Beyond Structured Settlements

Structured Settlements 2014 - Secondary Market

Is the bloom finally off the rose for structured settlement secondary market leader JGWPT Holdings, Inc. (JGWPT) whose subsidiaries include J.G. Wentworth (JGW) and Peachtree Settlement Funding (Peachtree)?

Despite strong sales since 2010, punctuated by the November 25, 2014 announcement that it had issued $207,501,000 of Fixed Rate Asset Backed Notes collateralized primarily by payment rights rights arising under court ordered structured settlement payment purchase contracts, JGWPT's NYSE per share price closed at $8.65 on December 12, 2014, down drastically from its 2014 high of $19.88 on March 4.

When JGWPT's Holdings IPO occurred November 8, 2013, with an initial offering price of $14.00 per share, one analyst opined the stock was worth at least $20 per share based upon JGW's "dominant franchise", access to securitization markets, low costs relative to competitors and "incalculable returns on capital", among other factors.

After JGW consolidated its 2011 merger with Peachtree, various industry experts estimated the combined combined company's structured settlement secondary market share totaled somewhere between 50% and 75%, and its share of industry profits exceeded 80%.

What happened?

Zacks Investment Research published two reports earlier this month on December 2 ("JG Wentworth - Bear of the Day") and December 9 ("What Falling Estimates & Price Mean for J.G. Wentworth").

Zacks' conclusion: "A key reason for this [downward stock price] move has been the negative trend in earnings estimate revisions. For the full year, we have seen four estimates moving down in the past 30 days, compared with no upward revision. This trend has caused the consensus estimate to trend lower, going from $1.71 a share a month ago to its current level of $1.45."

What has caused JGW's negative trend in earnings estimates?

As summarized in S2KM's 2013 annual report about the structured settlement secondary market, JGWPT faced a multitude of problems and controversies prior to 2014. New and/or expanded problems have occurred during the past 12 months - in particular:

• Brenston case law "progeny"; and
• Washington Square v. RSL.

Brenston Case Law "Progeny"

In the Brenston case, the Illinois Supreme Court in December 2013 denied Peachtree's petition for review of an Illinois Appellate Court decision which found multiple Peachtree-Brenston transfer orders, previously approved in accordance with the Illinois transfer statute, to be void ab initio because:

• Peachtree did not file all settlement documents with the transfer court.
• Peachtree concealed "by omission" the existence of anti-assignment provisions which the Appellate Court found "material".
• The conduct of Peachtree and it's attorney amounted to an "affirmative falsehood and a fraud upon the trial court".

The denial of Peachtree's petition for review has substantially reduced the secondary structured settlement market in Illinois according to industry sources. Some annuity providers reportedly have refused to waive anti-assignment provisions in Illinois cases while others evaluate them on a case-by-case basis. In addition, some annuity providers are citing Brenston to challenge transfers in other states.

The Brenston case was also quickly followed by Sanders v. JGWPT Holdings, a class action lawsuit, accusing JGWPT Holdings, Inc., several affiliate companies including JGW and Peachtree, and Illinois attorney Brian Mack, of violating the Illinois Consumer Fraud and Deceptive Business Practice Act (ICFA). The case has since been removed to the Federal Court in the Southern District of Illinois with that court expected to rule on various motions and petitions in February 2015.

Washington Square v. RSL

In this case, transfer company Washington Square (aka Imperial) sued transfer company RSL Funding in Texas for tortious interference with a transfer agreement that had not yet been approved in a final court order. The Court of Appeals of Texas, Fourteenth District, held:

• RSL was “justified” in interfering with Imperial’s proposed transfer agreement prior to court approval because obtaining a better price was in the seller's "best interest".
• Transfer agreements that have not received court approval are not enforceable on public policy grounds and therefore cannot justify legal actions for tortious interference with existing contracts.

As a result of this case, a strategic marketing shift appears to be occurring within the structured settlement secondary market as rival transfer companies increasingly search court records and seek to outbid other transfer companies who are awaiting court approvals. This marketing shift may provide lower discount rates for some structured settlement recipients when they sell their payment rights. The impact on the secondary market, however, will be "chaos", according to some participants, including extra "informational" demands on the judicial system responsible for administering the state protection acts.

For JGW and Peachtree, who have invested millions of dollars to build their TV and Internet brands, this strategic marketing shift promises new, much less-well financed competitors. Like pilot fish, these competitors can be expected to offer competitive bids based upon public court filings of not-yet-approved transfers proposed by JGW and Peachtree (as well as other established transfer companies) rather than based upon their own independent marketing. Assuming this occurs, the likely per case results for JGW and Peachtree will be lower success ratios and higher costs.

ADDENDUM (added December 15, 2014) - JGWPT's September 10, 2014 Form S-1/A filing with the SEC identifies multiple "Risk Factors" at least two of which could impact other structured settlement stakeholders:

• "[T]he insolvency or downgrade of a material number of structured settlement issuers." S2KM will discuss these rating downgrades, which include Genworth, Hartford and Aviva, in a subsequent 2014 annual report about ELNY and Reliance.

• "[T]he impact of the March 2014 Consumer Financial Protection Bureau inquiry and any findings or regulations it issues as related to us, our industries, our products or in general." (emphasis added)

Change of Directions for JGWPT?

One apparent result of JGWPT's continuing problems and controversies has been a change of CEOs with Stewart Stockdale replacing David Miller in July 2014. Another result appears to be a more diversified strategy away from structured settlements.

In a November 13, 2014 press release, Stockdale stated: "We are in the early stages of transforming J.G. Wentworth and are excited about the groundwork we have laid to achieve the three key strategic pillars -- Grow the Core, Become an Information-Based Company, and Diversify." To date, this proposed transformation does not appear to have impressed investment analysts or positively impacted JGWPT's common stock.

Other 2014 Secondary Market Developments

• Educational Dialogue - For the first time, educational programs sponsored by the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) featured representatives of the National Association of Settlement Planners (NASP) as participants in secondary market panel discussions. For the ninth consecutive year, NASP featured primary market representatives speaking about primary market issues at their annual educational conference. For summaries of these conferences, see the structured settlement wiki.
• Case Law - In addition to the Washington Square and Brenston-related cases summarized above, noteworthy 2014 case law developments occurred in Texas and New York related to split payments and servicing arrangements. Two Texas cases required JGW to continue servicing arrangements under prior court approved orders and also to service subsequent assignments by the same payees to another transfer company. Multiple New York judges expressed their concerns about servicing arrangements while approving structured settlement transfers. At least 27 state structured settlement protection acts prohibit partial transfers. During 2013, MetLife began actively opposing transfers that involve split payments as well as court-approved servicing arrangements. Under such servicing arrangements, structured settlement annuity providers remit the entirety of specific periodic payments to transfer companies to administer even when the original recipient/transferor only assigns a portion of the payments.
• State Legislation - Although structured settlement protection act (SSPA) activities occurred in Florida, Wisconsin, Minnesota, Louisiana, and Mississippi during 2014, only Minnesota enacted a legislative amendment. Minnesota amended its SSPA to require notice of the date and judicial district of any prior application for transfer filed by the transferee relating to a prior proposed transfer with the payee including whether the proposed transfer was approved or denied. If granted, such notice must provide the amount and due dates of transferred structured settlement payments, the aggregate amount, the discounted present value and the gross amount payable to the payee.
• PLR-143928-13 - Issued by the Internal Revenue Service in August, this two-part private letter ruling approves favorable tax treatment for a structured settlement annuity which includes the possibility of a commutation by the recipient pursuant to a Notice of Hardship Conversion. In a prior blog post, S2KM described this PLR as potentially "game changing" because it overcomes an industry concern (enunciated in a 2006 Robert Wood article) that commutations do not qualify for favorable tax treatment afforded third party factoring transactions under IRC 5891.
• Re-cycled payment rights - Representing a small fraction of secondary market sales, the resale to personal injury victims and their attorneys of payment rights previously acquired in a structured settlement factoring transaction (sometimes misleadingly referred to as "recycled structured settlements") continues to cause serious concern among most primary market participants. NSSTA considers engaging in or promoting the marketing or distribution of re-cycled payment rights to be risky, confusing and unregulated investment activity and inconsistent with its Mission.
• Discount rates - Discount rates for structured settlement transfers vary widely depending upon multiple factors including: single vs. multiple bids; fixed vs. life contingent payments; size of payments purchased; length of payment deferral; perceived financial strength of the annuity provider; and/or state law (eg. North Carolina rate cap). The NCOIL State Structured Settlement Protection Model Act, which NSSTA and NASP have agreed to support, contains a definition for "discounted present value" which is generally higher than, and unrelated to, the discount rate actually incorporated into most structured settlement transfers. Regardless of discount rates, judges continue to deny proposed transfers that do not otherwise satisfy the "best interest" test. Reasons include: funds from prior transfer(s) were not used for stated purposes; stated purposes do not justify approval.
• Secondary market sales
  • Based on interviews with industry experts in 2012, S2KM estimated 2012 structured settlement activity to be:
    • 12,000 secondary market transfers - with less than 120 contested by annuity owners and/or providers.
    • $360 million of total secondary market purchases (money paid to transferors).
    • $30,000 average individual transfer.
  • Opinions differ as to secondary market sales growth during 2013 and 2014 ranging from no growth to 7% growth per year.

S2KM will address 2014 developments related to personal injury settlement planning and the ELNY liquidation in subsequent blog posts,

For additional related S2KM reporting, see:

• NASP 2014 Annual Conference.
• Primary Market 2014 Report
• Prior Year Annual Reports

SSP 2014 Secondary Market Panel

In addition to its other accomplishments (most notably publication of "Standards of Professional Conduct for Settlement Planners"), the Society of Settlement Planners (SSP) has distinguished itself by sponsoring educational programs addressing issues, featuring speakers and permitting perspectives the more defense-oriented National Structured Settlement Trade Association (NSSTA) traditionally has been reluctant or unwilling to offer.

SSP's 2014 Annual Conference, to be held April 27-29 in New Orleans, promises to continue this more open-minded educational tradition.

As one example,  SSP's Secondary Market Panel discussion will feature two leading structured settlement transfer legal experts whose clients typically oppose each other in significant secondary market cases:

• Stephen R. Harris - among other roles and accomplishments, Stephen (a partner at Drinker Biddle whose clients include annuity providers) recently served as co-Chairman of NSSTA's Legal Committee.
• Earl S. Nesbitt - in addition to representing factoring companies, Earl (a founding partner of Nesbitt, Vasser & McCown) serves as Legal Counsel and Executive Director for the National Association of Settlement Purchasers (NASP).

SSP's Secondary Market Panel, which will be moderated by Patrick Hindert (S2KM's Managing Director and blog author), should be educational and entertaining - and hopefully somewhat controversial. Here are some of the questions the featured panelists will address.

Overview

• Is the secondary market good or bad for the primary structured settlement market?
• Among other objectives, IRC 5891 and the Model State Structured Settlement Protection Act (Model Act) were enacted to protect claimants from predatory secondary market business practices. Both NSSTA and NASP supported these statutes. How successfully have these statutes accomplished their objective to protect structured settlement recipients?
• Based upon your experience, what changes or amendments, if any, would improve the Model Act?
• Would adding a multiple bid requirement as part of the "best interest" test improve the secondary market?

Troubling Developments

• During NASP's 2013 annual conference, former NASP President Robin Shapiro expressed personal outrage about "troubling reports concerning the structured settlement factoring business" including:
  • Falsified transfer orders.
  • Inter-state forum shopping.
  • Short-cutting waiting periods and disclosure requirements.
  • Expediting hearing dates before preferred judges.
  • "Competing bids" from the same company.
• How prevalent are these business practices?
• What have NASP, NSSTA and/or other primary market participants done to address these issues? What should they do?

Falsified Orders

• Reports indicate a former paralegal at the New York law firm Paris & Chaikin falsified as many as 100 transfer orders?
• What happened? What is the status?
• How will these events impact the secondary market and its various participants including: the law firm, its secondary market clients, the annuity providers and the structured settlement recipient/transferors?

Anti-Assignment Restrictions

• Recent (Brenston) and current class action (Sanders) cases in Illinois address the impact of "anti-assignment" restrictions on transfers of structured settlement payment rights.
• What is the status of these cases and related litigation? What are the issues?
• Does the recommended assignment language in NSSTA's Model Qualified Assignment and Release Agreement solve this problem - or is some other solution necessary?
• What case-specific responsibilities do structured settlement brokers, settlement planners and other plaintiff advisers have related to anti-assignment restrictions?

Primary Market Responses

• MetLife recently adopted controversial new business practices whereby it opposes transfers that involve split payments as well as court-approved servicing arrangements.
• What is MetLife's rationale and objective?
• How are these business practices impacting the secondary market?
• The Florida state legislature is considering a bill that would add a maximum discount rate (similar to North Carolina) to its existing protection act..
• Is this a good idea?
• How has the North Carolina provision impacted the secondary market in that state?
• Why haven't more annuity providers offered commutation-like alternatives to third party factoring transactions? What impact would such alternatives have on the existing primary and secondary markets?

RLS Arbitrations

• RLS (formerly Rapid Settlements) has attempted to use the Federal Arbitration Act to side step state structured settlement protection statute requirements.
• What is the status of the related RLS litigation?

Conclusion

• What other secondary market issues do you see as important for the future of structured settlements?
• What opportunities exist for primary and secondary structured settlement market cooperation? What is preventing this cooperation?

For background about these secondary market issues, see the structured settlement wiki and more specifically these prior S2KM blog posts:

• Structured Settlements 2013 - Secondary Market
• Secondary Market Update - February 3, 2014
• Sanders v. JGWPT Holdings

For more detailed analysis of secondary market issues, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Dodd-Frank and Structured Settlements

What impact will the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, and related international regulatory developments, have on structured settlement annuity providers?

Proposed Amendment to Dodd-Frank

That issue was indirectly spotlighted this week when Senator Susan Collins (R., Maine) announced progress on a bill that would amend Dodd-Frank to permit the Federal Reserve to exempt insurers from new capital rules for banks.

Although the Federal Reserve has not yet published capital rules for insurers, "the Fed maintains it is required to set minimum capital requirements for insurance companies similar to the standards banks face," according to a recent Wall Street Journal (WSJ) article (subscription required).

Enacting legislation to reopen Dodd-Frank will be difficult, the WSJ article states, because many Senate Democrats fear such a bill would include broader changes and the Obama administration has opposed legislation that reopens Dodd-Frank before it has been fully implemented by regulators.

Many insurers believe "bank-centric" capital rules supervised by the Federal Reserve would require them to increase capital and product prices thereby creating a competitive disadvantage. Structured settlement annuity providers MetLife, Prudential, New York Life, and Mutual of Omaha have joined a lobbying coalition of insurers seeking separate capital requirements that take into account their business model, according to various new sources.

A recent LifeHealthPRO article , however, confirms life insurer expectations for increasing federal and international regulatory supervision quoting Gary Hughes, executive vice president and general counsel of the American Council of Life Insurers (ACLI) as stating: “In the very near future, a major segment of the U.S. insurance business will have material aspects of its capital structure dictated or influenced by someone other than a state insurance regulator.”

Hughes added: "life insurance regulation in the U.S. can no longer be viewed as a purely domestic matter” and highlighted the importance of regulatory cooperation, according to the LifeHealthPRO article.

"If the capital standards of the states, the Federal Reserve (FSB), the International Association of Insurance Supervisors (IAIS) and the European Union are not generally consistent," he stated, "the resulting competitive disparities mainly involving the relative cost of capital will significantly disrupt the U.S. and the global life insurance markets.”

BACKGROUND - Insurance Regulation, Capital Requirements and Structured Settlements

The United States insurance industry historically has been regulated by the states whose regulatory responsibility was reaffirmed in 1945 when Congress passed the McCarran-Ferguson Act .

Following the collapse of First Executive Corporation and its two Executive Life subsidiaries in 1991, which had invested heavily in "junk bonds" and had sold a substantial number of structured settlement annuities, the National Association of Insurance Commissioners (NAIC) adopted several model reforms including risk based capital (RBC) requirements. RBC requires insurance companies with higher amounts of risk to retain higher amounts of capital and surplus.

Prior to the Executive Life collapse, state insurance regulators had used fixed capital standards to monitor the financial solvency of insurance companies. Under fixed capital standards, depending upon the state and its line of business, insurance companies were required to maintain the same minimum amount of capital, regardless of the financial condition of the company.

Enacted in response to the 2008 global financial crisis, Dodd-Frank created changes in the United States financial regulatory system that impact all aspects of the financial services industry including insurance.

Among those changes, Dodd-Frank established the U.S. Treasury's Federal Insurance Office (FIO) and "vested FIO with the authority to monitor all aspects of the insurance sector ... and to represent the United States on prudential aspects of international insurance matters, including at the International Association of Insurance Supervisors [IAIS]".

Established in 1994, IAIS is "the international standard setting body responsible for developing and assisting in the implementation of principles, standards and other supporting material for the supervision of the insurance sector", according to its website.

IAIS' mission is "to promote effective and globally consistent supervision of the insurance industry in order to develop and maintain fair, safe and stable insurance markets for the benefit and protection of policyholders and to contribute to global financial stability."

The IAIS, whose members constitute nearly all of the world's insurance supervisors including the FIO and the NAIC, has committed to develop by 2016 and implement by 2019 the first-ever risk based global insurance capital standard (ICS).

The FIO published a report December 12, 2013 about "how to modernize and improve the system of insurance regulation in the United States." The report concludes:

• "[I]n some circumstances, policy goals of uniformity, efficiency, and consumer protection make continued federal involvement necessary to improve insurance regulation."
• However, "insurance regulation in the United States is best viewed in terms of a hybrid model, where state and federal oversight play complementary roles and where the roles are defined in terms of the strengths and opportunities that each brings to improving solvency and market conduct regulation."

Dodd-Frank also requires the Federal Reserve to regulate and establish capital levels for nonbank companies designated as "systemically important". The Financial Stability Board (FSB),an international body that monitors and makes recommendations about the global financial system, published a list of nine insurers on July 18, 2013 that it identified as “global systemically important”. The FSB list includes three United States insurers, AIG, MetLife and Prudential - each of which currently sells structured settlement annuities in the U.S. market.

Although these insurers insist they are nothing like banks in terms of insolvency risks, "regulators are more worried by non-insurance activities carried out by insurance groups than by their core activities", according to a July 27, 2013 article in The Economist titled "Global Systemic Insurers".

"But it is not clear", The Economist article adds, "which activities the FSB considers core and which it thinks are too racy for insurers. Regulators (and others) worry about some annuities, savings-like products which offer guaranteed returns to customers."

Dodd-Frank and Product Suitability Standards

In addition to the insurance regulatory and capital requirement changes discussed above, Dodd-Frank directed the SEC to study the need for a new, uniform fiduciary standard of care for broker-dealers and investment advisers and to apply such a uniform standard if it deemed necessary.

This study is potentially important for structured settlements and personal injury settlement planning because:

• Both of these related markets currently lack uniform product suitability standards.
• By comparison, structured settlement protection acts impose a "best interest" standard on the secondary market.
• Broker-dealers and investment advisers increasingly participate in settlement planning.
• Settlement planning increasing integrates structured settlement annuities with other insurance and financial products ("blended products") in settlement trusts subject to "best interest" fiduciary standards.

Although the SEC published a fiduciary standard study in January 2011, it has not yet published any related regulations. S2KM reviewed settlement planning product suitability standards in a four-part 2012 blog series.

Secondary Market Update

This structured settlement secondary market report updates S2KM's most recent secondary market reporting:

• Structured Settlements 2013 - Secondary Market
• Asta Funding Acquires CBC Settlement Funding

Falsified New York Transfer Orders

S2KM previously reported that a New York law firm had falsified court orders approving structured settlement transfers in as many as 100 cases - and possibly more. Industry sources have identified the responsible law firm as Paris & Chaikin where a former non-lawyer employee, apparently created the fraudulent, court-related documents. The primary transfer companies represented by Paris & Chaikin in these transactions were J.G. Wentworth, and its affiliate Peachtree Financial Solutions, as well as Stone Street Capital.

Paris & Chaikin has retained Pery D. Krinsky , according to industry sources, as outside ethics counsel for assistance with these cases. An online 2013 Speaker Biography states in part: "Pery’s ethics-based defense litigation practice focuses on: attorney ethics matters, representing judges before the Commission on Judicial Conduct, criminal defense matters, art law ethics & litigation matters, and representing law school students before the Committees on Character & Fitness. Pery serves as the Chair of the Ethics Committee of the Entertainment, Arts & Sports Law Section of the N.Y. State Bar Association. Pery also serves as Chair of the Committee on Professional Discipline of the N.Y. County Lawyers’ Association."

Ongoing investigations of these fraudulent transfers are being conducted by the New York State Courts and the New York County District Attorney's Office. Primary and secondary market representatives with whom S2KM has discussed these fraudulent transfers disagree on how they are impacting judicial attitudes toward structured settlement factoring transactions and factoring companies in New York.

Proposed Amendment to IRC 5891

Representative Matthew Cartwright (D-Pa) has introduced H.R. 3897, a bill which, if enacted into law, would amend IRC 5891 and impose standards and procedures which are substantially different than currently provided by the Model State Structured Settlement Protection Act (Model Act) and almost all of the 48 related state statutes.

The most controversial provision of H.R. 3897 appears to be proposed new paragraph (5) under current subsection (b) titled "Transaction Requirements" which would provide in part: "(A)" In General - A transfer of structured settlement payment rights shall be treated as satisfying the requirements of this paragraph only if the transfer meets the following requirements:

• "(1) The annual discount rate of the consideration for the transfer, determined by taking into account charges, fees and other expenses, does not exceed the prime rate plus 5 percentage points.
• "(2) The aggregate amount of the charges, fees and other expenses payable by the payee do not exceed 2 percent of the value of the consideration to the payee (net of such charges, fees and other expenses)."

This H.R. 3897 language is similar to provisions in the North Carolina structured settlement protection act. North Carolina is one of only three states which currently impose statutory ceilings on discount rates. A recent bill to amend the Florida structured settlement protection act likewise proposes a discount ceiling similar to North Carolina.

Note: following years of conflict, the primary market National Structured Settlement Trade Association (NSSTA) and secondary market National Association of Settlement Purchasers (NASP) reached an agreement in 2000 to support a combined federal and state legislative solution for structured settlement transfers which resulted in IRC 5891 and the Model Act. It is S2KM's understanding this agreement remains in effect.

Peachtree Settlement Funding v. Cathy Brenston

In 2013, an Illinois 5th District panel, sitting for the 4th District Illinois Court of Appeals, held that an Illinois state court, which had previously approved transfers requested by Brenston:

• Had a duty to enforce anti-assignment provisions in Brenston's original structured settlement documentation; and
• Had no authority under the Illinois protection act to approve the transfer petitions - even though all of the relevant parties had waived the anti-assignment provisions.

The Illinois Supreme Court subsequently denied Peachtree's petition for appeal of this decision leaving both primary and secondary structured settlement market participants uncertain about the case's precedential meaning and scope. In an Amicus curiae brief, NASP asserted the Appellate Court decision could render the Illinois transfer statute "a practical nullity"

S2KM has learned that a companion case involving Peachtree and Brenston remains on appeal in the 3rd District Illinois Court of Appeals and will be argued February 27, 2014. The parties had previously stayed their appeal waiting for the Illinois Supreme Court to rule on the 4th District case.

In a recent Florida case, summarized in this Drinker Biddle Structured Settlement Alert, a Sumter County Circuit Court Judge cited the Brenston case as authority in ruling that an April 2011 transfer order was void ab initio, and that resulting arbitration awards were “impotent and without substance.”

For additional information about structured settlements and anti-assignment provisions, see S2KM's prior blog post "Anti-Assignment Restrictions".

METLife Split Payment Policy

During NASP's 2013 Annual Conference, NASP Executive Director Earl Nesbitt reported that MetLife has begun actively opposing transfers that involve split payments as well as court-approved servicing arrangements. Under such servicing arrangements, structured settlement annuity providers typically remit the entirety of specific periodic payments to transfer companies to administer even when the original recipient/transferor only assigns a portion of the payments.

Primary market proponents of MetLife's new policy argue that at least 27 state structured settlement protection acts prohibit partial transfers. In addition, they maintain that servicing contracts represents an annuity provider obligation and that post-transfer problems can occur from subsequent, multiple transfers resulting from such occurrences as divorces, child support obligations and improper transfers by trust beneficiaries.

In response, Nesbitt believes this "Hobson's choice", forcing injury victims to sell all or nothing, will cause "deep trouble" for MetLife and other annuity providers who may adopt MetLife's split payment policy. Nesbitt argues that annuity providers are protected by stipulation agreements and administrative fees. He predicts litigation, legislation and attorney general investigations could result.

Stock Market Prices

• JGWPT Holdings, Inc. - JGWPT Holdings IPO, which occurred November 8, 2013, was poorly received with JGWPT Inc. reducing the initial offering price of its common stock from $19-$22 per share to $14.00 which then traded down to the high $12s. Since then, the common stock, which now trades on the New York Stock Exchange (symbol: JGW), reached a high of $18.00 per share and closed Friday January 31 at $16.992 per share.
• Asta Funding Inc. - Asta, a publicly traded company (Nasdaq: ASFI), acquired an 80% ownership interest in CBC Settlement Funding, LLC ("CBC"), a structured settlement factoring company on December 31, 2013. Following announcement of the purchase on January 7, 2014, Asta's stock price closed during regular trading hours at $8.28 per share. The stock closed Friday January 31 at $8.20 per share.

For S2KM's complete reporting about the structured settlement secondary market, see the structured settlement wiki.

Structured Settlements 2013 - Secondary Market

While Berkshire Hathaway quietly assumed leadership among primary market structured settlement annuity providers during 2013, J.G. Wentworth (JGW) continued to consolidate its control of the secondary market with the same "subtlety" and ubiquitousness that have characterized its late-night television advertisements.

Various industry experts estimate JGW's secondary structured settlement market share, following its 2012 merger with Peachtree Financial Solutions (Peachtree), now totals somewhere between 50% and 75%, and the combined JGW/Peachtree's share of industry profits now exceeds 80%.

JGWPT Holdings Inc. IPO

JGW's 2013 apogee occurred November 8 when JGWPT Holdings Inc.'s IPO produced what is currently the only publicly traded structured settlement company. The IPO was poorly received with JGWPT Inc. reducing the initial offering price of its common stock from $19-$22 per share to $14.00 which then traded down to the high $12s.

The stated purposes for JGWPT's IPO were to pay down some of JGW's $572 million debt and to provide its pre-IPO equity holders (JLL Partners) an opportunity to earn additional profits. Post-IPO, JLL Partners continues to hold a 39% economic interest and a 63% voting interest in JGWPT while four of its partners sit on the company's Board of Directors.

JGWPT's common stock, however, now trades on the New York Stock Exchange (symbol: JGW) and closed Friday (December 27, 2013) at $17.10 per share. At least one analyst has informed S2KM he believes the stock is currently worth at least $20 per share based upon JGW's "dominant franchise", access to securitization markets, low costs relative to competitors and "incalculable returns on capital", among other factors.

Problems and Controversies in 2013

As S2KM reported in this prior blog post, JGW, which was founded in 1995, had experienced a tumultuous history prior to 2013 - and problems and controversies continued to plague the company during 2013:

• Abandoned Sale - Bloomberg News reported in January 2013 that JLL Partners had abandoned plans to sell the company after bids failed to meet expectations. Earlier reports had indicated that JLL Partners was seeking a $1 billion purchase price for JGW from private-equity firms.
• Ratings Downgrade - Moody's Investors Service (Moody's) announced in February 2013 a downgrade of its Corporate Family Rating (CFR) for JGW from B3 to Caa1. Under Moody's credit rating scale, "Caa1" signifies a long-term rating "rated as poor quality and very high credit risk." Moody's CFR ratings for JGW are separate and distinct from financial agency ratings applicable to JGW structured settlement securitizations which historically have been rated as high quality and low risk investments.
• Shareholder Distribution - Moody's announcement confirmed "JGW is undergoing a leveraged recapitalization that will result in a tripling of the company's corporate debt as it pays its shareholders a very substantial dividend....Net proceeds from the $425 million Senior Secured Term Loan issuance will be used to finance a $309 million capital distribution to JGW's shareholders as well as to repay an existing $142 million term loan."
• Falsified Court Orders - JGWPT's amended S-1 statement, filed October 28, 2013 in anticipation of its public offering, included the following statement under a section titled "RISKS RELATED TO OUR BUSINESS OPERATIONS: ... there have in the past and may be in the future deficiencies in court orders obtained on our behalf by third parties that result in those court orders being invalid, including as a result of failures to perform according to our requirements and acts of fraud,..." That statement apparently references as many as 100 falsified court orders in New York approving JGW structured settlement transfers.
• Brenston Case - The Illinois Supreme Court denied Peachtree Settlement Funding's petition for appeal of the 4th District Illinois Court of Appeals' decision in the Settlement Funding v. Cathy Brenston case. The earlier Court of Appeals decision held the Illinois state court, which had previously approved transfers requested by Brenston 1) had a duty to enforce anti-assignment provisions in Brenston's original structured settlement documentation; and 2) had no authority under the Illinois protection act to approve the transfer petitions - even though all of the relevant parties had waived the anti-assignment provisions. In an Amicus curiae brief, the National Association of Settlement Purchasers (NASP) asserted the Appellate Court decision will render the Illinois transfer statute "a practical nullity"
• Competitor Outrage - During NASP's 2013 annual conference, in remarks apparently directed at JGW, former NASP President Robin Shapiro expressed personal outrage about "troubling reports concerning the structured settlement factoring business" including:
  • Falsified transfer orders.
  • Inter-state forum shopping.
  • Short-cutting waiting periods and disclosure requirements.
  • Expediting hearing dates before preferred judges.
  • "Competing bids" from the same company.
• NASP Conference - In addition to Shapiro's comments, NASP's 2013 annual conference focused on controversial issues which have historically divided the primary and secondary structured settlement markets. In her keynote remarks, NASP President Patricia LaBorde encouraged diverse perspectives and re-inforced NASP's policy of politically unobstructed learning. "We want to hear from all structured settlement stakeholders - even if they disagree with us or don't like who we are," LaBorde stated. "We are here to listen. We are here to improve."
• METLife Split Payment Policy - During his NASP presentation, Executive Director Earl Nesbitt reported a controversial new business practice that is troubling JGW and other transfer companies. MetLife apparently is now actively opposing transfers that involve split payments as well as court-approved servicing arrangements. Under such servicing arrangements, structured settlement annuity providers typically remit the entirety of specific periodic payments to transfer companies to administer even when the original recipient/transferor only assigns a portion of the payments.
• Educational Forums - In addition to the NASP conference, JGW competitor Strategic Capital sponsored an online structured settlement "expert roundtable" which examined secondary market business practices and issues. S2KM Managing Director Patrick Hindert participated in the expert roundtable and also served as moderator for NASP's annual primary market panel discussion.
• Former Executives' Lawsuit - Another 2013 JGW nadir occurred in October when two former JGW executives and directors filed a Complaint in the Court of Chancery of the State of Delaware against current JGW CEO David Miller, three current JGW Directors and multiple JGW affiliate companies seeking to enforce a Tax Receivables Agreement (TRA) under which they claim they are owed approximately $35 million. A copy of the Complaint, which is posted on the structured settlement wiki, highlights JGW's complex organizational history as well as a shareholder focus disconnected from the welfare of its customers.

SEC Addresses Structured Settlement Transfers

Responding in part to concerns about secondary market business practices, the Securities and Exchange Commission (SEC) Office of Investor Education and Advocacy issued an Investor Bulletin in 2013 titled "Pension or Settlement Income Streams: What You Need to Know Before Buying or Selling Them".

The Investor Bulletin highlights questions potential sellers and investors should ask before proceeding with proposed structured settlement transfers and includes a number of additional warnings and resource links.

A responding article , written by two industry leaders, characterized the SEC Bulletin as "misleading and in some cases inaccurate concerning the sale of structured settlement payment streams and factored structured settlements as an investment vehicle." The authors assert the SEC Investor Bulletin should have clarified the following features of structured settlement factoring transactions:

• "Always court ordered"
• "No negative tax consequences to the seller"
• "Investors' rights"

Secondary Market Growth

Despite problems and controversies, the U.S. structured settlement secondary market appears to have experienced additional growth during 2013. Based upon various industry sources, and subject to future revisions based upon subsequent information, S2KM estimates the 2013 structured settlement secondary market has increased approximately 7% compared with 2012 resulting from approximately 12,800 transfers and $385 million PV of secondary market purchases.

Adding these 2013 numbers to prior historic estimates, S2KM estimates:

• Approximately 149,000 structured settlement transfers have occurred since 1986;
• Involving approximately 74,000 recipients - many of whom have made multiple transfers;
• With approximately $4.4 billion PV in aggregate sums paid to those recipients.
• For an average of approximately $30,000 per transfer.

For comparison, S2KM estimates the primary market has sold approximately $139 billion PV of structured settlement annuities to approximately 800,000 recipients since 1975 with an average premium of approximately $174,000.

For additional S2KM reporting about the secondary market, see the structured settlement wiki. For additional S2KM 2013 annual reports, see:

• Part 1 - Primary market.
• Part 2 - Settlement planning.

J.G. Wentworth Update

November was an "interesting" month for JGWPT Holdings Inc. (JGWPT), the leading purchaser of structured settlement payment rights, which markets under the names of J.G. Wentworth (JGW) and Peachtree Settlement Funding (Peachtree).

Significant developments included: 1) falsified transfer orders in New York; 2) an initial public offering (IPO); and 3) a refusal by the Illinois Supreme Court to review the 4th District Illinois Court of Appeals' decision in the Settlement Funding v. Brenston case.

Also during November, at the most recent National Association of Settlement Purchasers (NASP) Annual Conference:

• Former NASP President Robin Shapiro expressed his personal outrage about "troubling reports concerning the structured settlement factoring business." At least some of Shapiro's criticism appeared to be directed toward some JGWPT business practices.
• NASP Executive Director Earl Nesbitt reported a controversial new business practice that is troubling JGWPT and other transfer companies. MetLife apparently is now actively opposing transfers that involve split payments as well as court-approved servicing arrangements. Under such servicing arrangements, structured settlement annuity providers typically remit the entirety of specific periodic payments to transfer companies to administer even when the original recipient/transferor only assigns a portion of the payments.

As S2KM previously reported, JGW, which was founded in 1995, had already experienced a tumultuous recent history prior to November:

• On June 1, 2009, JGW and two affiliated companies entered Chapter 11 bankruptcy protection after the company "encountered liquidity problems amid a tightening credit market".
• Standard & Poor's Rating Services had earlier announced, at JGW's request, that it would no longer rate JGW's counterparty credit and senior secured debt.
• During this period, JGW laid off 120 of its 200 employees and closed its office in Las Vegas.
• According to industry sources at that time, JGW's $325 million of general corporate bonds were "almost worthless" and were trading, if at all, for pennies on the dollar.
• Less than six months later, JGW emerged from bankruptcy with an announcement that owner JLL Partners had invested an additional $100 million in the company.
• By 2011, JGW had re-entered the asset-backed structured settlement securitization market.
• Also in 2011, JGW merged with Peachtree in a stock swap, with JLL Partners retaining control of the merged companies which have each continued to participate in the secondary market.
• On January 30, 2013, Moody's Investors Service announced a downgrade of its Corporate Family Rating (CFR) for JGW from B3 to Caa1. Moody's also issued the same downgrade for JGW's $425 million senior secured term loan and $20 million senior revolving credit facility issued by Orchard Acquisition Company, a subsidiary of JGW.

Estimates of secondary market experts interviewed by S2KM in late 2012 of the post-merger 2012 market share of the JGW and Peachtree varied from a low of 50% to a high of 75%. These experts also believed JGW/Peachtree's share of the estimated 2012 U.S. secondary structured settlement market profits of $120 million was $100 million, or 83%.

JGWPT Holdings Inc.'s Amended Form S-1 Registration Statement, filed October 28, 2013 prior to its November 8, 2013 public offering of common stock, provides more recent financial and marketing information about JGW's holding company. Selected data:

• JGWPT's 2012 revenue sources included: structured settlements (89% of revenues), lotteries (6%), presettlement funding (3%), and non-structured settlement annuities (2%).
• For the year ended December 31, 2012 and the six months ended June 30, 2013, JGWPT:
  • Generated revenue from structured settlement purchases totalling $416 million and $222 million.
  • Generated cash from the net financing activities of its warehouse financing and permanent securitization financing facilities totalling $314.8 and $131.3 million, not counting $29.9 million generated from its most recent July 2013 securitization.
  • Used cash of $225.7 million and $163.3 million in its operating activities.
• During 2013 prior to it IPO, JGWPT distributed $459.6 million to its "common interest holders" resulting in members' capital of $38.4 million and negative tangible equity of ($96.2 million) as of June 30, 2013.
• Since 1995, JGWPT has
  • Spent approximately $585 million in marketing through multiple media outlets including $216 million during the past three years.
  • Purchased more than $9.1 billion of structured settlement payments. Its average customer has completed two separate transactions.
• During an average four week period, JGWPT generates more than 510 million advertising impressions which result in 80% of its target audience viewing its advertisements five or more times during that four week period.
• Kantar Media estimates that JGW and Peachtree have each spent approximately five-times more than their nearest competitor on television advertising since 2008 and together have spent over 80% of the total amount spent by all participants in the U.S. secondary structured settlement market.
• JGWPT's customer databases included more than 121,000 current or prospective structured settlement recipients as of July 31, 2013 entitled to approximately $31 billion of unpurchased structured settlement payments.
• JGWPT's nationwide attorney network covers over 3,000 counties. Approximately 95% of the proposed structured settlement purchases JGW and Peachtree present to a judge have been approved.

The stated purposes for JGWPT's IPO were to pay down some of its $572 million debt and to provide its pre-IPO equity holders (JLL Partners) an opportunity to earn additional profits. Post-IPO, JLL Partners continues to hold a 39% economic interest and a 63% voting interest in JGWPT while four of its partners sit on the company's Board of Directors.

JGWPT originally anticipated raising $300 million by selling 12.2 million Class A shares at a price between $19 and $22 each. When demand didn't materialize, the IPO opened at $13 per share and fewer shares were offered.

JGWPT's stock trades on the New York Stock Exchange (symbol: JGW) and closed today (December 2, 2013) at $16.45 per share. At least one financial analyst with whom S2KM has spoken believes JGWPT's stock remains substantially undervalued and is worth at least $20 per share.

For additional S2KM reporting about J.G. Wentworth and the structured settlement secondary market, see the structured settlement wiki.

NASP 2013 Annual Conference - 2

Primary market representatives attending their first National Association of Settlement Purchasers (NASP) Annual Conference are typically surprised - both by the exceptional quality of the educational experience and NASP's encouragement of diverse perspectives on controversial issues which have historically divided the primary and secondary structured settlement markets.

NASP President Patricia LaBorde's keynote remarks at NASP's 2013 Annual Conference last week in Las Vegas re-inforced NASP's policy of politically unobstructed learning. "We want to hear from all structured settlement stakeholders - even if they disagree with us or don't like who we are," LaBorde stated. "We are here to listen. We are here to improve."

Consistent with these educational objectives, previous NASP speakers have included critics from the primary market such as John Darer and Jack Meligan as well as attorneys who represent annuity providers in transfer hearings such as Stephen Harris and Peter Vodola. Regular NASP educational program features also include both a Primary Market Panel and a Judicial Panel.

In addition to other speakers who highlighted and criticized specific secondary market business practices during this year's NASP conference, former NASP President Robin Shapiro provided the most comprehensive and unanticipated assessment. Shapiro's unannounced critique, which preceded, but was unrelated to, his introduction of NASP's 2013 Hamilton Award recipient Jack Kelly, will be summarized and discussed in subsequent S2KM blog posts.

NASP 2013 Speakers and Topics

• Jack Kelly - State and Federal Legislative and Regulatory Developments.
• Earl Nesbitt - Litigation Update and the Impacts of Unethical Conduct.
• Rajiv Goel - Capacity Issues in Structured Settlement Transactions.
• Boris Ziser - Financing Structured Settlement Transactions.
• Break Out Sessions
  • Avoiding Pitfalls with the Problem Payees.
  • Non-Traditional Financing of Secondary Market Transactions.
  • Maximizing Results in Front of a Tough Judge.
  • Marketing: Reaching Your Audience Without Breaking Ethical or Legal Standards.
• Edward Stone - The ELNY Saga.
• Brian Robinson and Erik Friedman - Issues in Life Contingent Transactions.
• Patrick Hindert (Moderator) and Daniel Hindert, Anthony Prieto, Jr., William Schemmel - Primary Market Panel.
• Matthew Bracy (Moderator) and Judges Nancy Allf, Carter Bise, James McCarthy - Judicial Panel.

S2KM Comments and Observations

• Sponsors - NASP conferences invariably attract more sponsors than any other conferences S2KM attends. NASP sponsors this year included Google and NBC.
• Legislation and Regulation - Secondary market legislative and regulatory developments have decreased considerably during the past couple of years. 48 states have now enacted protection acts with Oregon amending its statute during 2013.
• Case Law - Several cases decided in 2013 have the potential to significantly impact secondary market business standards and practices. "Structured Settlements and Periodic Payment Judgments" (S2P2J) will report on the following cases discussed during the NASP conference in upcoming Release 55:
  • Settlement Funding v. Cathy Brenston
  • Symetra v. Rapid Settlements
  • Hartford Life v. Estate of Solomon
  • In re: Porter
  • J.G. Wentworth Originations v. Mobley
• Brenston Case - S2KM will discuss the Brenston case, which is currently subject to a petition for review by the Illinois Supreme Court, in subsequent blog posts. A 5th District panel, sitting for the 4th District Illinois Court of Appeals, previously held that because Brenston’s settlement agreement contained an enforceable anti-assignment provision, the transfer court had a duty to enforce that provision and “it had no authority under the Act to approve” the transfer petitions.
• Special Needs Attorneys - Rajiv Goel, addressing capacity issues, was the first special needs attorney to speak at a NASP conference. At prior special needs conferences S2KM has attended, attorneys frequently criticize primary market consultants for "over structuring" and for opposing single claimant qualified settlement funds. In addition, several state Medicaid agencies are attempting to disqualify structured settlement funded special needs trusts because of the potential liquidity (resources) available via the secondary market. Primary and secondary structured settlement market participants appear to have shared interests in improving their special needs public relations and lobbying strategy.
• Marketing Restrictions - In addition to promoting the Better Business Bureau Code of Advertising, NASP's Marketing Break Out discussions highlighted compliance requirements for:
  • New Telephone Consumer Protection Act.
  • The CAN-SPAM Act.
  • Truth in Caller ID Act.
  • Section 43(A) of the Lanham Act.
• Financing Transactions - Boris Ziser's overview of secondary market financing transactions explained: 1) the changing landscape of capital markets; 2) why lenders and investors like structured settlements; 3) what is needed for a successful transaction; 4) current lender challenges; and 5) various types of lending facilities - among other topics.
• Expanding Market Segments - Separate presentations about 1) life contingent transfers and 2) the sale of structured settlement payment rights to individual investors including personal injury victims indicate both market segments are growing.
• ELNY Saga - Among ongoing ELNY developments reported by Edward Stone:
  • Although a final Schedule 1.15 has not yet been published, benefit reductions for ELNY structured settlement recipients may be 3-4% greater than originally predicted.
  • Guarantee Association Benefit Company (GABC), ELNY's D.C.- based successor insurer under NOLHGA's control, has not yet disclosed any information about the expenses association with ELNY's liquidation or the investment performance of ELNY's assets during and/or following ELNY's liquidation.
  • Despite shortfalls experienced by more than 1400 ELNY structured settlement recipients, none of the participating state Guarantee Associations paid out their full coverage amounts.
  • GABC is flagging factoring transactions which are not receiving supplemental benefits.
  • The ELNY class action lawsuit remains on hold while the appeal of Judge Galasso's contempt order is pending.
• Judicial Panel - NASP's Judicial Panel provided opportunities for both the judges and conference attendees to ask each other questions and to communicate problems they have experienced during transfer proceedings. Speaking for the panelists, Judge Bise, who attended the entire conference, stated "I have learned a lot. We would appreciate NASP continuing to educate us on transfer issues."
• Primary Market Panel - Panelist William Schemmel, legal counsel for the Western & Southern Financial Group, which owns Integrity Life among other affiliates, was one of two representatives of former primary market annuity providers attending the NASP conference. Similar to the judicial panel, Schemmel's discussion of transfer issues and problems was practical and productive without the political invective which frequently and unfortunately characterizes transfer discussions at primary market conferences.
• METLife's New Transfer Policies - Despite IRC 5891 and state protections acts, structured settlement annuity providers retain the ability to prevent payment right transfers by enforcing anti-assignment clauses in applicable settlement documents. Generally, however, for the cost of an administrative fee, structured settlement annuity providers have cooperated with factoring companies and payee/transferors since 2002 to enable court-approved transfers. During his case law update, NASP Executive Director Earl Nesbitt reported METLife has now reversed course and has begun challenging this cooperative spirit with new transfer policies prohibiting two previously existing industry standards: 1) transfers of partial payments; and 2) factoring companies assuming administrative responsibility for post-transfer payments.

Congratulations to NASP - especially NASP President Patricia LaBorde, conference chairman Ken Barnett, conference administrators Susan Barnes and Leslie Wren, and conference speakers - for continuing and upgrading the quality of NASP's annual educational conference.

For S2KM reporting about prior NASP conferences, see the structured settlement wiki.

Global Insurance Capital Standard

The International Association of Insurance Supervisors (IAIS), whose members constitute nearly all of the world's insurance supervisors including the United States Treasury's Federal Insurance Office (FIO) and the National Association of Insurance Commissioner (NAIC), has committed to develop and implement the first-ever risk based global insurance capital standard (ICS), according to Peter Braumüller, chairman of the IAIS Executive Committee.

This development was reported by the Duane Morris law firm in an October 11, 2013 Alert which also identified a 2016 target date for development of the ICS with full implementation expected in 2019 following two years of testing and refinement.

Established in 1994, IAIS is "the international standard setting body responsible for developing and assisting in the implementation of principles, standards and other supporting material for the supervision of the insurance sector", according to its website.

IAIS' mission is "to promote effective and globally consistent supervision of the insurance industry in order to develop and maintain fair, safe and stable insurance markets for the benefit and protection of policyholders and to contribute to global financial stability."

The Duane Morris Alert additionally reported conflicting reactions to the ICS from representatives of the FIO and the NAIC.

• FIO - Michael T. McRaith, director of the FIO and chairman of the IAIS Technical Committee, offered this assessment: "[f]rom the [2008] financial crisis, we learned that our global financial regulatory regime should be more robust and comprehensive in scope, and jurisdictions should share a commitment to global standards."
• NAIC - Ben Nelson, CEO of the NAIC, issued this response to the IAIS's announcement: "Although U.S. state insurance regulators continue to have serious concerns about the timing, necessity, and complexity of developing a global capital standard given regulatory differences around the globe, we intend to remain fully engaged in the process to ensure that any development augments the strong legal entity capital standards in the U.S. that have provided proven and tested security for U.S. policyholders and stable insurance markets for consumers and industry."

The United States structured settlement industry played an important historical role influencing the development of risk based capital requirements for insurance companies and will likely be impacted by related national and international developments.

Historical Background

• The United States insurance industry historically has been regulated almost exclusively by the states whose regulatory responsibility was reaffirmed in 1945 when Congress passed the McCarran-Ferguson Act.
• Following the collapse of First Executive Corporation and its two Executive Life subsidiaries in 1991, which had invested heavily in "junk bonds" and had sold a substantial number of structured settlement annuities, the NAIC adopted several model reforms including risk based capital (RBC) requirements.
• RBC requires insurance companies with higher amounts of risk to retain higher amounts of capital and surplus.
• Prior to the Executive Life collapse, state insurance regulators had used fixed capital standards to monitor the financial solvency of insurance companies.
• Under fixed capital standards, depending upon the state and its line of business, insurance companies were required to maintain the same minimum amount of capital, regardless of the financial condition of the company.
• As a result of the 2008 global financial crisis and huge exposures to subprime real estate mortgages incurred by one its non-insurance subsidiaries, American International Group, Inc. (AIG), a significant structured settlement annuity provider, required a $182 billion government bailout to avoid collapse.
• The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), enacted in response to the 2008 global financial crisis, created changes in the United States financial regulatory system that impact all aspects of the financial services industry including insurance.
• Among many provisions, Dodd-Frank, according the U.S. Treasury website, "vested FIO with the authority to monitor all aspects of the insurance sector ... and to represent the United States on prudential aspects of international insurance matters, including at the International Association of Insurance Supervisors [IAIS]."
• The Financial Stability Board (FSB),an international body that monitors and makes recommendations about the global financial system, published a list of nine insurers on July 18, 2013 that it identified as “global systemically important”.
• The FSB list includes three United States insurers, AIG, MetLife and Prudential - each of which currently sells structured settlement annuities in the U.S. market.
• Although these insurers insist they are nothing like banks in terms of insolvency risks, "regulators are more worried by non-insurance activities carried out by insurance groups than by their core activities", according to a July 27, 2013 article in The Economist titled "Global Systemic Insurers".
• "But it is not clear", The Economist article adds, "which activities the FSB considers core and which it thinks are too racy for insurers. Regulators (and others) worry about some annuities, savings-like products which offer guaranteed returns to customers."
• The Duane Morris Alert also reported the IAIS announcement "that by late 2014 it will have finalized and made ready for implementation 'straightforward, backstop capital requirements' for insurers that are designated as global systemically important insurers."

ELNY Liquidation Date Announced

New York Superintendent of Financial Services Benjamin Lawsky, as Receiver for Executive Life Insurance Company of New York (ELNY), has announced the proposed liquidation date and the proposed date of closing of the ELNY Restructuring Agreement will be August 8, 2013. ELNY's shortfall payees, including hundreds of structured settlement recipients, can expect their payment reductions to take effect shortly thereafter.

ELNY first entered rehabilitation in 1991 when then New York Insurance Commissioner Salvatore Curiale obtained a Court Order seizing control of the company. The Nassau New York State Supreme Court approved a Plan of Rehabilitation for ELNY in 1992. Neither the ELNY Order of Rehabilitation in 1991 nor the ELNY Plan of Rehabilitation in 1992 determined that ELNY was insolvent.

Under the Rehabilitation Plan, owners of ELNY single premium deferred annuities (SPDA), interest sensitive life policies, whole life policies and term policies were given the option to have Metropolitan Life Insurance Company (MetLife) assume their policies. However, all of ELNY's single premium immediate annuities (including all ELNY structured settlement annuities) remained with ELNY under the supervision of the Insurance Superintendent and his agent, the New York Liquidation Bureau (NYLB). The Rehabilitation Plan named MetLife as Administrator of the ELNY single premium immediate annuities (SPIAs) and payees continued to receive their scheduled annuity payments as part of the Rehabilitation Plan.

The first public announcement that ELNY was experiencing financial problems during its Rehabilitation occurred in December of 2007 when then New York Governor Eliot Spitzer reassuringly announced an “Agreement in Principle” designed to continue paying all ELNY annuitants 100 percent of their benefits. Unfortunately, the “Agreement in Principle” never materialized.

The first audited financial statements for ELNY during its Rehabilitation were released in 2009 for years 2006 and 2007. Those financial statements showed that, as of December 31, 2007, ELNY had assets of $1,344,729,904 and liabilities of $2,538,548,125 resulting in a negative surplus of $1,193,818,221. Subsequent financial statements for years 2008-2010 indicated a deteriorating financial condition. As of December 31, 2010, ELNY had assets of $905,945,201 and liabilities of $2,474,317 resulting in a negative surplus of $1,568,372,142. 

On December 17, 2010, Nassau County New York State Supreme Court Judge John M. Galasso issued an Order to Show Cause requiring New York's Insurance Superintendent to present the Court with a proposed Order and Plan of Liquidation for ELNY on or before July 1, 2011. As justification for ELNY's proposed liquidation, the Petition, which was ultimately filed September 1, 2011, stated: “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 . . . . 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 ELNY Restructuring Plan submitted to, and approved by, Judge Galasso was jointly prepared by the Superintendent and the National Organization of Life and Health Guaranty Associations (NOLHGA). Under the Restructuring Plan, participating state life and health guaranty associations (PGAs) and certain life insurance companies have formed a new special purpose not-for-profit captive insurance company under the laws of the district of Columbia to replace ELNY once it is liquidated. The PGAs have agreed to 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. The various participating life companies have agreed to provide additional enhancements and have set up an ELNY Hardship Fund.

The Restructuring Plan includes Schedule 1.15 listing all of ELNY's current annuities, with the names of the annuity owners and payees redacted. Schedule 1.15 includes additional information such as individual contract identification numbers, the proposed "uncovered amount" (shortfall) and "total percentage of contract protected" assuming contributions from state life and health insurance guaranty associations and certain supplemental enhancements. Following the Schedule 1.15 filing, the NYLB sent informational notices to each ELNY annuity payee and published weekly notices in the New York Times and the Wall Street Journal.

Judge Galasso signed the ELNY Order of Liquidation and Approval of the ELNY Restructuring Agreement on April 16, 2012 (as proposed by the Superintendent and despite objections by several structured settlement payees and their attorneys) following a two week hearing March 15-30, 2012.

The anticipated shortfalls resulting from the ELNY liquidation and restructuring were expected to total $920,641,977 on a present value basis as of April 16, 2012. This figure assumed promised state guarantee association payments and enhancements but did not include possible payments from the ELNY Hardship Fund and/or from structured settlement defendants who negotiated and promised to pay future periodic payments funded with ELNY annuities. As a result, approximately 15 percent of the ELNY annuitants are expected to experience an average present value loss of more than $600,000 per annuitant. The remaining ELNY annuitants are not expected to experience any reduction in their payments.

As part of his ELNY Liquidation Order, Judge Galasso granted judicial immunity "to the Receiver and his successors in office, the New York Liquidation Bureau, and their respective attorneys, agents and employees, ... for any cause of action of any nature against them, individually or jointly, for any action or omission by any one or more of them when acting in good faith, in accordance with this Order, or in the performance of their duties pursuant to Insurance Law Article 74 ..."

The Order also enjoined all persons "from commencing or further prosecuting any actions at law or other proceedings against ELNY or its assets, the Receiver or the New York Liquidation Bureau, or their present or former employees, attorneys, or agents, with respect to this proceeding or the discharge of their duties under Insurance Law Article 74."

Subsequent ELNY-related litigation and court filings followed:

• Appeal of Liquidation Order - On March 30, 2012, attorneys representing ELNY structured settlement shortfall payees filed a Notice of Appeal challenging the ELNY Liquidation Order and Restructuring Agreement. Both the Appellate Division of the Supreme Court of the State of New York, Second Department and the New York State Court of Appeals subequently denied this Appeal.
• Motion to Clarify and/or Correct - On June 14, 2012, attorneys representing several liability insurers who previously purchased ELNY structured settlement annuities filed a Motion asking Judge Galasso to "clarify and/or correct" his ELNY Memorandum Decision insofar as it "caused confusion or mistake" concerning responsibilities of those liability insurers to make up shortfalls on ELNY annuities. Judge Galasso denied the Motion.
• Class Action Lawsuit - On November 8, 2012, attorneys representing ELNY structured settlement shortfall payees filed a class action lawsuit in the United States District Court Southern District of New York against Superintendent of Financial Services of the State of New York, in his non-regulatory capacity as ELNY's Receiver, including predecessor ELNY Receivers, Metropolitan Life Insurance Company (MetLife) and Credit Suisse Group, AG (Credit Suisse) as defendants. The class action Complaint alleged  the defendants' mismanagement and misconduct had caused the plaintiffs' ELNY payment shortfalls.
• Contempt Order - On December 7, 2012, responding to the ELNY shortfall payees' class action lawsuit, Superintendent Lawsky filed a Notice of Motion seeking to enforce Judge Galasso's ELNY injunctions and to hold the ELNY shortfall payees' attorneys in contempt of Judge Galasso's ELNY Liquidation Order. On January 25, 2013, Judge Galasso issued an Order holding the ELNY shortfall payees' attorneys in contempt of court and imposing a fine for filing the class action lawsuit.
• Dismissal of Class Action - As a result Judge Galasso's Contempt Order, the ELNY shortfall payees voluntarily dismissed their class action lawsuit on February 7, 2013 without prejudice thereby preserving their right to re-file claims and tolling the statute of limitations.
• Appeal of Contempt Order - On February 14, 2013, three ELNY structured settlement shortfall payees and their attorneys filed a Notice of Appeal challenging Judge Galasso's Contempt Order. That Appeal currently remains unresolved.

For additional information about ELNY, see:

• Section 3.05[13] of "Structured Settlements and Periodic Payment Judgments" (S2P2J).
• The structured settlement wiki.

NY Court of Appeals Denies ELNY Review

The New York State Court of Appeals (Court of Appeals), New York's highest judicial authority, has denied a Motion for Leave to Appeal a February 6, 2013 decision bythe Appellate Division of the Supreme Court of the State of New York, Second Department which rejected a legal challenge by Executive Life of New York (ELNY) structured settlement shortfall payees to the ELNY Order of Liquidation and Approval of the ELNY Restructuring Agreement signed by New York State Supreme Court Judge John M. Galasso on April 16, 2012.

The appeal challenging the merits of the ELNY Liquidation Order had raised three primary issues each of which the Court of Appeals' decision effectively rejected:

• Due Process - "Did inadequate notice and the denial of information to Objectors (ELNY structured settlement shortfall payees), along with the selective application of the Civil Practice Law and Rules, deny Objectors a fair hearing as required by principles of due process?"
• Immunity - "Did the Supreme Court exceed its subject matter jurisdiction or otherwise err in granting immunity to the Receiver and others in their personal capacities, where such immunity is not provided for by statute, is inconsistent with the common law, and is unsupported by evidence?"
• Injunction - "Did the Supreme Court exceed its jurisdiction or otherwise err in permanently enjoining claims against the Receiver and others in their personal capacities, where such injunction is not provided for by statute or the common law, and no evidence was adduced at the hearing?"

The Court of Appeals decision effectively ends litigation challenging the merits of the ELNY Liquidation Order and permits the National Organization of Life and Health Insurance Guaranty Association (NOLHGA) to proceed with the ELNY Restructuring Agreement including substantial annuity payment reductions for more than 1400 structured settlement recipients.

ELNY Contempt Order and Class Action Lawsuit

Another anticipated result of the Court of Appeals decision will be the filing of a brief by legal counsel for three ELNY structured settlement shortfall payees (objector respondents) to perfect their appeal of a Contempt Order issued January 25, 2013 by Judge Galasso. Based upon previous court filings and out-of-court statements, they are expected to argue that Judge Galasso's Contempt Order violates the United States Constitution.

Following Judge Galasso's Contempt Order, attorneys representing the structured settlement shortfall payees voluntarily dismissed their federal court ELNY class action lawsuit , without prejudice, preserving their right to refile claims and tolling the statute of limitations. At that time, shortfall payee attorney Edward Stone characterized the voluntary dismissal as a "strategic decision" attributable to the Contempt Order which left open the possibility of additional fines for continued legal efforts to protect ELNY shortfall payees.

In a letter written to United States District Judge Jesse M. Furman prior to the voluntary dismissal of the ELNY class action lawsuit, shortfall payee attorney Roger Christensen quoted from the 1964 United States Supreme Court decision in Donovan v. City of Dallas: "Early in the history of our country, a general rule was established that state and federal courts would not interfere with or try to restrain each others proceedings. That rule has continued substantially unchanged to this time."

Christensen's letter continued: "It could not be more clear that a state court cannot enjoin a federal action or use contempt proceedings to preclude citizens' attempts to have their claims heard in federal court."

The original class action Complaint named Jeanice Dolan, Daniel A. Malin, Keith Vincent, and other similarly situated ELNY shortfall victims, as plaintiffs, and Benjamin M. Lawsky, Superintendent of Financial Services of the State of New York, in his non-regulatory capacity as ELNY's Receiver, including predecessor ELNY Receivers (Rehabilitator), Metropolitan Life Insurance Company (MetLife) and Credit Suisse Group, AG (Credit Suisse) as defendants.

Based upon allegations of defendant misconduct (see: ELNY Allegation Timeline), the original class action Complaint requested the following damages and relief:

• "Damages equaling the full present value of each Class Member's annuity issued by ELNY, less any amount determined to be owing to Plaintiff under the terms of ELNY's liquidation;
• "Damages equaling the amount of each defendant's unjust enrichment and ill-gotten gains;
• "Attorney fees and litigation expenses, to the extent permitted by contract or law;
• "Pre- and post-judgment interest, to the extent provided by contract or law; and
• "Such other equitable relief as the Court deems appropriate."

For S2KM's complete reporting of the ELNY liquidation, see the structured settlement wiki.