Monday, June 15, 2015

Sunday Globe Special: Murky Mutual Insurance

It used to be funny, but now it just makes me angry:

"A rich financial realm run almost without oversight; At mutual insurance firms, big money for insiders but no say for ‘owners’ — policyholders" by Deirdre Fernandes and Todd Wallack Globe Staff  June 07, 2015

SPRINGFIELD — Massachusetts Mutual Life Insurance Co. frequently brags that it doesn’t react to the whims of Wall Street, it answers to the millions of policyholders who own the giant insurer. But when a handful of those owners showed up for MassMutual’s annual meeting this spring, they were treated more like security risks.

After driving past the iron fence surrounding the company’s headquarters in Springfield, they had to get their photo taken at the security desk, submit to a search as a guard passed a metal-detecting wand over them, and wait for an escort. Once they got to the meeting, the annual business of the Fortune 100 company, with more than $250 billion in assets, was concluded in 15 minutes.

That same day, Liberty Mutual Insurance convened its annual meeting at its headquarters in Boston. The nation’s second largest property and casualty insurer, it has $124 billion in assets, and 50,000 employees.

And its executives closed out the meeting in six minutes. No presentations were made, no questions asked, and no outside board members attended.

The speed with which the policyholders were shooed out the door is symbolic of the shadows in which MassMutual, Liberty Mutual, and others among the nation’s largest insurance companies, such as State Farm and Nationwide, operate. They are “mutually owned,” which means owned by their policyholders; there are no stockholders as at publicly traded companies. It is a kind of corporate structure that dates to the early years of the American economy, when farmers and ordinary workers found it hard to find insurers and banded together to form their own.

It has grown into something else entirely: an opaque, poorly understood, and often immensely profitable world in which some executives and insiders operate with minimal scrutiny and, no coincidence, often reap maximum personal rewards.

I have to tell you, that is such at odds with the commercial advertisements that are plastered all over the television

Policyholders, despite their status as owners, have no meaningful oversight of how mutual companies spend their money — whether to lower rates, pay dividends, or fund executive salaries and perks — and few avenues to challenge such decisions.

It’s not as if there weren’t questions worth asking in the 21 minutes the two mutual giants together opened their doors to their “owners.”

Liberty’s policyholders might have wondered why the company, despite its $1.8 billion in annual income, generally doesn’t pay dividends to them. And whether its chief executive, David H. Long, merits his nearly $14 million annual pay package.

What are they saying, the feeling is not mutual and they resent the di$ingenuou$ne$$?

MassMutual’s policyholders might have asked about the eight-figure compensation package doled out to chief executive Roger Crandall, the two airplanes and two helicopters the company maintains, or the $34.5 million the company spent last year ferrying executives to New York, Europe, and the Caribbean.

“Here we have a major corporation in the United States that operates in the dark,” said Jason Adkins, a Boston lawyer and longtime insurance industry critic who represents policyholders pushing MassMutual to become more transparent. “People’s voices aren’t heard. It’s about the appropriate treatment of owners.”

At the MassMutual meeting, filled primarily with company employees, Adkins was the sole outsider to stand up and speak.

But more is at stake in this world of scant scrutiny than the interests of policyholders and the self-interest of executives. Mutuals like Liberty and MassMutual have grown to become far more than insurers; they are sprawling financial-services companies managing billions of dollars and with operations entwined in all aspects of the US economy, from real estate to retirement accounts to copper mines. MassMutual alone holds more in assets than Google Inc. and IBM Corp. combined, according to the Fortune 500 list released Friday.

Thus they are TOO BIG TO JAIL and tremendous formers of capital!

Their decisions, actions, and investments can have huge consequences on both Wall Street and Main Street. Recall the financial crisis that started in 2008: Risky products sold by American International Group, a publicly traded insurance company subject to more oversight and disclosure than mutuals, nearly brought down the global financial system and required a government bailout to prevent its collapse. Two other insurance companies took $4.4 billion in taxpayer-funded bailout money in 2009.

Related: Memory Hole: Aim Was Off On AIG Post

The greed distorted the scope.

Since then, the Dodd-Frank financial overhaul law granted the Federal Reserve powers to regulate large institutions — including insurers and their holding companies — that it designates as systemically important, meaning their failures could destabilize the entire financial system. But insurers, both mutual and publicly traded companies, have fought greater oversight, lobbying Congress to limit the involvement of the Federal Reserve and international regulators in the industry.

The sheer size of these companies, though, warrants greater oversight, Michael McRaith, director of the Federal Insurance Office at the US Treasury Department, said during a meeting of a mutual insurance trade group last fall.

“Financial stability conversations have to include the insurance industry,” he said. “I mean, it’s $7.3 trillion in assets in the US. It’s part of our national economy.”

Mutually owned insurance companies say there is no need to change. Quite simply, they argue, if policyholders are unhappy with a company’s management, they can cancel their coverage and buy from a wide array of competitors.


“Policyholders indicate their satisfaction in how the company is run with their decision to purchase insurance,” said John Cusolito, a spokesman for Liberty Mutual, which between 2008 and 2014 grew from the fourth- to the second-largest auto, home, and business insurer in the country, behind only State Farm. “Our growing number of policyholders and high retention rates indicate a strong level of customer satisfaction.”

Mutual insurance companies started as a form of public ownership. Members were supposed to share the risks and the benefits. Profits were supposed to be returned to the policyholders/owners in the form of dividends or lower premiums.

But as mutuals have grown from local to national and even international corporations, their operations have grown more impenetrable to outside review.

Mutuals lack many of the checks and balances of publicly traded companies, where the management can be pressured to make changes by large shareholders, whether institutions or individuals, who can form alliances with other big shareholders, sometimes by buying up millions more shares.

Activist investors like Carl Icahn regularly fight and win battles for seats on a public company’s board of directors, and force changes in corporate leadership, operations, and policies. 

Yeah, the great corporate raider Icahn is some sort of hero.

But with large operations like MassMutual and Liberty Mutual — the state’s only Fortune 100 companies — there are no major stakeholders who can make a difference because it’s virtually impossible for one person to buy millions of policies.

In corporate America, too, outsiders generally have limited power to influence how companies are run. Executives and directors of publicly traded companies can write the rules to ensure, for example, that shareholder votes are advisory and easily ignored. Their annual meetings are often just as brief as those of mutual companies. Public companies, however, must disclose more information, giving shareholders advantages over policyholders.

You guys are "outsiders?"

In the rare case where policyholders try to challenge the management of a mutual, the odds are stacked against them. They typically can’t get lists of other policyholders they might enlist to join their campaign; with public companies, the largest shareholders are publicly reported.

In 2001, when a group called the MassMutual Owners Association tried to get the insurer to convert to a publicly traded company, MassMutual fought back. The company changed its bylaws to prevent policyholders from bringing proposals for a vote without approval from the board of directors. It even took the dissident policyholders to court for trademark infringement for using the company’s name on their website.

The lack of accountability, critics say, could allow executives to mismanage the company or divert extra profits to themselves. That concern isn’t theoretical.

But I wouldn't worry. It's all good people up at the top that run this country and its institutions.

MassMutual fired Robert J. O’Connell as its chief executive in 2005 after alleging that he had improperly used the company’s fleet of aircraft for family and friends, abused his stock trading accounts to earn millions to pad his pay, bought a condominium in Marco Island, Fla., from the company at a price below market value, and interfered with an internal investigation involving two relatives who worked for MassMutual and were suspected of improperly sharing securities information. O’Connell also had affairs with two employees.

$cum of the crop.

The issues came to light only when O’Connell’s wife, who learned about at least one of the affairs, tried to confront MassMutual board members during one of their meetings. That forced the company to investigate, created a wave of bad publicity, and shook up its leadership.

A state court eventually ruled that MassMutual owed O’Connell $50 million in severance pay, although he did relinquish $23 million accumulated in his trading accounts. The two sides reached a private settlement in 2009.

O’Connell’s attorneys argued at the time that MassMutual relied on biased and stale evidence to fire him, and that he hadn’t violated any laws. MassMutual said it has committed to strong corporate governance to avoid such situations in the future.

“MassMutual operates for the benefit of our members and policy owners, and our governance structure, policies, practices and controls are designed — and regularly reviewed — to ensure the company is focused on serving their best interests and long-term needs,” said Jim Lacey, a company spokesman.

Then his tongue turned to sand. I hate to break it to you, but corporate governance has failed. There is 35 years of proof.

Liberty Mutual ran into its own bad publicity in 2012, when the Globe reported that former chief executive Edmund F. “Ted” Kelly earned roughly $200 million in his last four years overseeing the company, making him one of the nation’s highest paid executives. Liberty later acknowledged that his successor, Long, spent $4.5 million to renovate the executive office suite.

Yeah, that was a real bellyacher at the time.

All of this came as a surprise to policyholders, who were never told the details of Kelly’s compensation, perks, and spending. Liberty Mutual defended Kelly’s pay, saying that he earned it by expanding the business over two decades as head of the company. As for the office renovations, Long said that some of the high costs were due to heating and cooling system updates, and having to pay workers for weekend and night work to remove asbestos.

How do you like the lame-a$$ excu$es?

The controversy over Kelly’s compensation prompted the Legislature to require mutual insurers in Massachusetts to report the pay of their top executives on their websites or in letters to policyholders. The disclosures, however, don’t have as much detail as the reports that publicly traded companies must file with the US Securities and Exchange Commission.

In addition, the law doesn’t apply to insurers based in other states, even those with thousands of customers in Massachusetts. Many, including Amica Mutual Insurance Co. of Rhode Island and Nationwide Mutual Insurance Co. of Ohio, refuse to tell policyholders how much their executives make.

“There is a lot more scrutiny that takes place for a publicly traded company,” said Brandon Roberts, a Vermont insurance broker who writes the Insurance Pro blog.

David D’Alessandro led John Hancock Financial first as a mutual, and then as a public company following its conversion in 2000. He said executives can become wealthy running either type of insurer, but at public companies they must do more to justify their pay.

For instance, D’Alessandro was criticized for pocketing roughly $100 million in stock, severance, pension, and other payments in just four years, after he oversaw the Boston insurer’s conversion to a public company, and then its sale to a Canadian financial services company, Manulife, in 2004.

D’Alessandro noted that the company was sold for $38 per share, more than double its initial stock price of $17.

Gee, I wonder how that happened.

Liberty Mutual’s Kelly received twice what D’Alessandro did during a similar period without the same clear financial benefits to owners.

“It’s two different paths for executives to make a lot of money,” D’Alessandro said. “It’s just that the mutual path has a lot less scrutiny, accountability, and transparency.”

Mutual insurers are regulated primarily by a patchwork of state insurance commissioners, many with small staffs. MassMutual’s legal team alone is about half the size of the entire Massachusetts Division of Insurance, which has about 125 employees.

So who is watching out for policyholders? No one, really.

Why would anyone have to watch out? I don't understand why that would be necessary in the greatest economic $y$tem ever devised being run by the nicest class of benevolent rulers we have ever seen. I mean, that is what I have been taught and told about the AmeriKan economic $y$tem my whole life, a message that is reinforced in the Globe. Yeah, there are some bad people out there but the $y$tem, the $y$tem itself is sound and is better than any other ever devised by man!

With publicly held companies, the Securities and Exchange Commission is charged with protecting shareholder and investor rights. Big institutional shareholders, such as unions, pension funds, and foundations, have divisions set up to target companies with poor governance.

Yeah, the SEC is on the beat. Makes me feel a whole pile better.

They knew about Madoff, readers, and let it go on and on and on.

But there are no similar watchdogs to police mutual companies.

Laura Campos, director of shareholder activities for the Nathan Cummings Foundation in New York, said the foundation has used its $444 million endowment to influence a number of public companies, including pushing Rupert Murdoch’s News Corp. to disclose its political contributions, by lobbying executives or proposing shareholder resolutions.

Wow, that's more than 10x that of Harvard.

But Campos said it is so difficult to organize the dispersed owners of mutuals that the foundation hasn’t even tried.

Supporters of mutual ownership say the companies have sufficient oversight from their boards of directors. Lacey, the MassMutual spokesman, said the Springfield insurer’s directors are independent and well qualified, and include retired and current executives from the British chocolate maker Cadbury, Boston biotech Vertex Pharmaceuticals, and Westborough-based retailer BJ’s Wholesale Club, as well as a past Montana governor, and a former president of the Federal Reserve Bank of Boston.

See what I mean? People of impeccable qualifications and esteem.

Last year, the board approved a $10 million compensation package for Crandall, the chief executive, but the figure excluded the more then $14 million in accrued incentives that he cashed out. “Our compensation structure is designed to allow us to attract and retain talented associates in a competitive job market,” Lacey said. 

I'm just wondering how $ick you are of seeing that f***ing excu$e.

Crandall’s perks include personal use of the company’s aircraft. MassMutual owns two jets and two helicopters. It operates two helipads near its offices in Springfield and Connecticut, and employs a crew of pilots, flight attendants, and aviation managers.

MassMutual spent $34.5 million last year on travel expenses, according to its financial reports. That’s more than the $21.8 million reported by rival Northwestern Mutual Life Insurance Co. and the $30.3 million by New York Life Insurance Co. New York Life specifically bars executives from using company aircraft for personal travel.

MassMutual officials defend its aircraft operation, saying it is more cost effective than having executives travel commercially to the company’s business hubs around the world, and it’s difficult to compare spending among companies, since they vary in terms of office locations and lines of business.

As proof the company is well managed, Lacey noted that some policyholders recently received a 7 percent dividend, a return that is several times higher than many other fixed investments, such as certificates of deposit.

Who$e complaining?

Rating agencies that evaluate corporate finances give MassMutual among their highest marks, noting the insurer’s record sales, continued growth, and profitable subsidiaries, including Babson Capital Management, a global investment manager; OppenheimerFunds Inc., a fund and investment manager; and Cornerstone Real Estate Advisers, an investor in Boston’s Fan Pier developments.

The passivity of most policyholders is crucial to those ratings. If investments sour, MassMutual can reduce dividends without facing too much resistance, unlike the blow-back from shareholders that public companies would likely experience.

“Policyholders are a less demanding constituency than stockholders,” said Neil Strauss, a senior credit officer at the rating agency Moody’s Investors Service.

That’s because they don’t feel like owners, said Glenn Daily, a New York insurance consultant who owns a MassMutual life insurance policy.

Daily said he gets invitations to attend annual meetings, but receives little other information from MassMutual. He doesn’t know much about the company’s overseas operations or its investment subsidiaries, and whether they are benefiting him as a policyholder.

“In order to make me feel like an owner, they would have to treat me like an owner,” Daily said. “That is their culture: If they don’t have to disclose it, they don’t.”


Now about that payout:

"Liberty Mutual shedding its workers’ comp roots" by Deirdre Fernandes Globe Staff  June 12, 2015

Liberty Mutual Insurance, once the country’s biggest provider of workers’ compensation insurance, is pulling back from the market as its profits get squeezed by increasing medical costs and changing state regulations.

WTF? They are making record profits!

The Boston company, which got its start a century ago insuring railway, shipbuilding, and tannery workers hurt on the job. The insurer also has sold off some of its workers’ compensation subsidiaries and paid Warren Buffett’s Berkshire Hathaway Inc. to take over some of its claims.

Yeah, “they’ve taken pretty aggressive action to de-emphasize workers’ comp.” 

You are now in the hands of Buffett. Good hands, indeed! He's the most benevolent of our corporate masters, or haven't you heard?


Liberty Mutual’s retreat could reduce employers’ options and raise their insurance costs, said Ishita Sengupta, director of workers’ compensation at the National Academy of Social Insurance, a Washington think tank. That may make employers more likely to cut back on injury benefits or challenge claims submitted by workers, she said.

“I certainly think it doesn’t bode well,” Sengupta said.

Why? Don't you trust the financial firms?

Liberty Mutual officials said the company will remain a large player in the market, but is focusing on growing more profitable portions of its business, such as safety consulting and managing the claims and paperwork for companies that insure themselves for workers’ comp.

Liberty Mutual also remains committed to the workplace safety studies it conducts at the company’s research institute for safety in Hopkinton, officials said. But the company is “targeting underperforming accounts that were contributing to unacceptable results,” said Paul Condrin, president of Liberty Mutual’s commercial business.

For the past 30 years, Liberty Mutual has aspired to be more than just a workers’ compensation insurer, building its auto and home insurance business through several acquisitions. It is now the nation’s second-largest home, auto, and business insurer behind Illinois-based State Farm Insurance. The company also has expanded into Spain, South America, and Russia.

Liberty Mutual’s overall profits have grown since it began reducing its cutting its workers’ comp business three years ago. In 2011, the insurer earned $284 million. That rose to $829 million in 2012, $1.7 billion in 2013, and $1.8 billion last year, according to the company’s annual reports.

The company, which is owned by its policyholders, does not disclose profits for its workers’ comp business.

In 2012, Liberty Mutual sold its workers’ compensation business in Argentina. Last year, it shed Summit Holdings Southeast Inc., which was solely a workers’ compensation subsidiary. A few months later, Liberty Mutual announced that it would pay a Berkshire Hathaway company $3 billion to take over some of its workers’ compensation claims, along with liability tied to asbestos and environmental policies.

The deal freed Liberty Mutual to spend its money on other projects and investments, instead of having to set aside money for long-term workplace injury claims.

Workers’ compensation insurers have turned profits in recent years, boosted by state-approved rate increases, said Mark Dwelle, an analyst with RBC Capital Markets in Virginia. But those rate increases are slowing and running below inflation in many states, Dwelle said.

“Workers’ comp is not a line that historically produced good returns and because of the longer term nature of some of the claims payouts, it ties up capital for a long period,” he said. “Exiting comp frees up capital to write other business that may be even better.”

Rising medical costs also are affecting the workers’ compensation market. Medical expenses account for about half of workers’ comp payments and, according to the US Labor Department, medical costs have risen 12 percent since 2011 nationally, more than double the overall rate of inflation during that period.

And yet I'm told Obummercare has kept costs under control. Whatever.

In addition, shifting regulatory environments as businesses lobby state legislatures for reduced costs and labor groups for better benefits have made workers’ comp profits more volatile, Sengupta said. Several states also are considering dropping requirements that companies carry worker’s comp insurance, following the examples of Texas and Oklahoma.

Some insurers, however, remain optimistic about workers’ compensation, analysts said. The combination of recent state rate increases and more sophisticated data and technology to control costs, especially medical expenses, provides the potential to boost profits, they said.

Nothing murky about the f***ing greed. 

So how is that injured worker anyway?

The Travelers Cos. of St. Paul, Minn., has increased its share of the workers’ comp market and surpassed Liberty Mutual. Companies that were smaller players several years ago, such as Berkshire Hathaway and American Financial Group Inc. of Ohio, also have grabbed more of the market.

Starting to feel like cattle, labor?

Liberty Mutual has tended to pay out a larger percentage of its workers’ comp premiums in claims than the industry average, leading to shrinking profits in that business. In 2012, 89 percent of workers’ comp premiums collected by Liberty Mutual were paid out to claims, compared with 68 percent industrywide, according to the National Association of Insurance Commissioners.

Liberty Mutual is most interested in providing workers’ comp insurance to companies that buy other business policies from Liberty Mutual, such as commercial automobile coverage, analysts said. The strategy ensures that employers stick with Liberty Mutual for a longer period, since they have several policies with the insurer.

And if you don't like it, you can buy insurance from one of the other three corporate conglomerates.

Bob Hartwig, president of the Insurance Information Institute, a New York-based industry research group, said Liberty Mutual’s withdrawal from workers’ compensation has not disrupted the market yet. There are still hundreds of companies that offer workers’ compensation insurance at competitive prices, he said.

“There are always insurers changing their strategic emphasis,” Hartwig said.


You understand the policy, right?


"Ex-AIG chief Hank Greenberg wins bailout suit, no damages" Bloomberg News  June 15, 2015

NEW YORK — Maurice R. “Hank” Greenberg won his fight to hold the US government responsible for a bitter pill it forced down the throat of American International Group. But that’s about it.

The judge who called illegally onerous the terms of AIG’s $85 billion bailout — hatched in the depths of the financial crisis — also ruled that without it investors would probably have gotten nothing.

As a result, he awarded Greenberg’s Starr International Co., AIG’s biggest investor at the time, no money.

“In the end, the Achilles’ heel of Starr’s case is that, if not for the government’s intervention, AIG would have filed for bankruptcy,” US Court of Claims Judge Thomas Wheeler said Monday. “AIG’s shareholders would most likely have lost 100 percent of their stock value.”

Still, the scathing nature of Wheeler’s government critique may chasten regulators in future crises. The split decision sets up the possibility that both sides will appeal, prolonging for months or years to come their battle over the US response to the 2008 economic calamity.

What began as a longshot case by Greenberg and Starr gained credibility as the government repeatedly failed to get it dismissed.

Last year’s trial in Washington was a showpiece for Starr’s lead lawyer, David Boies. He grilled Ben Bernanke, Hank Paulson, and Timothy Geithner on government decision-making as the judge repeatedly ruled in Greenberg’s favor. A key ruling allowed internal e-mails to come out at trial, showing Fed lawyers trying to avoid an AIG shareholder bailout vote “we don’t control.”

One attorney for the Fed observed on Sept. 17, 2008, in the midst of the AIG takeover, that the government “is on thin ice and they know it. But who’s going to challenge them on this ground?”

Greenberg, AIG’s former chief executive, had sought as much as $40 billion in damages for shareholders. Though the absence of an award may temper Wheeler’s dramatic rebuke of the government handling of the bailout, the ruling may still limit the Federal Reserve’s ability to deal with the next crisis.

The next crisis? I thought the corruption and filth on Wall Street had all been cleaned up? WTF?!!!

“It is a huge loss for the government because it calls into question its actions in the crisis, and more importantly, calls into question what it will have latitude to do in future crises,” said Erik Gordon, a business professor at the University of Michigan.

Let 'em all fail next time. Then we will hit the streets and eat the elite.

Starr sued in November 2011, claiming the government broke the law by insisting on 80 percent of AIG stock and imposing a 12 percent interest rate on the loan.

Hey, look, they do it all the time. The law is only for the citizenry whose rights they are protecting with lies and deceit because they love us so.

Wheeler agreed, saying that while the Federal Reserve had the authority to make an emergency loan to AIG, it did not have the authority to take shares in exchange for it.

The government said the demands were justified since the loan was high-risk. As evidence, government lawyers cited similar terms in a private rescue that fell through over doubts about AIG’s ability to repay.

Though the bailout ballooned to $182 billion, AIG returned to the black and repaid the assistance in 2012, leaving the government with a $22.7 billion profit.

Oh, yeah, right, somehow the taxpayer made a profit of all the garbage debt and derivatives and all.

Current AIG shareholders were worried the insurer would be “on the hook for payment to reimburse the Treasury and Greenberg,” said Josh Stirling, an analyst with Sanford C. Bernstein. “The judge found a way of splitting the baby.” 

Isn't that a crime?

The Fed defended the bailout, saying the court decision recognizes “the extension of credit to AIG prevented losses to millions of policyholders, small businesses, and American workers who would have been harmed by AIG’s collapse.”

Nevertheless, Stirling said, the government may still appeal.

An appeal by Starr is also possible. According to Dennis Kelleher, head of the financial advocacy group Better Markets, Greenberg wasn’t looking to win without something to show for it.

“They weren’t suing for a moral victory,” Kelleher said. “They were suing for cold hard cash.”

That's all they care about. 

So what will they do when the whole thing goes electronic? How will the bribes be paid?