Beyond Structured Settlements

Garamendi v. Altus Finance S.A.

As Executive Life of New York (ELNY) stakeholders and structured settlement industry participants await the outcome of the ELNY appeal , challenging the ELNY Order of Liquidation and Approval of the ELNY Restructuring Agreement, they may be surprised to learn the ultimate fate of Executive Life of California (ELIC), ELNY's sister company, likewise continues to be litigated.

The most recent ELIC-related development occurred October 29, 2012, in Garamendi v. Altus Finance S.A., when a federal jury in Los Angeles rejected a claim by California's Insurance Commissioner that, but for a conspiracy by French investor group Artemis S.A.:

• ELIC's original conservator (then California insurance commissioner John Garamendi) would have accepted an alternative bid in 1991 by state insurance guaranty associations; and
• The alternative bid would have retained profits from ELIC's junk bond portfolio for the benefit of policyholders including ELIC structured settlement recipients.

The actual 1991 ELIC sales agreement was a two-part sales agreement with New California Life Holdings, Inc. (NCLH) and Altus Finance (Altus), an affiliate of the French Bank Credit Lyonnais. That agreement was subsequently modified and approved by a California Superior Court on August 13, 1993 as part of the ELIC rehabilitation plan.

Under the 1991 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. Also, as part of the actual sales agreement, the Artemis S.A. joint venture acquired a controlling interest in NCLH.

 A California Court of Appeals previously summarized these complex ownership relationships as follows: "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."

In retrospect, many critics claimed the 1991 agreement substantially undervalued ELIC's 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 First Executive Corporation (FEC) and its two Executive Life subsidiaries were current on interest payments and ultimately fulfilled their investment obligations.

ELIC-related legal developments between 1993 and the October 29, 2012 jury decision in Garamendi v. Altus Finance have also been complex. Relevant historical highlights:

• Subsequent to its NCLH purchase, Artemis learned of a conspiracy by Altus/MAAF Group, an investment group which previously controlled NCLH, to evade the prohibition under California law 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.
• In 1999, the California Insurance Commissioner learned from a whistleblower about the Altus S.A./MAAF Group conspiracy and filed conspiracy lawsuits against multiple defendants including French bank Credit Lyonnais.
• 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.
• The conspiracy lawsuit against the two remaining defendants, Artemis S.A. and Francois Pinault (Artemis' controlling shareholder), was conducted in Federal Court in 2005. The jurors found Artemis and Pinault 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.
• On August 25, 2008, the Ninth Circuit Court of Appeals vacated the damage awards against Artemis and Pinault and remanded the case for a new trial on the issue of damages.

For a more detailed background case summary, see S2KM's 2011 blog post "Aurora S.A. v. Poizner".

 In an article published October 30, 2012, Bloomberg Businessweek wrote that, following the most recent Garamendi v. Altus Finance SA verdict, U.S. District Judge Gary Klausner said "he was inclined to reinstate the restitution that the judge presiding over the 2005 trial had awarded the insurance commissioner" and "[Judge] Klausner ordered both sides to file briefs on the restitution including what amounts they thought were appropriate."

 For a background summary of ELIC, see S2KM's blog post "Executive Life of California" and, for greater detail, section 3.05[12] of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

For S2KM's complete and continuing Executive Life reporting, see the structured settlement wiki.

Executive Life Timeline

The following Executive Life timeline also appears on the structured settlement wiki where it will be edited and updated.

1935 - Executive Life Insurance Company of New York (ELNY) is incorporated and subsequently (in 1937) licensed as a stock life insurer company in the state of New York.

1961 - Executive Life Insurance Company of California (ELIC) is founded as a subsidiary of First Executive Corporation (FEC). FEC subsequently: 1) becomes a public company and 2) borrows $14.6 million from what is now Citibank to purchase ELNY.

1974 - Fred Carr joins FEC which then has $77 million of assets (355th among U.S. life insurers) of which $22 million represents policy loans. FEC's investment portfolio is $20 million under water. FEC is in default on its $14.6 million Citibank loan. Both the IRS and the New York Insurance Department are investigating ELNY. Touche Ross, FEC's auditors, refuses to express an opinion on its financial statements.

1986 - FEC's zenith. Shareholders' equity is more than $1.5 billion with no debt and total assets of $16.4 billion. The Ivan Boesky scandal erupts and junk bond prices begin to fall.

1987 - The New York Insurance Department disallows a number of reserve credits for ELNY resulting from questionable reinsurance treaties. ELNY admits to violating eight sections of the New York insurance code and agrees to pay a $250,000 fine. ELIC provides ELNY with a $151 million capital infusion requiring FEC to raise additional capital. Joseph Belth, an Indiana University professor and publisher of "Insurance Forum", begins writing negative reports about Executive Life. The mainstream financial press eventually echoes Belth's negative analysis questioning FEC's concentration of junk bonds. FEC and Executive Life complete over $40 billion in junk bond trades with Michael Milken and Drexel Burnam Lambert between 1982 and 1987. Executive Life's competitors promote these negative press reports to convince Executive Life policyholders to surrender their SPDA contracts.

1988 - Carr negotiates a $275 million loan for FEC from a consortium of Japanese banks.

1989 - FEC announces the sale of ELNY. With the Japanese bank loan nearing default, FEC completes a complex rights offering which raises $284 million.

1990 - The ELNY sale falls apart. FEC investors initiate a lawsuit alleging fraud. ELIC and ELNY announce a write down that eventually totals $776 million. A.M. Best's lowers ELIC's and ELNY's ratings from A+ to A. FEC becomes the most shorted stock in the United States during 1990. From July 1989 to the end of 1990, FEC's stock falls from $16 per share to 16 cents per share as its net worth declines to a negative $3 billion.

1991 - FEC loses $1 billion of its investment portfolio. Michael Milken is jailed for securities fraud. Newly elected California Insurance Commissioner John Garamendi obtains a court order seizing control of ELIC. New York's Insurance Commissioner Salvatore Curiale follows with ELNY on April 16. Both companies enter rehabilitation a status which ELNY retains to the present day. FEC files for Chapter 11 bankruptcy. The combined companies strand more than 500,000 policyholders, annuitants, investors, employees and agents. The annuitants include 13,500 structured settlement recipients. Commissioner Garamendi enters into a two-part sales agreement with New California Life Holdings, Inc. (New California) and Altus Finance (Altus), an affiliate of the French Bank Credit Lyonnais, in connection with the ELIC rehabilitation.

1992 - Gary Schulte publishes his book titled "The Fall of First Executive".

1993 - The 1991 ELIC sales agreement and the ELIC rehabilitation plan are modified and then approved by the Los Angeles Superior Court. Under this agreement, Altus pays $3.25 billion and acquires ELIC's $6.4 billion junk bond portfolio. The Altus purchase price includes $300 million of capital for a newly formed company, Aurora National Life Assurance Company, Inc. (Aurora) which assumes ELIC's remaining assets and liabilities including its structured settlement obligations.

1994 - ELIC's former policyholders and structured settlement recipients are given the opportunity to either opt out of the rehabilitation plan and receive the liquidation value of their existing ELIC contracts or opt in to a new restructured contract with Aurora.

1998 - An anonymous whistle-blower alleges that Crédit Lyonnais was the real buyer of ELIC and controls it through secret agreements. Because banks were prohibited from owning U.S. insurance companies in 1993, the California Insurance Department sues Credit Lyonnais and other parties alleging violations of the federal Bank Holding Company Act, the California Insurance Code and other California statutes.

2003 - Credit Lyonnais and some of the other defendants settle with the California Insurance Department for $730.5 million of which $211 million will be distributed to opt out policyholders and payees and $403 million to Aurora to supplement payments for opt in policyholders and payees.

2005 - The California Insurance Department case against the remaining defendants results in a substantial verdict including $700 million of punitive damages.

2007 - New York Governor Eliot Spitzer announces an "agreement in principle" for ELNY designed to continue paying all ELNY annuitants 100% of their benefits. The plan is intended to protect approximately 11,000 ELNY annuity recipients including approximately 8000 structured settlement recipients. The announced plan requires and anticipates future approval by the New York Nassau County State Supreme Court. The announced plan, however, whereby various insurers and guarantee associations apparently agreed to pay $650 to $750 million to fund approximately $2 billion of future ELNY payments, never materializes.

2008 - The U. S. Court of Appeals for the Ninth Circuit reviews the 2005 trial court verdict in the California Insurance Department ELIC case and remands the case for a new trial on the issue of damages. A new trial court date has not yet been set.

2009 - Audited financial statements indicate ELNY has total admitted assets of $984,021,594 compared with total liabilities of $2,516,254,541 as of December 31, 2009.

2010 - A New York State Supreme Court Judge orders the Superintendent of the New York State Insurance Department to present the Court with a proposed order and plan of liquidation for ELNY on or before July 1, 2011 after the Superintendent confers with the Life Insurance Company Guaranty Corporation of New York and other interested parties. The plan is supposed to establish a briefing schedule and provide for notice to all ELNY creditors. Audited financial statements (as of December 31. 2010) show ELNY has assets of $905,945,200 compared with liabilities of $2,474,317,342 resulting in a negative surplus of $1,568,372,142. The California Insurance Commissioners distributes funds received from the 2003 Credit Lyonnais settlement to approximately 27,300 former ELIC policyholders including former ELIC structured settlement recipients (opt outs) who elected to terminate their policies.

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

Executive Life of California

As structured settlement stakeholders await the anticipated liquidation of Executive Life Insurance Company of New York (ELNY), some may be asking what happened to ELNY's sister company Executive Life Insurance Company of California (ELIC) and ELIC's structured settlement recipients.

Gary Schulte describes the meteoric rise and fall of ELNY, ELIC and their parent holding company, First Executive Corporation (FEC), in his 1992 book "The Fall of First Executive" previously reviewed by S2KM. Schulte's story ends in 1991 when ELNY and ELIC entered rehabilitation and FEC declared bankruptcy. At that time, the combined companies owed junk bonds (among other investment assets) with a face value of $6.4 billion and had issued approximately 13,500 structured settlement annuities: 8000 by ELNY and 5500 by ELIC.

One of the preliminary issues in ELIC's receivership was whether the supervising Los Angeles Superior Court (Superior Court) could properly distinguish among groups of ELIC policyholders. Initially, structured settlement recipients seemed assured of receiving 100 percent of their scheduled payments compared with holders of guaranteed investment contracts (GICs) who were to receive only a fraction of their investments. Subsequently, however, an appellate court required equal treatment for GIC investors thereby reducing ELIC funds available to pay structured settlements.

On April 22, 1991, the Superior Court entered an order permitting California Insurance Commissioner John Garamendi, as Rehabilitator, (Garamendi) to continue payment of all of ELIC's death claims, certain medical claims and 70 percent of it structured settlement obligations. The Superior Court permitted “hardship” claimants to petition for a continuation of full scheduled structured settlement payments. Approximately 600 structured settlement recipients applied for and received hardship status and continued to receive all their scheduled funds during the rehabilitation proceeding.

Of those structured settlement recipients who experienced an initial 30 percent shortfall, approximately 800 had originally agreed to a qualified assignment with FEC as obligor. For those structured settlement recipients who had not agreed to a qualified assignment, the original obligor (defendant or liability insurer) remained contractually liable. Some of these original  obligors made supplemental (30 percent) monthly payments while others waited until an overall shortfall was determined.

In August 1991, Commissioner Garamendi entered into a two-part sales agreement with New California Life Holdings, Inc. (New California) and Altus Finance (Altus), an affiliate of the French Bank Credit Lyonnais, in connection with the ELIC rehabilitation. This sales agreement and the ELIC rehabilitation plan were subsequently modified and then approved by the Superior Court on August 13, 1993. Under this agreement, Altus paid $3.25 billion and acquired ELIC's $6.4 billion junk bond portfolio. The Altus purchase price included $300 million of capital for a newly formed company, Aurora National Life Assurance Company, Inc. (Aurora) which assumed ELIC's remaining assets and liabilities including its structured settlement obligations.

The ELIC sales agreement was subsequently subject to considerable criticism. At least in retrospect, the agreement substantially undervalued ELIC junk bond portfolio. Although the junk bond market was depressed and thinly traded in 1991, it was among the best performing investment markets in 1992 and 1993. Even in 1991, a substantial percentage of the junk bonds owned by FEC and its two Executive Life subsidiaries were current on interest payments and ultimately fulfilled their investment obligations.

Effective February 15, 1994, ELIC's former policyholders and structured settlement recipients were given the opportunity to either opt out of the rehabilitation plan and receive the liquidation value of their existing ELIC contracts or opt in to a new restructured contract with Aurora. For structured settlement annuities, the agreement of both the policyholder and annuitant was required before the policy could be cashed in. Both persons electing to opt out and persons electing to opt in were entitled to participate in future distributions from the remaining assets of the ELIC estate.

Those persons choosing to opt out of the Aurora plan received an initial cash payment of 56 percent of the value of their ELIC annuity plus promised subsequent payments estimated to provide an additional 28 percent depending on future events. The alternative was a revised annuity from Aurora the terms of which varied based upon what the ELIC annuity had promised.

The National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) became actively involved in the ELIC insolvency because Aurora's assets could not meet all of ELIC's obligations. For each structured settlement, a state life insurance guaranty association contributed up to $100,000 to  supplement Aurora's payment offers. Based upon this approach, approximately 4000 of ELIC's 5500 structured settlement payees were restored to 100 percent of their ELIC claim values. Of the remaining 1500 ELIC structured settlement recipients, most of those who did not agree to a qualified assignment have received supplemental payments from the original obligor (defendant or liability insurer).

In July 1998, an anonymous whistle-blower alleged that Crédit Lyonnais was the real buyer of ELIC and controlled it through secret agreements. In 1991, banks were prohibited from owning U.S. insurance companies. The California Insurance Department sued Credit Lyonnais and other parties alleging violations of the federal Bank Holding Company Act, the California Insurance Code and other California statutes.

Some of the defendants settled in 2005 for $730.5 million of which $211 million was distributed to opt out policyholders and payees and $403 to Aurora to supplement payments for opt in policyholders and payees. The case against the remaining defendants resulted in a substantial verdict (including punitive damages) in 2005 which the U. S. Court of Appeals for the Ninth Circuit reviewed in 2008 and remanded for a new trial on the issue of damages. A new trial court date has not yet been set.

For S2KM reporting about Executive Life of New York, see S2KM's structured settlement wiki.

"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).