Beyond Structured Settlements

ELNY Liquidation - 2

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

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

According to the News Release:

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

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

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

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

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

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

ELNY Liquidation - 1

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

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

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

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

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

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

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

Ivy Chang's Affidavit adds:

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

According to the Petition: "the unprecedented global economic crisis and resulting market collapse of 2008 had a significant negative impact on ELNY's retained assets and made continued implementation of the Rehabilitation Plan without a liquidation unfeasible." The most recent ELNY financial statements (as of December 31, 2010) show assets of $905,945,200 compared with liabilities of $2,474,317,342 resulting in a negative surplus of $1,568,372,142.

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

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

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

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

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

Aurora S.A. v. Poizner

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

Background

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

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

Life Insurer Liquidation Process

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ELNY Liquidation Plan Postponed

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

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

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

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

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

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

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

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

New York Liquidation Bureau

What is the New York Liquidation Bureau (NYLB) and what role will the NYLB play if and when Executive Life Insurance Company of New York (ELNY) is liquidated?

According to its Mission Statement: NYLB "acts for the Superintendent of Insurance as the court appointed fiduciary and Receiver of impaired and insolvent insurance companies, to maximize assets and resolve liabilities, return rehabilitated companies to the marketplace or distribute the proceeds of the company in a timely manner to creditors."

The NYLB website adds:

• NYLB is "a unique entity. Receiving no funding from taxpayers, it 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 performed this function since 1909, when the New York State Legislature passed the law mandating that the Superintendent assume the separate responsibility of Receiver. In the case of each insurance company in receivership, the Superintendent as Receiver is appointed by the New York State Supreme Court. The Court approves all of the actions of the Superintendent, and by extension those of the NYLB."

The New York Court of Appeals held in 2007 in the case Dinallo v. DiNapoli that, in his capacity as liquidator of insurance companies, the superintendent of insurance is not a state officer and that the NYLB, acting as the superintendent/liquidator's agent, is not a state agency and therefore is not subject to state audit.

The Court of Appeals reasoned: "[t]he Bureau does not perform a governmental or proprietary function 'for the state', but rather runs the day-to-day operations of private businesses in liquidation pursuant to Supreme Court order. The Bureau is not part of the Insurance Department's budget, operates without the benefit of state funds, maintains its own errors and omissions coverage, and is represented by its own private counsel, not the Attorney General, as is normally the case when a state agency is sued. Thus, the Bureau is not a 'state agency' within the ambit of State Finance Law § 8(2-b)(a)."

The Court of Appeals added: "When acting as liquidator of a distressed insurer, the Superintendent operates as a statutory receiver who stands in the shoes of a private entity and 'takes immediate possession and control of the assets and proceeds to a liquidation of its affairs' .... Indeed, the Superintendent as liquidator occupies a legal status that is 'separate and distinct from the superintendent of insurance as the public official charged with regulating the insurance industry generally' .... Thus, while the Superintendent's role as liquidator is judicial and private, his role as regulator and supervisor is administrative and public. Consequently, the Superintendent as liquidator is not a state officer but rather one who acts on behalf of a private entity."

New York attorney Peter Bickford has written a series of blog posts (titled "Insolvency Process in New York") which are highly critical of the NYLB. According to Bickford, the NYLB had (as of 2007) more than 450 employees ("most of whom are protected by union contracts") and an annual budget of more than $100 million.

Bickford's primary complaint about the NYLB is that the "receivership process in New York lacks meaningful transparency and accountability." Although the NYLB has promoted "a new era of openness and accountability" (including external audits beginning in 2006), Bickford maintains the opposite is true. As a primary example, Bickford highlights the NYLB's "recent unprecedented use of the courts to further insulate itself from outside scrutiny and accountability". As evidence, Bickford points to the following provision which he states now appears in liquidation and rehabilitation orders issued by New York courts:

“The Superintendent as [rehabilitator] [liquidator] of [the company], his successors in office and their agents and employees are relieved of any liability or cause of action of any nature against them for any action taken by any one or more of them when acting in accordance with this Order and/or in the performance of their powers and duties pursuant to Article 74 of the New York Insurance Law."

By adding this paragraph to court orders of liquidation or rehabilitation, Bickford claims "the [NYLB] seeks to obtain immunity without any basis in the law", and for which he maintains there is no precedent. This immunity, according to Bickford, "bestows absolute immunity – including for gross negligence or intentional acts committed while acting as liquidator or rehabilitator of an estate."

How do Bickford's criticisms of the NYLB square with the rehabilitation, and anticipated liquidation, of ELNY?

• As of today, 20 years following its 1991 Order of Rehabilitation, the ELNY profile that appears on the NYLB website is threadbare.
• Without any public explanation, the much ballyhooed 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 (which is not publicly available), has never materialized.
• The participants in the agreement, which apparently included Allianz, Fireman’s Fund, Allstate, State Farm and Travelers among other liability insurers who previously purchased ELNY annuities to fund structured settlements, have signed confidentiality agreements with the NYLB.

In a separate blog post, Bickford quotes from a Business Insurance article reporting statements by Mark Peters, who then served as the NYLB Superintendent, about the ELNY 2007 agreement in principle:

“The contributions will be enough to offset the $2 billion deficit that ELNY is predicted to face in 12 to 15 years, regulators say. The deficit results largely from an overly optimistic assumption in ELNY’s 1992 rehabilitation plan that the estate would earn 10% annually on its invested assets, Mr. Peters said. The actual return was between 7% and 8%. The Liquidation Bureau is now assuming a future annual return of just over 6%, he said. Most of ELNY’s contracts will run off within 35 years, with the last contract expiring in about 70 years, he said.”

In his blog post, Bickford takes issue with Peter's ELNY explanation, stating in part:

• "Inadequate interest rate assumptions cannot begin to account for the purported deficit."
• "The 1992 plan of rehabilitation does not include interest rate assumptions."
• "The 1992 plan of rehabilitation specifically stated that that the cash flows from investments 'are projected to be sufficient to cover current [covered annuity] payouts for at least ten (10) years.'”
• "So if it is not the interest rate assumptions causing the purported deficit, what is causing it?"

ELNY sold an estimated 8,000 structured settlement annuities prior to entering rehabilitation. To date, all related ELNY structured settlement payments have been paid in full. 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. New York Governor Andrew Cuomo recently appointed Jonathan Bing to serve as Special Deputy Superintendent of the NYLB.

On June 23, 2011 the Superintendent of the New York Insurance Department filed a motion to postpone the previous 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."

Thanks to John Darer whose earlier ELNY blog posts introduced S2KM to Peter Bickford's writing.

S2KM's complete ELNY reporting and analysis appear on 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).