Beyond Structured Settlements

S2P2J Release 51

Publisher Law Journal Press anticipates an April 2012 distribution date for hardcopy supplements for Release 51 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). Online S2P2J will also be updated April 2012 to include Release 51 materials. First published in 1986, S2P2J is co-authored and updated semi-annually by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) utilize S2P2J as an educational resource for their certification programs.

Release 51 Highlights

Release 51 for "Structured Settlements and Periodic Payment Judgments" features a comprehensive Executive Life update including expanded and updated coverage for the Executive Life of New York (ELNY) liquidation proceedings now in progress. In related reporting, Release 51 also:

• Expands and updates prior reporting for life insurance insolvency procedures and state guaranty association laws;
• Offers advice to plaintiff attorneys about how to address the risk of non-payment by annuity providers; and
• Summarizes recent case developments impacting Aurora, the successor company to Executive Life Insurance Company of California (ELIC),

Release 51 also updates Medicare Secondary Payer (MSP) developments and conditional Medicare payment requirements. Contributing author Peter H. Wayne IV provides current analysis and advice about Medicare Set-Aside (MSA) arrangements in liability cases discussing new and related case law, new CMS pronouncements and new CMS field office guidance with practice tips for structured settlement and settlement planning consultants, attorneys and claim supervisors.

Release 51 expands existing coverage of structured settlement business standards and practices including analysis of the following legislation impacting settlement planners:

• The NAIC Suitability in Annuity Transactions Model Regulation;
• The NAIC Annuity Disclosure Model Regulation;
• Dodd-Frank's impact on fiduciary and suitability standards; and
• The Uniform Prudent Investor Act.

Other topics addressed in Release 51:

• Structured settlement metrics for defendants and liability insurers.
• The Treasury's final regulations for IRC section 104(a)(2) incorporating amendments resulting from the Small Business Job Protection Act of 1996.
• The new IRS Lawsuits, Awards and Settlements Audit Techniques Guide.

"Structured Settlements and Periodic Payment Judgments" is now available in both hardcopy and online versions. For summaries of prior Release Highlights, see the structured settlement wiki.

Structured Settlements in 2011 - 1

The proposed liquidation of Executive Life Insurance Company of New York (ELNY) represents the dominant 2011 structured settlement news story and also one of the most significant developments in the history of the structured settlement industry.

Although ELNY first entered rehabilitation in 1991, the public events anticipating and announcing ELNY's proposed liquidation began December 17, 2010 when Nassau County New York State Supreme Court Judge John M. Galasso ordered the Superintendent of the New York Insurance Department, as ELNY's Receiver, to present the Court with a proposed Order and Plan of Liquidation on or before July 1, 2011. Following two postponements, the Receiver petitioned the Court for an Order of Liquidation and Approval of a Restructuring Agreement on September 1, 2011.

Note: New York Governor Cuomo merged the New York State Department of Insurance with the New York State Banking Department to create the New York State Department of Financial Services (DFS or ELNY Receiver) as part of the 2011-2012 State Budget.

The DFS Superintendent, as ELNY's Receiver, filed Schedule 1.15 for the proposed ELNY Restructuring Agreement with the Court under seal on November 7, 2011. Schedule 1.15 provides extensive information about each of ELNY's remaining 9694 annuities of which 4168 are structured settlement annuities (SSAs). According to Schedule 1.15, 1459 SSAs will experience shortfalls ("uncovered amounts") as a result of ELNY's liquidation and restructuring even assuming state guaranty association contributions and enhancements.

For the 1459 ELNY SSAs with anticipated shortfalls:

• 156 SSAs are identified as having been factored - although some industry sources believe the actual number of current ELNY SSAs previously factored is considerably higher.
• 1100 SSAs have "uncovered amounts" in excess of $100,000 each on a present value (PV) basis including
• 237 SSAs which have "uncovered amounts" in excess of $1,000,000 PV each including
• 17 SSAs which have "uncovered amounts" in excess of $5,000,000 PV each.
• The largest ELNY SSA has an "uncovered amount" of $25,692,377 PV.
• Note: Schedule 1.15 now appears on the ELNY website.

The DFS Superintendent, as ELNY's Receiver, began publishing weekly notices in the New York Times and Wall Street Journal. on November 21, 2011. These notices:

• Announce a hearing on the Liquidation Petition is scheduled for March 15, 2012, before the Honorable John M. Galasso, J.S.C., at the Courthouse, 100 Supreme Court Drive, Mineola, New York, at IAS Part 37, at 9:30 a.m.
• Warn persons who wish to object to the ELNY Liquidation Petition or the Restructuring Agreement that they must serve a written statement setting forth objections with supporting documentation upon the DRS Superintendent by January 16, 2012 and must also timely submit copies with an affidavit of service to the Court.
• Note: a special thanks to one astute reader of "Beyond Structured Settlements" who:
  • Points out that January 16, 2012 is Martin Luther King Day and the New York Supreme Court will be closed.
  • Recommends that ELNY objections be sent certified mail, return receipt requested, to arrive no later than Thursday January 12, 2012.
  • Further notes it is important to keep the mailing receipt from the time of mailing at the Post Office because the green certified postcards often fall off letters prior to delivery or the Post Office/mail deliverer may forget to obtain the signature or the signature on the green postcard may be illegible.

Acting as the Receiver's agent, the New York Liquidation Bureau (NYLB) mailed letters (payee letters) on December 7, 2011 to individual ELNY annuity payees with anticipated shortfalls notifying them about the proposed ELNY liquidation and Restructuring Agreement and the amount of their anticipated shortfalls. The ELNY payee letters also:

• Highlight that any reduction in benefit payments will not occur until implementation of the Restructuring Agreement, which is not expected before April 2012 at the earliest.
• Encourage ELNY annuity payees with anticipated shortfalls to contact their ELNY SSA annuity owner who may be responsible for supplemental payments, depending upon the terms of the structured settlement agreement, to the extent full payments are not made under the Restructuring Agreement.
• Announce an ELNY "Hardship Fund" of at least $100 million (not a component of the Restructuring Agreement) created by a consortium of life insurance companies with a toll-free information line at 1-888-809-2254.
• Identify "Guaranty Association Benefits Company" ("GABC") as the name of the new captive insurance company formed by the National Organization of Life and Health Guaranty Associations (NOLHGA) and the participating state Guaranty Associations that is referenced in the proposed ELNY Restructuring Agreement as "NEWCO".
• Warn ELNY payees "if you have transferred any part of your right to receive ELNY SSA benefits to a third party, you may not be eligible to receive benefits from CABC related to the benefits you transferred."
• Include legal notices with instructions for ELNY contract owners, payees and other claimants who wish to object to the proposed Restructuring Agreement.
• Direct ELNY SSA annuity payees to the ELNY website and toll-free information line (1-888-398-8213) for additional information.

In a subsequent blog post, S2KM will summarize other important (non-ELNY) structured settlement developments that occurred during 2011.

For S2KM's complete ELNY reporting, including an Executive Life timeline, see the structured settlement wiki. For more detailed history and analysis of ELNY and its sister company, Executive Life of California (ELIC), see Section 3.05[10] of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

ELNY Liquidation - 3

The New York Superintendent of Financial Services filed Schedule 1.15 for the proposed Executive Life of New York (ELNY) Restructuring Agreement with the Supreme Court of Nassau County New York on November 7, 2011. Following the Schedule 1.15 filing, the New York Liquidation Bureau (NYLB), acting as ELNY's Receiver, is required to send informational notices to each ELNY annuity payee and publish weekly notices in the New York Times and the Wall Street Journal.

Although the names of the annuity owners and payees are redacted, Schedule 1.15 lists all of ELNY's current annuities with individual contract identification numbers plus additional information including the proposed "uncovered amount" (shortfall) and "total percentage of contract protected" assuming contributions from state life and health insurance guaranty associations and certain supplemental enhancements.

ELNY Schedule 1.15 Highlights

• Schedule 1.15 lists extensive information for 9694 ELNY annuities of which:
  • 4168 are structured settlement annuities (SSAs).
  • 571 are single premium immediate annuities (SPIAs).
  • 4955 are pension annuities.
• Schedule1.15 indicates shortfalls ("uncovered amounts") will occur for the following annuities even assuming state guaranty association contributions and enhancements:
  • 1459 SSAs.
  • 31 SPIAs.
  • 12 pension annuities.
• For the 1459 Schedule 1.15 SSAs with anticipated shortfalls:
  • 156 SSAs are estimated to have been factored. Note: reliable industry sources have informed S2KM the actual number of current ELNY SSAs previously factored is considerably higher.
  • 1100 SSAs have "uncovered amounts" in excess of $100,000 each on a present value (PV) basis including
  • 237 SSAs which have "uncovered amounts" in excess of $1,000,000 PV each including
  • 17 SSAs which have "uncovered amounts" in excess of $5,000,000 PV each.
  • The largest ELNY SSA has an "uncovered amount" of $25,692,377 PV.
• According to Schedule 1.15, the total percentage of each ELNY SSA contract value "protected" by ELNY's remaining assets, state guaranty fund payments plus additional enhancements varies from 34 percent to 100 percent depending upon the individual contract.

For additional information about the ELNY liquidation including an Executive Life timeline, see the structured settlement wiki.

NASP 2011 Annual Meeting

Highlighting a year during which the secondary structured settlement market is exceeding previous annual transfer totals, the National Association of Settlement Purchasers (NASP) cautiously celebrated its seventh Annual Meeting November 9-11, 2011 in Las Vegas with record conference attendance including member company representatives, affiliate attorneys and invited guests.

Recognizing its legislative successes, NASP honored its Executive Director Earl Nesbitt for his past lobbying efforts by awarding him with NASP's 2011 Alexander Hamilton Award. Nesbitt represented NASP in helping to enact Internal Revenue Code section 5891 and the Model State Structured Settlement Protection Act upon which are based most of the related state structured settlement protection statutes.

NASP President Matthew Bracy additionally praised NASP's founders stating: "Through their vision, guts and determination, we have not only persevered but flourished. Today NASP celebrates the fact that structured settlement recipients, in compliance with federal and state laws, have the right to sell their asset when needed."

NASP Educational Program

Maintaining its tradition of inviting judges representing different states to speak, NASP's 2011 educational program featured a panel discussion of judges from New York (Honorable Judith McMahon), Texas (Honorable Alexandra Smoots-Hogan) and Mississippi (Honorable Denise Owens) moderated by Patricia LaBorde. Among other issues, the judges discussed how they interpret the "best interest" standard as well as their expectations for transfer company counsel, transfer documentation, disclosure of prior transfers and levels of proof in transfer cases.

Another highlight of NASP's 2011 educational program was NASP's decision to organize smaller breakout group discussions consisting primarily of NASP member general counsel and affiliate NASP member attorneys to discuss:

• Issues in Obtaining Court Approval of the Transaction; and
• Issues in Underwriting Structured Settlement Transactions.

Other Speaker and Topics

Robin Shapiro - Shapiro, Chairman of NASP's Legal Committee, summarized historical and 2011 secondary structured settlement legislative and case law developments. Among the specific cases and issues:

• Symetra v. Rapid - This ongoing litigation appears likely to be completed in 2011 with injunctions prohibiting Rapid Settlement's prior business practices of using arbitration to by-pass state structured settlement protection statutes and taking security interests to gain rights of first refusal for future transfers.
• Conflicts between "incumbents" and "insurgents" in the secondary structured settlement market with a substantial portion of new transfers including individual investors not just institutional investors.
• Confusion between transfers of structured settlement payment rights and "settlement liquidity" businesses involving other asset classes such as the increasing sale of veterans' benefits.
• At least one (unnamed) annuity provider that refuses to release guaranteed payments to investors when a payee dies resulting in delays and legal costs for transfer companies.

Leonard Bernstein - Bernstein, a financial services regulatory attorney, presented separate discussions about how 1) Dodd-Frank and 2) advertising laws impact structured settlements. Although both discussions were directed toward a secondary market audience, each also contained valuable information for primary market participants.

• Dodd-Frank - Bernstein's Dodd-Frank update focused on the Consumer Financial Protection Bureau (CFPB), a new federal agency . CFPB's central mission is "to make markets for consumer financial products and services work for Americans ....." Among its core functions are to take consumer complaints and to restrict unfair, deceptive or abusive acts or practices under the Federal consumer financial laws. Dodd-Frank provides CFPB with authorities that go beyond the existing consumer protection statutes. CFPB has broad authority to ask questions and demand information including consumer complaints. Dodd-Frank also establishes the Federal Insurance Office (FIO) with the authority to monitor all aspects of the insurance industry.
• Advertising - Bernstein's advertising discussion referenced sections of the Better Business Bureau's Code of Advertising that could impact structured settlement purchasing transactions (or primary market transactions) by prohibiting advertisements which are untrue, misleading, deceptive, fraudulent, falsely disparaging of competitiors, or insincere offers including deception through omission. As one strategy to protect against false advertising, Bernstein recommended using disclaimers whose effectiveness depends upon their prominence and location.

Elizabeth Yingling - Yingling, a securities attorney, discussed how federal and state securities laws can impact structured settlements. In defining what constitutes a "security", Yingling focused on the meaning of an "investment contract" as that term was defined in SEC v. Howey, a 1946 U.S. Supreme Court decision. Yingling offered several practical tips for transfer companies to avoid the mine fields of the securities laws when marketing to individual investors and also emphasized the serious risks involved when dealing with unsophisticated investors.

Earl Nesbitt - Nesbitt discussed the concepts of "discount rate" and "discounted present value" both of which play an important role in court hearings to evaluate structured settlement transfer proposals. The Model State Structured Settlement Protection Act defines "discounted present value" to mean: "the present value of future payments determined by discounting such payments to the present using the most recently published Applicable Federal Rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service." In addition to identifying many factors that can determine the discount rate for a specific case, Nesbitt summarized the results of a recent survey he conducted of the discount rates approved by judges in Harris County Texas. Results:

• The average discount rate: 15.8 percent;
• The weighted average (i.e. taking into consideration the relative case size): 12.96 percent;
• The lowest discount rate: 7.4 percent; and
• The highest discount rate ($3494 paid for $7282 due in less than one year): 61.3 percent.

Patrick Hindert - Hindert (author of S2KM's blog "Beyond Structured Settlements") provided a "Primary Market Report" addressing current industry challenges and issues. In addition to explaining why primary market annuity premium could fall below $5 billion for 2011, Hindert summarized the historical background and current status of Executive Life of New York (ELNY). The impact of the secondary structured settlement market on the ELNY liquidation has been underestimated in most ELNY reporting by primary market sources. According to reliable secondary market sources, however, payment rights from as many as 1000 of ELNY's remaining structured settlements are currently owned by secondary market companies and/or investors.

Joe Feltes - Feltes, an attorney whose clients include health care providers and whose legal expertise includes social media, e-mail and Internet use, spoke about privacy issues in structured settlement transactions. Based upon his research, Feltes expressed surprised at the paucity of information available about structured settlements and privacy issues. As one example, Feltes pointed out the Model State Structured Settlement Protection Act does not address privacy. Before seeking and transmitting private medical information about structured settlement candidates and/or recipients, Feltes recommended obtaining purpose-specific written authorization including a waiver and release. In addition to HIPAA, Feltes discussed the privacy provisions contain in Graham Leach Bliley.

Congratulations to NASP for continuing its high educational standards with an outstanding 2011 Annual Meeting. Conference Chairperson Patricia LaBorde prepared helpful and related handout summaries for several of the presentations.

For S2KM reporting about prior NASP annual meetings plus additional analysis about the ELNY liquidation, 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.

ELNY Liquidation - 2

The New York State Insurance Department has posted a News Release on its website announcing the proposed liquidation plan for Executive Life Insurance Company of New York (ELNY) and providing additional information to supplement the petition for liquidation filed September 1, 2011 by New York Insurance Superintendent James Wrynn.

In the announcement, Benjamin M. Lawsky, Superintendent of New York's Department of Financial Services, states "Executive Life does not have enough assets to meet all its obligations, a fact made far worse by the recent financial crisis. Protecting the people who depend on payments from the company was challenging, but working with the guaranty associations and the life insurance industry, we have devised a plan that will maximize payments and ensure the fairest possible outcome for everyone."

According to the News Release:

• ELNY's proposed restructuring plan will double ELNY's assets and "should fully protect approximately 84 percent of those who currently benefit from [ELNY's] payments."
• The exact impact of the ELNY restructuring plan on each payee will not be known until at least mid-October after the guaranty funds finalize the amount of their contributions.
• The anticipated ELNY restructuring plan will include:
  • "ELNY's remaining assets of approximately $900 million.
  • "An estimated $730 million in contributions from state life insurance guaranty associations.
  • "Approximately $40 million from life insurance companies for enhanced benefits for contract owners, payees and beneficiaries who are not covered by any state guaranty association to provide coverage up to $100,000.
  • "Approximately $25 million from life insurance companies for a further 'top-up' benefit to increase the coverage up to $250,000 for beneficiaries who are not covered by any state guaranty association, or whose maximum state guaranty association coverage is below $250,000."

The News Release also provides a special call center number for ELNY contract owners and beneficiaries.

In a separate, but related, announcement on its website, the National Organization of Life and Health Guaranty Associations (NOLHGA) has posted a revised schedule for its September 7-9, 2011 Members' Participation Council (MPC) meeting in Reston, Virginia. The MPC holds quarterly meetings to discuss the latest developments in NOLHGA-related insolvencies and the insolvency arena. The revised September 8, 2011 MPC meeting agenda allocates more than six hours for a closed session and working lunch to discuss ELNY.

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

Addendum (September 8, 2011): Industry insiders point out that the New York Insurance Department ELNY News Release is not totally consistent with the proposed ELNY Restructuring Agreement included with the New York Insurance Superintendent's September 1, 2011 ELNY Petition for Liquidation. Readers should also note: 1) the newly proposed ELNY restructuring plan has not yet been finalized or approved; and 2) the prior  ELNY "Agreement in Principle" announced in 2007 never materialized.

Addendum 2 (September 8, 2011): The New York Liquidation Bureau (NYLB) has now posted on its website the ELNY proposed "Restructuring Plan", "Order to Show Cause" and "Supporting Motion Papers".

ELNY Liquidation - 1

James Wrynn, New York's Insurance Superintendent, (Superintendent and/or Rehabilitator, and/or Liquidator) has petitioned the Supreme Court of Nassau County New York for an Order of Liquidation and Approval of a Restructuring Agreement for Executive Life Insurance Company of New York (ELNY).

In addition to the Petition, the Superintendent's September 1, 2011 court filing also includes an Affidavit by Ivy Chang , an Accounting Manager for the New York Liquidation Bureau (NYLB), a Memorandum of Law in Support of the Petition, a proposed Order to Show Cause plus numerous related Exhibits including the Proposed Restructuring Agreement and prior ELNY financial reports from 2006 to 2010.

In the Petition, the Superintendent requests the court to issue a Show Cause Order:

• Setting a hearing on the Petition;
• Approving a briefing schedule;
• Approving the form of notice and method of service for ELNY's policyholders and creditors;
• Ordering that payments to structured settlement and other annuitants be continued pursuant to the ELNY Rehabilitation Plan;
• Continuing the injunctions provided by the Rehabilitation Order.

ELNY entered rehabilitation in 1991 and has been operating under the supervision of the NYLB, as agent for the Superintendent, pursuant to a Rehabilitation Plan approved by the Nassau County Supreme Court in 1992. The Rehabilitation Plan permitted the sale of ELNY's existing policies to Metropolitan Life Insurance Company (MetLife) except for structured settlement annuities and certain other non-surrenderable contracts which MetLife has also administered under a separate servicing contract.

According to the Petition, ELNY will have obligations to approximately 9700 policyholders as of January 1, 2012. In a separate communication to its members, the National Structured Settlement Trade Association (NSSTA), which has been working closely with New York officials on the ELNY matter, estimated that approximately 4800 ELNY structured settlement annuities remain in force. Prior to entering rehabilitation, ELNY sold approximately 8000 structured settlement annuities. To date, all ELNY structured settlement annuities have been paid in full and on time.

As justification for ELNY's proposed liquidation, the Petition states: "ELNY's financial condition is progressively deteriorating" and "ELNY will be unable to pay its outstanding lawful obligations as they mature in the regular course of business and further efforts to rehabilitate ELNY are futile."

Ivy Chang's Affidavit adds:

• "ELNY experienced financial difficulties because of unfavorable investment results, with sustained low interest rates and poor capital market performance during significant periods."
• "The Rehabilitator began negotiating with various life insurance industry parties, and in 2007, he announced that he had secured a commitment, in principle, of funds that would permit the continuation of full benefit payments for all ELNY policyholders."
• "Until the financial crisis of 2008, it appeared that such a restructuring of the Rehabilitation Plan would be possible."

According to the Petition: "the unprecedented global economic crisis and resulting market collapse of 2008 had a significant negative impact on ELNY's retained assets and made continued implementation of the Rehabilitation Plan without a liquidation unfeasible." The most recent ELNY financial statements (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.

The proposed ELNY Restructuring Plan, which is subject to court approval, was jointly prepared by the Superintendent and the National Organization of Life and Health Guaranty Associations (NOLHGA). Key provisions:

• A formula to determine the present value of all ELNY annuity contracts using a 4.25% discount rate and a jointly-agreed upon mortality table.
• A liquidation value assigned to each annuity contract which will be reduced by a percentage based upon the ratio of the liquidation value of ELNY's assets to the aggregate liquidation value of all contracts.
• This restructured value for each annuity contract is expected to lower benefit payments to approximately 34% of any remaining obligations.
• The participating state guaranty associations (PGAs) will supplement the ELNY benefit payments for annuity contracts eligible for state guaranty association coverage up to the maximum allowable by their state guaranty association laws. This maximum can vary between $100,000 and $500,000.
• In addition, New York's Article 75 Guaranty Association (its second of two life insurance guaranty associations) has agreed to provide coverage for ELNY contracts on a pro rata basis up to its statutory cap of $50 million. The Article 75 Guaranty Association coverage applies to ELNY contracts issued prior to August 2, 1985, and not otherwise covered by the PGAs, regardless of where the owner, payee or beneficiary resides.
• A consortium of life insurance companies has agreed to provide hypothetical guaranty association coverage up to $100,000 for ELNY policyholders and/or payees who are not otherwise covered by a state guaranty association.
• The Superintendent and NOLHGA have reached an agreement in principle with these same life insurance companies for additional, supplemental benefit enhancements subject to the completion of definitive documentation.
• Assuming ratification by all PGAs (anticipated by October 1, 2011) and all of the above contributions, the Superintendent and NOLHGA estimate 84% of ELNY contracts will be fully paid under the Restructuring Agreement - or 79% without the supplemental benefit enhancements.
• To replace ELNY and administer ELNY's restructured contracts, the PGAs and life insurance industry will form a special purpose not-for-profit captive insurance company ("NEWCO") under the laws of the District of Columbia.
• ELNY policyholders will receive a policy certificate to evidence NEWCO's reinsurance and assumption of all or the appropriate portion of ELNY's contract liabilities.
• Although insurance company professionals and independent directors will manage NEWCO, the Superintendent (as Liquidator) will exercise additional oversight and will retain the ability to petition the Nassau County court for relief if NEWCO fails to honor its obligations.
• The Liquidator and NEWCO will attempt to facilitate the efforts of any owners of ELNY structured settlement annuities that decide to provide additional payments to payees and or beneficiaries.
• At defined future dates, NEWCO will attempt to transfer all of NEWCO's liabilities to a financially-strong third party life insurance company and remit the net proceeds back to the ELNY estate.
• Although creditors must present proofs of their claims within four months of the proposed Order of Liquidation, all policyholders who appear on ELNY's books and records will be deemed to have filed timely proofs of claims.

The Petition states the Superintendent proposes to give notice to ELNY policyholders, creditors and all other interested parties of the Petition and its requested relief and to allow such parties to present their objections. The Petition further proposes a court hearing on or about March 15, 2012 to consider the petition and a briefing schedule.

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

Addendum (September 9, 2011): The Supreme Court of Nassau County New York has entered the Order to Show Cause requested by the Superintendent of the New York Insurance Department as Rehabilitator (now Liquidator) for ELNY. The Order sets March 15, 2012 as the date for hearing on the entry of orders described above and requires the Superintendent, following submission to the Court of the schedule to the Restructuring Agreement, to give notice to each ELNY policyholder that will show the projected liquidation plan treatment of benefits under individual ELNY annuities. The schedule is anticipated to be submitted later this month after state Guaranty Associations have approved the restructuring plan and agreed to specific funding commitments.

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.