12-30-2002, 10:54 AM
What with the near collapse of our health care system and defined benefit pension system, pretty soon actuaries might not have anything to do:
Insurers Move to Protect 'Split-Dollar' Compensation
By THEO FRANCIS and ELLEN E. SCHULTZ
Staff Reporters of THE WALL STREET JOURNAL
A largely hidden, but lucrative, form of executive compensation may get some fresh attention in January.
So-called split-dollar life-insurance policies have become a prime tool to provide tax-free pay and loans to top executives, and, in the process, mask from shareholders the value of large amounts of executive compensation, whether intentionally or not.
Now, the life-insurance industry is fighting to protect the benefit amid greater scrutiny and regulation. The Sarbanes-Oxley Act, set to take effect in late January, bans corporate loans to executives, putting into limbo many split-dollar arrangements, which are essentially loans. Industry lobbyists are seeking to reverse the effect of the act by introducing a technical correction, among other moves, in the coming session of Congress.
Companies typically provide several kinds of life insurance to executives. Such executives usually participate in any group life-insurance plan open to rank-and-file employees; these plans typically provide one to two times an employee's annual salary. In addition, most enjoy so-called executive group life insurance programs.
But those at the very top are also eligible for split-dollar policies, whose primary purpose actually isn't life-insurance protection but a kind of substantial, tax-favored compensation or loan. The arrangements get their name because the executive typically must pay a sliver of the premiums, while the employer pays the lion's share, and they technically split the proceeds. Most of the premium -- often millions of dollars -- goes into a tax-sheltered investment account, which the executive can tap. Such an executive doesn't have to pay the borrowings back, either; when the executive dies, the death benefit repays the loans. When the executive changes jobs or dies, among other triggering events, the employer gets its initial outlay back.
The $25 million policy that CSX Corp. promised in 2001 to buy for John Snow, now President Bush's nominee for Treasury secretary, is typical. The railroad conglomerate agreed to buy the policy, which would cost about $5 million, within seven years, according to company filings. At the end of the period, Mr. Snow would own a policy paying $25 million at his death, and which could be liquidated for its cash value -- essentially the initial $5 million in premiums plus investment earnings on that money. (CSX hadn't yet bought the policy when Mr. Snow was nominated for the Treasury post; the company instead plans to give him the $5 million in cash if he leaves to run the agency.)
Companies that provide split-dollar arrangements include Equifax Inc., General Motors Corp., H.J. Heinz Co. and Unifi Inc.
Among the benefits of split-dollar life-insurance policies: They are more secure than executive pensions , which are generally backed only by corporate promises. In fact, many companies allow executives to swap their regular executive pension benefits for a cash-in-hand, split-dollar policy. Kenneth Lay, former chairman of Enron Corp., made such a swap, giving up pensions the company owed him for a policy costing $2.5 million.
The appeal of owning the policy outright is that executives can take the policies with them when they leave, and the benefits are out of the hands of creditors if the company goes into bankruptcy, unlike regular executive pensions . Plus, the executive may get to choose how the cash value is invested.
Another reason for the growing popularity of split-dollar insurance: In an era of increased scrutiny of executive pay, the policies obfuscate the value of massive amounts of compensation to an executive. That is because Securities and Exchange Commission regulations require companies to disclose the economic benefit of a policy to top executives. And for years they have done so using the term life-insurance value of the policy -- a fraction of the total value, representing how much it would cost the executive to buy his share of an equivalent amount of term life-insurance coverage. Because term life is so much cheaper than whole or universal life-insurance, it makes the policy look much less costly and valuable than it is.
Motorola Inc. reported that in 2001 it provided Christopher Galvin, its chief executive, term life-insurance premiums totaling $3,928, a seemingly trivial amount, but the company didn't disclose the total value of the policy. A spokeswoman said that the premiums aren't a loan to Mr. Galvin, but declined additional comment.
Some companies report the outsize initial premiums in proxy compensation tables. But once the premiums are paid, usually in a few years, the benefit vanishes from view altogether. Sometimes, individual split-dollar agreements are included as attachments to SEC filings, as Mr. Lay's was. Recently, however, companies have taken to filing generic split-dollar plans, which omit any details about specific benefits promised to individual officers. That leaves investors with nothing more than the scant proxy disclosures to determine how much the executive receives, and how much it costs the company.
Split-dollar insurance has long received favorable tax treatment. Essentially, executives pay no tax on the policies they receive, except for being taxed on the term value of the policy if they didn't pay that portion themselves. Moreover, by channeling the policy through a personal or family trust -- something Mr. Lay did, for example -- executives can further minimize the impact of income and estate taxes.
In the last weeks of the Clinton administration, the Treasury Department proposed taxing the premiums as if they were compensation, and a softened version of that proposal is pending. This summer, after Congress passed the Sarbanes-Oxley act, some companies, including AMR Corp. eliminated their split-dollar programs. A spokesman for AMR, parent of American Airlines, says the company viewed the arrangement as a form of loan.
The American Council of Life Insurers, a major industry lobbying group, argues that split-dollar policies are neither compensation (beyond the tiny term life-insurance portion that is already taxed), nor loans, so should remain unaffected by any new or proposed rules.
Write to Theo Francis at email@example.com and Ellen E. Schultz at firstname.lastname@example.org
12-30-2002, 11:10 AM
How Life Insurance Morphed Into a Corporate Finance Tool
By ELLEN E. SCHULTZ and THEO FRANCIS
Staff Reporters of THE WALL STREET JOURNAL
After the Sept. 11 terror attacks, some of the first life-insurance payouts went not to the victims' families, but to their employers.
Unknown to most people outside the insurance world, corporations now are among the largest beneficiaries of life insurance, collecting on policies they purchased on the lives of employees.
Life insurance has long been championed as a safety net for widows and orphans. But over the past decade and a half, hundreds of American companies have taken out life insurance on millions of their employees, harvesting tax advantages that fatten their coffers.
In the industry, companies' coverage of the lives of low-level workers is called "janitors insurance." It has two notable features: Most of the workers never consented to the coverage, and it remains in force even if they've long since left the company.
Recently, employers have been taking out larger policies on the lives of managers, usually with their consent. Like janitors insurance, these policies make the employer, not the family, the beneficiary.
The Tax Allure
Neither buyers nor sellers of this insurance disclose much about it. Among the few traces of the Sept. 11 payouts was Hartford Life Insurance Co.'s fleeting reference, in a quarterly regulatory filing, to an after-tax charge of $2 million related to the Sept. 11 attacks. Hartford confirms that the payout itself was greater than the net charge and that it went to employers. It declines to give other details.
For employers that buy these policies, tax strategy is the driving force. The money they pour into life insurance grows tax-free. Gains on the investments within the policies flow to the companies' income statements each year.
This isn't cash income. It's paper profit, which the employer isn't, at first, free to spend. But little by little, deaths of employees and former employees unlock the paper profits. With the deaths, the employers receive death benefits, which, like those a family receives on a loved one, aren't taxed.
The Internal Revenue Service has invalidated, as "sham" transactions, some of the tax benefits claimed by employers in past years. Several courts have endorsed the IRS position. Employers have also been on the losing end, so far, of suits by workers' families challenging their right to insure the workers' lives.
For some big insurers, meanwhile, sales of corporate-owned life insurance are a source of growth as traditional sales stagnate. In the first nine months of this year, Mony Group Inc.'s sales of life insurance to companies soared 128% from a year earlier, to $124 million, while its other life-insurance sales fell 3% to $94 million. Industrywide, corporate sales now make up 25% to 30% of life-insurance sales, insurance experts say.
Yet corporate-owned life insurance is controversial even within the industry. John H. Biggs, chairman and chief executive of annuity giant TIAA-CREF, calls it "a form of insurance that's always seemed revolting to me."
The legal and tax landscapes have been changing through the years. Along the way, employers and consultants have changed their strategies as well, to continue to make insuring the lives of workers a paying proposition.
It adds up to a little-known story of how life insurance morphed from a safety net for the bereaved into a strategy of corporate finance.
The story begins in the 1980s. Employers had long insured the lives of their most important executives, to protect themselves. "Key man" policies, as these were called, weren't new.
Nor was the type of insurance. Instead of simple, inexpensive "term" insurance, which protects for a set period, companies bought the kinds called "whole life" and "universal life." These don't have a time limit. They're essentially investment funds for the buyer with a death benefit attached. The critical advantage is that, since they're a form of life insurance, the money in them accumulates untaxed.
What changed in the 1980s was that some companies began shoveling huge amounts of money into key-man policies. They sought both tax-free buildup and another advantage: They could borrow from the policies and deduct the interest. The combination yielded rich benefits with little risk.
By the mid-1980s, companies were pouring so much into the policies that Congress, sensing a misuse of life insurance, cracked down. A 1986 law said only the interest on the first $50,000 borrowed on a given policy would be deductible.
Companies quickly found a way around the cap: Buy a great many policies. If they insured thousands of employees, not just "key men," they could continue placing large sums in life-insurance contracts and taking out large tax-deductible loans.
"They thought, 'Well, if we can do it for 200, why not for 20,000?' " says Kenneth Kirk, who worked at Clark/Bardes Inc. That firm, a publicly held insurance broker and consultant, has played a central role in the evolution of corporate-owned life insurance.
One company Clark/Bardes worked with was Dow Chemical Co. When the Midland, Mich., company decided to have a look at the strategy, it saw an obstacle. Like many states, Michigan required that a beneficiary of a life-insurance policy have an "insurable interest" -- that is, the beneficiary would benefit from the insured's continued life and be harmed by the insured's death. Alas, said a Dow Chemical internal memo, except for top-paid executives, it was "doubtful that Dow has an insurable interest in any of its employees."
But Clark/Bardes lobbied the Michigan legislature to agree that employers are harmed when even low-level workers die. Reason: the cost of hiring and training replacements and providing future employee benefits. Michigan agreed to the change. And by 1992, Dow Chemical had bought life-insurance policies on more than 20,000 employees.
Amid lobbying throughout the 1990s, the Michigan legislature chipped away at other requirements, including one that insurance proceeds be used for employee benefits. Thanks to lobbying by Clark/Bardes and others, Michigan and many other states handed employers a near-blanket insurable interest on their workers by the mid-1990s. Some other states followed later, including Texas in 1999.
The lobbyists said employers would use life insurance's tax advantages to finance employee benefits. "The main reason employers are buying life insurance is so that they can provide benefits, in particular retiree medical benefits," says Jack Dolan, a spokesman for the American Council of Life Insurers.
The link to benefits is a tenuous one, however. For one thing, the tax-free buildup in policies isn't cash that employers are free to spend, until covered employees die. Secondly, the gains go into the general corporate pot. "The assets are fungible," Mr. Dolan acknowledges.
Moreover, employers have been cutting retiree health coverage throughout the 1990s, even as they were buying more life insurance. And some that bought janitors insurance didn't offer retiree health coverage to the rank-and-file workers whose lives they were insuring. An example is Hillenbrand Industries Inc., a coffin maker in Batesville, Ind. A spokesman for Hillenbrand says it bought the policies to beef up other employee benefits.
Tom Wamberg, Clark/Bardes's chairman and chief executive, says that "even though there's no lockbox, those programs are, in [employers'] minds, dedicated" to employee benefits.
In many states, it ceased to matter. Thanks to lobbying by Mr. Wamberg's firm and others, many states eventually dropped the requirement that corporate-owned life insurance be used to finance employee benefits. Across the U.S., millions of workers soon were being insured by hundreds of employers, among them AT&T Corp., Nestle USA and Amway.
In Congress, few knew how big a deal this was until a brown envelope arrived in 1995 on the desk of Ken Kies, chief of staff at the Joint Tax Committee. According to Mr. Kies, inside was a list of companies that had bought life insurance on employees -- along with calculations showing how a company might take in $1.2 billion over 10 years by insuring 50,000 of its people. One nugget Congress learned: Wal-Mart Stores Inc. had made itself the beneficiary of insurance on 350,000 workers' lives from 1993 to 1995.
Seeing a big cost to federal coffers, Congress in 1996 voted a three-year phaseout of all deductions for interest on loans against life insurance. The Joint Tax Committee estimated the saving to the Treasury at $16 billion over 10 years.
With no more $50,000-per-policy cap, companies had no more need to buy policies on large numbers of employees. They basically stopped buying janitors insurance policies. And while generally keeping these policies in force, they stopped borrowing against them.
Companies still had a big incentive to own life insurance, though: the tax-free buildup. And they found a way around the interest-deduction crackdown. They simply borrowed elsewhere, with interest that was still deductible, and then bought more insurance. "Indirect leverage," this was called.
Indirect leverage was especially appealing to banks, since they can borrow money cheaply. Banks bought fresh policies on employees. By 1997, some were looking into insuring the lives of depositors and credit-card holders, as well. And Fannie Mae, the giant mortgage buyer, proposed to insure the lives of home-mortgage holders.
That was too much for Congress. It nixed these innovations by going after any loans that a firm might use to buy life insurance on depositors or mortgage holders. The formula: If such a firm bought X amount of life insurance, then for X amount of that firm's loans, interest wasn't deductible.
Yet the new law didn't apply that same interest penalty when the life insurance covered employees. In 1998, the Clinton administration tried to close the door on this exception. Clarke/Bardes was among those lobbying to defeat this effort.
Hiring an Insider
This time around, Clark/Bardes had the help of one of the government's leading experts on the corporate-owned life insurance: Mr. Kies.
As a House Ways & Means Committee staffer in the 1980s, Mr. Kies had helped write the $50,000 limit on deductible loans against policies. After a turn as a tax lawyer and lobbyist, he returned to the government as staff chief at the Joint Tax Committee when the anonymous brown envelope arrived. By early 1998 he was back in the private sector, at a lobbying arm of what's now PricewaterhouseCoopers, and Clark/Bardes engaged him to lobby his old employer, Congress.
Mr. Kies helped lead the insurance industry's defense against the latest threat to corporate-owned life insurance. The campaign blanketed Congress with more than 170,000 letters and faxes and ran radio and newspaper ads targeting lawmakers. One of Mr. Kies's arguments was that companies borrow all the time, and their loans shouldn't be regarded as necessarily going to buy life insurance.
The Clinton administration's 1998 effort to limit tax deductions for borrowing went down to defeat. So did similar administration efforts in 1999 and 2000. Last year, Clark/Bardes gave a board seat to another Washington heavyweight, former Ways & Means Chairman Bill Archer, who had criticized janitors insurance as a tax shelter in 1995. Mr. Archer didn't return calls seeking comment.
Janitors insurance had by then mutated into managers insurance. Focusing on middle managers made it a little easier to argue that the insurance was being used to finance employee benefits, since managers were almost always eligible for benefits. While most states no longer cared what employers used life insurance for, the IRS did, to some extent. Under tax law, life insurance purchased by a corporation is supposed to have a business purpose.
Another change: Instead of keeping their life-insurance buying secret from employees, companies usually got their consent, often by telling them the insurance would help the company thrive.
That's what Bank of America told managers, says Cristina Deniel, who was a vice president there in 1996. She declined to let the bank buy a policy on her life after she learned the bank would keep the policy in force if employees left, tracking their deaths through the Social Security Administration. "I found that disgusting, frankly," says Ms. Deniel, who left the bank the following year.
Employers today sometimes offer managers incentives to agree to be insured. Ms. Deniel says Bank of America offered a modest payment to a charity of her choice when she died. Bank of America declines to comment on Ms. Deniel's experience.
New York Times Co. uses a different kind of carrot: It permits certain highly paid employees to use a deferred-compensation plan if they let the company make itself the beneficiary of insurance on their lives. About 200 employees have agreed to do so, a spokeswoman for the company says.
At KeyCorp, J. Stephen Reid readily gave consent, but changed his mind when he got a sense of how big the policy was. He learned from an annual report in 1998 that KeyCorp's life insurance on workers had a cash value of nearly $2 billion. Estimating that this translated to $8 billion or more in death benefits, he remembers thinking, "My God -- they're covering people for huge amounts of insurance, and I'm one of them."
Employers rarely tell employees how much they're covered for, but sometimes an estimate can be teased out. Wachovia Corp.'s life insurance has a cash "surrender" value of $6.1 billion, according to the company and its filings with the Federal Deposit Insurance Corp. That might buy death benefits of a little under $20 billion. Wachovia says it insures about 20,000 lives, implying average death benefits of $952,380. Wachovia says it can't calculate an average death benefit, but calls the estimate high.
Mr. Reid says Key Bank wouldn't tell him how big a policy it had on his life, nor what insurer provided it. An insurance salesman for 38 years, Mr. Reid, 63, calls corporate-owned life insurance "the underbelly of the insurance industry that they don't want you to know about. I know I'm insured for the rest of my life, and I don't like it."
Mr. Reid recently wrote a mystery novel, "Murder Insured," in which a firm hired a hit man to kill executives and collect death payments; the firm met its earnings targets, and officers got their bonuses. It was a spoof, of course, but Mr. Reid says he nonetheless refused to let his current employer insure his life: "I didn't want to have two ransoms on my head."
KeyCorp declines to comment on Mr. Reid's experience. A spokesman says that "employees do not pay premiums, and therefore there's no reason to disclose the details of the policy to them."
This year, insurance lobbyists again stepped up to the plate amid new rumblings in Congress about reining in corporate-owned life insurance. Rep. Gene Green, Democrat of Texas, proposed requiring employers to tell all employees, past and present, about any coverage bought on their lives since 1985. Democratic Sen. Jeff Bingaman of New Mexico began looking for cosponsors for a measure to eliminate tax benefits for policies covering employees gone for more than a year.
Clark/Bardes and insurance-industry groups led the opposition, aided by Mr. Kies's lobbying practice, which Clark/Bardes acquired earlier this year. The industry took out radio ads in the Washington area attacking proposals to curb what it called "business insurance." The proposals went nowhere.
Recently, lawsuits have shed light on some usually hidden details of corporate-owned life insurance. After the IRS invalidated deductions for interest on loans against janitors insurance, several companies sued to reclaim the lost deductions. So far they've made little headway.
Wal-Mart is involved in two other kinds of lawsuits. First, it has sued several insurers and brokers, claiming it was misled about the risk that loans against janitors insurance might be nailed as a tax shelter. The IRS disallowed interest deductions on the retailer's janitors insurance, and the company subsequently gave up the policies. The defendants in Wal-Mart's suit, filed in Delaware state chancery court, include units of American International Group Inc., Hartford Financial Services Group Inc. and Marsh & McLennan Cos. They declined to comment.
Wal-Mart was itself sued by the widow of a worker whose life it had insured, Douglas Sims. A federal district court in Houston ruled that the retailer had no legal right to insure Mr. Sims. Wal-Mart is appealing.
For investors, the challenge is knowing how much life insurance might be contributing to a company's bottom line. Few companies mention life insurance in their filings. When they do, they sometimes use vague terms such as "mortality income receivable," a phrase favored by Panera Bread Co.
The St. Louis restaurant company collected $3 million from the deaths of employees and ex-employees last year, equal to nearly a quarter of its net income. Panera's chief financial officer, Bill Moreton, says that in 1994, when the company owned Au Bon Pain cafes, it bought policies on 4,600 employees as a "tax strategy." He says Panera borrowed against the policies and used the death benefits to repay some of the loans.
Bank of America obtains about $570 million in revenue and $196 million in net income a year from the life insurance it owns on employees and ex-employees, according to a Wall Street Journal estimate based on the bank's $9.5 billion of life insurance. That would be about 2.9% of 2001 earnings. The bank doesn't dispute the estimate.
Clark/Bardes itself got income from life-insurance on an employee in 2000. "Includes $1 million in life insurance proceeds in Other Income," says a line from a financial summary it provides investors. When asked, the insurance broker and consultant confirms that the payment was a death benefit, paid to it after an employee died in a plane crash.
Insurers Do It, Too
There's sometimes a bit more disclosure when the employer that's buying life insurance on workers is itself an insurer. If it buys the policies from a subsidiary, it has to disclose the purchases as related-party transactions.
Prudential Insurance Co. of America owns four groups of policies on workers' lives, valued at $813 million, prospectuses show. Prudential says it uses the policies to pay for employee benefits but declines to provide details. MetLife Inc., a big seller of corporate-owned life insurance, bought policies on "several thousand" of its own employees in 1993, 1998 and 2001. Hartford, another major provider, took out an undisclosed amount of insurance on about 800 of its own managers earlier this year.
A Des Moines, Iowa, insurer called AmerUs Group Co. has life insurance on most of its 1,000 or so employees. It bought them for the tax benefits, says a company official, Marty Ketelaar, who adds: "It's a profitable piece of business that also allows the employee to derive a benefit." He declines to specify the benefit. The industry is reluctant to say how big the overall market is or how fast it's growing. A.M. Best determined in 1999 that sales of corporate-owned life insurance were growing faster than sales of other kinds, but Best says it no longer keeps track of corporate life-insurance purchases. CAST Management Consultants in Los Angeles has said that in the two years through 2001, sales of new corporate-owned life insurance rose 60%. It declines to provide more recent figures.
The benefit many companies now say they're financing with life insurance is deferred-compensation, which is a kind of giant savings plan for highly paid executives. But even if an employer buys bales of life insurance in connection with its deferred-comp plans, there's no guarantee the money will remain in the policies.
Consider what happened at Enron Corp. It took out $500 million of life insurance on employees, which it indicated was to finance its deferred-compensation programs and executive pensions . But Enron borrowed most of the assets within the policies, documents from bankruptcy court filings show, leaving it roughly $145 million short of what it owed its executives for deferred-compensation benefits alone.
Now the policies are assets in Enron's bankruptcy proceedings. The total death benefits on the policies, before paying off policy loans, could reach $2 billion. Waiting in line for this money are Enron creditors, to whom Enron executives are worth more dead than alive.
Wanted: Dead or Alive
Employers have continued to buy ever-greater amounts of life insurance on employees, eluding lawmakers' crackdowns again and again.
KEY MAN INSURANCE JANITORS INSURANCE MANAGERS INSURANCE
Employers buy insurance on Top executives Rank-and-file workers Middle managers
When 1980s* to present 1987 to 1996 1996 to present
Government crackdown 1986: Congress limits interest deduction for a single-policy loan to $50,000 1996: Congress phases out interest deduction for policy loans 1997: To prevent lenders from taking out policies on mortgage holders and depositors, Congress limits deduction on loans used to buy life insurance on them; it exempts policies on employees. 1998-2000: Congress seeks to rescind the 1997 exemption
Employer response Companies instead buy thousands of smaller polcies on rank-and-file workers Companies instead borrow money from other sources to buy life insurance on managers Employers continue to buy even more life insurance on employees
Ostensible use of insurance To protect company from untimely deaths of key executives To pay for retiree medical benefits To pay for retiree medical benefits and executive deferred- compensation programs
Financial benefit to employer (for all types) Money in policies grows tax-free and boosts income. The combination of tax-free returns and deductions for interest on loans used to buy life insurance effectively produces attractive returns.
*Employers purchased smaller amounts of key man insurance prior to the 1980s.
Write to Ellen E. Schultz at email@example.com and Theo Francis at firstname.lastname@example.org.
12-31-2002, 11:54 AM
American Psycho pretty much nails it.
But let's answer your question:
[I don't intend these questions rhetorically. I'm an FCAS with no special knowledge of life products. Can anyone explain what is going on?]
First, you should understand that whole life insurance products pay something like 50% to the agent and the insurance company (i.e., present value of benefits to policyholder is around 50%), while they both sell it to the public as an 'investment'.
The scams run the gamut, and when caught and fined, generally it is merely a cost of doing business.
Second you should understand that most people are very bad when it comes to understanding compound interest and that money payable in the future must always be present valued (the reciprocal of the compound interest function). And also that many of the promises made by the agent are predicated on non-guaranteed dividends, or in the case of equity related products both life and annuity, on past performance continuing--like the recent bubbles in our dotcom and high-tech industries.
Sales agents, with great help from the insurance company market this crap to individuals who don't have a clue.
When the Pru not so long ago was caught red-handed selling millions of policies that were highly misleading--to older folks generally throughout the US, but especially in Florida, the feds moved in and asked them to take all their files, box them up and move them to warehouse in North Jersey. Before the feds could move in and confiscate them, the entire warehouse burned to the ground. Arson was cited as the likely reason.
The Met and other major firms also were caught.
The Pru paid a 500 million dollar fine, Those familiar with the case said it should have been many times that.
The life insurance industry is quite corrupt, having lobbied hard back in the 1930s to be overseen by the states as opposed to the feds, notwithstanding that they clearly do interstate commerce, which the Constitution says is a federal regulatory matter. The large companies' typically can easily overwhelm state regulators and the political forces in all but a few states. NY is the toughest, but even there not up to what the feds can bring to bear, any more than Elliot Spitzer, for all his good work, can match the SEC, when it has the needed funds, of course, in overseeing thousands of companies
And let's not leave out the health industry which has it's own peculiar form of scams, typically revolving on very hard to understand individual policies and typically paying out around 60% of every premium dollar, with some companies paying as little as 30%.
They also target the most vulnerable members of our society, often the elderly--including BTW, folks who have diseases like Alzheimer's. Some of these insurers and their agents go so far as to sell dozens of such policies to the same people and pass along the names of these poor folks to others, as 'marks'--not unlike what some Wall Street firms also do when selling stocks.
But in answer to your question as to how they get away with it all--hey--how did Enron, Tyco, Worldcom, etc, etc get away with it all? Payola big time to reduce the effectiveness of government agencies of course--federal and state, using mostly Republican congressmen, but sometimes also Democrats.
On that last, it was Joe Lieberman, erstwhile Democratic Presidential contender, that put a lot of pressure on Arthur Levitt to not treat stock options as an expense. Joe is also in a state that has large numbers of large insurers, Connecticut, and often supports much of their agenda.
But mostly--far and away--it has been the Republicans, right up to GW. He and Cheney themselves participated in scandals similar to the ones perpetrated by Enron, et al, for Harkin and Halliburton, and they and many in their administration have been upo to their eyeballs in working with Kenneth Lay and Enron et al for years. Trent Lott was a big helpful buddy of WorldCom's Bernie Ebbers.
For god's sake Bush's Secretary of the Army worked for Enron in their phony energy unit and was 'planted' by bush for the express purpose of getting Enron to capture the energy business of the Department of Defense for Enron. The DOD is far and away the largest consumer of energy in the US. The Secretary was called Mr. McGoo by folks at Enron, presumably because of his marvelous business acumen. Cheney of course left Halliburton with a 23 million-buck package sold his stock, and soon thereafter Halliburton's stock collapsed because of Cheney's failure to do due diligence on pushing the merger with Dresser Industries, a company with huge potential asbestos liabilities.
But back to Execs.
Executive compensation consulting is a major component of almost all large management consulting practices, including the ones that hire most pension actuaries.
The whole idea is to increase CEO and other executive compensation and to do it in such a fashion as to hide it from everyone, including and especially shareholders. It is very complicated stuff and almost impossible to figure out from the info we get as shareholders, unless you are an expert in it.
It all began with actuaries. They were the ones that set up ERISA excess plans for execs, making up for what Congress limited in the rank and file defined benefit pension plan. Then they moved to SERPS, Rabbi Trusts and a host of other employee benefit plans for the top folks--all the while designing rank and file plans that tended to screw employees, such as health plans that passed along much of the costs to employees and of course taking advantage of the enormous backloading of the present values of accrued benefits (because the definition of how benefits accrue in ERISA is fouled up and actually causes this backloading).
Then of course they pretended to fix this backloading by putting the infamous cash balance plans in.
But they gave up the exec comp stuff back in the 80s (except for those pensions) pretty much to major consultants specializing in a whole host of complicated stuff. This often involving stock options or very complicated stuff involving stock prices--always influencing the stock price in the short term, and devastating it in the long term.
They do this of course to get fees but even more to ingratiate themselves in with the top executives, who are then more reluctant to fire them in other areas, often throwing lots of business their way in this nefarious quid pro quo game.
Since the early 80s, CEO compensation in the top 1000 companies, including all of these 'perks', has increased from around 40 times the median pay of employees to more than 400 times.
No other companies in the world come anywhere close to this. As bad as that is, the awful truth is that these same CEOs were awful in their business practices--always going for the short term at the expense of the long. It seems there is a very high correlation between being a crook and being a lousy CEO.
Part of that short-term is the continual downsizings of workers--which Wall Street loves--until the real earnings start going down, and down.
And as I have said many times before at least part of the reasons for those downsizings and in some cases a major part, has been the extreme backloading of the present values of accrued benefits in DB pension plans. Couple this with the marvelous salutary effect this has on pension expense caused by the related huge actuarial gains, which serve to reduce that expense and thus increase earnings and with crooked Wall Street brokers who couldn't care less about pensions, and you have trouble with a capital 'T'.
Keep in mind that the pension assets of many of our largest corporations are very large, sometimes larger than the assets of the companies themselves, and when you can play games such as this, it is kind of like a perpetual motion machine, manufacturing 'profits' as you go, all the while leaving workers with inadequate pensions.
As I like to say--is this a great country or what?
There is a solution to all of this mess, including getting major watchdogs to make sure corporations toe the line--and if you have read any of my stuff you know what it is.
One last thing--the imminent failure of Social Security is a global problem of enormous magnitude in every democratic country, and will become one also in all other nations within 50 years.
It is not an exaggeration at all, to say that solving that problem the right way--keeping our major national retirement plans as defined benefit ones, but chucking PayGo and replacing it with actuarial advance funding and avoiding like the plague it's opposite, defined contribution plans (which benefit both Wall street and the insurance industry at our expense)---can literally save democracy and capitalism too.
Of course we should also fix DB plans and by so doing THEN (not before) simplify our pension laws-which I'm sure corporations and actuaries would like, along with the public.
Sometimes doing the right things in the right order for the right reasons, can save one helluva lot of time in having to straighten it all out, and also benefits everyone--except the bad guys.
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