Beyond Structured Settlements

S2P2J Release 57 Highlights

The United States structured settlement market has been in existence for more than 35 years and continues to expand its scope, complexity and importance within the context of personal injury settlement planning.

Since it was first published in 1986, "Structured Settlements and Periodic Payment Judgments" (S2P2J), has provided structured settlement stakeholders with an authoritative reference guide, consisting of 16 chapters with extensive footnotes and Appendix documents, to help them understand issues and fashion settlements and judgments utilizing periodic payments. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) have utilized S2P2J as an educational resource for their certification programs.

Co-authored and updated semi-annually by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert, S2P2J now features an online version as well as the traditional hardcopy. Online S2P2J includes a search feature and download capability as well as link features to access individual book sections, appendices, footnotes, cases and statutes.

Publisher Law Journal Press anticipates a March 2015 distribution date for hardcopy supplements for S2P2J Release 57 with online S2P2J subcribers receiving their update simultaneously with no additional subscription charge. Competent professionals confronted by structured settlement issues should have access to an up-to-date copy (or the online version) of this indispensable source book.

Release 57 Highlights - Release 57 will feature new, updated and/or expanded sections addressing the following structured settlement topics:

• WCMSAs - Release 57 re-positions and expands S2P2J's extensive summary of the new CMS rules for workers compensation Medicare set-asides, the fastest growing segment of the structured settlement primary market. Regulatory rules for liability MSAs remain essentially unchanged following the withdrawl by CMS on August 8, 2014 of it the liability MSA-related NPRM it had earlier submitted to the Office of Management and Budget.
• Indexed Annuities - PLR 143928-13 highlights the potential importance of indexed annuities and annuity riders as structured settlement funding alternatives. Release 57 features a new section explaining indexed annuities, differentiating variable annuities and summarizing the related PLR.
• Commutation Riders - PLR 143928-13 also provided favorable tax treatment for a commutation rider pursuant to a Notice of Hardship Conversion as a potential alternative to factoring transactions. This PLR justified an expansion in Release 57 of S2P2J's current section discussing commutations.
• Non-qualified Assignments - Most non-qualified assignments depend upon off-shore assignment companies which raise tax and security issues for participants. Release 57 expands S2P2P's analysis of non-qualified assignments to address these issues.
• CLM Advisors Surveys - Release 57 summarizes results from two surveys commissioned by NSSTA to determine the value claims executives and adjustors place on structured settlements and structured settlement consultants. The results and related metrics are generally favorable and arguably provide a valuable marketing blueprint for defense brokers.
• ABLE Accounts - Release 57 features a new section describing ABLE Accounts, a tax-preferenced funding option authorized by the Achieving a Better Life Experience Act (ABLE Act) of 2014. Although some structured settlement consultants view ABLE Accounts as a competitive product, others see opportunities to fund ABLE accounts using structured settlements.
• Insurance Regulation - States historically have regulated insurance in the United States. As a result of the 2008 global financial crisis, however, new federal and international insurance regulatory agencies now exist which are targeting some of the largest structured settlement annuity providers among other financial and insurance companies. Release 57 adds a new section to introduce and explain these new regulatory developments and entities.
• ELNY and Reliance - The recent ELNY and Reliance liquidations have each impacted thousands of structured settlement recipients. Although judicial solutions have been fashioned, litigation continues - as least involving some ELNY shortfall payees. Release 57 updates S2P2J's extensive coverage of the ELNY and Reliance liquidations.
• Role of Plaintiff Attorneys - As structure settlements and personal injury settlement planning have become more complex, and plaintiff attorneys increasingly require the services of other settlement planning professionals, plaintiff attorneys should continue to perform certain essential structured settlement and settlement planning roles. Release 57 identifies and discusses those roles and provides additional related advice for plaintiff attorneys.
• Secondary Market Update - The continuing expansion of the secondary market has generated controversy and litigation as well as legislative reform and changing business practices. S2P2J continues to track these developments in expanding chapter 16 titled "Transfers of Structured Settlement Payment Rights". Release 57 highlights include "anti-assignment" issues in Illinois originating with the Brenston case and the market "chaos" some secondary market participant see occurring as the result of the Washington Square v. RSL Funding case.
• IRC 104(a)(2) Treasury Regulations - Recent U.S. Treasury Regulations for IRC 104(a)(2) relating to the exclusion from gross income for amounts received on account of personal physical injuries or physical sickness make two primary changes to the current regulations which Release 57 summarizes in the context of S2P2J more extensive analysis in Chapter 2 of "Taxation of Damages Received by the Claimant".

For related S2KM blog reporting about structured settlement 2014 developments, see:

• Primary market
• Secondary market
• Settlement planning
• ELNY and Reliance

 

Structured Settlements 2014 - ELNY and Reliance

The Executive Life of New York (ELNY) liquidation, which occurred on April 16, 2012 represented the dominant structured settlement story of 2011, 2012 and 2013 and one of the most important developments in the history of the United States structured settlement industry.

Related follow-up litigation continued during 2014. Individual ELNY shortfall payees filed class action lawsuits against various structured settlement brokers. Other ELNY shortfall payees and their attorneys lost their appeal of a Contempt Order.

Class Action Lawsuits

Separate (but nearly identical) class action lawsuits were filed in Florida and Oregon during 2014 on behalf of ELNY shortfall victims against named and unnamed structured settlement brokers. In the Florida case, against EPS Settlement Group (EPS) and various brokers, a federal judge granted defendants' Motion to Dismiss the plaintiffs' claims with prejudice on December 17, 2014. The Oregon case, which remains unresolved, names Ringler Associates Incorporated (Ringler), Paul Hoffman (as the individual agent who brokered structured settlement annuities for the named plaintiffs) and John Does 1-100 as defendants.

Note: A prior and separate class action lawsuit filed in New York in 2012 by ELNY shortfall victims against Benjamin M. Lawsky, Superintendent of Financial Services of the State of New York, Metropolitan Life Insurance Company (MetLife) and Credit Suisse Group, AG (Credit Suisse) as defendants was voluntarily dismissed in 2013 without prejudice.

Oregon Class Action

The 2014 Oregon class action Complaint was filed in U.S. District Court and alleges Ringler, Hoffman and John Does 1-100 violated state statutes and their alleged duty of care to ELNY shortfall victims whose structured settlements were funded with qualified assignments and who resided in states where ELNY was not licensed to sell insurance when their settlements were consummated.

The John Does 1-100 "represent those individual insurance brokers who, as employees and/or agents of Ringler, its affiliates, or predecessor companies, brokered the sales of the SSAs at issue in this case, of which members of the proposed class were beneficiaries." The complaint further states "that with proper discovery into the matter these Defendants can be identified, and the complaint can be amended at a later date to include the individual names of these Defendants."

The Complaint against defendants Ringler et al. (Defendants) identifies two causes of action:

• Negligence - failing to disclose facts about ELNY's deteriorating financial condition.
• State statutory violation - prohibiting persons from assisting unlicensed insurers transact business.

Although the negligence counts do not state specific amounts of damages, the statutory violation counts claim "Plaintiffs and Statutory Subclass members are entitled to damages for the fulI amount of their unpaid claims pursuant to the State Statutes."

Defendants filed a Motion to Dismiss on June 26, 2014 plus a subsequent Request for Judicial Notice in Support of their Motion. On December 5, 2014 a Magistrate issued:

• Opinion and Order - granting in part and denying in part Defendants' Request for Judicial Notice.
• Findings and Recommendations (to be referred under advisement to a district judge) - that Defendants’ Motion to Dismiss should be granted in part as to Defendants’ alleged continuing duty to inform plaintiffs that their coverage may be threatened due to ELNY’s declining financial condition and otherwise should be denied. Note: Although the Magistrates' Findings and Recommendations identifies December 22, 2014 as the due date for any objections, S2KM has been informed that Defendants requested and received a scheduling extension.

ELNY Contempt Order

In response to the 2012 New York class action lawsuit, Judge John Galasso issued a Contempt Order on January 25, 2013. He also imposed a $5000 fine and threatened additional fines plus imprisonment of legal counsel if the ELNY structured settlement shortfall payees did not dismiss their Federal action which they did (without prejudice) on February 7, 2013.

The ELNY shortfall payees who filed the New York class action and their attorneys appealed Judge Galasso's Contempt Order which was argued before the Supreme Court of the State of New York Appellate Division Second Judicial Department on October 3, 2014. On November 5, 2014, the Court issued an Order dismissing the appeal by the shortfall payees and affirming the Contempt Order as to their attorneys.

Reliance Liquidation

Reliance Insurance Company was declared insolvent in 2001 and the Pennsylvania Insurance Commissioner was appointed as Liquidator. The Reliance Estate, however, remained open and its assets, until November 4, 2013, included approximately 3,400 structured settlements of which approximately 3093 involved annuities issued by United Pacific Life Insurance Company, a former Reliance subsidiary which Reliance sold in 1993 and which is now known as Genworth Life Insurance Company.

Pennsylvania Commonwealth Court Judge Bonnie Brigance Leadbetter signed an Order on November 4, 2013 approving a Transfer and Assumption Agreement whereby Reliance will transfer all Reliance-owned structured settlement annuity contracts and corresponding payment obligations issued by Genworth Life Insurance Company to a new corporation, the Genworth Annuity Service Corporation.

At one time a major provider of structured settlement annuities, Genworth and its life insurance affiliates have subsequently received financial downgrades by various rating agencies. As of this blog posting, for example, Standard & Poors rates Genworth Life Insurance Company as BBB+ which qualifies as "high yield" or "non-investment grade" - the same "junk bond" category that characterized ELNY's investments before it entered rehabilitation in 1991.

Conclusion

In its recent SEC filings, JGWPT Holdings, Inc. warns potential investors for its structured settlement securitizations about investment risks including "the insolvency or downgrade of a material number of structured settlement issuers".

Should structured settlement recipients receive similar warnings about the potential (or actual) financial deterioration of their structured settlement funding entity(s)?

Various ELNY lawsuits, including the Oregon class action case summarized above, suggest (at least indirectly) these types of related questions:

• What is the scope of post-settlement responsibilities, if any, for structured settlement brokers and/or settlement planners?
• Should a structured settlement broker (defense or plaintiff) or settlement planner be legally responsible for warning structured settlement recipients if and when an annuity provider or assignee experiences a deteriorating financial condition?
• What about the annuity provider or assignee itself?
• If any such legal responsibilities exist, what criteria would define a deteriorating financial condition?

For prior S2KM summaries of ELNY and Reliance with additional informational links, see:

• Structured Settlements 2013 - ELNY and Reliance.
• Structured Settlements 2012 - Executive Life of New York.
• Structured Settlements 2011 - Executive Life of New York

For additional S2KM blog posts summarizing 2014 structured settlement developments (primary market; secondary market; settlement planning), see the structured settlement wiki.

2014 Educational Conferences

Personal injury settlement planning conferences will start early in 2014 when the National Alliance of Medicare Set-Aside Professionals (NAMSAP) hosts a Regional Meeting in Miami, Florida on January 10.

Here is a preliminary listing of 2014 educational conferences and events which historically have addressed personal injury settlement planning and structured settlement issues, some of which limit attendance to members while others are open to non-members:

• January 10 - NAMSAP Miami Regional Meeting - open to non-members.
• February 8-12 - American Association for Justice (AAJ) Winter Meeting - members only.
• February 11-13 - National Structured Settlement Trade Association (NSSTA) Structures 101 - members only.
• March 18 - American Association of People with Disabilities (AAPD) Leadership Gala - open to non-members.
• March 27-29 - Academy of Special Needs Planners (ASNP) Annual Conference - open to non-members.
• April 1-3 - NSSTA Annual Conference - members only.
• April 27-29 - Society of Settlement Planners (SSP) Annual Conference - open to non-members.
• May 8-9 - NAMSAP Annual Meeting - open to non-members.
• May 15-17 - National Academy of Elder Law Attorneys (NAELA) Annual Meeting - members only.
• July 26-30 - AAJ Annual Meeting - members only.
• November 4-7 - National Association of Settlement Purchasers (NASP) Annual Conference - open to non-members.

One of the issues common to all of these associations' members and clients will be the impact of the Patient Protection and Affordable Care Act (ACA), the most important provisions of which (including the individual mandate and pre-existing injury coverage) became effective January 1, 2014.

The following S2KM blog posts address ACA issues that should concern settlement planning and structured settlement professionals - and hopefully will be discussed during their 2014 educational conferences:

• Impact of Health Care Reform - highlighting articles and authors featured in the Spring 2011 Issue of NAELA Journal.
• Medicare Cost-Savings Components - review of Spring 2013 NAELA Journal article written by Alfred J. Chiplin Jr. and Bethany J. Lilly.
• Impact on Personal Injury Damage Awards - review of research paper written by Joshua Congdon-Hohman and Victor A. Matheson.
• Impact on the Collateral Source Rule - review of law review articles by Rebecca Levenson and Ann Levin.

For background reporting about significant 2013 structured settlement and settlement planning developments, see these S2KM blog posts:

• Primary Market
• Settlement Planning
• Secondary Market
• ELNY and Reliance Liquidations

For historic S2KM reporting about structured settlement and settlement planning professional association educational conferences, see the structured settlement wiki.

Structured Settlements 2013 - ELNY and Reliance

Structured settlements are supposed to provide economic security for people with serious injuries and disabilities - to help them rebuild their lives and, in many cases, to achieve special lifetime accomplishments. Instead of an all-cash personal injury settlement, structured settlement recipients accept a promise of future periodic payments.

What happens, if and when, that promise is broken? What happens when a structured settlement funding company, and the regulators and guaranty system responsible for protecting the structured settlement recipients, fail to make and/or insure full payment?

ELNY Liquidation

These questions are highlighted by the Executive Life of New York (ELNY) liquidation - the dominant structured settlement story of 2012 and 2013 and one of the most important developments in the history of the United States structured settlement industry.

The story of ELNY, as well as its affiliate Executive Life of California (ELIC), and their parent company, First Capital Corporation (FEC), is long and complex. For background of events prior to ELNY's 1991 receivership, S2KM recommends Gary Schulte's 1992 book "The Fall of First Executive".  For an Executive Life timeline, see the structured settlement wiki.

Significantly, neither the 1991 ELNY Rehabilitation Order nor the 1992 Order approving the ELNY Rehabilitation Plan declared ELNY to be insolvent.

Following 22 years of "Rehabilitation" supervised by various New York State Superintendents of Insurance and Financial Services, as Receivers, ELNY was officially liquidated August 8, 2013 pursuant to an Order of Liquidation signed by Nassau County New York State Supreme Court Judge John M. Galasso on April 16, 2012.

As part of his Liquidation Order, Judge Galasso also approved a Restructuring Agreement, as proposed by ELNY's Receiver and NOLHGA, whereby ELNY's remaining assets and ongoing liabilities have now been transferred to a successor company, Guaranty Associations Benefit Company (GABC), a not-for-profit Washington D.C.-based captive insurance company.

ELNY Shortfall Payees

GABC published two versions of a final Schedule 1.15 on its website in November 2013. Among the significant details:

• Thirty-seven (37%) percent of all remaining ELNY (now GABC) structured settlement annuities (SSAs) will experience shortfalls.
• SSAs represent ninety-eight (98%) percent of total ELNY shortfall annuities.
• The total percentage of each ELNY SSA contract value "protected" by ELNY's remaining assets, state guaranty fund payments plus additional enhancements varies from 31% to 100% depending upon the individual contract.

In a 2013 blog post titled "An ELNY Nightmare", S2KM profiled Glenn Arensdorf, one of the ELNY structured settlement victims. For profiles of five additional ELNY structured settlement shortfall payees, see "The Complete ELNY Saga - 21 Years of Mismanagement, Corruption, Broken Promises and Shattered Lives", the lead article in a comprehensive ELNY analysis published in 2012 by LifeHealthPro.

Faced with significant payment reductions resulting from ELNY's liquidation and restructuring agreement, ELNLY's structured settlement shortfall payees were left with three options:

1. Accept their payment reductions under the ELNY Restructuring Agreement and do nothing; or,
2. Appeal Judge Galasso's Order and ask the Appellate Court to send ELNY's Receiver back to drawing board; or,
3. Bring a separate legal action against the Receiver personally for bad faith conduct, breach of fiduciary duty and fraudulent concealment or waste.

Several ELNY structured settlement shortfall payees chose Options 2 and 3.

Option 2 failed. The Appellate Division of the Supreme Court of the State of New York, Second Department denied the ELNY shortfall payees' appeal of Judge Galasso's Order on February 6, 2013. New York State Court of Appeals denied a subsequent motion by ELNY shortfall payees for Leave to Appeal the Second Department decision on May 3, 2013.

Option 3 remains unresolved.

• Class Action Lawsuit - Several ELNY structured settlement shortfall payees pursued Option 3 by filing a federal class action lawsuit November 8, 2012 in the U.S. District Court for the Southern District of New York against the ELNY Receiver (New York Superintendent of Financial Services Benjamin Lawsky) in his personal capacity.
• Receiver's Response - In response, the Receiver filed a motion December 7, 2012 asking the Liquidation Court (Judge Galasso) to find the shortfall payees in contempt for violating the injunction provision of the ELNY Liquidation Order.
• Contempt Order - Judge Galasso issued a Contempt Order on January 25, 2013. He also imposed a $5000 fine and threatened additional fines plus imprisonment of legal counsel if the ELNY structured settlement shortfall payees did not dismiss their Federal action which they did (without prejudice) on February 7, 2013.
• Bottom Line - So long as Judge Galasso's Contempt Order and continuing threat of additional fines and imprisonment of legal counsel remain in effect, ELNY structured settlement shortfall payees are effectively barred from pursuing Federal legal action against ELNY's Receiver for alleged mismanagement of ELNY's assets during ELNY's 22 year Rehabilitation.
• Shortfall Payee's Appeal - ELNY's shortfall payees are currently pursuing an appeal challenging "each and every part" of Judge Galasso's January 25, 2013 Contempt Order as a necessary step before re-filing their Federal action against the Receiver and his agents.
• Appellate Issues - The appellate brief filed on behalf of the ELNY shortfall payees addresses three legal issues:
  • Did the ELNY Liquidation Court exceed it subject matter jurisdiction or otherwise err by interfering with shortfall payees' constitutional right to bring suit against the Receiver in Federal court?
  • Did the ELNY Liquidation Court err in holding the shortfall payees in contempt for violating its injunctive Order when the order does not clearly and unequivocally bar personal capacity suits against the Receiver?
  • Did the ELNY Liquidation Court err in holding that the shortfall payees conceded the Order barred personal capacity lawsuits by appealing the order and using this alleged concession as the basis to hold the shortfall payees in contempt?

Reliance Liquidation

Reliance Insurance Company was declared insolvent in 2001 and the Pennsylvania Insurance Commissioner was appointed as Liquidator. The Reliance Estate, however, remains open and its assets, until November 4, 2013, included approximately 3,400 structured settlements of which approximately 3093 involve annuities issued by United Pacific Life Insurance Company, a former Reliance subsidiary which Reliance sold in 1993 and which is now known as Genworth Life Insurance Company.

Pennsylvania Commonwealth Court Judge Bonnie Brigance Leadbetter signed an Order on November 4, 2013 approving a Transfer and Assumption Agreement whereby Reliance will transfer all Reliance-owned structured settlement annuity contracts and corresponding payment obligations issued by Genworth Life Insurance Company to a new corporation, the Genworth Annuity Service Corporation.

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

For additional S2KM 2013 annual reports, see:

• Part 1 - Primary market.
• Part 2 - Settlement planning.
• Part 3 - Secondary market.

Structured Settlements 2013 - Primary Market

The U.S. structured settlement industry in 2013 continued to define itself into three related markets (primary, secondary and settlement planning) with the liquidations of Executive Life Insurance Company of New York (ELNY) and Reliance Insurance Company representing important industry storylines.

This blog post reviews 2013 non-ELNY and non-Reliance primary market developments - focusing on structured settlement annuity sales. Subsequent S2KM blog posts will address structured settlement developments for the 2) settlement planning and 3) secondary markets and summarize 4) ELNY and Reliance-related events.

Primary Market Premium

Primary market structured settlement annuity premium and the number of structured cases have increased slightly during 2013 compared with 2012 based upon third quarter industry results compiled by Melissa Evola. Projected 2013 annual premium totals, however, will fall substantially short of the historic 12 month industry high ($6,226,578,725 in 2008) after consistently averaging close to $6 billion annually from 2001-2007.

Evola reports 2013 third quarter primary market annuity premium of $3,736,499,370 resulting from 19,656 cases ($190,094 per case average). Comparable third quarter results for:

• 2012 - $3,565,368,323 premium from 18,706 cases ($190,600 per case).
• 2008 - $4,429,915,586 premium from 25,545 cases ($173,416 per case).

Adding these 2013 third quarter results to historic U.S. structured settlement totals, S2KM estimates the following primary market metrics from 1976 thru September 2013:

• Total annuity premium: $137.4 billion.
• Total structured settlement cases: 790,000.
• Average annuity premium: $174,000.

Individual Annuity Provider Results

Although overall 2013 third quarter results do not differ significantly from 2012, individual company production has changed dramatically per Evola's report. Berkshire Hathaway, which re-entered the market in 2011 following a multi-year hiatus, has assumed primary market leadership. Berkshire Hathaway generated $1,034,199,209 of structured settlement annuity premium (28% of the industry total) during the first nine months of 2013.

Berkshire Hathaway's structured settlement annuity premium and market share since 2011:

• 2011 - $116,458,245 annual premium (2% market share)
  • 1st - $4,976,847
  • 2nd - $11,311,378
  • 3rd - $39,880,339
  • 4th - $60,289,681
• 2012 - $824,962,720 annual premium (17% market share)
  • 1st - $97,187,721
  • 2nd - $193,222,438
  • 3rd - $181,111,553
  • 4th - $353,441,008
• 2013 - $1,034,199,209 nine months premium (28% market share)
  • 1st - $339,325,403
  • 2nd - $340,049,486
  • 3rd - $354,824,320
  • 4th - ?

With announced departures of Allstate and John Hancock during 2013, the U.S. structured settlement market now consists of eight annuity providers. Nine month 2013 sales results for other structured settlement annuity providers (per Evola's report) plus the rounded increase (+) or decrease (-) from comparable 2012 results:

• Pacific Life - $600,146,000 (- $13 million)
• MetLife - $564,000,000 (+ $57 million)
• Amgen/USL - $434,691,262 (+ $25 million)
• Liberty Life - $409,286,609 (+ $118 million)
• Prudential Life - $372,700,000 (- $124 million)
• New York Life - $192,317,226 (- $75 million)
• Mutual of Omaha - $50,407,140 (+ $8 million)

Non-Qualified Assignments

Non-qualified assignments represent transfers of periodic payment obligations that do not meet the requirements of IRC section 130. Unlike qualified assignees, non-qualified assignees are subject to income tax on the amount they receive from whatever entity assigns (or more accurately "delegates") periodic payment obligations to assignees who purchase annuities to fund obligations for claimants who do not qualify for tax exclusions under IRC section 104(a)(1) or (2) - such as employment discrimination cases or deferred attorney fees. 

Despite projections of a large and growing market, only two structured settlement annuity providers (AmGen and Liberty) currently offer non-qualified assignments. Nine month 2013 non-qualified assignment sales of $124,287,610 have declined more than $19 million compared with comparable 2012 sales totals according to Evola's report.

Growing the Primary Market

Many industry observers view the United States structured settlement primary market as a strategic, underperforming segment of the larger personal injury settlement planning market. S2KM looked at some of the related issues in a three-part 2013 blog series titled "Growing the Primary Market"

• Part 1 - Daniel Durbin's survey of primary market leaders.
• Part 2 - NSSTA and NASP 2013 Fall Conferences.
• Part 3 - NSSTA's marketing boot camp - "What business are we in?"

S2KM supplemented this analysis with a report on the developing global insurance capital standard which poses additional challenges for structured settlement annuity providers.

For S2KM's previous annual structured settlement industry reports, see the structured settlement wiki.

Reliance Structured Settlement Annuities - 2

Pennsylvania Commonwealth Court Judge Bonnie Brigance Leadbetter has signed an Order approving a Transfer and Assumption Agreement whereby Reliance Insurance Company will transfer all Reliance-owned structured settlement annuity contracts and corresponding payment obligations issued by Genworth Life Insurance Companies to a new corporation, the Genworth Annuity Service Corporation.

Reliance was declared insolvent in 2001 and the Pennsylvania Insurance Commissioner was appointed as Liquidator. The Reliance Estate, however, remains open and its current assets, prior to the Transfer Order, included approximately 3,400 structured settlement annuity contracts of which approximately 3093 involve annuity contracts issued by Genworth and owned by Reliance.

Many of these Genworth funded structured settlements involve annuity contracts issued by United Pacific Life Insurance Company, a former Reliance subsidiary which Reliance sold in 1993 and which is now known as Genworth Life Insurance Company.

According to the November 4, 2013 Transfer Application which Judge Leadbetter's Order approved:

• The transferred structured settlements will continue to satisfy the corresponding periodic payment obligations and Reliance will be discharged from its obligation for those future periodic payments.
• Based upon a private letter ruling from the Internal Revenue Service:
  • Neither Reliance nor Genworth will incur any adverse tax consequences as a result of the transfer.
  • The tax treatment of the periodic payments to the structured settlement recipients will remain unchanged.
• Genworth Annuity Service Corporation will be owed 80 percent by Genworth and 20 percent by Reliance.

In an earlier Transfer Application filed with the Liquidation Court on September 10, 2012, the Reliance Liquidator had requested an Order approving transfer of ownership of all Reliance-owned structured settlement annuity contracts to the annuity payees. In many cases according to that transfer application, these payees included factoring companies and investors who had purchased structured settlement payment rights from factoring companies.

Judge Leadbetter never approved the September 10, 2012 Transfer Application and on February 28, 2013 ordered that Transfer Application “be held in abeyance until further order of this Court.”

The September 10, 2012 Transfer Application noted:

• The Liquidator did not have a complete list of current names and addresses of Reliance structured settlement payees.
• This failure resulted, in part, because Reliance did not retain copies of either the annuity contracts or other structured settlement documents issued by United Pacific Life Insurance Company when it sold the company to Genworth in 1993.
• The Liquidator assumed Reliance structured settlement annuity issuers had the ability to furnish individual notice.

For an earlier S2KM report about Reliance structured settlement annuities, see this blog post.

Reliance Structured Settlement Annuities

What happens, or should happen, to structured settlement payees when the owner of their structured settlement annuities becomes insolvent?

Reliance Insurance Company (Reliance), a liability insurer, is the most recent example where these issues are being adjudicated. Previous examples include Monarch Capital Corporation and First Executive Corporation, both non-insurance companies which, as "qualified assignees", owned structured settlement annuities issued by their subsidiary life insurance companies.

The Commonwealth Court of Pennsylvania (Liquidation Court) declared Reliance insolvent and issued an Order of Liquidation which appointed the Pennsylvania Insurance Commissioner as Liquidator in 2001.

The Reliance Estate, however, remains open and its current assets include approximately 3,400 structured settlement annuity contracts which the Liquidator estimates have a present discounted value of $95.1 million. The Liquidator further estimates:

• Over 85 percent of the structured settlement annuity contracts owned by the Reliance Estate are “qualified assignment” contracts and the rest are “buy and hold” contracts.
• Over 95 percent of the qualified assignment contracts owned by the Reliance Estate involve annuity contracts issued by United Pacific Life Insurance Company, a former Reliance subsidiary which Reliance sold in 1993 and which is now known as Genworth Life Insurance Company.

As part of the Reliance liquidation process, current Pennsylvania Insurance Commissioner Michael F. Consedine requested the Liquidation Court on September 10, 2012 to enter an Order approving transfer of ownership of these structured settlement annuity contracts to the annuity payees which, in many cases, now include factoring companies and investors who have purchased structured settlement payment rights from factoring companies.

On February 28, 2013, Pennsylvania Commonwealth Court Judge Bonnie Brigance Leadbetter ordered the Liquidator’s Application for Approval to Transfer Ownership (Transfer Application) “be held in abeyance until further order of this Court.”

As justification for the proposed transfer of structured settlement ownership, the Transfer Application provides in part:

• With the exception of several structured settlement annuities issued by Executive Life of California and Executive Life of New York (ELNY), all payments related to structured settlement annuities owned by the Reliance Estate have been paid by the annuity issuers.
• The structured settlement annuity payees will have the same right to receive payments from the annuity issuers assuming transfer of ownership to the payees.
• As owner of the annuity contracts, Reliance has the right to transfer ownership upon notice to the annuity issuers.
• The Liquidator has concluded that transferring ownership of the annuity contracts to current payees under those contracts, with the simultaneous discharge of Reliance’s related structured settlement payment obligations:
  • Would be in the “best interest” of the Reliance Estate and represents “the only viable option”; and
  • Would not create any federal income tax liability for Reliance.
• Recognizing that any asset transfer requires prior court approval, the Liquidator “explored several other options” including transfer of the annuity contracts to:
  • A newly-formed entity such as a subsidiary corporation; and/or
  • A trust owned by Reliance.
• The Liquidator, however, concluded that any and all such alternative options would fail to provide the Reliance Estate with finality and expense reduction.

The Liquidator’s Transfer Application provides the following additional comments about the Reliance structured settlement payees:

• Tax consequences – The Liquidator concluded “it is impossible and imprudent” for the Liquidator to make predictions or provide tax advice for the payees because each has unique circumstances. Accordingly, “payees may want to consult a tax advisor or accountant with respect to the [proposed] transfer.”
• Priority in liquidation – If any structured settlement annuity issuer fails to meet its structured settlement obligation (which the Transfer Application questionably refers to as “the primary obligation”), the Liquidator has determined a claim against the Reliance Estate under a “qualified assignment” contract “would warrant no higher than class (e) priority" under the Pennsylvania Insurance Company Act. The Liquidator, however, anticipates no Reliance creditors below class (b) priority will receive any distribution from the Reliance Estate.
• Notice – The Liquidator does not have a complete list of current names and addresses of Reliance structured settlement payees in part because Reliance did not retain copies of either the annuity contracts or other structured settlement documents issued by United Pacific Life Insurance Company when it sold the company in 1993. The Liquidator assumes Reliance structured settlement annuity issuers have the ability to furnish individual notice. In addition, the Liquidator plans to publish notice in multiple regional and national newspapers.

Additional Resources

• For additional documents related to the Reliance Liquidation, see the Reliance Documents website.
• For additional information about the resolution of Monarch Capital Corporation structured settlements, see Section 5.04[2][b][ii] of "Structured Settlements and Periodic Payment Judgments" (S2P2J).
• For additional information about the resolution of First Executive Corporation structured settlements, see the structured settlement wiki and S2P2J Sections 3.05[11-13].
• For a discussion of alternative funding options ("qualified assignments" vs. "buy and hold") in the context of the ELNY liquidation, see "ELNY Qualified Assignments".