Beyond Structured Settlements

Structured Settlements in 2011 - 3

Prior S2KM 2011 year-end structured settlement blog posts have highlighted the historic significance of the ELNY liquidation and provided a strategic 2011 industry retrospective . This blog post summarizes additional important 2011 structured settlement developments and information.

Taxation

• IRS Audit Guides - The Internal Revenue Service published an Audit Guide in 2011 to assist its examiners in determining the tax treatment of proceeds from lawsuits, settlements and awards received after August 21, 1996. That date marked the enactment of the Small Business Job Protection Act of 1996 which added a "physical" requirement to IRC § 104(a)(2). The IRS had previously published an Audit Guide to assist its examiners in determining whether the IRC §5891 excise tax applies to specific structured settlement factoring transactions.
• JTC Structured Settlement Estimate - The Joint Committee on Taxation (JCT) in 2011 released its Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014 (JCT Report). For the first time, the JCT Report calculated an estimated tax revenue loss for the "exclusion of investment income from structured settlement arrangements". The JCT estimate projected structured settlement tax revenue loss to be "de minimis" - meaning less that $50 million for Fiscal Years 2010-2014 or less than $12.5 million per year.

Government Benefits

• Medicare Secondary Payer Protocol - Although no statutory or regulatory authority requires Medicare set-aside arrangements (MSAs) in third party liability settlements, confusion continues as to whether and when MSAs are necessary and/or appropriate for such cases. On May 6, 2011, the United States Attorney's Office for the Western District of New York (USAOWDNY) released a one page "Medicare Secondary Payer Protocol" (MSP Protocol) establishing a voluntary process by which that U.S. Attorney's Office will review MSA proposals for liability cases provided certain conditions are met.

• U.S. v. Stricker - In this case involving periodic payments and the MSP Act, a U.S. District Court in Alabama denied a motion by the U.S. Government to reconsider the court's earlier dismissal based upon its finding that the applicable statutes of limitations barred the Government's complaint. The Government had argued on appeal that the court erred in granting its motions to dismiss without considering the Government's theory of continuing accrual argument.

• WCMSA portal - The Centers for Medicare and Medicaid Services (CMS) announced the creation of an Internet portal for submission of workers compensation MSA (WCMSA) proposals. The new web-based application:
  • Enables WCMSA proposals to be submitted electronically for CMS review;
  • Accepts submission documents and supplemental information CMS may request;
  • Provides online status updates for MSA applications;
  • Generates email alerts when approval letters are issued.
• Conditional payment guidelines - CMS released guidelines during 2011 to provide certainty and finality for conditional Medicare payments. This "self-calculated final conditional payment amount" option, will be initiated in February 2012 for claims with a total settlement value of $25,000 or less allowing attorneys and/or claimants to receive a final amount owed number from CMS prior to settlements. For additional information see the Medicare Secondary Payer Recovery Contractor (MSPRC) website.

Minors Settlements - Whether a structured settlement annuity that extends beyond the age of majority is "suitable" for, or in the "best interests" of, a minor (especially a minor without a debilitating injury) represents an important industry issue. In his 2009 presentation to the Society of Settlement Planners (SSP) titled "What Judges Look for When Approving a Minor's Settlement", Texas attorney Phillip McCrury surveyed state minors' statutes and concluded many states require judges to consider the "best interest" of a minor even though very few states directly address structured settlement annuities. Two 2011 cases (only one involving a structured settlement) highlight the potential for conflicting judicial interpretations when annuities are part of a proposed minor's settlement.

• Hancock v. Share - A Florida Appellate Court reversed a Florida Trial Court ruling that denied approval of a proposed structured settlement for a minor. Although the trial court had found that the proposed structured settlement was in the "best interests" of the minor, it refused to approve the structured settlement citing a Florida statute that prohibits a guardian "to bind the assets" of a minor beyond the age of majority.
• In the Matter of Sandra McDuffie - A New York trial court ruled against an estate administrator who proposed to purchase an annuity for a minor child of the decedent stating "the Court cannot authorize the administrator to restrict funds due to an infant after the infant has reached the age of [majority]".

Executive Life Insurance Company of California - In a legal dispute (Aurora S.A. v. Poizner) which it characterized as "another aspect of the dizzyingly complex and heavily litigated failure of the Executive Life Insurance Company", a California Court of Appeals on August 8, 2011 upheld a trial court decision that California's Insurance Commissioner correctly declined to approve the proposed sale of Aurora National Life Assurance Company (Aurora) by Aurora S.A. to Reassure America Life Insurance Company (REALIC), a Swiss Reinsurance subsidiary.

Structured Settlement Annuity Sales - S2KM acknowledges and appreciates receiving market recap reports highlighting quarterly structured settlement annuity sales (Melissa Evola) and weekly financial market data (Richard Nahill).

• Annuity sales - Evola's most recent quarterly compilation of 2011 structured settlement annuity sales (thru September 30) indicates 21,846 cases have been structured for a total premium of $3,633,489,474. These numbers represent a significant decrease from 2010 (also thru September 30) of 23,578 cases and $4,140,704,642 of premium.
• Interest rates - Nahill's most recent 2011 financial market recap (for week ending December 16) shows interest rates of 1.86 percent for 10-year U.S. Treasury bonds compared with 3.30 percent as of December 31, 2010.

For prior S2KM annual reports summaring structured settlement industry developments, see the structured settlement wiki.

Structured Settlement Metrics - 3

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[10] 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.

For S2KM's complete reporting and analysis about: 1) Executive Life and 2) structured settlement metrics, see the structured settlement wiki.

Aurora S.A. v. Poizner

In a legal dispute (Aurora S.A. v. Poizner) which it characterized as "another aspect of the dizzyingly complex and heavily litigated failure of the Executive Life Insurance Company", a California Court of Appeals on August 8, 2011 upheld a trial court decision that California's Insurance Commissioner correctly declined to approve the proposed sale of Aurora National Life Assurance Company (Aurora) by Aurora S.A. to Reassure America Life Insurance Company (REALIC), a Swiss Reinsurance subsidiary.

Background

• After Executive Life Insurance Company of California (ELIC) failed in 1991, then California Insurance Commissioner John Garamendi approved the transfer of ELIC's insurance policies, including approximately 5500 structured settlement annuities, to Aurora, a newly formed company, and agreed to allow Aurora to operate as a life insurance company in California. Aurora was a subsidiary of New California Life Holdings (NCLH) which was controlled by an investment group called Altus S.A./MAAF.
• In 1992, with the approval of Commissioner Garamendi, a joint venture called Artemis S.A. acquired a controlling interest in NCLH. As summarized by the California Court of Appeals: "Artemis S.A. is the parent of Aurora S.A. Aurora S.A. owns a controlling interest in NCLH. NCLH owns 100 percent of Aurora."
• Subsequent to its NCLH purchase, Artemis learned of a conspiracy by Altus/MAAF Group to evade the prohibition under California on foreign entities controlling California insurers. Rather than disclose this conspiracy to the California Insurance Commissioner, Artemis submitted multiple filings that contained false or misleading information about Artemis' own interest in Aurora as well as Altus's secret control of Aurora through its agreement with the MAAF Group.
• In 1999, the California Insurance Commissioner learned from a whistleblower about the Altus S.A./MAAF Group conspiracy and filed lawsuits (conspiracy lawsuits) against multiple defendants including French bank Credit Lyonnais (which allegedly was a secret, indirect buyer of ELIC and controlled Aurora through secret agreements) alleging violations of the Federal Bank Holding Company Act, the California Insurance Code and other California statutes.
• In 2000, Aurora S.A. and one of its investment partners agreed to sell their interests in NCLH to Reassure America Life Insurance Company (REALIC), a wholly-owned subsidiary of Swiss Reinsurance Company for $227,805,874 subject to the approval of the California Insurance Commissioner.
• In 2005, some of the defendants in the conspiracy lawsuits, including Credit Lyonnais, settled for $730,500,000, most of which was distributed to former ELIC policyholders and payees who had earlier "opted out" of the Aurora rehabilitation plan and received the liquidation value of their existing ELIC contracts and to Aurora to supplement payments for policyholders and payees who had "opted in" (i.e. accepted the Aurora rehabilitation plan).
• The conspiracy lawsuits against the two remaining defendants, Artemis S.A. and Francois Pinault (a key participant in the alleged conspiracy), was conducted in Federal Court in 2005. The jurors found Artemis liable for engaging in a conspiracy and awarded $0 in compensatory damages and $700 million in punitive damages. The trial court awarded an additional $241 million in equitable restitution.
• Artemis appealed, moved to stay execution of judgment while the appeal was pending and offered to pledge as security $55 million from its anticipated sale of NCLH to REALIC. The trial court accepted the Artemis offer and agreed to stay execution of judgment. On August 25, 2008, the Ninth Circuit Court of Appeals vacated the damage awards against Artemis and remanded the case for a new trial on the issue of damages.
• On September 18, 2008, after the trial court vacated its earlier order requiring Artemis to pledge $55 million, REALIC filed an application requesting California Insurance Commissioner Steve Poizner to approve REALIC's purchase of Aurora from Aurora S.A.
• On September 23, 2009, following several earlier, acrimonious communications with representatives of REALIC, a representative of the California Insurance Commissioner sent an email stating the Department of Insurance "intends to deny the pending Form A application unless 100% of the Artemis sale proceeds are deposited in an escrow account satisfactory to the Commissioner. It is our understanding that Artemis refuses to agree to place 100% of its sale proceeds into escrow. Therefore, we are in the process of preparing a denial letter."
• On October 14, 2009, Aurora S.A. filed a lawsuit seeking to compel the California Insurance Commissioner to issue a decision on REALIC's application to purchase Aurora. After the Commissioner formally disapproved REALIC's request to purchase Aurora on November 23, 2009, Aurora S.A. amended its lawsuit alleging the Commissioner's disapproval constituted abuse of discretion.
• On July 22, 2010, the trial court ruled the Commissioner did not abuse his discretion and denied Aurora S.A.'s petition. Aurora S.A. appealed.

For S2KM's complete reporting and analysis of the Executive Life Insurance Companies, including an Executive  Life timeline, see the structured settlement wiki.

Life Insurer Liquidation Process

What happens if and when a multistate life insurance company like Executive Life Insurance Company of New York (ELNY) is liquidated?

The answer: no one knows for certain. This uncertainty, specifically for ELNY, results from many factors:

• No significant multistate life insurers have failed since 1994.
• Many state life insurance guaranty association laws have been amended since 1994.
• Different state life insurance guaranty laws provide significantly different coverage applications, caps and requirements.
• ELNY's current negative surplus is historically large compared with previously liquidated life insurers.
• The vast majority of ELNY's remaining liabilities consist of structured settlement obligations.
• A 2007 "Agreement in Principle" to address ELNY's problems has never materialized.
• In a 2007 Business Insurance article, Mark Peters, then head of the New York Liquidation Bureau (NYLB) stated that this proposed bail-out plan “would be cheaper for the insurers and avoids the ‘chaos’ that would come with a liquidation.” (emphasis added)
• As ELNY's Rehabilitator, the New York Insurance Superintendent has repeatedly extended the original July 1, 2011 state court imposed deadline for filing a plan of liquidation, most recently to September 1, 2011.
• According to some critics, including New York attorney Peter Bickford, the problems with the insurer liquidation process in New York are systemic and lack transparency and accountability.
• New York has two state life and health insurance guaranty funds with different coverage dates, caps and requirements.
• The 2010 Dodd Frank law created a Federal Insurance Office (FIO) which could eventually supervise some life insurer insolvencies.

How U.S. life insurer liquidations are supposed to work

The United States federal bankruptcy law expressly excludes insurance companies from the definition of "debtor". As a result, when a life insurance company fails, it does not enter bankruptcy. Instead, the insurance commissioner (or superintendent) of the state that granted the life insurer's charter (domiciliary state) places the company in receivership - a status which can include conservatorship, rehabilitation and/or liquidation depending upon the severity of the insurer's problems. Liquidation is the most serious form of receivership.

All forms of life insurer receivership are conducted pursuant to the domiciliary state's insurance receivership statute under the supervision of a state court. Thirty-two states have adopted some version of the Insurers Rehabilitation and Liquidation Model Act which the National Association of Insurance Commissioners (NAIC) adopted in 1978. This Model Act helps to achieve uniformity and encourages reciprocity among the states.

ELNY was placed into rehabilitation on April 23, 1991 by the New York Superintendent of Insurance, a status it retains to the present day under the supervision of the NYLB. Prior to 1991, ELNY sold an estimated 8,000 structured settlement annuities which, according to ELNY's most recent financial statements (December 31, 2010) continue to represent "the vast majority of the value of ELNY's remaining contract liabilities." To date, all related ELNY structured settlement payments have been paid in full. However, the most recent ELNY financial statements show assets of $905,945,200 compared with liabilities of $2,474,317,342 resulting in a negative surplus of $1,568,372,142.

If and when the insurance commissioner (or superintendent) determines that a life insurer should be placed in liquidation, the commissioner petitions a state court for an Order of Liquidation. On December 17, 2010, a New York State Supreme Court Judge ordered the Superintendent of the New York State Insurance Department to present the Court with a proposed Order and Plan of Liquidation for ELNY on or before July 1, 2011 - a date which has now been pushed back twice most recently to September 1, 2011.

In most states, following an order of liquidation, the court appoints the commissioner/superintendent as liquidator and grants the liquidator title to all of the life insurer's assets and, subject to court approval, control of the life insurer's operations with the objective of winding up the life insurer's business. In New York, the NYLB, acting as agent for the Superintendent of Insurance, generally serves as liquidator in life insurance insolvency proceedings.

The liquidator is responsible for "marshalling" the insurer's assets, evaluating the claims of policyholders and creditors, and distributing assets to approved claimants according to statutorily prescribed priorities. Alternatively, as was the case with Executive Life Insurance Company of California (ELIC), a liquidation plan may provide for the transfer of some or all of the failed insurers assets and/or liabilities to a new and/or healthy insurer. The objective, with either alternative is to protect policyholders and consumers against three risks:

• Delays in claim payments;
• Uncertainties about payment amounts; and
• Replacement costs for defaulted policies.

An Order of Liquidation also generally triggers involvement by one or more state life and health insurance Guaranty Associations. These state Guaranty Associations are specially chartered, not-for-profit legal entities created pursuant to state guaranty association legislation. All fifty states, plus Puerto Rico and the District of Columbia, have enacted some version of the NAIC's Life and Health Insurance Guaranty Association Model Act which was first promulgated in 1971. Important differences, however, exist among these various state statutes including coverage caps and whether the Guaranty Associations protect annuity policyholders or payees.

All state life and health guaranty associations are also members of the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA), a not-for-profit organization founded in 1983. The core mission of NOLHGA and its member Guaranty Associations, according to NOLGA President Peter Gallanis, is "to ensure that consumers receive at least a statutorily prescribed base level of financial protection when a life or health insurance company fails. That protection may be achieved either by transferring to a healthy insurer the failed company's business that is in force at the time of the company's failure or by supporting the 'runoff' of that in-force business."

A 2009 NOLHGA document assessing ELNY and titled "Information and Guidance on Estimating Potential Guaranty Association Assessments Relating to Executive Life Insurance Company of New York ('ELNY')" includes the following paragraph:

"No guaranty association has yet to enter into a legally binding commitment to participate in any plan or contribute any level of funding. As a result, at this time, we cannot confirm which particular state guaranty associations will participate in any plan. It is estimated, however, that if a plan similar to the one that is being considered is adopted, the majority of the guaranty associations’ costs (e.g., 66-75%), will likely be borne by New York's guaranty associations. Currently, it is estimated that 20-30 guaranty associations may eventually participate in a final plan once it is completed. In most states, assessments by guaranty associations relating to annuities are primarily associated with the allocated annuity account. New York has two separate guaranty associations: the assessment base for its “new” guaranty association is primarily associated with its life insurance, annuity and funding agreement account; while the assessment base for its “old” guaranty association is based upon admitted assets."

The 2009 NOLHGA document also includes a section titled "Guidance on Estimating a Company’s Potential Guaranty Association Assessment".

For S2KM's complete reporting and analysis of ELNY, including an Executive Life timeline, see the structured settlement wiki.

ELNY Liquidation Plan Postponed

The Superintendent of the New York Insurance Department, serving as Rehabilitator for Executive Life of New York (ELNY), has informed the New York Supreme Court of Nassau County by letter that it 'is not in a position to submit a consensual proposed order and plan of liquidation on or before August 10, 2011" as previously promised.

Instead, the August 8, 2011 letter from the Superintendent's legal counsel indicated the Superintendent now plans to submit the proposed order and plan on or about August 26, 2011. Even if the plan is filed by that date, however, it apparently will not have been approved by the Life and Health Guaranty Associations.

ELNY first entered rehabilitation in 1991. For a summary of ELNY and its sister company Executive Life Insurance Company of California (ELIC) prior to rehabilitation, see "The Fall of First Executive".

In 2007, then New York Governor Eliot Spitzer announced an "agreement in principle" for ELNY designed to continue paying all ELNY annuitants 100% of their benefits. The agreement, which was intended to protect approximately 11,000 ELNY annuity recipients including approximately 8000 structured settlement recipients, has never materialized.

On December 17, 2010, a Nassau County Supreme Court Judge ordered the Superintendent to present the Court with a proposed order and plan of liquidation for ELNY on or before July 1, 2011 after the Superintendent confered with the Life Insurance Company Guaranty Corporation of New York and other interested parties. The plan was supposed to establish a briefing schedule and provide for notice to all ELNY creditors.

On June 23, 2011, the Superintendent filed a motion to postpone the deadline for filing a proposed order and plan of liquidation for ELNY with the New York State Supreme Court of Nassau County from July 1, 2011 to August 10, 2011 "in order to present a comprehensive and consensual proposed Plan of Liquidation that maximizes the potential benefits for ELNY's structured settlement and other annuitants."

As of December 31, 2011, audited financial statements indicated ELNY had assets of $905,945,200 compared with liabilities of $2,474,317,342 resulting in a negative surplus of $1,568,372,142.

For S2KM's complete reporting and analysis of ELNY, including an Executive Life timeline, see the structured settlement wiki.

Executive Life Timeline

The following Executive Life timeline also appears on the structured settlement wiki where it will be edited and updated.

1935 - Executive Life Insurance Company of New York (ELNY) is incorporated and subsequently (in 1937) licensed as a stock life insurer company in the state of New York.

1961 - Executive Life Insurance Company of California (ELIC) is founded as a subsidiary of First Executive Corporation (FEC). FEC subsequently: 1) becomes a public company and 2) borrows $14.6 million from what is now Citibank to purchase ELNY.

1974 - Fred Carr joins FEC which then has $77 million of assets (355th among U.S. life insurers) of which $22 million represents policy loans. FEC's investment portfolio is $20 million under water. FEC is in default on its $14.6 million Citibank loan. Both the IRS and the New York Insurance Department are investigating ELNY. Touche Ross, FEC's auditors, refuses to express an opinion on its financial statements.

1986 - FEC's zenith. Shareholders' equity is more than $1.5 billion with no debt and total assets of $16.4 billion. The Ivan Boesky scandal erupts and junk bond prices begin to fall.

1987 - The New York Insurance Department disallows a number of reserve credits for ELNY resulting from questionable reinsurance treaties. ELNY admits to violating eight sections of the New York insurance code and agrees to pay a $250,000 fine. ELIC provides ELNY with a $151 million capital infusion requiring FEC to raise additional capital. Joseph Belth, an Indiana University professor and publisher of "Insurance Forum", begins writing negative reports about Executive Life. The mainstream financial press eventually echoes Belth's negative analysis questioning FEC's concentration of junk bonds. FEC and Executive Life complete over $40 billion in junk bond trades with Michael Milken and Drexel Burnam Lambert between 1982 and 1987. Executive Life's competitors promote these negative press reports to convince Executive Life policyholders to surrender their SPDA contracts.

1988 - Carr negotiates a $275 million loan for FEC from a consortium of Japanese banks.

1989 - FEC announces the sale of ELNY. With the Japanese bank loan nearing default, FEC completes a complex rights offering which raises $284 million.

1990 - The ELNY sale falls apart. FEC investors initiate a lawsuit alleging fraud. ELIC and ELNY announce a write down that eventually totals $776 million. A.M. Best's lowers ELIC's and ELNY's ratings from A+ to A. FEC becomes the most shorted stock in the United States during 1990. From July 1989 to the end of 1990, FEC's stock falls from $16 per share to 16 cents per share as its net worth declines to a negative $3 billion.

1991 - FEC loses $1 billion of its investment portfolio. Michael Milken is jailed for securities fraud. Newly elected California Insurance Commissioner John Garamendi obtains a court order seizing control of ELIC. New York's Insurance Commissioner Salvatore Curiale follows with ELNY on April 16. Both companies enter rehabilitation a status which ELNY retains to the present day. FEC files for Chapter 11 bankruptcy. The combined companies strand more than 500,000 policyholders, annuitants, investors, employees and agents. The annuitants include 13,500 structured settlement recipients. Commissioner Garamendi enters into a two-part sales agreement with New California Life Holdings, Inc. (New California) and Altus Finance (Altus), an affiliate of the French Bank Credit Lyonnais, in connection with the ELIC rehabilitation.

1992 - Gary Schulte publishes his book titled "The Fall of First Executive".

1993 - The 1991 ELIC sales agreement and the ELIC rehabilitation plan are modified and then approved by the Los Angeles Superior Court. Under this agreement, Altus pays $3.25 billion and acquires ELIC's $6.4 billion junk bond portfolio. The Altus purchase price includes $300 million of capital for a newly formed company, Aurora National Life Assurance Company, Inc. (Aurora) which assumes ELIC's remaining assets and liabilities including its structured settlement obligations.

1994 - ELIC's former policyholders and structured settlement recipients are 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.

1998 - An anonymous whistle-blower alleges that Crédit Lyonnais was the real buyer of ELIC and controls it through secret agreements. Because banks were prohibited from owning U.S. insurance companies in 1993, the California Insurance Department sues Credit Lyonnais and other parties alleging violations of the federal Bank Holding Company Act, the California Insurance Code and other California statutes.

2003 - Credit Lyonnais and some of the other defendants settle with the California Insurance Department for $730.5 million of which $211 million will be distributed to opt out policyholders and payees and $403 million to Aurora to supplement payments for opt in policyholders and payees.

2005 - The California Insurance Department case against the remaining defendants results in a substantial verdict including $700 million of punitive damages.

2007 - New York Governor Eliot Spitzer announces an "agreement in principle" for ELNY designed to continue paying all ELNY annuitants 100% of their benefits. The plan is intended to protect approximately 11,000 ELNY annuity recipients including approximately 8000 structured settlement recipients. The announced plan requires and anticipates future approval by the New York Nassau County State Supreme Court. The announced plan, however, whereby various insurers and guarantee associations apparently agreed to pay $650 to $750 million to fund approximately $2 billion of future ELNY payments, never materializes.

2008 - The U. S. Court of Appeals for the Ninth Circuit reviews the 2005 trial court verdict in the California Insurance Department ELIC case and remands the case for a new trial on the issue of damages. A new trial court date has not yet been set.

2009 - Audited financial statements indicate ELNY has total admitted assets of $984,021,594 compared with total liabilities of $2,516,254,541 as of December 31, 2009.

2010 - A New York State Supreme Court Judge orders the Superintendent of the New York State Insurance Department to present the Court with a proposed order and plan of liquidation for ELNY on or before July 1, 2011 after the Superintendent confers with the Life Insurance Company Guaranty Corporation of New York and other interested parties. The plan is supposed to establish a briefing schedule and provide for notice to all ELNY creditors. Audited financial statements (as of December 31. 2010) show ELNY has assets of $905,945,200 compared with liabilities of $2,474,317,342 resulting in a negative surplus of $1,568,372,142. The California Insurance Commissioners distributes funds received from the 2003 Credit Lyonnais settlement to approximately 27,300 former ELIC policyholders including former ELIC structured settlement recipients (opt outs) who elected to terminate their policies.

2011 - The Superintendent of the New York Insurance Department files a motion to postpone the deadline for filing a proposed order and plan of liquidation for ELNY with the New York State Supreme Court of Nassau County from July 1, 2011 to August 10, 2011 "in order to present a comprehensive and consensual proposed Plan of Liquidation that maximizes the potential benefits for ELNY's structured settlement and other annuitants."

Executive Life of California

As structured settlement stakeholders await the anticipated liquidation of Executive Life Insurance Company of New York (ELNY), some may be asking what happened to ELNY's sister company Executive Life Insurance Company of California (ELIC) and ELIC's structured settlement recipients.

Gary Schulte describes the meteoric rise and fall of ELNY, ELIC and their parent holding company, First Executive Corporation (FEC), in his 1992 book "The Fall of First Executive" previously reviewed by S2KM. Schulte's story ends in 1991 when ELNY and ELIC entered rehabilitation and FEC declared bankruptcy. At that time, the combined companies owed junk bonds (among other investment assets) with a face value of $6.4 billion and had issued approximately 13,500 structured settlement annuities: 8000 by ELNY and 5500 by ELIC.

One of the preliminary issues in ELIC's receivership was whether the supervising Los Angeles Superior Court (Superior Court) could properly distinguish among groups of ELIC policyholders. Initially, structured settlement recipients seemed assured of receiving 100 percent of their scheduled payments compared with holders of guaranteed investment contracts (GICs) who were to receive only a fraction of their investments. Subsequently, however, an appellate court required equal treatment for GIC investors thereby reducing ELIC funds available to pay structured settlements.

On April 22, 1991, the Superior Court entered an order permitting California Insurance Commissioner John Garamendi, as Rehabilitator, (Garamendi) to continue payment of all of ELIC's death claims, certain medical claims and 70 percent of it structured settlement obligations. The Superior Court permitted “hardship” claimants to petition for a continuation of full scheduled structured settlement payments. Approximately 600 structured settlement recipients applied for and received hardship status and continued to receive all their scheduled funds during the rehabilitation proceeding.

Of those structured settlement recipients who experienced an initial 30 percent shortfall, approximately 800 had originally agreed to a qualified assignment with FEC as obligor. For those structured settlement recipients who had not agreed to a qualified assignment, the original obligor (defendant or liability insurer) remained contractually liable. Some of these original  obligors made supplemental (30 percent) monthly payments while others waited until an overall shortfall was determined.

In August 1991, Commissioner Garamendi entered into a two-part sales agreement with New California Life Holdings, Inc. (New California) and Altus Finance (Altus), an affiliate of the French Bank Credit Lyonnais, in connection with the ELIC rehabilitation. This sales agreement and the ELIC rehabilitation plan were subsequently modified and then approved by the Superior Court on August 13, 1993. Under this agreement, Altus paid $3.25 billion and acquired ELIC's $6.4 billion junk bond portfolio. The Altus purchase price included $300 million of capital for a newly formed company, Aurora National Life Assurance Company, Inc. (Aurora) which assumed ELIC's remaining assets and liabilities including its structured settlement obligations.

The ELIC sales agreement was subsequently subject to considerable criticism. At least in retrospect, the agreement substantially undervalued ELIC junk bond portfolio. Although the junk bond market was depressed and thinly traded in 1991, it was among the best performing investment markets in 1992 and 1993. Even in 1991, a substantial percentage of the junk bonds owned by FEC and its two Executive Life subsidiaries were current on interest payments and ultimately fulfilled their investment obligations.

Effective February 15, 1994, 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. For structured settlement annuities, the agreement of both the policyholder and annuitant was required before the policy could be cashed in. Both persons electing to opt out and persons electing to opt in were entitled to participate in future distributions from the remaining assets of the ELIC estate.

Those persons choosing to opt out of the Aurora plan received an initial cash payment of 56 percent of the value of their ELIC annuity plus promised subsequent payments estimated to provide an additional 28 percent depending on future events. The alternative was a revised annuity from Aurora the terms of which varied based upon what the ELIC annuity had promised.

The National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) became actively involved in the ELIC insolvency because Aurora's assets could not meet all of ELIC's obligations. For each structured settlement, a state life insurance guaranty association contributed up to $100,000 to  supplement Aurora's payment offers. Based upon this approach, approximately 4000 of ELIC's 5500 structured settlement payees were restored to 100 percent of their ELIC claim values. Of the remaining 1500 ELIC structured settlement recipients, most of those who did not agree to a qualified assignment have received supplemental payments from the original obligor (defendant or liability insurer).

In July 1998, an anonymous whistle-blower alleged that Crédit Lyonnais was the real buyer of ELIC and controlled it through secret agreements. In 1991, banks were prohibited from owning U.S. insurance companies. 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.

Some of the defendants settled in 2005 for $730.5 million of which $211 million was distributed to opt out policyholders and payees and $403 to Aurora to supplement payments for opt in policyholders and payees. The case against the remaining defendants resulted in a substantial verdict (including punitive damages) in 2005 which the U. S. Court of Appeals for the Ninth Circuit reviewed in 2008 and remanded for a new trial on the issue of damages. A new trial court date has not yet been set.

For S2KM reporting about Executive Life of New York, see S2KM's structured settlement wiki.

"The Fall of First Executive"

Twenty years after entering rehabilitation, Executive Life of New York (ELNY) appears on the brink of liquidation with potential future losses resulting to structured settlement stakeholders including defendants and liability insurers who purchased structured settlement annuities as well as structured settlement recipients.

The most recent financial statements for ELNY (as of December 31. 2010) show assets of $905,945,200 compared with liabilities of $2,474,317,342 resulting in a negative surplus of $1,568,372,142.

On December 17, 2010, a New York State Supreme Court Judge ordered the Superintendent of the New York State Insurance Department to present the Court with a proposed order and plan of liquidation for ELNY on or before July 1, 2011. On June 23, 2011, the Superintendent moved to postpone the deadline from July 1 to August 10 "in order to present a comprehensive and consensual proposed Plan of Liquidation that maximizes the potential benefits for ELNY's structured settlement and other annuitants."

Because of the 20 year time lapse since ELNY sold the last of its nearly 8,000 structured settlement annuities many current structured settlement stakeholders have either forgotten or never directly experienced the meteoric rise and fall of First Executive Corporation (FEC) and its two life insurance subsidiaries, Executive Life of California (ELIC) and ELNY (also referred to herein together as "Executive Life")

For persons interested in the background story of the rise and fall of FEC, "The Fall of First Executive", written by Gary Schulte and published in 1992, provides a fascinating and educational history of the events that led to the largest insurance failure in history. Schulte, who served as Marketing Director for Executive Life, provides an insider's account in the immediate aftermath of the FEC and Executive Life debacle.

Schulte's story inevitably features FEC CEO Fred Carr, who first gained a national reputation as a financial "gunslinger" during the 1960 mutual fund "Go-Go" years when his company, the Enterprise Fund, first outperformed the mutual fund industry then tanked in 1968. Carr's subsequent experience with FEC and Executive Life had many parallels to his mutual fund career.

ELIC was founded in 1961 and subsequently borrowed $14.6 million from what is now Citibank to purchase ELNY. Because the New York insurance code is more restrictive than other states, many life insurance companies own separate New York affiliates.

When Carr first joined FEC in 1974, the company was already publicly traded and "a financial mess". FEC had $77 million of assets (355th among U.S. life insurers) of which $22 million represented policy loans. FEC's investment portfolio was $20 million under water. FEC was in default on its $14.6 million Citibank loan. Both the IRS and the New York Insurance Department were investigating ELNY. Touche Ross, FEC's auditors, refused to express an opinion on its financial statements.

At its zenith, under Carr's leadership in 1986-87, FEC had shareholders' equity of more than $1.5 billion, no debt, and total assets of $16.4 billion. The combined assets of the two Executive Life subsidiaries ranked 15th among U.S. life insurers. Both Executive Life companies held ratings of AAA and A+ from Standard & Poor's and A.M. Best's respectively. Executive Life was ranked #1 in employee productivity and sold the highest average per case premium in the life insurance industry.

FEC's stock price reached its all time high in June 1986 at $23 per share. FEC counted among its major shareholders some of the most respected investors in the United States including John Templeton of Templeton Funds (7.3%) and Peter Lynch of Fidelity Securities (11.4%). Here is what analysts had to say during 1986-87:

• "Executive Life's capital structure and, hence, operating leverage are substantially more conservative than virtually all its "AAA" rated counterparts" - Standard & Poor's November 3, 1986;
• "I'd rather have Fred Carr running my company than the people who run General Motors" - Peter Lynch, Magellan Fund, in Barron's, February 2, 1987;
• "First Executive Corportation is one of the strongest life insurers in the United States ... The company's strong financial position is a counter to potential criticisms of investment policy." Johnson, Lane Equity Research Report, February 23, 1987.

By the time it collapsed in 1991, however, FEC had lost $1 billion of its investment portfolio; its market value had declined 99% from $1.5 billion to $15 million; and its net worth had sunk from almost $2 billion to a negative $3 billion.

So what happened to explain this roller coaster ride? On the upside, Schulte attributes FEC's early success to the convergence of four crucial components:

• Superior investment performance - Fred Carr was an early advocate for and investor in "high yield securities" (junk bonds). He formed a strategic relationship with "junk bond king" Michael Milken. By 1987, FEC and Executive Life had accumulated the largest junk bond portfolio in the world. Unlike its competitors, Executive Life initially did not have old investment portfolios or many existing policyholders to service. FEC offered new money rates at a time when interest rates reached historic highs and new money was hot.
• Profitable, competitive, innovative products - FEC specialized in interest sensitive and single premium products. Unlike structured settlements, most of FEC's products, including single premium deferred annuities (SPDA) and guaranteed investment contracts (GICs) were transferable. Offering higher rates than its competitors, Executive Life initially benefited from product transfers (disintermediation) from more conservative life companies.
• National distribution system - Fred Carr entered the life insurance industry when the traditional and expensive captive agency system (agents representing one company) was morphing into an independent agency system (agents representing multiple companies). With virtually no development costs, FEC was able to cherry pick the best agents who had been trained by and had previously represented other companies. The Executive Life companies also sold their products through stockbrokers and offered top producers participation in an agent owned reinsurance company.
• Unlimited capital to fund growth - As one informal quid pro quo for purchasing junk bonds from Milken and his company Drexel Burnham Lambert, Fred Carr had a reciprocal outlet for selling FEC stock. In addition, FEC implemented a series of "innovative" surplus relief reinsurance agreements which initially accelerated FEC's growth.

To explain the downfall of FEC and Executive Life, Schulte highlights both specific developments and more fundamental problems. The specific developments:

• In 1986, the Ivan Boesky scandal erupted and junk bond prices began to fall. Also in 1986:
  • Michael Milken's problems began to surface as junk bonds increasingly were utilized to finance leveraged buyouts, many of which were underfunded. Although Milken, in 1986, was still considered by many "the most influential man in American finance since J.P. Morgan", the "junk bond king" eventually was jailed for securities fraud in 1991.
  • Financial analysts first noted that municipalities were not legally responsible for the performance of GIC-backed bonds. In a matter of months, Executive Life's extensive GIC market dried up.
  • The Tax Reform Act of 1986 restricted the flexibility of withdrawls from two additionally important Executive Life products: SPDAs and interest sensitive whole life insurance.
• In 1987, the New York Insurance Department disallowed a number of reserve credits for ELNY resulting from questionable reinsurance treaties. ELNY admitted to violating eight sections of the New York insurance code and agreed to pay a $250,000 fine. ELIC subsequently provided ELNY with a $151 million capital infusion requiring FEC to raise additional capital.
• Also in 1987, Joseph Belth, an Indiana University professor and publisher of "Insurance Forum", began writing negative reports about Executive Life. The mainstream financial press eventually echoed Belth's negative analysis questioning FEC's concentration of junk bonds. Executive Life's competitors promoted these negative press reports to convince Executive Life policyholders to surrender their SPDA contracts.
• To pay for contract surrenders, FEC was forced to sell junk bonds before their maturity at a loss in a plummeting and thinly traded market. During the first half of 1990 alone, Executive Life experienced $2 billion of SPDA surrenders which Schulte equates to a "run on the bank".
• Although Fred Carr invested in companies that were heavily indebted, he disliked debt and avoided using debt financing for FEC. Nevertheless, as financial pressures increased in 1988, Carr negotiated a $275 million loan for FEC from a consortium of Japanese banks.
• To raise capital in 1989, FEC announced the sale of ELNY but the sale fell apart in January of 1990. With the Japanese bank loan nearing default, FEC did complete a complex rights offering which raised $284 million in 1989 but also resulted in a 1990 investor lawsuit alleging fraud.
• In January 1990, Executive Life announced a write down that eventually totaled $776 million and A.M. Best's lowered Executive Life's ratings from A+ to A. Peter Lynch liquidated Fidelity's investment in FEC the same month after stating to Fred Carr: "Fred, I've been listening to you for an hour and you sound to me like someone who's shorting the FEC stock". In fact, FEC was the most shorted stock in the United States during 1990. From July 1989 to the end of 1990, FEC's stock fell from $16 per share to 16 cents per share as its net worth declined to a negative $3 billion.
• On April 11, 1991, newly elected California Insurance Commissioner John Garamendi obtained a court order seizing control of ELIC. New York's Insurance Commissioner Salvatore Curiale followed with ELNY on April 16. FEC filed for Chapter 11 bankruptcy on May 13. As Schulte points out: FEC was bankrupt when Fred Carr took it over in 1974, and it was bankrupt when he left seventeen years later.

More fundamental problems attributed by Schulte to Fred Carr, FEC and Executive Life:

• In mid-1980s, Executive Life was known for three things and two were bad: competitive, innovative products; junk bonds; and the poorest service to agents and policyholders in the industry.
• FEC and Executive Life overdosed on junk bonds. In a properly constructed portfolio, higher risk of default for high yield bonds may be compensated for by higher returns. Fred Carr, however, never said "no" to Michael Milken. He "bought in" on every Drexel Burnham Lambert junk bond deal. FEC did over $40 billion in trades with Drexel Burnam between 1982 and 1987 and accumulated the largest portfolio of junk bonds in world. Fred Carr underestimated the risks associated with the yields.
• Executive Life was also very aggressive with mortality assumptions reaching too far and promising more than it could deliver. Fred Carr took a short-term period during which exceptional yields were available and extrapolated those yields to long-term products.
• The lack of good operating systems caused serious servicing problems. Schulte characterizes FEC as a "Fortune 500 sole proprietorship". There was no budgeting or internal controls; no pension or profit sharing plan. FEC had an "addictive reliance" on outside consultants. Officers never attended Board meetings. Employee morale was always low. FEC and Executive Life hired young, single, poorly qualified, immigrants. In 1986, turnover in operations at FEC was 106 percent.
• Schulte also highlights how FEC and Carr greatly underestimated the "psychomedia risk". Once Executive Life was caught in the media cross-hairs, a crisis in confidence occurred creating an avalanche of policy surrenders. Of the $19 billion of assets Executive Life held on January 1, 1990, $11 billion were subject to surrender by policy holders.

When FEC and Executive Life collapsed in 1991, the combined companies stranded more than 500,000 policyholders, annuitants, investors, employees and agents. The annuitants included 13,500 structured settlement recipients. Despite payment delays, almost all of the ELIC structured settlement payees eventually received, and continue to receive, their payments in full. ELNY, operating under the control of the New York Liquidation Bureau since 1991, has met all of its structured settlement payment obligations to date despite its deteriorating financial condition.

The ultimate fate of ELNY's structured settlement payees and purchasers remains uncertain pending the results of its anticipated liquidation. As Schulte concludes in his 1992 book: "the proverbial fat lady in the First Executive Opera has yet to sing. Her song could put a different complexion on [the Executive Life story]."

For additional and continuing reporting and analysis about Executive Life, see:

• S2KM's structured settlement wiki;
• Sections 3.05 and 5.04 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).