Monthly Archives: August 2010

Investigations into retained asset accounts are heating up from regulators and New York Attorney General Andrew M. Cuomo. At issue is how insurance carriers report and maintain the death-benefit proceeds held in the accounts. According to an Aug. 4 story by Investment News, regulators are discussing the possibility of requiring carriers to break out details on the retained-asset accounts on the financial statements that insurers file with state regulators.

“We’re paying close attention to how these accounts are reported through the financial filing process and looking to see if more can be done with their oversight,” said Susan Voss, insurance commissioner of Iowa and president-elect of the National Association of Insurance Commissioners, in the Investment News story.

Insurers use retained asset accounts to keep cash when beneficiaries of the policies do not elect a lump-sum payout of death benefits. However, the accounts themselves aren’t backed by the Federal Deposit Insurance Corp. and may pay uncompetitive interest rates.

“These accounts were invented not to help consumers, but to help insurance companies,” said Bob Hunter, director of insurance for the Consumer Federation of America in Washington, in the Aug. 4 Investment News article. “I can’t think of any reason why you wouldn’t want a lump-sum payout.”

When survivors don’t opt for a lump-sum payment, insurers place the cash belonging to the beneficiaries in the insurers’ corporate accounts. The cash then earns upwards of 4.8% for the insurance companies. Beneficiaries, however, do not exact the same benefits. The insurers pay families as little as 0.5% interest, less than half the rate available at some FDIC-insured banks.

As reported by Aug. 6 by Bloomberg, beneficiaries need to give careful consideration to the interest rates being offered on retained asset accounts and whether that rate is high enough to take on the risk of forgoing FDIC insurance.

Currently, no state keeps track of how much money insurers are holding in retained assets.

Retained asset accounts translate into significant profits for insurance carriers. The accounts allow more than 100 carriers to earn investment income on $28 billion owed to life insurance beneficiaries, according to Bloomberg. At the same time, insurers typically market retained asset accounts as a “service” designed to give beneficiaries the appropriate amount of time to decide what they will eventually do with the funds.

Carriers make money by investing the funds in bonds and pocketing the difference between returns and the interest credited to the accounts.

According to Bloomberg, some 40% of retained asset accounts at insurance companies still have money in them a year later. Some insurance companies issue a “checkbook” to beneficiaries. Because the checks generally mimic actual bank checks, beneficiaries are likely to assume that their money is in bank-insured accounts when in reality it isn’t.

“There needs to be improved disclosure requirements,” said Jane Cline, president of the National Association of Insurance Commissioners, in the Aug. 6 Bloomberg article.

On July 29, New York Attorney General Andrew M. Cuomo launched a fraud investigation into the life insurance industry over practices that he says misled military families and others into putting benefits into insurer-controlled, low yield, potentially risky accounts that reaped millions of secret profits for the insurers.

Embattled broker/dealer Securities America has a new leader at the helm: Jim Nagengast. One of his first assignments as the new CEO: Dealing with the problems that Securities America brokers created when they unloaded Medical Capital private placements on investors from 2003 to 2008.

In January, Massachusetts Secretary of State William Galvin filed a lawsuit against Securities America, accusing the firm of misleading investors who bought the investments. According to the complaint, 400 Securities America representatives and advisers sold almost $700 million private placements issued by Medical Capital Holdings.

In July 2009, the Securities and Exchange Commission filed fraud charges against Medical Capital.

The Massachusetts lawsuit alleges that Securities America failed to tell investors key information about the private placements and, specifically, the financial condition of Medical Capital itself. In total, Medical Capital issued $2.2. billion in notes; about half are in default. Many broker/dealers sold the notes, but Securities America, which has more than 1,900 representatives and advisers, is the largest broker/dealer to have sold them.

As reported July 26 by Investment News, an administrative hearing at the Massachusetts Securities Division is set for Aug. 30. According to the story, Nagengast believes Securities America performed its due diligence in selling Medical Capital notes to investors.

There may be evidence to the contrary, however. The Massachusetts lawsuit cites several e-mails from Nagengast in 2005 stating that the firm should stop selling the product until it received audited financials from Medical Capital.

According to the complaint, Nagengast wrote the following in one e-mail:

“We simply have to tell [Medical Capital] that if they don’t have financials by [a specified] date, we will stop distributing the product on that date. Then they can decide if it’s worth spending $50,000 to have [the audit] done. If they won’t spend the money, that should give us concern.”

If you have a story to tell involving Securities America and/or Medical Capital Notes, please contact a member of the securities fraud team at Maddox, Hargett & Caruso.