Beyond Structured Settlements

Courthouse News ELNY Article

Courthouse News Service, a nationwide news service for lawyers and the news media, has published a report about the ELNY Liquidation Hearing titled: "Insurance Beneficiaries Say NY is Cheating". Written by Julia Filip, the article features the following quotes from attorney Edward Stone excerpted from written objections he filed on behalf of his ELNY structured settlement shortfall clients plus additional allegations Stone makes in his interview with the Courthouse News Service Article:

• "For more than twenty years the NYLB [New York Liquidation Bureau] mismanaged ELNY and created a deficit of epic proportions never before seen in the context of a life insurance company insolvency .... And now this court is being asked to sweep all of this waste, mismanagement and neglect under the rug by taking away benefits from those most in need: the shortfall payees."
• Stone's clients, and other ELNY structured settlement shortfall victims,"were excluded from the process of designing the liquidation plan and denied the opportunity to confront the New York Liquidation Bureau."
• "To suggest that my clients should have divined that their payments were being reduced prior to the receipt of the notice letter in mid-December, which is the only time any shortfall information was given to them, and somehow fashioned an alternative plan for consideration by the court with no access to any source data or reference materials they could have independently assessed is simply absurd."
• "Nobody ever came to anyone whose benefits were being cut and said, 'Hey, do you want to come up with an alternative plan, with a better way to do this?'"
• "To make matters worse, the Superintendent continues to maintain supervision over the process at the expense of the shortfall payees. ..Isn't 21 years of supervised rehabilitation enough?"
• "The NYLB proposed plan favors [Guaranty Associations] over shortfall payees and the entire restructuring agreement is designed to favor NOLGHA members' interests at the expense of my clients."
• "They're doing it [ELNY proposed liquidation and Restructuring Agreement] in a way that is so unfair and insensitive and the only reason they do it is to cover up 21 years of mismanagement."
• "I wasn't able to get an audit; who knows if [the Receiver and MetLife as annuity administrator] were paying people who were already dead?"
• "NYLB admitted that their data is not accurate and is unreliable, and they based all the data on information from only one source, which, by [NYLB's witnesses] own admission, is not credible, and was never verified by any third party."
• "The data produced by the NYLB to date is inconsistent, inaccurate and completely and wholly lacking in transparency. To push through an inequitable plan of liquidation and approve the restructuring agreement before the court, without giving the shortfall payees a meaningful opportunity to be heard flies in the face of the most basic notions of fairness and due process."
• "Based on the way twenty years of 'rehabilitation' have unfolded, my clients have no way of knowing the true financial condition of ELNY and there has been no transparency, no credibility and no integrity in the financial reporting that took place in the past."
• Referring to an article about ELNY written by New York attorney Peter Bickford: "ELNY's cash flow went negative in 2002, ten years after the plan of rehabilitation and six years before the economic downturn of 2008."
•  "Without requiring any additional contributions from the [Guaranty Associations], we could structure an alternative plan that would have an independent entity take over, let them pursue legal action on behalf of everyone, let them supervise, and take all the contributions from the [Guaranty Associations] and pay off those benefits, and offer people alternatives. If they want to convert annuities into a different product, as a choice, they could do it now, as opposed to just leave them on a hook forever."
•  "But to really propose a new plan, I would have to understand what the liabilities are, to really figure out what we have to do, we need the same information the other side has had for 3 years. We never got it."
•  "A fair and equitable plan of liquidation would base future payments on the percentage of the original settlement that has been received by all payees and apply the percentage that remains outstanding to ELNY's assets, such that all 9,600 remaining ELNY payees receive as close to the same percentage of promised benefits as is possible."
• "A fair and equitable plan would also consider the impact of payment reductions and consider rescheduling future payments to allow for an upfront benefit to ease the transition for those payees whose payments are ultimately reduced. The proposed liquidation plan does not address this."
• "The most vile part is asking the judge to grant them judicial immunity ... I suspect from the data we had that something is not right. They made a $1 billion dollar adjustment to their reserve in 2006, based on a change in assumptions that they could have made in 1992."

The ELNY Liquidation hearing continues for the sixth day today before Judge John M. Galasso in Room 35 of the Nassau County State Supreme Court Building in Mineola, New York. S2KM's complete ELNY reporting appears on the structured settlement wiki.

S2P2J Release 50

Publisher Law Journal Press is currently distributing hardcopy supplements for Release 50 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). Online S2P2J was also updated as of October 21, 2011 to include Release 50 materials.

First published in 1986, S2P2J is co-authored and updated semi-annually by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) utilize S2P2J as an educational resource for their certification programs.

S2P2J Release 50 Highlights

Release 50 for Structured Settlements and Periodic Payment Judgments reviews the history of the receivership of Executive Life of New York ("ELNY"), tracks the status of its receivership and impending liquidation, updates discussion of the operation and role of U.S. life and health guaranty associations (“GAs”), and provides a comprehensive new chart summarizing coverage limits under the enabling statutes for all GAs in each of the U.S. states and territories.

This Release also expands and updates the discussions of several topics, including:

• Understanding the scope and meaning of “physical” as that crucial term is used in IRC § 104(a)(2) for claimants who receive damages on account of personal injuries that are not “physical” per se, such as wrongful incarceration and PTSD.
• Negotiating the important issue whether and pursuant to what terms a settlement payor will issue an IRS 1099-MISC form in cases where the tax treatment of agreed damages appears to be neither fully excludable under IRC § 104(a)(2) nor fully includable as income to the claimant.
• Determining choice of forum for establishing a 468B fund when one or more claimants against the 468B fund is a protected person.

In addition, Release 50 includes an extensive discussion of the IRS’s Structured Settlement Factoring Audit Technique Guide used to assist its examiners in determining taxability of structured settlement factoring transactions. The Guide describes the interplay between state law requirements and federal tax sanctions and presents a simplified conceptual framework to be used for determining taxability.

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".

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.

SSP and NSSTA 2011 Annual Meetings - 7

Fulfilling the promise to pay future periodic payments has been the primary mission, and a cornerstone for success, of the United States structured settlement industry for more than 30 years.

With the exception of Executive Life Insurance Company of California, which collapsed in 1991 and resulted in some individuals receiving somewhat less than 100% of their payments, all structured settlement recipients, or the factoring companies and/or investors who purchased their payment rights, have to this date received their promised future periodic payments in full.

What happens if and when a structured settlement annuity provider is financially unable to meet its periodic payment obligations?

In the United States, the regulation of insurance and insurer insolvency is governed by state law. Insurance companies are expressly excluded as debtors under the Federal Bankruptcy Code. For structured settlements, however, the Federal Bankruptcy Code could apply if a non-insurance qualified assignee entered bankruptcy.

Most state insurance laws provide for the Commissioner of Insurance of the state where an insurance company is domiciled to:

• Determine that an insurer should be placed in liquidation.
• Petition a state court to enter an order of liquidation.
• Serve as receiver or liquidator when an insurer is placed in liquidation.
• The liquidator's role is to wind up the insurer's business under court supervision.
• In New York, the New York Liquidation Bureau (NYLB) manages insurance company liquidations as well as conservatorships and rehabilitations.

Since 1971, when the National Association of Insurance Commissioners first promulgated the Life and Health Insurance Guaranty Association Model Act (Model Act), state life and health guaranty associations have provided a safety net to protect consumers from some of the risks resulting from the insolvency of a life or health insurance company.

Every state, plus the District of Columbia and Puerto Rico, currently has a life and health guaranty association. All of these guaranty associations are members of the National Organization of Life & Health Insurance Guaranty Associations (NOLHGA).

NOLHGA was founded in 1983 and operates as a not-for-profit corporation. The primary mission of NOLGA and its members, who are separate from but work closely with state insurance regulators, is to ensure that consumers receive (at a minimum) a level of financial protection as prescribed by state statute when a life or health insurance company fails.

Perhaps anticipating the possible insolvency of Executive Life Insurance Company of New York (ELNY), the National Structured Settlement Trade Association (NSSTA) provided a timely and valuable educational discussion about state life and health guaranty associations featuring Thomas Ronce and Craig Ulman during its 2011 Annual Meeting.

In his NSSTA presentation, Ronce explained how the state life and health guaranty structure differs from FDIC protection because of the non-uniform state-based provisions, lack of pre-funding, and the nature of the guaranty itself. Ronce reviewed the history of the guaranty associations and also discussed:

• Guaranty association coverage issues.
• Powers and duties of guaranty associations.
• How assessments are calculated.
• Collections and tax offsets.
• NOLHGA's role generally and in multi-state insolvencies.
• NOLHGA's Insolvency Task Forces.

Ulman focused his discussion of guaranty association coverage on "Issues, Pitfalls and Developments Affecting Structured Settlements". Among the issues:

• Guaranty association coverage limits - with more than half the states providing $250,000 or less.
• Owner-based coverage vs. payee based coverage - with most states providing the later.
• The NAIC Model Act subrogation provisions (enacted in 27 states) which specifically address and impact structured settlements.

As potential pitfalls for structured settlements, Ulman highlighted general and state-specific coverage exclusions as well as timing issues which could determine whether and when a state guaranty statute applies to a structured settlement recipient.

As significant, related developments, Ulman identified several enacted or proposed amendments to state guaranty statutes:

• Replacing owner-based coverage with payee-based coverage.
• Increasing coverage limits from $100,000 to $250,000.
• Adopting subrogation provisions based on § 8.K.(3) of the NAIC Model Act.
• Relaxing or eliminating the prohibition on advertising the availability of Guaranty Association coverage.
• Reducing or eliminating state tax offsets for Guaranty Association assessments.

For additional information about structured settlement annuity company insolvencies and state insurance guaranty associations, see sections 3.05 and 5.04 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

For S2KM's complete reporting about the SSP and NSSTA 2011 Annual Meetings, see the structured settlement wiki.

Executive Life of New York - 2

A New York State Supreme Court Judge has ordered the Superintendent of the New York State Insurance Department to present the Court with a proposed order and plan of liquidation for Executive Life Insurance Company of New York (ELNY) on or before July 1, 2011 which establishes a briefing schedule and provides for notice to all ELNY creditors, after the Superintendent confers with the Life Insurance Company Guaranty Corporation of New York (Guaranty Corporation) and other interested parties.

The "Order to Show Cause" was issued by Nassau County New York State Supreme Court Judge John M. Galasso on December 17, 2010 - more than three years after then New York Governor Eliot Spitzer announced an "agreement in principle" to resolve the financial problems of Executive Life of New York (ELNY).

The December 17, 2010 "Order to Show Cause" also ordered that:

• If the New York Insurance Superintendent, as ELNY's Rehabilitator, is unable to present a proposed plan to the Court on or before July 1, 2011, then the Superintendent must submit papers in support of an application for an order of liquidation on or before August 1, 2011 and must provide notice of papers, plus a copy of the December 17, 2010 Order, to the Guaranty Corporation and all persons as directed by the Court;
• Any answering papers must be filed and served upon the Superintendent by November 11, 2011, and any reply papers must be filed and served by the Superintendent by December 16, 2011;
• The Guaranty Corporation and other parties wishing to be heard must appear before the Court on January 4, 2012, at 9:30 a.m. to show cause why the Court should not grant an order of liquidation for ELNY;
• The Order of Rehabilitation for ELNY entered on April 23, 1991 and the December 16, 1992 Order approving the Plan of Rehabilitation for ELNY continue in force and effect, including the provisions providing for payments to structured settlement and other annuitants; and
• The Superintendent must serve a copy of the Order to Show Cause upon the Guaranty Corporation within five (5) days following the signing of the December 17, 2010 Order.

ELNY has been in rehabilitation since 1991. The most recent audited financial statements were published July 28, 2010 and indicate that ELNY had total admitted assets of $984,021,594 compared with total liabilities of $2,516,254,541 as of December 31, 2009.

For S2KM's complete and continuing coverage of Executive Life of New York, see S2KM's structured settlement wiki.