A 2011 National Litigation Management study sponsored by the Council on Litigation Management (CLM):
- Identified structured settlement as the "most penetrated external initiative" among 30 litigation-related service areas analyzed based upon interviews with leading litigation management executives;
- Determined that more than 74 percent of the study's participants rated their available litigation management metrics as "Fair" or worse for measuring the effectiveness of their litigation management programs; and
- Concluded that, to be successful, national litigation management service programs must deliver metrics and analytics that justify the quality, performance, and satisfaction levels litigation management executives are seeking.
What metrics and analytics should litigation management executives utilize to justify and evaluate their structured settlement programs?
In two prior blog posts, S2KM summarized findings from CLM's Litigation Management study and highlighted historic justifications, characteristics and metrics for defense structured settlement programs. This blog post and two subsequent posts will examine historic structured settlement performance analytics and discuss those analytics in the context of the "quality, performance and satisfaction levels" litigation management executives should be seeking.
Recognizing no official or accepted industry records exist for total historic structured settlement annuities written and/or annuity payment rights transferred, S2KM offers the following estimates based upon industry input and sources including "Structured Settlements and Periodic Payment Judgments" (S2P2J), Melissa Evola's primary market compilations, and DBRS' June 8, 2011 Pre-Sale Report for J.G. Wentworth's Fixed Rate Asset-Backed Notes Series 2011-1:
- Primary market (1976-2010)
- Total annuities written: 716,500
- Total Premium: $124 billion
- Secondary market (1986-2010)
- Total number of annuity (or partial annuity) transfers: 98,300
- Total recipients who have sold payment rights: 65,600
- Total aggregate payment streams purchased: $7.5 billion
S2KM welcomes continuing industry input and reserves the right to revise these estimates and/or future estimates based upon industry input.
Regardless of how many structured settlement annuities have been written, or transferred, or how much structured settlement annuity premium has been generated, or payment streams purchased, the key issue for evaluating the "quality" of structured settlements concerns structured settlement payout performance. Most specifically, how many annuity-funded structured settlement recipients or transferees have or have not received 100% of their promised periodic payments?
For annuity funded structured settlements, the payout performance to date has been excellent though not perfect. Overall, even when structured settlement annuity providers such as Confederation Life, Monarch Life and Capital Life have entered receivership, the protections provided by state life and health guaranty associations have proven to be an important safety net - at least for the purchaser/obligors and original structured settlement recipients.
The only exception to date, of which S2KM is aware, for some annuity-funded structured settlement recipients not receiving 100% of their promised periodic payments is Executive Life Insurance Company of California (ELIC) which became insolvent in 1991 and involved approximately 5500 structured settlement annuities as well as many other life insurance products. Note also, however:
- New York's Insurance Superintendent has petitioned for Executive Life Insurance Company of New York (ELNY), to enter liquidation and undergo restructuring. Although all ELNY structured settlement annuities have been paid in full to date, the exact impact of the ELNY liquidation and restructuring plan on individual structured settlement payees and transferees will not be known at least until the state life and health guaranty associations finalize the amount of their ELNY contributions.
- The DBRS report cited above indicates that J.G. Wentworth, and/or investors of J.G. Wentworth's securitized structured settlement payment rights, have suffered losses of 0.11% from the 59,000 transactions J.G. Wentworth has consummated since 1995 without identifying the specific source of these losses.
Selected highlights from ELIC's receivership and rehabilitation plan - Sources: Sections 3.05 of "Structured Settlements and Periodic Payment Judgements" (S2P2J) and the structured settlement wiki.
- Beginning in 1991, California insurance regulators and courts addressed the 5,500 structured settlement annuities issued by ELIC in a series of actions, stretching over two years and culminating in the sale of ELIC in late 1993.
- During this time, most structured settlement recipients received 70% of their scheduled periodic payments. The supervising Los Angeles Superior Court permitted approximately 600 “hardship” claimants to petition for and receive continuation of full scheduled payments.
- Recipients who experienced a 30% shortfall were of two categories: assigned and non-assigned cases. Approximately 800 ELIC structured settlement recipients had agreed to a qualified assignment using ELIC's parent, First Executive Corporation (FEC), as assignee. FEC entered bankruptcy in 1991.
- For the 4700 ELIC structured settlement recipients who had not agreed to a qualified assignment, the original obligor (defendant or liability insurer) continued to be liable. Many of these original obligors made direct arrangements with individual ELIC structured settlement recipients to pay the 30% difference. Others waited until the overall shortfall could be determined.
- In 1993, the supervising court approved an ELIC sales agreement and rehabilitation plan under which a newly formed company, Aurora National Life Assurance Company, Inc. (Aurora) assumed ELIC's structured settlement obligations.
- ELIC's former policyholders and structured settlement recipients were given the opportunity to either opt out of the rehabilitation plan and receive the liquidation value of their existing ELIC contracts or opt in to a new restructured contract with Aurora.
- Structured settlement recipients choosing to opt out of the Aurora plan were promised a cash payment of 56% of their ELIC annuity's value when ELIC became insolvent (without any state guaranty association enhancement) plus subsequent payments depending upon future events which could provide an additional estimated 28% of their annuity value.
- The other choice was to accept a revised annuity from Aurora which for most former ELIC structured settlement payees would be enhanced by payments from state life and health guaranty funds. Most of the former ELIC structured settlement payees who selected this option (approximately 4000) received 100% of the value of their ELIC policies plus 5.34% interest for past shortfalls.
- For the remaining 1500 ELIC structured settlement payees (including Aurora opt outs) shortfalls, which S2P2J's authors originally estimated to average 10%, exist.
- The future (post 1994) enhancements for former ELIC structured settlement payees, however, received an unexpected bonus source in 1998 when an anonymous whistle-blower alleged that Crédit Lyonnais was the real buyer of ELIC and controlled Aurora through secret agreements. Because banks were prohibited from owning U.S. insurance companies in 1993, the California Insurance Department sued Credit Lyonnais and other parties alleging violations of the federal Bank Holding Company Act, the California Insurance Code and other California statutes.
- The results of these lawsuits:
- A 2003 settlement with Credit Lyonnais for $730.5 million of which $211 million was distributed to opt out policyholders and former structured settlement payees and $403 million to Aurora to supplement payments for opt in policyholders and continuing structured settlement payees; and
- A 2005 verdict against the other defendants including $700 million in punitive damages which awaits retrial following appeal and remand on the issue of damages.
The Executive Life insolvencies, both of which originated in 1991, represent exceptions that prove the rule: the payout record ("quality" metric) of structured settlement annuities has been excellent - based upon the performance record of annuity providers who have issued an S2KM-estimated 716,500 structured settlement annuities since 1976.
The quality of structured settlement annuities was further highlighted during the 2011 Annual Meeting of the National Structured Settlement Trade Association (NSSTA) by:
- Jim Morris, Chairman, President, and CEO of Pacific Life Insurance Company, who accentuated the current financial strength of U.S. life insurance companies and explained why structured settlement annuities represent an excellent strategic product for life companies; and
- Thomas Ronce, a member of the NOLHGA Board of Directors, who highlighted lessons learned and industry improvements resulting from the Executive Life experience:
- Risk-based capital testing - more sophisticated systems to measure insurance and investment risk in life insurers.
- Coordinated, sophisticated, national regulatory consultation for troubled companies doing business nationally.
- Skilled, professional leadership and stakeholder participation in the processes to resolve insolvencies of nationally significant insurers.