agreement to which I referred in No. 200 (posted January 27, 2017). Included in the LTCG memorandum is a tabulation showing for each state, and for each of the two Penn Treaty companies separately, estimates of the number of policies, the gross liabilities, the assets, and the net liabilities. The total number of policies was 78,661, gross liabilities were about $3.0 billion, assets were about $434 million, and net liabilities were about $2.6 billion. Regarding the tabulation, the spokesman said:
Please note that the estimates are based on year-end 2015 information. We expect the results of ongoing claim payments over 2016 and the first two months of 2017 will have a significant impact on the final liquidation date projections.
My Survey of Companies
I asked several shareholder-owned companies for their estimates of the amounts they will be assessed in connection with the Penn Treaty liquidation. Several referred me to their 10-K reports filed with the Securities and Exchange Commission (SEC) for the year ended December 31, 2016. Some also said they will comment further in their 10-Q reports filed with the SEC for the quarter ended March 31, 2017. I reviewed the 10-K reports of those companies and those of several other shareholder-owned companies. Here are the results of my survey:
Aetna: $230 million.
AFLAC: $10 million to $20 million.
Anthem: $190 million to $220 million.
Centene: Nothing found in 10-K.
CIGNA: $85 million after tax.
CNO Financial: Nothing found in 10-K.
Genworth: Referred me to the 10-K, in which the company said in part: "[W]e have not established any accruals for guaranty fund assessments associated with Penn Treaty as of December 31, 2016. We will continue to monitor the situation and may record a liability and expense in future reporting periods."
Humana: $30 million.
Manulife: The Canadian parent of John Hancock. Manulife did not respond to my inquiry, and the relevant financial statement for the year ended December 31, 2016 has not yet been filed with the SEC.
MetLife: A spokesman said there is no estimate yet.
Prudential: $47.9 million for Penn Treaty, Executive Life, and Lincoln Memorial combined.
UnitedHealth: $350 million.
Unum: $12 million to $15 million after tax.
Three Other Inquiries
I wrote to New York Life, a mutual company that is in the LTC insurance business. A spokesman said there is no schedule or general interrogatory in the statutory financial statement requiring the company to disclose this detail. He said that, if it were material, the company would disclose it in the company's audited financial statement and potentially in a footnote in the company's statutory financial statement.

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

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

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

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

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


Monday, March 6, 2017

No. 207: The Hank Greenberg/Howard Smith/New York Attorney General Settlement of Civil Charges—A Follow-Up

In No. 205 (posted February 21, 2017), I discussed the recent settlement of civil charges by the New York Attorney General (NYAG) against Maurice ("Hank") Greenberg and Howard Smith, former executives of American International Group, Inc. (AIG). Greenberg's attorneys are in the firm of Boies, Schiller & Flexner LLP. When I posted No. 205, I sent it as a courtesy to a Boies spokesman. He sent me eight "factual points," which he asked me to "fix in the interests of accuracy." I asked him for several documents, and he provided all but two. This follow-up shows his eight points and my comments on them. I also expand here on my brief reference in No. 205 to AIG's 2006 global settlement with federal and state agencies. That settlement is relevant to several of the points and comments below.

Point 1: You write that, "Over the years since, Greenberg and Smith settled most of the state charges." That is not the case. The other claims and the pursuit of damages were all dropped by the NYAG, not settled.

Comment 1: The documents I received from the Boies spokesman in response to my request show that the NYAG dropped the charges against Greenberg and Smith, other than the two recently settled charges, and did not pursue damages relating to the dropped charges. I stand corrected.

Point 2: You also write the following: "I mentioned earlier the July 2005 memorandum from Greenberg's attorneys challenging AIG's restatements. Now Greenberg says the 'accounting for the Gen Re transaction was correctly restated by AIG.'" This is misleading because the bulk of the White Paper on the Restatement had to do with other items.

Comment 2: In response to my request, the Boies spokesman sent me the "White Paper on the Restatement," which I called the "July 2005 memorandum from Greenberg's attorneys." The 49-page document includes a three-page discussion (on pages 16-19 of the PDF) of the Gen Re transaction and the question of what constitutes a sufficient transfer of risk to qualify a transaction for accounting treatment as reinsurance. In the statement that is part of the recent settlement with the NYAG, and as shown in No. 205, Greenberg said: "The accounting for the Gen Re transaction was correctly restated by AIG in AIG's 2005 Restatement." So that readers can understand the full context of the three-page discussion of the Gen Re transaction, I am including the 49-page document as part of the package offered at the end of this post. I believe that my characterization of the document as challenging AIG's restatements was not misleading.

Point 3: You state as fact: "Security analysts pay closer attention to underwriting losses than to investment losses." That is disputed, and in fact the effect of the Capco transaction on AIG's Combined Ratio was immaterial (less than 0.5 percent in any year).

Comment 3: I asked the Boies spokesman for documents showing that one or more persons think security analysts do not pay closer attention to underwriting losses than to investment losses. He sent me an excerpt from trial testimony by Greenberg that "The combined ratio is the key ratio for that in determining whether you make a profit." He also sent me excerpts from the testimony of other AIG witnesses. I still believe that security analysts pay closer attention to underwriting losses than to investment losses, and that Greenberg's concern about the matter prompted the Capco transaction. Also, I said nothing in No. 205 about materiality.

Point 4: You also state about the transaction with Gen Re, "The reinsurance was a sham because it did not transfer risk." There was no finding of that—that's just the allegation.

Comment 4: I asked the Boies spokesman for documents showing the reasoning of one or more persons who believe that the Gen Re transaction transferred risk. He sent me excerpts from trial testimony by Greenberg, Smith, and other AIG witnesses, such as the statement that "AIG reasonably believed that the transaction transferred risk and could be accounted for as reinsurance." However, in the trial of the "Hartford Five," the transcripts of the telephone conversations show that Gen Re executives viewed the absence of risk transfer as the key problem with the transaction. Gen Re treated the transaction as a deposit rather than as reinsurance, and in 2005 AIG restated its financial statements to treat the transaction as a deposit rather than as reinsurance. I still believe that the transaction was a sham that did not transfer risk and therefore did not qualify as reinsurance for accounting purposes.

Point 5: Regarding the statement that you have not seen the settlement agreement, you have in fact seen all the documents, including Feinberg's recommendations, which contain the provisions of the settlement. (The only thing you haven't seen, as far as I know, is the Mediation Agreement.)

Comment 5: I am not sure what the Boies spokesman's complaint is on this point, because he agrees with me that I have not seen the settlement agreement, which he calls the "Mediation Agreement." Perhaps he is saying I do not need to see that document. In any case, I asked him for the original version and the amended version of it. He said they are confidential. He said the original version is simply an agreement to enter into mediation before Feinberg and identifies the procedures to be followed. He said the amended version simply extends the schedule for completion of the mediation process. I fail to see why such documents should be confidential.

Point 6: Also, you suggest that Greenberg and Smith paid interest on top of the $9 million for Greenberg and $900,000 for Smith. In fact those amounts were inclusive of interest.

Comment 6: I said this in No. 205: "Greenberg agreed to pay $9 million (with interest), and Smith agreed to pay $900,000 (with interest)." My comments about interest were based on an ambiguous statement in the Feinberg recommendations that Greenberg and Smith "personally disgorge a total amount of $9,900,000 from cash bonuses received plus interest, with Mr. Greenberg personally paying $9,000,000 and Mr. Smith personally paying $900,000." I asked the Boies spokesman for the original and amended agreements in an effort to clear up the ambiguity.

Point 7: Where you say "The DOJ had powerful evidence in the form of tape recordings"—that evidence implicated the Gen Re defendants, not Milton (the AIG defendant).

Comment 7: Christian Milton, from 1985 to 2005, was an AIG vice president with responsibility for reinsurance. His name appeared only once in the Gen Re recordings, but the context implicated him in the AIG/Gen Re transaction. See Comment 8 below showing that he paid a larger fine than two others of the Hartford Five. He also received the longest prison term, although the Hartford Five did not serve their prison terms because the convictions were overturned on appeal.

Point 8: Finally, you write that the Hartford "defendants paid substantial fines." These amounts were not "substantial," and you also fail to mention that the reason the case wasn't retried was the severe criticism of the Government's principal witness (Napier).

Comment 8: John Houldsworth and Richard Napier, both of Gen Re, pleaded guilty. Napier testified for the government during the trial, and questions have been raised about the veracity of his testimony. However, I have no insight into the minds of the prosecutors about why they decided not to retry the case. Also, I think the fines were substantial. So that readers can decide, I show below the fines the district court judge imposed. In parentheses are the prison terms the judge imposed. The defendants did not serve prison time because the convictions were overturned on appeal and the case was not retried. They paid the fines pursuant to deferred prosecution agreements.
Ronald Ferguson of Gen Re: $200,000 (24 months)
Christopher Garand of Gen Re: $150,000 (12 months)
Robert Graham of Gen Re: $100,000 (12 months)
Christopher Milton of AIG: $200,000 (48 months)
Elizabeth Monrad of Gen Re: $250,000 (18 months)
The 2006 Global Settlement
On February 9, 2006, in an 8-K (significant event) report filed with the Securities and Exchange Commission (SEC), and in a press release, AIG announced four settlements—an agreement with the DOJ, a final judgment and consent with the SEC, a settlement agreement with the NYAG, and a stipulation with the New York Department of Insurance. AIG said: "As a result of these settlements, AIG will make payments totaling approximately $1.64 billion." The settlements were attached to the 8-K report as exhibits.

One of the settlements was a February 6, 2006 letter agreement between the DOJ and AIG. The letter was signed by a DOJ official, an attorney for AIG, and Martin Sullivan, the AIG chief executive officer who succeeded Greenberg. The letter focused on the Gen Re and Capco transactions. Here are excerpts about them:
On or about May 31, 2005, AIG filed its 2004 Form 10-K with the SEC which reversed and restated the $500 million increase in loss reserves relating to the AIG/Gen Re [transaction] and stated in part: "AIG has concluded that the transaction was done to accomplish a desired accounting result and did not entail sufficient qualifying risk transfer. As a result, AIG has determined that the transaction should not have been recorded as insurance. AIG's restated financial statements recharacterize the transaction as a deposit rather than as insurance."
In 2000, AIG initiated a scheme to hide approximately $200 million in underwriting losses in its general insurance business by improperly converting them into capital losses (i.e., investment losses) that were less important to the investment community, and thus would blunt the attention of investors and analysts.... In its restatement filed with the SEC in 2005, AIG admitted that the Capco transaction "involved an improper structure created to recharacterize underwriting losses relating to auto warranty business as capital losses. That structure ... appears to have not been properly disclosed to appropriate AIG personnel or its independent auditors."
General Observations
In No. 205, I said Greenberg would never give up. The response from the Boies spokesman supports that statement. The response and the assembling of the documents I requested must have required the expenditure of a substantial (from my viewpoint) amount of time and money by the Boies firm and therefore by Greenberg. However, the amount is surely trivial relative to the total expenses incurred by Greenberg in his 12-year legal battle with federal and state agencies.

The relatively small amount of feedback I received from No. 205 suggests little interest currently among readers. Nonetheless, at the request of the Boies spokesman, I decided to post this follow-up.

Available Material
The 63-page PDF I offered in No. 205 is still available. Now I am offering another complimentary 57-page PDF consisting of AIG's 3-page 2006 press release, the 5-page 2006 AIG/DOJ settlement, and the 49-page "White Paper on the Restatement." Email and ask for the March 2017 package relating to AIG's 2006 settlements.


Wednesday, March 1, 2017

No. 206: Long-Term Care Insurance Premium Increases for Three Companies Are Partially Approved by the Florida Regulator

On January 12, 2017, the Florida Office of Insurance Regulation (FLOIR) announced partial approval of long-term care (LTC) insurance premium increases requested by Metropolitan Life Insurance Company (MetLife), Unum Life Insurance Company of America (Unum), and Provident Life and Accident Insurance Company (Provident). The approvals were through consent orders issued after August 2016 hearings at which FLOIR received public input about the requested increases.

Upon review of MetLife's request for approval of LTC insurance premium increases, FLOIR determined that the requested increases were not reasonable in relation to the benefits provided, but that some increases were necessary for the company to have adequate rates and protect the interests of policyholders. FLOIR approved a portion of the requested increases. The company agreed it would refrain from requesting further increases for ten years, implement the increases over three years, and have the increases reflect policyholder issue age and type of policy.

MetLife agreed to provide four options for policyholders who want to lower their premiums: accept a reduction in the daily benefit, accept a lengthening of the elimination period, accept a reduction in or removal of the inflation provision, or accept a paid-up policy with maximum benefits equal to the premiums paid. The company waived its right to a hearing on the order, and waived its right to challenge the order in an administrative proceeding or in court.

The order includes tables showing percentage increases by issue age for eight policy series: employer group, group, LTC97, VIP1, VIP1RS, TIAA, VIP2 Old, and VIP2 New. For "group," the increases are 20 percent for issue ages up to 70, with smaller percentage increases for older issue ages. For "VIP1," the increases are 70 percent for issue ages up to 70, with smaller percentage increases for older issue ages. For "TIAA," the increases are 55 percent for issue ages up to 70, with smaller percentage increases for older issue ages. A list showing numbers of policyholders in each of Florida's 67 counties accompanies the order.

As indicated above, one MetLife series is "TIAA," which stands for Teachers Insurance and Annuity Association of America. TIAA caters primarily to faculty members of colleges and universities. In November 2003, TIAA informed its 46,000 LTC insurance policyholders that it was getting out of the LTC insurance business and was transferring its existing block of policies to MetLife. I learned of the transfer through telephone calls from professors at Indiana University and other schools. The professors, who had chosen TIAA because of its reputation for stellar treatment of its policyholders, were furious.

I had written several articles in The Insurance Forum about policy transfers. The first is in the October 1989 issue. The first of three major articles about the TIAA/MetLife transfer is in the March/April 2004 issue. TIAA and MetLife are domiciled in New York, and the transfer had to be approved by the New York superintendent of insurance. I sent a statement to the superintendent suggesting several conditions he should impose before approving the transfer. He approved the transfer, but some of my suggested conditions were not imposed. My statement is in the March/April 2004 article.

Unum and Provident
The consent orders directed at Unum and Provident (they are affiliates) are similar to the order directed at MetLife. For Unum, the increases are for three policy series: LTC94, LTC92, and BLTC. For "LTC94," the increases are 101 percent for issue ages up to 70, with smaller percentage increases for older issue ages. A county list accompanies the order.

For Provident, the increases are for one policy series: LTC03. The increases are 85 percent for issue ages up to 70, with smaller percentage increases for older issue ages. There is no county list.

Two Questions
The consent orders express the increases in percentages, but the press release expresses the increases in dollars per month. For example, in MetLife's "TIAA" series, the order says the increases are 55 percent for most issue ages, but the press release says the "average monthly premium increase" is $25 in the first year. I asked FLOIR these questions:
  1. Were the figures in the press release shown in dollars per month to make the premium increases look small?
  2. If not, why did you show the premium increases in the press release in dollars per month?
A spokeswoman for FLOIR answered "No" to the first question. In answer to the second question, she said:
The approved rate filing changes for each company were calculated using percentages by series/form number and issue age, which varied extensively on each exhibit (from the Consent Orders). It would have been confusing for consumers to easily translate this information into actual costs. To help them understand this information better, we developed the average monthly premium impact charts so they could determine what these increased costs would be on their monthly budgets over the 10-year time period.
General Observations
TIAA transferred its existing block of LTC insurance policies to MetLife for two reasons. First, TIAA did not want to administer a block of policies in runoff. Second, MetLife at the time was a "major player" in the LTC insurance business. Ironically, a few years later MetLife itself got out of the LTC insurance business, but is administering its blocks in runoff. Unum and Provident also have gotten out of the LTC insurance business, and are administering their blocks in runoff.

Most companies once active in the LTC insurance business have gotten out of the business. Some transferred their existing LTC insurance blocks to other companies, and some are administering their blocks in runoff. Only a few companies remain active in selling LTC insurance.

Penn Treaty Network America Insurance Company and an affiliate, which are LTC insurance companies, have been in rehabilitation since 2009, have been administering their blocks in runoff, and may be liquidated soon. Also, some other LTC insurance companies have financial problems.

In the Forum since 1991, and on my blog, I have expressed my belief that the problem of financing the LTC exposure cannot be solved through the mechanism of private insurance. The reason is that the LTC exposure violates important insurance principles.

FLOIR's partial approval of the increases requested by MetLife, Unum, and Provident, with a guarantee of no further requests for increases for ten years, is interesting. However, I think it is an example of dealing with problems by "kicking them down the road." What eventually will happen to the LTC insurance business remains to be seen.

Available Material
I am offering a complimentary 35-page PDF consisting of the FLOIR press release (2 pages); the order directed at MetLife, including the county list (10 pages); the order directed at Unum, including the county list (9 pages); the order directed at Provident (7 pages); and the October 1989 and March/April 2004 articles in The Insurance Forum (7 pages). Email and ask for the March 2017 package relating to the FLOIR approval of LTC insurance premium increases.


Tuesday, February 21, 2017

No. 205: Hank Greenberg and Howard Smith Settle with the New York Attorney General over Accounting Practices

On February 10, 2017, the office of the New York Attorney General (NYAG) issued a press release about the settlement of civil charges against Maurice ("Hank") Greenberg and Howard Smith, former executives of American International Group (AIG). Eliot Spitzer, the NYAG at the time, filed charges in 2005 over accounting practices relating to transactions that dated back to 2000.

The Departures
In March 2005, amid reports of accounting improprieties in AIG's financial statements, Chief Executive Officer Greenberg and Chief Financial Officer Smith refused to cooperate with investigators, and invoked their Fifth Amendment rights. AIG's board of directors fired Smith and forced Greenberg to resign.

The State Charges
In May 2005, Spitzer, together with Howard Mills, the New York superintendent of insurance at the time, filed civil charges in state court against AIG, Greenberg, and Smith. The complaint addressed eight matters. AIG settled the charges and restated its financial statements. Over the years since, Greenberg and Smith settled most of the state charges.

The recent settlement involved the remaining two charges. One of them involved a sham reinsurance transaction between AIG and General Reinsurance Corporation (Gen Re), a Berkshire Hathaway company. The reinsurance was a sham because it did not transfer risk.

The other remaining charge involved characterizing automobile warranty losses as investment losses rather than underwriting losses. Security analysts pay closer attention to underwriting losses than to investment losses. The recharacterization was accomplished through Capco Reinsurance Company (Capco), a Barbados company.

In July 2005, Greenberg's attorneys prepared an extraordinary memorandum challenging the restatements that AIG had made in its financial statements. The memorandum also discussed Greenberg's role in the transactions that had prompted the restatements.

The Federal Charges
In February 2006, the Securities and Exchange Commission (SEC) filed civil charges against AIG. The firm settled with the SEC, and at the same time settled with the U.S. Department of Justice (DOJ) to avoid the filing of criminal charges. AIG acknowledged that the accounting for the transactions was improper, had already restated its financial statements, and agreed to a global settlement of more than $1.6 billion to settle the state and federal charges.

That same month, the DOJ indicted four individuals—one from AIG and three from Gen Re—involved in the sham reinsurance. In September 2006, the DOJ filed an amended indictment adding another individual from Gen Re. The defendants became known as the "Hartford Five" because the federal jury trial was held in Hartford. The DOJ had powerful evidence in the form of tape recordings; a Gen Re affiliate involved in the transaction was located in Ireland, where it was routine to record telephone conversations. The jury convicted the Hartford Five, but a federal appellate court overturned the ruling on technical legal grounds. The DOJ decided not to retry the case, and entered into non-prosecution agreements under which the defendants paid substantial fines.

In August 2009, the SEC filed civil charges against Greenberg and Smith. They settled the charges the same day. Greenberg and Smith paid $15 million and $1.5 million, respectively, and neither admitted nor denied the allegations.

The Recent Settlement
The bench trial relating to the two remaining state charges against Greenberg and Smith was interrupted while the parties sought to settle the case. Kenneth Feinberg was the mediator. On February 10, 2017, Feinberg issued his recommendations. He referred to an "Agreement" that was "dated November 28, 2016, and subsequently amended." I asked the NYAG's press office for a copy of the agreement, but received no reply. I then asked the NYAG's office for the agreement pursuant to the New York Freedom of Information Law. I do not know when I will receive it.

On February 10, the NYAG announced the settlement in a press release entitled "A.G. Schneiderman Announces Settlement of Martin Act Case Against Former AIG CEO Maurice R. Greenberg and Former AIG CFO Howard I. Smith." The press release includes links to the statements Greenberg and Smith made as part of the settlement. The statements describe their roles in the Gen Re and Capco transactions. For example, Greenberg's statement reads in part:
The Gen Re transaction was done for the purpose of increasing AIG's loss reserves, and the Capco transaction was done for the purpose of converting underwriting losses into investment losses. I knew these facts at the time that I initiated, participated in and approved these two transactions.... I certified AIG's publicly-filed annual consolidated financial statements aware that the financial effects of these transactions were and continued to be reflected in those statements. As a result of these transactions, AIG's publicly-filed consolidated financial statements inaccurately portrayed the accounting, and thus the financial condition and performance for AIG's loss reserves and underwriting income. The accounting for the Gen Re transaction was correctly restated by AIG in AIG's 2005 Restatement.... The accounting for the Capco transaction was also restated by AIG in AIG's 2005 Restatement of the Company's financial results.
Greenberg agreed to pay $9 million (with interest), and Smith agreed to pay $900,000 (with interest). Those amounts were tied to cash bonuses they received in 2001 to 2004.

I mentioned earlier the July 2005 memorandum from Greenberg's attorneys challenging AIG's restatements. Now Greenberg says the "accounting for the Gen Re transaction was correctly restated by AIG."

The Aftermath
The NYAG's press release had three subtitles that included the words "fraudulent," "frauds," and "fraud," and the first sentence of the text included the word "fraud." Many prominent media outlets picked up on those words from the press release. As examples, a headline in The New York Times was "Two Ex-Executives Settle A.I.G. Fraud Case," and a headline in The Wall Street Journal was "Greenberg Settles Civil-Fraud Allegations in AIG Case."

Greenberg was furious, because the words "fraudulent," "frauds," and "fraud" are not in his statement related to the settlement with the NYAG. Greenberg announced a press conference "to set the record straight." Reportedly a member of the media asked Greenberg whether he was going to sue the NYAG, and Greenberg responded that the NYAG has immunity. The headline of a follow-up story in the Times was "Former A.I.G. Chief Tries to Fight the Headlines."

David Boies, Greenberg's attorney, issued a statement. Its final sentence reads: "Nowhere in the agreed statement by Mr. Greenberg is there any reference to any accounting being fraudulent, let alone that Mr. Greenberg was aware of any fraud."

I asked the NYAG's press office to comment on the Boies statement, but received no reply. However, a spokesman for the NYAG reportedly said that Greenberg's admission "speaks for itself: Mr. Greenberg initiated, participated in, and approved two transactions that fundamentally misrepresented AIG's financial performance to shareholders. No number of press conferences or TV interviews by Mr. Greenberg or Mr. Boies is going to change that fact."

Schiff's Writings
David Schiff wrote extensively about AIG and Greenberg in Schiff's Insurance Observer. I asked Schiff for a statement to be included in the package I am offering to readers. He provided a statement in which the final paragraph begins: "But just because he hasn't pled guilty to fraud doesn't mean he's vindicated. He is, at best, a stained legend." Schiff's statement includes a link to his "AIG Chronicles," which consist of 23 articles from 1993 to 2007.

My Writings
I wrote extensively about AIG and Greenberg in The Insurance Forum. My first article about them included in an appendix the full text of the original Spitzer/Miils complaint. Another article included in an appendix the transcripts of the tape recordings of the telephone conversations that the DOJ used in prosecuting the Hartford Five. My articles appeared in eight issues of the Forum from 2005 to 2012.

General Observations
Greenberg, now 91, will never give up. He has never admitted and will never admit he committed fraud, engaged in fraudulent transactions, or was aware of fraudulent transactions. He spent 40 years building AIG into one of the largest insurance companies in the world, and he became one of the most powerful insurance executives in the world. He does not want to be remembered as having committed fraud, engaged in fraudulent transactions, or been aware of fraudulent transactions.

The key problem is that the recent settlement agreement, which I have not yet seen, probably does not contain the language of an agreed-upon joint statement that the parties could have used in announcing the settlement. That is an important lesson to be learned from the events that occurred in the wake of the recent settlement.

Available Material
I am offering a complimentary 63-page PDF consisting of the Feinberg recommendations (1 page), the NYAG press release (2 pages), the Greenberg statement (1 page), the Smith statement (1 page), the Boies statement (2 pages), the Schiff statement (2 pages), and articles from eight issues of the Forum (54 pages). Email and ask for the February 2017 package relating to the settlement of the NYAG case against Greenberg and Smith.


Tuesday, February 14, 2017

No. 204: President Donald Trump's Outrageous Two-for-One Executive Order Faces a Powerful Legal Attack

On February 8, 2017, Public Citizen and two other plaintiffs filed a powerful lawsuit against President Donald Trump, the United States of America, and many other defendants. The plaintiffs seek to prevent implementation of an outrageous presidential executive order directing federal agencies to rescind two regulations for every new regulation proposed or issued. The case was assigned to Senior U.S. District Judge Gladys Kessler, a 1994 President Clinton nominee who took senior status in 2007. (See Public Citizen v. Trump, U.S. District Court, District of Columbia, Case No. 1:17-cv-253.)

Public Citizen is a national, nonprofit consumer advocacy organization with more than 400,000 members and supporters nationwide. It engages in research, advocacy, media activity, and litigation related to advancing health and safety, consumer protection, and the environment, among other things.

Natural Resources Defense Council is another plaintiff. It is a nonprofit environmental and public health organization with hundreds of thousands of members nationwide.

Communications Workers of America, part of the AFL-CIO, is another plaintiff. It is a labor union representing 700,000 workers in the telecommunications, media, manufacturing, airline, and health care industries and in a wide variety of public sector positions in the U.S., Canada, and Puerto Rico.

President Trump and the U.S.A. are defendants. The other defendants are top officials of the Office of Management and Budget (OMB), the Department of Energy, the Department of Transportation, the National Highway Traffic Safety Administration, the Department of Labor, the Department of the Interior, the Federal Motor Carrier Safety Administration, the Fish and Wildlife Service, the Environmental Protection Agency, the Pipeline and Hazardous Materials Safety Administration, the National Marine Fisheries Service, the Mine Safety and Health Administration, and the Federal Railroad Administration.

The Complaint
Four paragraphs in the ten-paragraph introductory section of the complaint summarize the case. They read:
1. This action seeks declaratory and injunctive relief with respect to an Executive Order on "Reducing Regulation and Controlling Regulatory Costs" issued by President Donald Trump on January 30, 2017, and Interim Guidance issued by the Office of Management and Budget (OMB) on February 2, 2017, regarding implementation of the Executive Order. The Executive Order exceeds President Trump's constitutional authority, violates his duty under the Take Care Clause of the Constitution, and directs federal agencies to engage in unlawful actions that will harm countless Americans, including plaintiffs' members.
2. The January 30, 2017, Executive Order states, among other things, that an agency may issue a new regulation only if it rescinds at least two existing regulations in order to offset the costs of the new regulation. It directs agencies, among other things, (1) to identify at least two existing regulations to repeal for every new regulation proposed or issued, and (2) to promulgate regulations during fiscal year 2017 that, together with repealed regulations, have combined incremental costs of $0 or less, regardless of the benefits. The total incremental cost limit for future fiscal years is to be identified later by the Director of OMB.
3. The Executive Order will block or force the repeal of regulations needed to protect health, safety, and the environment, across a broad range of topics—from automobile safety, to occupational health, to air pollution, to endangered species.
10. The Executive Order is unlawful on its face. Implementation and enforcement of the Executive Order should be enjoined.
Illustrations in the Complaint
The complaint illustrates the kinds of regulations the executive order encompasses, but they are only a few examples of the regulations to be affected. The complaint identifies regulations issued pursuant to several statutes: the Motor Vehicle Safety Act, the Motor Carrier Safety Act, the Occupational Safety and Health Act, the Mine Safety and Health Act, the Toxic Substance Control Act, the Hazardous Materials Transportation Act, the Federal Railroad Safety Act, the Federal Water Pollution Control Act, the Energy Policy and Conservation Act, the Endangered Species Act, and the Clean Air Act.

Causes of Action
The complaint contains five causes of action. They are: (1) the executive order violates the separation of powers, (2) the executive order violates the Constitution's Take Care Clause, (3) because the executive order directs agencies to violate the law, the executive order is of no force and effect, (4) because the executive order directs agencies to violate the law, the OMB interim guidance implementing the executive order and the executive order are of no force and effect, and (5) because the executive order directs unlawful action, its implementation by the director of the OMB will cause other federal agencies to violate the Administrative Procedure Act and is of no force and effect.

The plaintiffs ask the court to do five things. They are: (1) declare that the executive order violates the Constitution's Take Care Clause, exceeds presidential authority under the Constitution's Article II, infringes on legislative authority, and is invalid; (2) declare that the defendants cannot lawfully implement or comply with sections 2, 3(a), and 3(d) of the executive order; (3) declare unlawful and set aside the OMB interim guidance; (4) enjoin the agency defendants, including the director of the OMB, from complying with the executive order; and (5) grant such other relief as the court may deem just and proper.

General Observations
I think Public Citizen's complaint against President Trump is a powerful legal attack against an outrageous two-for-one executive order. Because the executive order focuses on regulatory costs and says nothing about regulatory benefits, I think issuance of the executive order is an act of treachery that is contrary to the health and welfare of humanity.

Public Citizen's complaint has not yet received the broad publicity it deserves, in contrast to the massive public attention to the outrageous executive order relating to immigrants and refugees. It will be important to watch the progress of Public Citizen v. Trump.

Disclosure Note
Public Citizen Litigation Group (PCLG), a unit of Public Citizen, played a major role in drafting the complaint discussed here. PCLG has represented me on several occasions, most notably in my successful lawsuit against the North Carolina Department of Insurance. The Department had sought to ban distribution in North Carolina of the April 1981 issue of The Insurance Forum. That four-page issue was devoted in its entirety to the first of my many articles about the A. L. Williams organization.

Available Material
I am offering a complimentary 61-page PDF consisting of Public Citizen's complaint (49 pages), the two-for-one executive order (4 pages), and OMB's interim guidance (8 pages). Email and ask for the February 2017 package relating to Public Citizen v. Trump.