Beyond Structured Settlements

The ELNY Due Process Issue

Assuming presiding Judge John M. Galasso signs the Order of Liquidation and Approval of a Restructuring Agreement for Executive Life of New York (ELNY) as proposed by the Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY's Receiver, a critical issue arises:

Will the ELNY structured settlement shortfall payees have been afforded "due process" before being deprived of a percentage of their payment rights?

The Fifth and Fourteenth Amendments to the United States Constitution provide in part:

• Fifth Amendment - "No person shall be ... deprived of life, liberty, or property, without due process of law;"
• Fourteenth Amendment Section 1 - "No State shall ... deprive any person of life, liberty, or property, without due process of law."

The United States Supreme Court has interpreted these clauses as creating two doctrines: substantive due process and procedural due process.

Substantive Due Process

Substantive due process addresses whether the government has an adequate reason for taking away a person's life, liberty or property. The most obvious, and presumably adequate, reason why the ELNY liquidation hearing could result in some persons (shortfall payees) being deprived of property (percentage of their annuity payments) is that ELNY is insolvent.

ELNY does not have sufficient assets to meet all of its future payment liabilities. Because of variations in state guaranty association laws (primarily coverage caps) as well as individual ELNY contracts (size of annuities), approximately 15 percent of ELNY's annuity payees (mostly structured settlement payees) anticipate shortfalls while the other 85 percent expect to receive 100 percent of their promised future payments from ELNY's successor company, Guaranty Association Benefits Company (GABC).

Alternative Legal Recourse

Some of the structured settlement shortfall payees should have recourse against defendants and/or liability insurers who funded their structured settlement using a "buy and hold" methodology. Other structured settlement payees, whose structured settlements were funded with qualified assignments, likely would not have similar secondary payment options because First Executive Corporation (FEC), the purchaser and owner of their annuities, declared bankruptcy in 1991 and no longer exists. For an explanation of the difference between "buy and hold" funding and qualified assignments, see this prior S2KM blog post.

Although ELNY shortfall victims (including both policyholders and payees) might have a legal claim against the Superintendent, as Receiver, and his agents, including the New York Liquidation Bureau (NYLB), the Superientent's proposed Liquidation Order includes an immunity clause intended to protect the Superintendent and his agents from any legal claims that they mismanaged the ELNY Rehabilitation and are responsible for ELNY's insolvency. For additional information about the ELNY immunity issue, see this prior S2KM blog post.

Procedural Due Process

Procedural due process addresses whether the government has followed adequate procedures in taking away a person's life, liberty or property. A denial of procedural due process occurs only when there is a denial of life, liberty or property without adequate procedures. For many ELNY structured settlement payees, the probable result of the ELNY Liquidation Order and Restructuring Agreement will be to deny them of a portion of their future structured settlement payment rights. The key question for purposes of procedural due process is whether the procedures that could result in this loss of property have been "adequate".

Structured settlement payees who anticipate shortfalls and their attorneys have argued "no" - the procedures have not been adequate and therefore they anticipate suffering an unconstitutional taking of their property because of:

• Inadequate notice - ELNY's financial records indicate ELNY became insolvent as early as 2002. Former New York Governor Eliot Spitzer held a press conference in 2007 announcing "an agreement in principle" that all future ELNY payments would be paid in full and on time. The NYLB mailed letters to individual ELNY annuity payees on December 7, 2011: 1)  notifying them about the proposed ELNY Liquidation and Restructuring Agreement; and 2) alerting them of anticipated shortfalls for specific ELNY annuity contracts and a January 16, 2012 deadline for filing written objections. Responding to objections of inadequate notice, the Superintendent has argued the ELNY notice and briefing schedule balanced the need for a prompt resolution of ELNY’s deepening insolvency against the ability of affected parties to review and object to the proposed liquidation and Restructuring Agreement.
• Denial of information - ELNY shortfall victims and their attorneys claim they have received inadequate information to properly evaluate the proposed Restructuring Agreement in order to propose possible improvements and/or alternatives. The Superintendent's response: this objection does not constitute grounds for rejecting the Restructuring Agreement because the information sought has been provided or is premature and unnecessary for the Court’s consideration and approval of the Restructuring Agreement. The Superintendent further points out the objectors have not offered a competing plan. During the ELNY hearing, Judge John Galasso denied a motion by attorneys for the structured settlement shortfall victims to gain access to source materials utilized by Jack Gibson, the Superintendent's expert, who testified: 1) GABC is "financially viable"; 2) the Superintendent's proposed plan was "the best plan"; and 3) all ELNY shortfall victims will be better off under the proposed Restructuring Agreement than under a straight liquidation.
• Denial of witnesses - Judge Galasso refused to allow attorneys for ELNY shortfall payees to introduce several expert witnesses stating "they wouldn't help". Among the witnesses not permitted to testify:
  • A former Chief Executive Officer of ELNY.
  • Two expert actuaries.
  • Two forensic accountants one of whom is also an insurance fraud investigator.

In an article published in the Touro Law Review (Vol 16 page 871), titled "Procedural Due Process Claims", constitutional legal expert Erwin Chemerinsky highlights the following three-part balancing test the United States Supreme Court articulated in Mathews v. Eldridge (1976) to determine whether an individual has been denied procedural due process:

• The more important the interest to the individual, the more procedural protections the reviewing court is going to require.
• The reviewing court must balance the ability of additional procedures to increase the accuracy of the fact finding; how likely is it that the additional procedures will reduce the risk of erroneous deprivation?
• Whether the government's interest in administrative efficiency is such that the more expensive the procedures would be, the less likely it would be that the reviewing court would require them.

For S2KM's complete reporting about the ELNY Liquidation Hearing, see the structured settlement wiki.

ELNY Liquidation Hearing - 7

Day 10 of the Executive Life of New York (ELNY) Liquidation Hearing was consumed by the closing summations of attorneys representing Objectors to the ELNY Restructuring Agreement proposed by the Superintendent of the New York State Department of Financial Services (Superintendent), as Receiver for ELNY. The Objectors included: ELNY structured settlement shortfall payees, ELNY policyholders and at least one structured settlement factoring company.

Attorney Megha Charalambides, speaking on behalf of her shortfall victim clients, proposed to presiding Judge John M. Galasso that he appoint a "Special Master" to meet with representatives of all parties for the purpose of considering possible alternatives to the Superintendent's proposed plan. If an alternative plan materialized by a specified deadline, the Judge could consider it. Otherwise, he could approve the Superintendent's plan. Judge Galasso did not immediately respond to Charalambides' proposal.

Representing Travelers, attorney Craig Ulman confirmed his client was prepared to make whole any ELNY-related structured settlement payment obligations funded on a "buy and hold" basis and that Travelers had already sent out notices to payees under such ELNY annuity contracts. On "cross-summation" attorney Edward Stone pointed out that Travelers is already legally obligated to make those payments and that Travelers' offer apparently does not apply to ELNY structured settlement payment obligations Travelers funded using a "Qualified Assignment".

Note: This prior S2KM blog post explains the difference between buy and hold and Qualified Assignment structured settlement funding. The problem for most, if not all, of the ELNY structured settlement shortfall victims with Qualified Assignment funding is that First Executive Corporation (FEC), the assignee/owner, collapsed in 1991 and no longer exists. This prior S2KM blog post provides a background summary of FEC's history.

Judge Galasso denied two motions by attorney Stone during his closing summation without offering explanations:

• Stone moved for a mistrial (which Judge Galasso re-characterized as a motion for a misorder) on the grounds that his clients' property was being taken without due process.
• Stone also moved for a 30 day stay of hearing to allow structured settlement shortfall victims to develop and present an alternative ELNY restructuring plan.

Closing summations continue on Thursday. For S2KM's complete reporting about the ELNY Liquidation Hearing, see the structured settlement wiki.

ELNY Objections and Replies

On March 15, 2012, the Supreme Court of Nassau County New York (Court) is scheduled to consider a Petition by the Superintendent of the New York State Department of Financial Services (Superintendent) for an Order of Liquidation and Approval of a Restructuring Agreement for Executive Life Insurance Company of New York (ELNY).

In response to the proposed ELNY Liquidation Order and Restructuring Agreement, approximately 130 persons and/or companies have filed objections. On March 1, 2012, Eric T. Schneiderman, Attorney General for the State of New York and Attorney for the Superintendent, filed an "Omnibus Reply Memorandum of Law in Response to the Objections to the Proposed Liquidation of ELNY and Distribution of ELNY's Assets Pursuant to the Restructuring Agreement" (Reply Memorandum).

The Reply Memorandum consists of 56 pages plus an Exhibit A titled "List of Objections". Exhibit A identifies individual objectors (presumably ELNY annuity payees) by contract number and liability insurers (presumably ELNY "buy and hold" annuity owners) by name. Exhibit A also identifies a couple of structured settlement factoring companies as objectors. Among the Reply Memorandum's conclusions:

• "No interested person has come forward with a viable alternative or proposed statutorily compliant changes to the Restructuring Agreement that would increase benefit payments to ELNY Contract policyholders and payees above those already provided for and guaranteed under the Restructuring Agreement."
• "The Court should overrule the objections submitted and issue an order declaring ELNY to be insolvent and directing the liquidation of ELNY on the terms set forth in the Restructuring Agreement."

S2KM summarized the Reply Memorandum as well as two other recent ELNY Court filings in a prior blog post. In this blog post, S2KM summarizes the ELNY objections and the Superintendent's replies as set forth in the Reply Memorandum. For S2KM's complete coverage of the ELNY liquidation, including an Executive Life timeline, see the structured settlement wiki.

Benefit Reductions

• Objection- ELNY annuity benefit payments should not be reduced because:
  • A reduction in benefits will cause extreme hardship.
  • The terms of the ELNY annuity contracts prohibit a reduction in payments.
  • Many of the ELNY annuity contract were issued pursuant to structured settlement agreements approved by court orders that cannot be abrogated.
  • Assurances were received that the ELNY structured settlement annuity payments would be guaranteed.
• Superintendent's Reply
  • These objections cannot outweigh the necessity for an order of liquidation because ELNY’s current assets are insufficient to cover the claims of all creditors.
  • Without liquidation, insolvency will continue to worsen and ELNY will exhaust its assets without the ability to meet its future annuity payment obligations.
  • Upon a finding of insolvency and the issuance of an order of liquidation, ELNY will cease to exist and the Superintendent, as liquidator, will be vested with discretionary authority to dispose of ELNY’s assets and to compromise its claims in accordance with New York Insurance Law Section 7435 in the manner directed by this Court.
  • As a result, prior orders and contractual obligations regarding payments do not form a valid basis for objecting to the approval of the Restructuring Agreement.
  • The Restructuring Agreement maximizes benefits and minimizes the risk of disruption and loss to ELNY policyholders and payees.

Additional Disclosure

• Objection - More information is needed to determine whether objections exist to the Restructuring Agreement.
• Superintendent's Reply
  • This objection is not grounds for rejecting the Restructuring Agreement because the information sought has been provided or is premature and unnecessary for the Court’s consideration and approval of the Restructuring Agreement.
  • The Superintendent has been working to provide objectors with all of the information requested, most of which has already been disclosed including recently completed Exhibit 6.1.2, the Supplemental Benefits Reinsurance and Participation Agreement.
• Objection - The Restructuring Agreement and its exhibits and schedules have not been finalized and executed.
• Superintendent's Reply
  • The reason for seeking approval of the Restructuring Agreement as drafted is to allow flexibility for making non-material changes to successfully close the Restructuring Agreement without negatively impacting ELNY policyholders and payees.
  • The Superintendent does not object to the Court considering and resolving any objections filed after the January 16, 2012 deadline to the extent they concern disclosures or changes made after that date.
  • The Superintendent is negotiating a draft "facilitation plan" with NOLHGA, on behalf of GABC, and certain annuity owners, which is not a closing condition to the Restructuring Agreement.
  • Even without the facilitation plan, ELNY policyholders and annuitants will still receive the same benefit payments from GABC plus whatever supplemental payments they are entitled to from responsible annuity owners.
• Objection - The Superintendent did not provide sufficient information and/or assurances concerning the financial ability of GABC to meet its future obligations to ELNY policyholders and payees.
• Superintendent's Reply
  • The Superintendent did not present additional financial information concerning the assets and liabilities of GABC at the time of filing the Verified Petition.
  • Reason: except for GABC's New York Article 75 guaranty payments (less than 5 percent of total liabilities), GABC's liabilities will be guaranteed by state guaranty associations or life insurance companies.
  • Because of this objection, however, the Superintendent has filed an expert report of Jack Gibson and an affidavit of Jonathan Bing and intends to present their testimony as well as Ivy Chang's testimony on March 15, 2012. Note: Gibson's report plus the affidavits of Bing and Chang are posted on the ELNY website. S2KM summarized Gibson's report and Bing's affidavit in this prior blog post and Chang's affidavit in this prior blog post.
  • The Superintendent also promises to provide additional information concerning Schedule 1.15, including guaranty association coverage, enhancements, and the treatment of third parties with rights under assignments of annuity benefit payments in accordance with Article 74 of the Insurance Law.
• Objection - The Restructuring Agreement is subject to change after Court approval including Schedule 1.15, participating guaranty association (PGA) coverage, and/or the extent of third-party rights to payments from PGAs.
• Superintendent's Reply
  • Prior notices to ELNY policyholders and annuitants explained that information about possible benefit reductions was “estimated” and “subject to change”.
  • Note: the Superintendent has revised the proposed Restructuring Agreement as of March 6, 2012.
  • The Superintendent promises to file with the Court an updated Schedule 1.15 prior to the March 15, 2012 hearing on the Petition.
  • Under the applicable statutes, however, Schedule 1.15 cannot be finalized until after court approval of the Restructuring Agreement to allow sufficient time for resolution of any Section 1.15-related disputes.
  • After the Court approves the Restructuring Agreement, Schedule 1.15 will also change to the extent:
    • An ELNY policyholder moves, provides updated address information, or dies, which could alter PGA coverage and/or ELNY’s contractual obligations;
    • The total assets and liabilities of ELNY change to a sufficient degree to alter the projected pro rata percentage distribution of ELNY’s assets to all ELNY policyholders and payees;
    • A PGA determines that an ELNY policyholder or payee is or is not entitled to coverage previously noted in Schedule 1.15; and/or
    • Information is provided that shows an error in Schedule 1.15, requiring correction pursuant to the Restructuring Agreement.

Notice Issues

• Objection - The notice procedures and briefing schedule were inadequate to provide interested parties with an opportunity to review and to present objections to the proposed ELNY liquidation and Restructuring Agreement.
• Superintendent's Reply
  • The ELNY notice and briefing schedule balanced the need for a prompt resolution of ELNY’s deepening insolvency against the ability of affected parties to review and object to the proposed liquidation and Restructuring Agreement.
  • By the March 15, 2012 hearing date, interested parties will have had:
    • 195 days since the Superintendent issued a press release about ELNY’s financial situation and the plans to liquidate and restructure;
    • 118 days since a form of Court-approved Notice began being published in the national editions of the New York Times and Wall Street Journal for four consecutive weeks, and
    • 99 days since personalized informational mailings were distributed to the last known address of each ELNY policyholder and payee.
  • The Superintendent, through the NYLB, created a new dedicated website specifically for ELNY policyholders and other interested parties on September 1, 2011 - the same day the Order to Show Cause was issued.
  • The Superintendent has received, considered and responded to several objections submitted past the January 16, 2012 deadline.

Not Fair and Equitable

• Objection- The Restructuring Agreement is not fair and equitable and does not comport with New York law because:
  • Some ELNY annuity payees will experience substantial shortfalls while the great majority of ELNY annuity payees will be paid in full; and
  • It improperly favors ELNY contracts that are either not covered by a PGA or covered by a PGA in an amount less than $250,000.
• Superintendent's Reply
  • The Restructuring Agreement complies with the statutory requirements of Article 74 of the New York Insurance Law. It treats all ELNY policyholders equally and creates no favored subclass with respect to ELNY's assets.
  • A straight liquidation of the ELNY estate without implementation of the Restructuring Agreement would provide far fewer benefits in a significantly less orderly manner.
  • Under New York law, the Superintendent has the power to enter into the Restructuring Agreement and the Court has the ability to direct the manner in which payments and dividends to creditors shall be made.
  • In his role managing the affairs of an insolvent insurer, the Superintendent, as Rehabilitator or Liquidator, is entitled to deference unless his decisions are arbitrary or unreasonable.

PGA Participation and Funding

• Objection - The Restructuring Agreement should not be approved because it limits or alters ELNY policyholders’ and payees’ rights against the PGAs.
• Superintendent's Reply - The Restructuring Agreement does not limit or alter ELNY Contract policyholders’ and payees’ rights against the PGAs, including the right to contest the amount or conditions of any applicable state guaranty association coverage.
• Objection - The Restructuring Agreement unfairly permits the PGAs to reduce the amount of their statutory coverage obligations.
• Superintendent's Reply
  • The net contribution, as opposed to a full contribution by the PGAs of the maximum amount of each PGA’s statutory coverage, arises under the express provisions of Section 7435 of the New York Insurance Law, not under applicable state guaranty association statutes.
  • This netting effect occurs because the contributing PGA is entitled to a pro rata distribution of ELNY’s assets with equal priority to the claims of ELNY policyholders and payees.
  • It is accounted for in the Restructuring Agreement by calculating the PGAs total required contributions on a net basis after reduction of the PGAs’ corresponding claim against the ELNY estate.

Proposed Immunity Provisions

• Objections
  • Provisions in the proposed Order of Liquidation extending judicial immunity to the Superintendent, his successors, agents and representatives, should be denied and/or eliminated.
  • The Court should use funds from the ELNY estate to appoint an investigator/expert to determine the cause of ELNY’s insolvency.
• Superintendent's Reply- The Court should reject these requests and grant immunity to the Superintendent and his agents because:
  • The Superintendent, as regulator of the insurance industry in the State of New York, is immune for his decision to seek liquidation and the timing of such decision.
  • The Superintendent, as Receiver for ELNY, has no liability for actions performed within the scope of his authority pursuant to the Rehabilitation Order, the Rehabilitation Plan Order, and subsequent orders of this Court.
  • Historical returns on ELNY’s investments were not as high as anticipated under the Rehabilitation Plan (13% for the common stocks and 100-150 basis points above 30 year U.S. Treasury obligations for bonds).
  • The Superintendent adjusted and increased the reserves required to meet ELNY’s future annuity obligations in 2006 using the then-current statutory basis of 5.25 percent.
  • The net effect was to increase the projected funds needed by ELNY to meet its future obligations by nearly $1 billion dollars.
  • While ELNY’s actual payment obligations remained unchanged, the 2006 financial statements showed an increase in assets necessary to meet those obligations.
  • New York Insurance law does not provide for the appointment of an investigator/expert by the Court to be paid for by the ELNY estate.
  • Any claim against the Superintendent would deplete estate assets without any benefit to ELNY Contract policyholders or payees.
  • If the Court does not grant immunity, the Superintendent will be forced to reserve assets in the ELNY estate to pay the costs of defending these meritless claims, which could significantly delay the liquidation of ELNY and the closing of the Restructuring Agreement.
  • The injunctions restraining all persons from commencing any action against the Superintendent, as Receiver, should be continued.
  • No objector has met its burden of proof to vacate or modify the injunctions granted by the Court.

Miscellaneous

• Objection - The Court should provide a lump sum payment option or the right to opt out of the proposed Restructuring Agreement.
• Superintendent's Reply - An opt out is not required under New York Insurance Law and would not provide any economic or administrative benefit to policyholders and payees.
• Objection - The Court should appoint counsel to represent ELNY policyholders and payees or hold an annual hearing to determine if the economy has sufficiently recovered to permit 100% back pay.
• Superintendent's Reply - Such measures are outside the scope of New York Insurance Laws. In addition, Section 6.2 of the Restructuring Agreement already provides, if economic conditions improve, any excess of assets necessary to meet GABC’s obligations will be returned to the ELNY estate for distribution to ELNY policyholders and payees.
• Objection - Any remaining valuable assets of First Executive Corporation (FEC) should be segregated and credited to structured settlement payees to whom FEC is obligated pursuant to a qualified assignment.
• Superintendent's Reply - Any segregation or crediting of annuity contracts owned by FEC would impermissibly create a subclass under New York insurance law.
• Objection - Certain property and casualty insurance companies that own ELNY Contracts object to specific provisions of the Restructuring Agreement.
• Superintendent's Reply - With a couple of exceptions, if the Court agrees with any of these provision specific objections to the Restructuring Agreement, the Superintendent will not object. The Superintendent does oppose one provision specific objection concerning third-party beneficiary rights (Section 16.15) and proposes an amendment to the provision (8) of the proposed liquidation order agreeing that the current version is unintentionally and overly broad.
• Objection - Contributions by life insurance companies should be enhanced significantly, with additional enhancements for ELNY structured settlement annuity payees.
• Superintendent's Reply - There is no mechanism for the Superintendent or the Court to compel contributions above what is already provided, and capped, by statute.

ELNY Liquidation - 5

Acting as agent for the Receiver of Executive Life Insurance Company of New York (ELNY), the New York Liquidation Bureau (NYLB) mailed letters (shortfall letters) on December 7, 2011 to many individual ELNY structured settlement annuity (SSA) payees notifying them about the proposed ELNY liquidation and restructuring agreement as well as the amount of their anticipated shortfalls.

The ELNY shortfall letters also encourage ELNY SSA payees with anticipated shortfalls to contact their ELNY SSA 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."

Many SSA recipients of the NYLB letters are understandably confused because their annuity contracts identify "First Executive Corporation" (FEC) as the owner of their SSAs. Unfortunately for these ELNY payees and their beneficiaries, FEC declared bankruptcy in 1991 and no longer exists. For a background summary about the rise and fall and ultimate bankruptcy of FEC, see this prior S2KM blog post.

To help SSA recipients of the NYLB shortfall letters better understand their situation, this blog post explains the difference between two alternative methods utilized to fund ELNY SSAs:

• Traditional annuity financing (aka "buy and hold"); and
• Qualified assignments - as defined in Internal Revenue Code Section 130.

Here is a graphic comparison of the "buy and hold" and qualified assignment financing alternatives, courtesy of The Settlement Services Group (TSSG), as set forth in Chapter 3 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). Note: Patrick Hindert, author of "Beyond Structured Settlements", is also Managing Director of TSSG and co-author of S2P2J.

Annuity Financing ("Buy and Hold")

As defined in S2P2J, “ 'annuity financing' [buy and hold] means that a defendant or its liability insurer (the 'obligor') (1) gives the claimant an unfunded, unsecured promise to pay money in the future and (2) purchases and owns an annuity to provide a source of funds to meet this obligation."

Applied to ELNY, the owner of the annuity (defendant or its liability insurer) is the obligor and, if ELNY cannot pay, then the owner is obligated to make the periodic payments or make up the difference.

S2P2J further explains the rights and duties of the parties resulting from annuity financing:

1. "In exchange for a release from tort liability, the obligor promises to make periodic payments to the claimant and purchases an annuity to provide a source of funds to meet this obligation.
2. "The obligor owns the annuity, and as such, retains all incidents of annuity ownership, including the right to change the payee of annuity benefits. Of its own volition, the obligor directs that annuity benefits be paid by the annuity issuer to the claimant.
3. "The claimant has the right to receive periodic payments as due and may rely only on the general credit of the obligor for the collection of such payments. The claimant does not have rights in any property or investments owned by the obligor that are greater than rights of the obligor’s other general creditors.
4. "The claimant has no express rights against the annuity issuer because there is no privity of contract between them. Nonetheless, the claimant receives annuity benefits directly from the annuity issuer, and has no reason to complain to the obligor as long as the benefits are received as promised."

Qualified Assignment

As defined in S2P2J, “ 'qualified assignment' means that the defendant or its liability insurer (1) first gives the claimant a promise to pay money in the future; (2) then transfers that obligation to a substituted obligor pursuant to [Internal Revenue Code] Section 130; and (3) thus extinguishes its contractual liability for the obligation so transferred."

Applied to ELNY, the substituted obligor/assignee/annuity owner is FEC and, assuming the qualified assignment complied with all of the statutory requirements, the original obligor/assignor (defendant or liability insurer) thereby extinguished (or intended to extinguish) its contractual liability for the transferred periodic payment obligation.

S2P2J further explains the rights and duties of the parties resulting from a qualified assignment:

1. "In exchange for a release from tort liability, the defendant or its liability insurer or both (the 'assignor') promise to make specified periodic payments to the claimant.
2. "The claimant agrees to discharge the assignor’s duty provided an acceptable new obligor (an 'assignee') promises to make the periodic payments to the claimant.
3. "The assignee makes this promise to the claimant, the claimant accepts the assignee’s promise, and the assignor’s duty is discharged.
4. "For qualified assignments entered into on or before November 10, 1988: The claimant has the right to receive periodic payments as due and may rely only on the general credit of the assignee for the collection of the payments. The claimant does not have rights in any property or investments owned by the assignee that are greater than rights of the assignee’s other general creditors."
5. Note: because of a change in the tax law, for qualified assignments entered into after November 10, 1988, claimants may have a security interest in property owned by the substituted obligor without jeopardizing the tax-free status of the promised payments. If applicable to specific ELNY SSA payees, such a security interest could raise interesting legal issues because FEC also owed Executive Life of California (ELIC).

So what should ELNY SSA payees who received NYLB shortfall letters do?

• First, they should try to locate copies of their annuity contracts, settlement agreements and, if applicable, qualified assignment agreements. If they have not personally retained these documents, they might try contacting:
  • The attorney who represented them in their original lawsuit; or
  • The structured settlement agent who helped purchase their annuity from ELNY; or
  • Metropolitan Life Insurance Company which has been administering ELNY annuities since 1991.
• Second, they should retain legal counsel to review their documents and recommend options keeping in mind:
  • The January 16, 2012 deadline (Martin Luther King Day) for filing objections to the proposed ELNY Liquidation Petition and Restructuring Agreement; and
  • The announced 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.

For additional information about FEC and ELNY, see the structured settlement wiki.

For additional information about annuity financing and qualified assignments, see Chapter 3 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

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 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.

Bing Appointed NYLB Superintendent

New York Governor Andrew Cuomo's recent appointment of Jonathan Bing to serve as Special Deputy Superintendent of the New York Liquidation Bureau (NYLB) could prove a positive development for structured settlement stakeholders in the anticipated liquidation of Executive Life of New York (ELNY).

Bing, who was serving his fifth term in the New York State Assembly, assumed his new position just prior to the June 23, 2011 motion by the Superintendent of the New York Insurance Department 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."

Created in 1909 by the New York State Legislature, the NYLB "carries out the responsibilities of the Superintendent of Insurance as Receiver, and acts on his behalf in the discharging of his statutorily defined duties to protect the interests of the policyholders and creditors of insurance companies that have been declared impaired or insolvent."

Prior to the collapse of First Executive Corporation in 1991, at which time ELNY entered rehabilitation under the supervision of the NYLB, ELNY sold an estimated 8,000 structured settlement annuities. To date, all related ELNY structured settlement payments have been paid in full. However, 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. The 2007 announcement of "an agreement in principle", whereby various insurers and guarantee associations apparently had agreed to pay $650 to $750 million to fund future ELNY payments, has never materialized.

As the NYLB's Special Deputy Superintendent, Bing can be expected to play an important role in any ELNY liquidation. What are Bing's attitudes toward structured settlement recipients and persons with disabilities?

Bing's strong support for, and favorable attitude toward, persons with disabilities (and also therefore, at least potentially, structured settlement victims) are apparent from his responses to a 2008 Questionnaire when he was running for re-election to the New York State Assembly. The questionnaire was compiled and published by the 504 Democratic Club, "The First Democratic Club in the Country Focusing on Disabled Rights". Here are some of Bing's responses:

• "While in office, I have introduced legislation sponsored by 41 colleagues to expand the Disabled Rent Increase Exemption ... for rent regulated tenants and worked closely with the disability community on this issue."
• "This year [2008], I authored legislation ... to create licensing for vision rehabilitation therapists and orientation and mobility specialists."
• "I co-sponsored the law that phased in an increase to $29,000 in the income eligibility for the real property tax exemption for disabled property owners."
• "I have also sponsored legislation to create a New York State housing registry containing up-to-date information regarding accessible housing statewide for people with disabilities, and supported the law which created the Access to Home program to provide financial and technical resources to assist renters and property owners to make dwelling units accessible for low and moderate income persons with disabilities."
• "I was also a co-sponsor of "Timothy's Law," [designed to end health insurance discrimination by enacting parity in coverage for people with biologically-based psychiatric disabilities] which was a significant step to end our health insurance system's second-class treatment of individuals requiring mental health care."
• "In [my] capacity [as the New York Coordinator for the Federal Emergency Management Agency's Disaster Legal Services Program after 9/11], I supervised attorneys responding to disabled New Yorkers with questions concerning housing, employment, health and environment, and a host of other issues."
• "During the two-year process of writing [a substantial 1996 law journal article on the subject of the mentally retarded and capital punishment], I learned much about the plight of mentally retarded defendants in the criminal justice system."
• "In December 1990, I was hospitalized for emergency surgery to repair a detached retina in my left eye....The experience taught me to appreciate the difficulties that people with visual impairments or blindness must face."
• "The first person I hired in my political career was Micah Kellner, a person with a disability who was elected to the Assembly in 2007."
• "With regard to the DRIE legislation discussed above, I have brought together a coalition of advocates for the disabled - including the Coalition for the Homeless, Multiple Sclerosis Society, and the Center for the Independence of the Disabled -- to work to advance this measure as well as prevent bills that would cause harm to the disability community from moving forward in the Assembly."
• "I have supported legislation ... which has passed the Assembly on several occasions that would waive sovereign immunity for New York State for [Americans with Disabilities] violations."
• "Yes" in response to: "Would you oppose proposals which would negatively affect eligibility, benefits, coverage, and/or access to services for Medicaid beneficiaries and eliminate the systemic bias that leads to unwanted placement in nursing homes and other institutions?"
• I am a sponsor of ... legislation that would require the inclusion of [Post Traumatic Stress Disorder] among the list of biologically based mental illnesses that would be covered under Timothy`s Law. I was a sponsor of the 2006 law which ensured that treatment of autism was covered by health insurance."
• "Yes" in response to: "Do you support Medicaid Presumptive Eligibility legislation which would eliminate the standard 45 days coverage gap that blocks access to treatment?"
• "I am a sponsor of ... legislation that would add low-income disabled persons to the list of those eligible for [Elderly Pharmaceutical Insurance Coverage] ."
• "I have also sponsored legislation ... that has passed the Assembly to create a statewide registry of accessible housing for people with disabilities."
• "Yes" in response to: "Do you favor incorporating [provisions Section 504 of the Rehabilitation Act of 1973 requiring housing developers to set aside a certain percentage of accessible units for persons with disabilities when federal funds are used for construction] into State law so that the Department of Housing and Community Renewal can be empowered to enforce these provisions?"
• "I support many efforts to ensure that those with disabilities have access to the voting booth. I am a sponsor of ... legislation which passed the Assembly that would require each New York State polling place to be accessible to physically disabled voters. I have also voted for [legislation] which would require that polling places, whenever practicable, be on a public transportation route, and ... which would provide that ballots be made available in Braille."
• "Yes" in response to: "Will you support a fully funded office of disability services on each SUNY and CUNY campus to assist students with disabilities in securing accommodations?"
• "I will work with schools in my District to ensure that students with disabilities have access to a quality education. I am a sponsor of A. 3496, the "Dignity for All Students Act," that would authorize the State Education Department to establish policies and procedures for affording all public school students an environment free of harassment and discrimination based on their disability."
• "I convinced the New York City Department of Transportation to build a driveway in front of a senior facility in the heart of the Second Avenue Subway construction zone in the East 90s so that the residents would have access to wheelchair-accessible transportation. I have also supported [legislation] to ensure that persons with disabilities have access to gasoline at service stations."
• "Yes" in response to: "Will you support Assembly Member Kellner's proposed bill requiring NYC to transition to a 100% accessible taxi fleet?"
• "Yes" in response to:"Do you support legislation requiring car services, and all shuttle services to purchase wheelchair accessible vehicles or otherwise ensure that they have the capacity to serve persons with disabilities?"

For complete and continuing 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).