Beyond Structured Settlements

ELNY Liquidation Hearing - 2

Presiding Judge John M. Galasso today denied a motion filed on behalf of Executive Life of New York (ELNY) structured settlement shortfall victims to compel immediate disclosure of source materials relied upon by testifying expert Jack Gibson as well as copies of all objections filed in connection with the Petition to liquidate and restructure ELNY.

Attorneys for the structured settlement shortfall victims had argued that claims of confidentiality by ELNY's Receiver, the Superintendent of the New York State Department of Financial Services, (Superintendent) intentionally deprived their clients of full and fair access to important and relevant information and, accordingly, a full and fair opportunity to challenge the Superintendent's proposed ELNY Restructuring Agreement.

Gibson, the Superintendent's expert witness, had earlier testified that an ELNY annuity administrative database prepared by MetLife had formed the sole basis for his projections regarding ELNY's future liabilities which, under the proposed Restructuring Agreement, would become liabilities of successor company Guaranty Association Benefits Company (GABC).

In addition to the MetLife database, attorneys for the ELNY structured settlement shortfall victims unsuccessfully sought disclosure of other documents relied upon by Gibson including an ELNY 2002-2010 Mortality Experience Study, a MetLife/ELNY Administrative Agreement, Investment Reports from ELNY's Investment Managers, plus information developed by NOLHGA showing Guaranty Association estimates and allocations for individual annuity contracts.

Neither the ELNY structured settlement shortfall victims nor their attorneys have had access to any of these materials which Gibson relied upon to conclude that GABC is financially viable. The ELNY structured settlement shortfall victims' attorneys claimed it is "extremely prejudicial" to require them to cross-examine Gibson ("a highly skilled actuary") without access to the source data and assumptions he used to perform his calculations.

In addition to Gibson's source materials, the ELNY structured settlement shortfall victims' motion also sought to compel the Superintendent to make accessible all publicly filed court documents including especially the Objections filed by all objectors.

Despite references to various objections in the Superintendent's Reply Memorandum and Jonathan Bing's Affidavit and testimony, the Superintendent has refused to share copies with the ELNY structured settlement shortfall victims or their attorneys. In contrast, the Superintendent has shared the full set of Objections with the National Organization of Life and Health Guaranty Associations (NOLHGA) and the Life Insurance Company Guaranty Corporation of New York (LICGCNY).

To address the Superintendent's claimed concerns of confidentiality, attorneys for the ELNY structured settlement shortfall victims offered to accept redacted versions of the documents or enter into a confidentiality agreement. Challenging the Superintendent's claimed concerns of confidentiality, attorneys for the ELNY structured settlement shortfall victims alleged the Superintendent's true motive is to deprive the ELNY structured settlement shortfall victims a full and fair opportunity to challenge the proposed ELNY Restructuring Agreement.

The ELNY Liquidation Hearing will reconvene Tuesday March 20, 2012 with attorneys for the ELNY structured settlement shortfall victims continuing their cross-examination of Gibson. For S2KM's complete reporting about the ELNY liquidation, 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.

New ELNY Website Documents

On March 15, 2012, the Supreme Court of Nassau County New York 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).

According to Schedule 1.15 for the proposed ELNY Restructuring Agreement, 4168 of ELNY remaining 9694 annuities are structured settlement annuities of which 1459 will experience shortfalls even assuming proposed 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.

During the past two weeks, five new documents have been added to the ELNY website:

• Affidavit of Jonathan L. Bing,
• Reply Memorandum in Response to Objections to the Proposed Liquidation of ELNY
• Expert Report of Jack L. Gibson
• Exhibit 6.1.1 - Revised Reinsurance and Participation Agreement
• Exhibit 6.1.2 - Supplemental Benefits Reinsurance and Participation Agreement

Bing's Affidavit

Bing was appointed Special Deputy Superintendent of the New York Liquidation Bureau (NYLB) in 2011. 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." The NYLB has been responsible for the day to day management of ELNY since it entered rehabilitation in 1991.

Filed with the Court on March 1, 2012, Bing's ELNY Affidavit supports the Superintendent's Petition for Liquidation, the proposed Restructuring Agreement and the Reply Memorandum referenced above and summarized below. Bing's Affidavit summarizes the history of the ELNY rehabilitation and acknowledges "[t]he Superintendent or his representatives received a number of requests for additional information concerning the proposed liquidation." In response, Bing's Affidavit states:

• "[C]oncerning the Restructuring Agreement, on February 17, 2012 the Superintendent filed with the Court a revised form of Reinsurance and Participation Agreement (which is Exhibit 6.1.1 to the Restructuring Agreement) and the form of Supplemental Benefits Reinsurance and Participation Agreement (which is Exhibit 6.1.2 to the Restructuring Agreement), which both contained details concerning certain benefits and guarantees provided by a consortium of life insurance companies."
• "[C]oncerning the Guaranty Association Benefits Company (“GABC”), on February 27, 2012 the Superintendent filed and served the expert report of Jack L. Gibson, a Managing Director of Towers Watson, concerning the financial viability of GABC, which was also posted to the ELNY.org website."

Bing's Affidavit further states the Superintendent has received "approximately" 130 objections to the proposed ELNY liquidation and restructuring agreement. Bing's response: "[n]otwithstanding the objections, it is clear that approval of the Restructuring Agreement as part of a comprehensive plan of liquidation is in the best interest of policyholders, creditors, and the public."

Reply Memorandum

Also filed with the Court on March 1, 2012, the Reply Memorandum is fully titled "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." It is signed by Ralph Pernick, Assistant Attorney General, on behalf of Eric T. Schneiderman, Attorney General for the State of New York and Attorney for the Superintendent of Financial Services of the State of New York.

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.

The contents of the Reply Memorandum are organized as follows:

• Preliminary Statement
• Factual Background
• Argument
• Conclusion
• Exhibit A

The Preliminary Statement confirms that "130 objectors have raised several types of issues that the Superintendent has organized into categories, which this single, omnibus response addresses for the Court’s convenience." The Superintendent's categories of objections:

• Objections to benefit reductions by individual policyholders, including objections that ELNY Contracts cannot be modified pursuant to their contractual terms or a prior court order;
• Objections requesting additional disclosure;
• Objections relating to notice issues;
• Objections arguing that the Restructuring Agreement contravenes applicable New York law and/or is not fair and equitable;
• Objections to the calculation, amount, and timing of participation and funding by the PGAs;
• Objections to the immunity provisions of the proposed liquidation order and requests for the appointment of an independent investigator or expert; and
• Miscellaneous other objections.

The Preliminary Statement concludes:

• "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."

In addition to providing factual background about the ELNY rehabilitation, the second section states: "[t]he Superintendent continues to believe that obtaining approval of the Restructuring Agreement as part of a comprehensive plan of liquidation is in the best interest of ELNY’s creditors, ELNY Contract policyholders, and the public because it:

• "Adds substantial additional value from state guaranty associations and voluntary insurance industry participants that will result in the full coverage of approximately 85 percent of ELNY Contracts,
• "Minimizes the risk of disruption in annuity benefit payments,
• "Provides guaranty association coverage without disruption of benefits and without requiring ELNY Contract policyholders and payees from having affirmatively to seek guaranty association coverage to which they are entitled under state statutes,
• "Provides for an optimal transition for ELNY from rehabilitation to liquidation,
• "Does not impermissibly discriminate against any class of ELNY creditors, and
• "Treats ELNY creditors and all other interested parties fairly and equitably in accordance with the requirements and intent of Insurance Law Section 7435."

The Factual Background section concludes: "if the Restructuring Agreement is not approved, benefit payments for the more than 9,500 non-objecting ELNY Contract policyholders and payees will be placed at risk of disruption, there will be no guarantee for future payments, and orphan contracts (those not covered by a state guaranty association) would suffer a reduction in benefits to a level supported only by ELNY’s current assets. Such a result is inconsistent with the best interest of ELNY creditors, ELNY Contract policyholders and payees, and the public."

In the Argument section, the Reply Memorandum considers and rejects each of the categories of objections outlined above. S2KM will summarize and discuss the Reply Memorandum arguments in a subsequent blog post.

The Reply Memorandum concludes: "For the reasons set forth above, this Court should grant the relief requested in the Verified Petition and grant such other and further relief as the Court deems just and proper."

Jack Gibson Expert Report

Jack Gibson's Expert Report is dated February 27, 2012. It consists of 18 pages, 33 Exhibits and 3 Appendices. According to Gibson, he has been retained as an expert witness by Faegre Baker Daniels LLP, on behalf of its client, NOLHGA, and Sidley Austin LLP, on behalf of its client, the Superintendent of Financial Services of New York, as Receiver for ELNY. Gibson's clients have asked him to review the proposed ELNY Restructuring Agreement and to assess the financial viability of the resulting special purpose entity (GABC).

Among his qualifications, Gibson states he is a Managing Director of Towers Watson. He previously supported NOLHGA related to Executive Life of California. He has been engaged by NOLHGA since February 2006 as consulting actuary for the NOLHGA ELNY Task Force. In connection with Gibson's ELNY consulting services, his clients are compensating Towers Watson at an hourly billing rate of $525.

Among the information and materials Gibson reviewed for his ELNY analysis, several appear not to have been made available to ELNY annuity payees, their representatives or the general public:

• ELNY 2002-2010 Mortality Experience Study, developed by Towers Watson under Gibson's direct supervision and direction;
• MetLife/ELNY Administration Agreement 2011-2013, dated May 12, 2011;
• Investment asset data provided by the investment managers for ELNY, Wellington Management Company and Goldman Sachs Asset Management, as of July 31, 2011 and December 31, 2011;
• ELNY Contract administrative record detail from MetLife as of September 30, 2002, September 30, 2003, September 30, 2004, September 30, 2005, September 30, 2006, March 31, 2007, December 31, 2008, December 31, 2009, December 31, 2010, March 31, 2011, and December 31, 2011; and
• March 31, 2011 estimates for every ELNY contract, showing Guaranty Association coverage state (if any), GA coverage amount (if any), and Article 75 allocations (if any), provided by NOLHGA.

Based upon his analysis, Gibson concludes:

• "GABC is financially viable and provides a combination of significant initial funding of assets, along with an array of guarantees that together provide significant security and protection to enable GABC to meet all future financial obligations; and
• "For every one (100%) of the 9,000 scenarios tested and summarized in this report, the assets of GABC were sufficient to pay all future GABC benefit payments."

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

Product Suitability Standards - 4

With declining annuity premium and historically low interest rates, structured settlement stakeholders should be discussing how to improve and grow their business. To help promote this discussion, S2KM's current blog series about "product suitability standards" highlights two fundamental issues rarely addressed during industry educational conferences:

• When is a structured settlement annuity appropriate for a specific physical personal injury claimant?
• What standards exist to help judges, guardians, trustees, mediators, attorneys, settlement planners, structured settlement consultants and other structured settlement stakeholders make this determination?

Potential sources for structured settlement product suitability standards discussed in prior S2KM blog posts:

• Part 1 - NSSTA's Code of Ethics; SSP's Standards of Professional Conduct; and the NAIC's Suitability in Annuity Transactions Model Regulation.
• Part 2 - State minors' statutes and state structured settlement protection statutes.
• Part 3 - The Uniform Prudent Investor Act (UPIA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)

Fiduciary Standard

Among other findings, S2KM's prior review points out a general legislative trend to protect investors and consumers with a more uniform fiduciary, and/or "best interest", standard of care. In general, a fiduciary standard is viewed as the highest legal standard of customer care requiring both a duty of care and a duty of loyalty. A fiduciary is required to act in the best interest of the investor and/or customer and to fully disclose all material facts plus any conflicts of interest. Trustees and investment advisers currently are held to a fiduciary standard which may soon also apply to financial planners and broker dealers. Many state minors' statutes and all state structured settlement protection statutes incorporate "best interest" standards.

Model Annuity Regulations

For some but not all annuity products, the National Association of Insurance Commissioners (NAIC) has created a "Suitability in Annuity Transactions Model Regulation". Significantly, the NAIC Model Suitability Regulation exempts structured settlements and provides less consumer protection than the fiduciary, and/or "best interest" standard. The NAIC has also promulgated an "Annuity Disclosure Model Regulation" "to provide standards for the disclosure of certain minimum information about annuity contracts to protect consumers and foster consumer education." It also exempts structured settlements. The legislative history of the NAIC Model Disclosure Regulation indicates that "[i]nterested parties spoke in favor of an exemption for sophisticated transactions such as ..... structured settlements."

A Hall Pass?

Do these NAIC exemptions mean that structured settlements have been given a "hall pass" for purposes of product suitability requirements? No. If structured structured stakeholders want to improve and grow their business, there are many reasons why they should: 1) understand the meaning and requirements of all three standards (fiduciary duty, best interest, and suitability); and 2) adopt better business practices that address and incorporate one or more of these product standards. Reasons include:

• Blended products - Structured settlement annuities increasingly are paid into trusts (UPIA standard) that also include financial products (Dodd-Frank standard).
• Multiple licenses - In addition to structured settlement annuities, settlement planners increasingly sell securities as well as multiple life insurance and annuity products.
• Competition - To successfully compete in today's economic and legal environment, structured settlement sales persons must adjust upward to match the higher product suitability standards and best business practices of their competitors.
• Clients and Stakeholders - As a matter of self-protection as well as consumer protection, many structured settlement clients (defendants; plaintiff attorneys) and stakeholders ( judges; mediators) will increasingly demand higher product and sales standards for injury victims.
• Lawsuits - In this era of accountability and compliance, all structured settlement participants are likely to be held to higher legal standards.

Three-Card Monte

Why do product suitability standards create issues for the structured settlement industry? At their worst, especially from the perspective of an unrepresented injury victim, some traditional structured settlement business practices not only fall far short of the fiduciary standard - they can resemble a game of "Three-card Monte" .

Misrepresentations or omission of material facts

• Cost or Value - From a claimant's perspective, a core strategy for traditional structured settlements often appears "to make a little money look like a lot of money". The Spencer v. Hartford class action allegations outline one "sophisticated" variation of this strategy which often depends on hiding or misrepresenting annuity "cost" and/or settlement "value".
• Guaranteed payments - Many structured settlement sales brochures continue to promise "guaranteed payments" without specifying who guarantees what if and when an annuity provider like Executive Life of New York (ELNY) becomes insolvent.
• Managed account - Many structured settlement recipients do not understand important product details when their case is settled including how structured settlements differ from managed accounts and why they cannot access funds without court approval pursuant to state structured settlement protection acts.
• Structured settlement myths- historically used to promote sales such as:
  • Studies show that nine out of 10 lump sum recipients squander the entire amount within five years.
  • Structured settlements enable injury victims to live free of reliance on government assistance.

Conflicts of interest - without written, informed client and/or customer consent

• Single product - The danger of single product structured settlement sales persons is not limited to whether his or her product is "suitable" or in the "best interest" of a particular claimant/customer. The danger is also that single product sales persons are inherently conflicted in recommending how much of any settlement should be allocated to their product.
• Multiple roles - A structured settlement sales person introduced into a case by a defendant or liability insurer frequently plays four separate roles each of which potentially conflicts with the other roles: agent for the annuity provider; broker for the defendant; broker for the plaintiff; and agent for the defendant in helping to negotiate and settle the case.
• Compensation sharing - Unless all parties to a settlement are informed about whether and how structured settlement annuity commissions are shared, a structured settlement creates a variety of potential conflicts of interest.
• Funding alternatives - Based upon traditional structured settlement business and compensation models, the potential availability and applicability of 468B qualified settlement funds for "appropriate cases" creates inherent conflicts of interest between defendants and their structured settlement brokers.

Recommendations

• Education - Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) should devote more educational resources to understanding product suitability standards applicable directly and indirectly to structured settlements including standards applicable to their clients and competitors.
• Business standards - SSP's "Standards of Professional Conduct for Settlement Planners" represents an important industry document that has received less attention among structured settlement stakeholders than it deserves. As a result of Dodd-Frank, SSP should review and re-consider the product suitability standards proposed in its current Standards of Conduct.
• Business model - Without violating anti-trust laws, both NSSTA and SSP should encourage their members to continue studying and discussing how transitional settlement planning business models impact traditional structured settlement broker roles, compensation models and business standards.
• Documentation - In the context of transitional business models and standards, structured settlement stakeholders should review and improve core case documents including client requests for proposals, sales materials, settlement agreements, broker of record letters, and commission sharing agreements.

For additional S2KM reporting and commentary about structured settlement business standards and practices, see the structured settlement wiki.

"The Trouble with ELNY"

In an article titled "The Trouble with ELNY" and published this week on his website, New York attorney Peter Bickford describes "how the receivership process has failed Executive Life Insurance Company of New York [ELNY], its policyholders and annuitants." Bickford calls for a review of the "flawed receivership process" in New York that he claims has resulted in ELNY's proposed liquidation and restructuring.

On its ELNY web page, the New York Liquidation Bureau (NYLB), the entity responsible for day to day management of ELNY's rehabilitation, blames ELNY's failure on "adverse economic conditions" including the financial and stock market collapse of 2008. However, as Bickford points out:

• Neither the 1991 ELNY rehabilitation order nor the 1992 order approving the ELNY rehabilitation plan declared ELNY to be insolvent; and
• Based on ELNY financial reports (including unaudited reports prior to 2006 that Bickford obtained through Freedom of Information Law requests), ELNY was "de facto insolvent" long before the 2008 economic downturn.  
• Note: Bickford's article features a chart that shows ELNY's surplus turned into a deficit in 2002, ten years following ELNY's plan of rehabilitation was approved and six years prior to the 2008 economic downturn.

According to Bickford, "[t]he 1992 ELNY rehabilitation Plan, like the Titanic, was doomed the moment it left port..." (emphasis added) How was it doomed? Bickford points out ELNY's original rehabilitation plan "stripped out all the traditional life and annuity business and transferred it to Met Life with the supporting, statutory reserve assets. These contract holders received an equivalent policy from Met Life and suffered no material financial consequences..... [F]or whatever reason the most volatile, long-tailed book of ELNY business [single premium immediate annuities (SPIAs) including all structured settlements] was left in ELNY together with its weakest assets."

ELNY's 1992 rehabilitation plan included an assessment that projected ELNY's bond investments and common stock dividends would "be sufficient to cover current SPIA payouts for at least ten years" which turned out to be accurate until ELNY's started running deficits in 2002. Given the fact that ELNY was not declared insolvent in 1992 and was not subsequently audited until 2006, Bickford asks why proper accounting and reserve levels were not maintained? Even before ELNY's first external audit in 2006 (resulting in a substantial increase in reserves), the NYLB, according to Bickford, acknowledged that the reserve standard used in its annual statements “substantially understate[d] reserves when compared to reserves that would be required to satisfy regulatory requirements for a going concern insurance carrier.”

To explain how ELNY was allowed to pay full annuity benefits for a decade after becoming de facto insolvent in 2002, Bickford blames the receivership process in New York. Counter intuitively, according to Bickford, when an insurance company enters rehabilitation in New York, it ceases to be regulated. "The rigorous statutory requirements for filings, reports or certifications imposed on other licensed companies are no longer imposed on estates in rehabilitation; there are no periodic regulatory reviews, examinations or communications; there is no regulatory oversight of the operations, assets or finances; and there is no mechanism for regulatory oversight of financial condition or compliance with the insurance law or regulations."

If ELNY had never entered rehabilitation, and had been required to continue to file statutory financial statements, annual independent accountings and actuarial certifications, Bickford argues:

• Insurance regulators would never have allowed ELNY to reach its current status;
• ELNY's management might have proposed a recovery plan and been allowed to correct its financial problems; and/or
• ELNY's officers, directors, independent auditors, actuaries and other agents, could have potentially been held accountable for their actions or inactions contributing to ELNY failure.

Bickford points out, however, with ELNY in rehabilitation, the New York Superintendent of Insurance (Superintendent) and the NYLB (the same parties charged with managing ELNY since 1991) are also the proponents and overseers of ELNY's proposed liquidation and restructuring plan. To add insult to injury, they are also seeking court-ordered immunity for their past actions and omissions even though, according to Bickford, no statutory immunity exists for the New York Superintendent or his agents in their roles as ELNY's receiver.

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 as part of the 2011-2012 State Budget.

As an additional source of recovery, the NYLB has suggested that ELNY structured settlement annuity recipients may have recourse against the owners of ELNY annuity policies or others who may still be liable under the original settlements. But even if true, Bickford asks: why should ELNY structured settlement annuitants have the burden of pursuing litigation to recover their loses for a second time? And why is there no recourse against the parties responsible for ELNY's insolvency?

Bickford also argues that the logic behind the state insurance guaranty fund caps is "upside down" in the ELNY scenario. Instead of fully protecting annuitants with the greatest need (structured settlement recipients who have the largest annuities), the guaranty funds are more likely to fully protect investors with relatively smaller ELNY annuities. In this respect, however, Bickford's argument is incomplete, if not partially incorrect, because he does not address the uncertain status in ELNY's proposed liquidation and restructuring of investors who have purchased ELNY's structured settlement payment rights via factoring transactions.

Addendum (February 15, 2012): apologies to Peter Bickford for comments in the concluding paragraph above. S2KM overlooked footnote 12 in Bickford's article which states: "Many of these [structured settlement] claims have been sold by SPIA beneficiaries to factoring companies, which raises a whole other set of issues that are not covered by this article."

For additional ELNY reporting, including links to other ELNY articles by Peter Bickford plus an ELNY timeline, see the structured settlement wiki.

 

Structured Settlements in 2011 - 2

In a prior blog post, S2KM highlighted the historic significance of the ELNY liquidation as the dominant 2011 structured settlement industry development. This blog post offers a strategic perspective of the industry's status in 2011 focusing in part on the industry's three national associations and also providing a broader perspective for ELNY.

Strategic Overview - Primary Market

The National Structured Settlement Trade Association (NSSTA) celebrated its 25th anniversary in 2011. Among its 2011 accomplishments, NSSTA noticeably improved its marketing and educational programs while focusing substantial resources to help minimize problems related to the ELNY liquidation. NSSTA has attempted to balance the need to inform its members (not the public) about ELNY's status with the need to promote the strength of its life insurance markets and the state guaranty fund system.

Speaking at NSSTA's 2011 Annual Meeting, Thomas Ronce, Chairman of NOLHGA, described the current life and health guaranty system in the United States as experienced, well-financed and armed with a multitude of optional legal and financial tools. Applied to ELNY, this state guaranty system will substantially improve the recovery for many ELNY structured settlement recipients. The state guaranty system, however, will not make whole every ELNY structured settlement recipient. Unfortunately, even with guaranty fund payments and additional enhancements, many ELNY structured settlement recipients are expected to experience shortfalls.

NSSTA's 2011 Annual Meeting and Fall Educational Conference also showcased the current strength of the structured settlement market and its product providers.

• Jim Morris, President, Chairman and CEO of Pacific Life Insurance Company, accentuated the current financial strength of U.S. life insurance companies generally and explained why structured settlement annuities represent an excellent strategic product for life companies. Confirming Morris' assessment, three new product providers (Mutual of Omaha, National Indemnity and Hartford) entered (or re-entered) the structured settlement marketplace during 2011.
• William T. Robinson III, President of the American Bar Association (ABA) strongly endorsed structured settlements as "professional and dignified solutions" for injury victims based upon his first-hand experience as a litigation attorney. Robinson also suggested the ABA and NSSTA should identify shared interests and lobbying opportunities.
• American General Life President Mary Jane Fortin described AIG, a structured settlement product provider that received more than $180 billion of loans and investments from the United States government in 2008, as "a strong, stable and resilient company dedicated to keeping our promises". Fortin also dispelled several "myths" about AIG, summarized AIG's recovery from the 2008 financial crisis and expressed optimism about the future of life insurance industry and structured settlements.

Despite these positive assurances, however, primary market structured settlement annuity sales have continued to trend downward for the past three years, arguably because of the 2008 financial crisis and historically low interest rates which many experts predict will continue for the foreseeable future. What has been missing from NSSTA's leadership during 2011 has been a positive vision for NSSTA's own future and the future of structured settlements.

David Ringler, NSSTA's first President, spoke during the NSSTA 2011 Annual Meeting. Ringler stated the most important reason for creating NSSTA was "having a place where everyone and anyone can sit down with each other and discuss the issues and viewpoints regardless of beliefs."  Sometime during the past 25 years, NSSTA lost sight of this original vision and now generally excludes industry voices and perspectives that challenge traditional structured settlement business models and practices.

As one result, two additional professional associations have formed with alternative structured settlement perspectives:

• The Society of Settlement Planners (SSP) - SSP espouses the claimant's right to select his or her own structured settlement adviser and funding company. SSP promotes structured settlement annuities as a core product for special needs settlement planning and favors greater utilization of IRC 468B Qualified Settlement Funds (QSFs).
• The National Association of Settlement Purchasers (NASP) - NASP promotes the right of structured settlement recipients, in compliance with federal and state laws, to sell their payment rights provided a state judge approves the sale in advance as being in the "best interest" of the transferor/payee taking into account the welfare and support of the payee's dependents.

To its credit, NSSTA expanded the scope of its educational programs in 2011 to discuss QSFs and to provide its members with more detailed information about structured settlement secondary market. The perspective for these NSSTA discussions, however, remains defensive and protective without any attempt to envision or discuss new business opportunities or product improvements.

By comparison, SSP's vision for the the future of structured settlements is defined and supported by its "Standards of Professional Conduct". SSP views structured settlements as a core product for personal injury settlement planning. SSP's vision agrees with and encompasses the business model Joseph DiGangi introduced to NSSTA in 2009 as "Settlement Consulting" which he characterized as "a wake up call for the industry." SSP's educational conferences continue to push structured settlement industry thinking beyond its historic boundaries and the inevitability of its path dependence.

In addition to SSP, three national legal associations are developing special needs business practices and models that expand the framework and opportunities for structured settlements:

• Academy of Special Needs Planners (ASNP)
• National Academy of Elder Law Attorneys (NAELA)
• Special Needs Alliance (SNA).

Faced with the ELNY crisis, declining annuity sales and the continuing prospect of low interest rates, some primary market structured settlement stakeholders now recognize that business practices and models that made sense in the past may have survived despite the eclipse of their earlier justification.  S2KM believes more primary market stakeholders should expand their strategic perspectives and re-think structured settlements in the context of the changing legal and financial landscape.

For example, here are four 2010 developments with important consequences for structured settlement stakeholders that have heretofore received inadequate primary market educational attention:

• Patient Protection and Affordability Care Act - how does health care reform impact injury victims and what opportunities does it create for structured settlements?
• Dodd-Frank Wall Street Reform and Consumer Protection Act - how will the Consumer Financial Protection Bureau (CFPB) address structured settlement complaints?
• NAIC Suitability in Annuity Transactions Model Regulation - what does "suitability" mean for structured settlement annuities and how does "suitability" differ from the "best interest" standard applicable to trustees, investment advisers and structured settlement transfers?
• Spencer v. Hartford class action settlement - what are the lessons learned and resulting new best practices for structured settlements?

Strategic Overview - Secondary Market

The ELNY liquidation is also having a negative impact on the secondary structured settlement market. Some industry experts have estimated that as many as 1000 of ELNY structured settlement annuities (out of the 4168 total) have undergone transfers of some or all payment rights. Investors who have purchased ELNY annuity payment rights may not be eligible to receive contributions from state guaranty funds which historically protect "consumers". The NYLB's December 7, 2011 letters warned 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."

Although the financial crisis of 2008 had a devastating short term impact on the structured settlement secondary market, the market has experienced robust sales in 2011 as institutional investors continue to be attracted to the relatively high rates of returns generated by restructured (post transfer) payment right obligations. More individual investors, including personal injury claimants and their attorneys, have also begun purchasing restructured payment rights although some industry experts caution against potential tax and securities law uncertainties.

The structured settlement secondary market changed dramatically in 2011 with the announced merger of  J.G. Wentworth and Peachtree Settlement Funding. The merger combined the two largest purchasers of structured settlement payment rights with an estimated 80-85 percent of the market.

The merger highlights a remarkable turnaround for Wentworth whose shareholders control the majority of the combined companies. In 2009, Wentworth and two affiliated companies entered Chapter 11 bankruptcy protection after the company "encountered liquidity problems amid a tightening credit market". Wentworth laid off 120 of its 200 employees and closed its office in Las Vegas. Its general corporate bonds were "almost worthless" and were trading, if at all, for pennies on the dollar. Less than six months later, Wentworth emerged from bankruptcy with an announcement that JLL Partners (Wentworth's owners) had invested an additional $100 million in the firm.

In a significant case (Symetra v. Rapid Settlements) highlighting controversial business practices which were opposed by NASP as well as structured settlement annuity providers, a Texas court issued injunctions during 2011 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.

Check the structured settlement wiki for additional S2KM structured settlement reporting:

• ELNY liquidation
• Annual industry reports
• Professional association meetings

ADDENDUM (12/12/2011) - S2KM's report above omits at least one important 2011 strategic structured settlement development. NSSTA and its product provider members launched the first-ever industry metrics study during 2011. For more information about metrics, see S2KM's "Structured Settlement Metrics" series featured on the structured settlement wiki.

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 - 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.