The complaint came from Bob DeFillippo, chief communication officer for Prudential Financial, Inc., who fired it off the day that The Audit’s Ryan Chittum gave a thumbs up to Bloomberg’s David Evans in an Audit Notes.
Chittum’s assessment of “good work” was for Evans’ reporting on a life insurance industry practice of retaining lump-sum death benefits, sending beneficiaries “drafts” with which to withdraw the money and, in the meantime, investing the benefits and paying beneficiaries a portion of the earnings. The Bloomberg stories said this was a problem because Prudential and other insurers didn’t disclose clearly that the accounts were not federally insured and made it needlessly difficult for bereaved families to obtain the lump sums that 95 percent of them had requested. Meanwhile, the wire said, the insurer invested the money well for itself, but paid relatively low interest to beneficiaries.
“Hard-hitting investigative journalism is something that deserves our praise and support,” DeFillippo wrote. “Unfortunately, that isn’t what the public is getting from Bloomberg’s David Evans and his reports on the Servicemembers Group Life Insurance Program, which is administered by Prudential Financial. Your praise for Evans and Bloomberg is misplaced.”
The Audit’s chief, Dean Starkman, asked me to take a look in my role as the Arbiter. After all, it’s consistent with the goal of improving financial journalism to take complaints seriously. And anyone who’s been in this business for awhile knows that journalists are capable of making mistakes. Somewhere in my files I have a copy of a Washington Post correction of a recipe that said to boil baby spinach but left out the word “spinach.”
DeFillippo’s charges were pretty tough, and I understand why he is upset. Bloomberg’s reporting stirred up a hornets’ nest of regulatory inquiries, criticism and litigation with Prudential and Met Life at the center of it. And I think he has some points. Sometimes the language in the Bloomberg stories is a little over the top, although, when it is, it is usually in a quote. I also think DeFillippo has a point that Bloomberg should have mentioned every time it pointed out the accounts are not insured by the Federal Depository Insurance Corp. that the industry argues that the accounts are protected by state insurance guaranty funds.
But having said that, overall, I think Bloomberg’s stories—a series with three installments and related articles in Bloomberg Markets magazine, plus many day stories on the wire, which ran between July 28 and Sept. 30—are good, solid journalism that clarify a policy that was poorly understood, even by regulators. (Links to PDFs of key stories are here and here.) The wire also showed that the policy, while a moneymaker for insurers, could be disadvantageous to the families to whom benefits were owed. One mark of the value of Bloomberg’s reporting: it got results. Regulators issued consumer alerts, attorneys general announced investigations and the U.S. Veterans Affairs Department, which hired Prudential to administer the program, altered its practices in response to the series. The stories also do an excellent job of raising the issue of the industry’s lack of federal regulation.
First a word about process. After I read DeFillippo’s complaint and talked to him, I called David Evans, the main reporter on the series, and spoke briefly with him and Jonathan Neumann, who edited the principal articles. Evans and Neumann initially declined to comment, citing Bloomberg policy, though they did send eight stories Bloomberg had done on the issue, two of which I already had from DeFillippo. They also sent a point-by-point rebuttal to DeFillippo’s consisting of paragraphs from the stories. I read that only after I had read the stories myself and made my own initial conclusions.
Now, let me slip on my Arbiter robe and go through DeFillippo’s complaint:
The articles have been inaccurate and irresponsible because they fail to point out that beneficiaries have always been able to get all of their money when they want it by using our Alliance Account. Prudential does not withhold a penny of the money that belongs to beneficiaries. In fact, we pay interest. This information is clearly explained in the first letter sent to beneficiaries. Bloomberg has knowingly withheld these facts (emphasis added) and, as a result, has done the beneficiaries of our fallen servicemembers a great disservice.
The first story appeared on the Bloomberg wire July 28, 2010, under the headline: “Fallen Soldiers’ Families Denied Cash as Insurers Profit.” (Indeed, I think the headline was too strong, as I’ll explain below.)
The story focuses on a bereaved mother, Cindy Lohman. After her 24-year-old son Ryan was killed by a bomb in Afghanistan, she received a letter from Prudential saying, according to the story, “that the full amount of her payout would be placed in a convenient interest-bearing account, allowing her time to decide how to use the benefit.”
But then, she says, two retailers rejected the insurance company’s drafts when she tried to use them, and later she learned the account wasn’t FDIC-insured.
The story effectively lays out her perspective and the problems with the accounts. But it also quotes DeFillippo giving the company’s view:
“For some families, the account is the difference between earning interest on a large amount of money and letting it sit idle,” he says.
”We fully and regularly disclose the nature and terms of the account to account holders,” DeFillippo says. “We make it clear that the money can be withdrawn at any time by simply writing a draft.”
By quoting DeFillippo, Bloomberg makes it clear that beneficiaries could get their money using the drafts and that they were paid interest. So the text of the story provides that information, rather than withholding it. Indeed, the fact that it was so clear that beneficiaries could get their funds via the drafts is why I think the phrase in the headline—“denied cash”—crossed the line (and was not fair). In contrast, and tellingly, the story never uses that phrase.
Reading the story, it is clear that beneficiaries could get their hands on the lump sum, but not without going to extra trouble—writing a draft for the total amount and taking it to a bank. According to a subsequent Wall Street Journal story on the accounts, a banking consultant said that drafts can sometimes take two to three days longer to clear than checks. And, crucially, as the story makes clear, beneficiaries and even VA officials, often didn’t understand the terms of the deal.
“Delayed cash” isn’t as sexy as “denied cash.” A better headline might have been, “Fallen Soldiers’ Families Snared in Red Tape as Insurers Profit,” or some such.
Subsequent decisions by the VA to require Prudential to improve disclosure underscore that the process wasn’t as clear as it should have been. In dealing with the recently bereaved, you probably want to err on the side of too much disclosure rather than too little. It is worth noting that confusion here would tend to benefit Prudential.
The other problem with the program, which Bloomberg properly flags, is that it required the bereaved to opt out of the “checkbook” alternative. And, as every marketer knows, a program that requires action to get out of means that a higher percentage of participants will stay in the program. On September 14, the VA said that it “will provide better clarity of payment options by using new document that asks the beneficiary to choose one payment option, including a lump sum check, or a lump sum Alliance Account (retained asset account) that allows beneficiaries the option to immediately write a check for the entire payment or any lesser amount.”
So, Bloomberg did some good here.
The legal status
From DeFillippo’s complaint:
Several judges have rejected claims against accounts like the Alliance Account, concluding that beneficiaries are in virtually the same position they would be in had the insurer sent them a check because consumers can immediately withdraw the full proceeds. On Friday, Sept. 10, a federal judge in Nevada threw out a lawsuit against MetLife that alleged the insurer misled beneficiaries over the use of such an account. Last December, Judge Joseph Greenaway Jr., in federal court in Newark, N.J., asked a plaintiff’s lawyer, “What am I missing here? Your client has the ability to get all of her money from day one.”
But Bloomberg, in its July 28 story, did discuss the state of litigation, and it’s not as simple as DeFillippo makes out:
A few people have sued insurers over the use of retained-asset accounts. Prudential won a lawsuit in 2009 in which a survivor complained about the Alliance Account. MetLife has a case pending in which a survivor says that she was cheated by the retained-asset account. In court-filed papers, MetLife denies any wrongdoing.
There has been only one ruling by a federal appellate court on the substance of such accounts —and it went against an insurance company.”
As for the Nevada case, although a win for MetLife, it was not an endorsement of the accounts. Bloomberg dealt with the ruling by U.S. District Judge Larry Hicks, in Reno, in a story on September 28 (although that story had not run when DeFillippo complained to The Audit):
Hicks said MetLife, the biggest U.S. life insurer, gave consumers the misimpression that its Total Control Account Money Market Option account for death benefits was insured by the Federal Deposit Insurance Corp. Still, he threw out the suit, which claimed the insurer unfairly profited on the policy, saying the beneficiary had not lost money….
‘An ordinary reasonable person, provided with the contract at issue, would be under the impression that they were receiving either a money-market account or an account associated with money market protects,” Hicks wrote.
Far from endorsing retained asset accounts, Hicks characterized them as confusing, providing further support to the Bloomberg story.
The story on the ruling (which, again, came after DeFillippo complained) also noted that “Most court rulings on retained-asset accounts have favored the insurance industry.”
In his e-mail to us, DeFillipo accurately describes the judge’s ruling but left out the important context of his comments.
I think Bloomberg did a good job, even in its first July 28 story, of making it clear that litigation by account holders against insurance companies was far from a slam-dunk.
From DeFillippo’s complaint:
Further, Bloomberg has deliberately misled its audience by consistently claiming that these accounts are not federally insured by the FDIC. While the statement is true and designed to lead you to believe the accounts are risky, Mr. Evan’s and Bloomberg fail to report—despite repeated attempts to correct the record—that retained asset accounts are protected by State Guaranty Funds that provide protection of at least $250,000 and up to $500,000. These guarantees are at least the same as—and in most cases exceed—FDIC guarantees.
In the first, July 28 Bloomberg story much is made of the lack of FDIC protection for these accounts.
In tiny print, in a disclaimer that Lohman says she didn’t notice, Prudential disclosed that what it called its Alliance Account was not guaranteed by the Federal Deposit Insurance Corp…
This unregulated quasi-banking system operated by insurers has none of the protections of the actual banking system. Lawrence Baxter, a profesor at Duke University School of Law in Durham, North Carolina, say the potential exists for a catastrophe….
There’s more than $25 billion out there in these accounts,” Baxter says. “A run could be triggered immediately by one company not being able to honor its payout. The whole point of creating the FDIC was to put an end to bank runs…..
‘The way Prudential has set up the ‘checks’ implies that JPMorgan stands behind the accounts and that they are thus backed by the FDIC,’ Duke’s Baxter says.
It’s a fair and important point to make that some beneficiaries (and regulators!) didn’t understand that the accounts are not covered by the FDIC. But I think that, since the industry argues that the accounts are protected by state guaranty funds, that point of view should be noted in any story that raises the FDIC issue. DeFillippo said he made that point to Evans in talking to him for the first, July 28, story, but it wasn’t reflected there or in some subsequent stories that raised the issue of the lack of FDIC coverage.
Bloomberg presented the fact that the accounts are protected by state guaranty funds only a day later, July 29, in two related stories about regulators and New York’s attorney general launching probes into the accounts. (UPDATE AND CORRECTION: One of these stories ran on July 28, the same day as the first installment in the series, as well as on July 29.)
In addition, on August 13, Bloomberg published a story headlined “Lawmakers Question Value of Insurer Safety Net to Beneficiaries.” It quotes industry officials at some length about the protection that the state guaranty funds provide, although it also raises questions by others about how much protection they really offer. It’s a balanced account.
A subsequent story on August 24, by David Glovin, also raised questions about whether the state guaranty funds provide adequate financial protection.
But even after those stories ran, Bloomberg went back to raising the issue of the lack of FDIC coverage without mentioning the industry position that beneficiaries are protected by the state guaranty funds.
In the September 14 story, although the lack of FDIC coverage comes up again—among other reasons because FDIC Chairman Sheila Bair had raised the issue—the industry point of view that the accounts are protected isn’t reflected, and it should have been.
A deal’s secrecy
Back to DeFillippo:
As for the allegation that there was some secret agreement between Prudential and the VA, the use of the Alliance Account was, as Evans reports, done with the approval of the VA. From the outset, the use of Alliance Account as the lump-sum option was disclosed to beneficiaries in the letter they receive prior to selecting a payment option.
I think Bloomberg accurately reported on the deal. Yes, it was done with the approval of the VA, as any deal with the VA would have to have been. But what Bloomberg reported on September 14 was that documents obtained through a Freedom of Information Act request disclosed an amendment to Prudential’s contract with the VA that had been put through a year ago, on September 1, 2009, which in turn:
…ratified another unpublicized deal that had been struck between the insurer and the government 10 years earlier—one that was never put in writing….This verbal agreement in 1999 provoked concern among top insurance officials of the agency, the documents released in the FOIA request show…
And, according to Bloomberg, the original 1965 contract between Prudential and the VA:
“….says any alternations must be made in writing.”
When I talked to Bloomberg editor Neumann, who subsequently was given permission to talk to me, he said that the VA was asked whether it or Prudential had publicly announced the change. “We gave them a whole range of questions. ‘Did you say it in any form? Did you do a press release or inform Congress?’” The gist of what VA attorney Dennis Foley said was “this is how these types of contract changes are made,” said Neumann.
Since the Bloomberg stories ran, a news story from the American Forces Press Service, a news service run by the Department of Defense, surfaced that, in a backhanded way, could be said to have announced the deal. The story, which is the equivalent of a DOD press release, ran in October 1999 to announce a related change the program. It said:
Recent changes to the Servicemembers’ Group Life Insurance program should ease the burden on beneficiaries immediately following a service members death.
Since June 1999, benefits are immediately placed into interest-bearing checking accounts rather than lump-sum checks mailed to beneficiaries, which was the previous practice. Now, beneficiaries receive a checkbook for an Alliance Account set up by Prudential, which runs the program.
‘This is important because it relieves the immediacy on the part of the beneficiary to find something to do with that money,’ Navy Capt. Elliott Bloxom said during an interview.
Neumann said the Bloomberg team was unaware of the DOD news service story. DeFillippo, who sent it to me, said even he only saw it long after the series had run. He found it linked to in one of the comments on Chittum’s original post about the series. Neumann also said no one interviewed in the course of reporting the series had ever mentioned the article and that it doesn’t undo the fact that neither the VA nor Prudential announced the agreement when it was made.
I agree. Granted, the fact that there was a DOD news service story about the change suggests there was no great effort to keep it secret. But going back to my point about more disclosure being better than less, it would have been good to announce that the program was being changed when it happened. And, as a VA lawyer acknowledged in a story, the contract change should have been done in writing. That’s a no-brainer.
Here is another point that apparently didn’t get made to Evans and Neumann. DeFillippo said in an e-mail to Hugh Son, a Bloomberg reporter who writes about insurance, which DeFillippo shared with me after our initial interviews about his complaint:
The Alliance Account assets constitute less than 1 percent of our General Account assets and the rate that we earn on the Alliance Account assets is not comparable to rates earned on the General Account as a whole.
Neither Neumann nor DeFillippo found any record that that point was in the e-mails exchanged after DeFillippo’s and Evans’ conversations became “very contentious,” in DeFillippo’s words.
Which is too bad because it seems like it would have been a useful bit of context for readers of Bloomberg’s September 14 story, which included this (emphasis added):
Prudential invests the survivors’ money in its general corporate account, where it can earn the insurer as much as eight times as much as it currently pays in interest to beneficiaries.
Prudential held $662 million of survivors’ money in its corporate general accounts as of June 30, according to information provided by the VA. Prudential’s general account earned 4.2 percent in 2009, mostly from bond investments, according to regulatory filings. The company has paid survivors holding Alliance Accounts 0.5 percent in 2010.
In the first, July 28, story, Bloomberg wrote that:
Insurance companies tell survivors that their money is put in a secure account. Neither Prudential nor MetLife Inc., the largest life insurer in the U.S. segregates death benefits into a separate fund.
DeFillippo concedes that is true. But he also said that money needed to meet withdrawals from on-demand types of accounts, including the Alliance Accounts, is invested more conservatively for shorter term, lower yields with less exposure to risk. Did the insurance companies make money by holding the accounts? No doubt they did. Was it equal to the spread in the entire amount earned by the general fund and the amount paid beneficiaries? Unlikely.
And were Prudential’s profits from the accounts major? Probably not given the relative size of the accounts to the general fund.
Neumann said that he, Evans and another editor who worked on the series believe: “The issue is the risk of loss for people with retained-asset accounts. The size of a company’s general fund is irrelevant.”
Myself, I think it would have been useful information to compare the size of the program to that of the general fund, but I can’t fault Bloomberg for not including information that apparently wasn’t provided. DeFillippo said he thought he had told Evans, because it was part of his basic talking points. Evans said he didn’t, and Neumann said that the e-mail to Hugh Son including that information was not forwarded to him or Evans until after I raised the question.
Now let me say a little something about tone.
Quoting Cindy Lohman, whose 24-year-old son was killed by a bomb in Afghanistan, was certainly fair enough:
”It saddens me as an American that a company would stoop so low as to make a profit on the death of a soldier. Is there anything lower than that?”
From the same story, a quote from Jeffrey Stempel, an insurance law professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas:
“‘It’s turning death claims into a profit center.”
And from the same story:
It also quotes Stephen Wurtz, deputy assistant director for insurance at the VA, who has overseen the program for 25 years:
”Uncle Sam is ripping off their own,” Wurtz says. “My wife would get the money, and they would blood-suck some of it out of her.”
And then there’s the kicker:
”It’s outrageous that somebody’s profiting off other people’s grief,“ says Mark Umbrell of Doylestown, Pennsylvania. His 26-year-old son, Colby, an Army Airborne Ranger who earned a Bronze Star and Purple Heart, was killed in Iraq in May 2007. Umbrell was among those who got a “checkbook” account.
“I think we’re being taken,” he says.
Now here’s the thing: It’s not hard to make insurance companies look bad. They deal, after all, in unpleasant realities: death and catastrophe. And it’s true that insurers make money by investing the premiums they hold while hoping never to have to pay. A former colleague of mine often had to explain to editors why a devastating hurricane was less damaging to an insurance company’s earnings than a downturn in the markets.
But, in fact, insurance, when it is working right, is collective risk-sharing. The industry protects its customers from catastrophic losses if those horrors occur. And the industry’s view of the retained asset accounts is that they provide extra protection—investing large lump sums while survivors have some time to think, guarding against importuning relatives and opportunistic sales pitches.
If I had been the editor of the series, I think I would have argued for fewer colorful quotes about the blood-suckers. I would have also made room in any story that raised the issue of no FDIC coverage for the industry’s position that the state guaranty funds protect the accounts, even if followed by something to the tune of: But lawmakers have questioned the adequacy of that protection.
With those caveats, Bloomberg performed a valuable service by shining a light on a system that was poorly understood by both beneficiaries and regulators and, in doing so, succeeded in bringing about important changes.
This article was originally published in the Columbia Journalism Review on Dec. 29, 2010.