Executive Life, Part II, The problem that never seems to end for the structured settlement profession


As laid out in my post from yesterday, ELNY was a problem from the start of the liquidation back in the early 1990's in that all of the annuity obligations and assets to support those contracts were taken over by Met Life, except for the structured settlement contracts. What made these long term contracts so problematic that virtually no life insurance company wanted to buy them? It was the fact that they were priced at a time when ELNY was desperate for cash in flows, so the companies actuaries used interest rate and mortality assumptions that were incredibly aggressive, so as to lower the cost of the ELNY contracts to levels dramatically below those of peer companies to encourage sales. This caused few problems in the early years of the contracts, but when a company has a huge block of life time payments with huge lump sums, compounding elements and other cost inflators tied to a book of assets, and those prudently managed assets are earning far less than the original junk bond yield assumptions, the gap between available assets and future liabilities doesn't shrink, it grows exponentially with each passing year. 

This actuarial fact had to have been well known by the state of NY liquidation bureau, so in order to secure future payments for the ELNY claimants they hired investment managers to watch over the ELNY estate's assets with the goal to get the gap between available assets and future payments narrowed to a degree that their would not be what is commonly known as an unfunded liability. I will not assume to be an expert on the history of the management of this pile of cash, bonds and assets over the following 20 years, but the outcome of the management was that the problem was kicked down the road until it reached a point where it was do or die. The rehabilitation process had run it's course and now liquidation of the ELNY estate and payment of the remaining assets and obligations was the only viable option. This is a very short hand version of how "the gap" was arrived at over two decades of management and why so many people were asked to take a hair cut on their payments as a result. I will leave it to others to examine that 20 year period and why this gap was allowed to grow to the level it ultimately ended it. 

Once this hair cut was negotiated and announced, it became clear that there were going to be haves and have not's, with many of the "have nots" being people or casualty insurance companies whose payments were being made to annuitants in states where ELNY was not approved for sale, but where the agent for the structured settlement company still pushed the sale through. Now in the real world of insurance if this happened in the course of business, typically the life company would have never issue the contract to begin with. However, if it found out there was an error of this nature, they would refund the money, pull back the agent commission and make the client whole and move on. Unfortunately, In the case of ELNY you had an insolvent company with a whole block of contracts written in this fashion, of which the managers of the ELNY estate had to be aware of, but which chose the prudent route available to them in 1991-92 which was to make sure everyone possible was paid for a long as you can possibly pay them, hence kicking the problem down the road for someone else to clean up at some point in time. Shutting down the contracts and refunding the money to the clients was never a practical option so they took the next best course with the theory that it was for the greater good and hoped that returns on the estate might someday close this gap and prevent loss of payments on ELNY structured settlements. 

This has all come home to roost since the final liquidation order and payment allocations in August of 2013 when it then became painfully apparent to the remainder group of claimants that state guarantee fund payments were not going to be adequate to cover their future contract amounts and the original defendants were not going to make up the difference either. In short, due to their state of domicile not being in a state where ELNY was approved to be sold, many of the state guarantee funds refused to contribute toward those accounts, creating a degree of short fall. Further, if the guarantor of the payments was not one of the major casualty companies who owned the non-assigned ELNY contracts, you had in many cases self insureds, defendants or other parties unable to make up that short fall as well. ( It should be noted that one of the least reported elements of this story is that most of the major casualty companies quietly stepped up and paid claims a second time in order to keep many claimants whole, avoiding an even larger pool of claimants getting cut back.) The details of this final liquidation are beyond the scope of this post, but suffice it to say that the legal and regulatory issue of non-approval of ELNY in certain states was used by many state guarantee funds to reduce their contributions to the final pot of money to be carved up. 

So, as I wrap up part II of my examination of the ELNY liquidation and the litigation that is currently in process, we can summarize the issue so far as one where it was clearly evident at the time of the ELNY melt down that the company was in trouble and it should not have been a market used by structured settlement professionals. We had just witnessed the liquidations of Charter Life, Baldwin United and Monarch Life a few years earlier, the press was loaded with stories about the issues with junk bond financing and the risk to companies such as Reliance and Executive Life. AM Best reports of that era clearly showed that 90%+ of ELNY holdings were in junk bonds, yet this fact was largely ignored as long as they had the appropriate ratings. The competitive pressure to get the lowest cost for casualty companies on the structured deal was substantial, the NY entity offered the hope of larger state guarantee fund security and as a result hundreds of millions of premium was placed with ELNY that in retrospect never should have been written given the risks.

That it was industry practice at that time to argue that where the defendant was located, as regards licensing and sales approval, was more important than where the claimant resided is certain to be a key argument in the current litigation and may turn out to be a fatal error over the long haul for the structured settlement profession. In part three of this series tomorrow I will look at the current litigation and the implications to the structured settlement profession as law suits tied to this issue of licensing and state approval moves through the courts. 

This is a copy of an article that originally appeared on The Settlement Channel.