Lifetime annuities and longevity insurance carry unique investment challenges for life insurers because they may guarantee payments beyond the term of standard investments. For example having to pay lifetime income for a 10 year old girl means a payment duration of more than twice the longest maturity for United States Treasury Bonds. Structured settlement annuities carry particular challenges because of a traditionally long tail that might be stretched by substandard rated age underwriting. To a certain extent a large insurer can lay off its bets if it has a large and diversified block of business. Pardon the macabre actuarial maxim, but when it comes to annuities, those that live shorter lives balance out the risk posed by those who live longer lives. But there's "no where to run...nowhere to hide" when it comes to deferred lump sum payments exceeding 30 years.
20 years ago in April, the Supreme Court of the State of New York Nassau County issued an Order of Rehabilitation against Executive Life of News York ("ELNY"). ELNY's fate potentially affects thousands of structured settlement annuitants whose structured settlements were created prior to the Order of Rehabilitation. It also affects a number of factoring companies and individual investors that have purchased structured settlement payment rights from ELNY structured settlement annuitants from stuctured settlement factoring transactions.
What Does It Mean When An Insurer is in Rehabilitation?
A chief insurance regulator may petition a state court for an order of rehabilitation as a mechanism to remedy an insurer’s problems, to protect its assets, to run off its liabilities to avoid liquidation, or to prepare the insurer for liquidation.
A rehabilitation proceeding is a formal court proceeding, commencing with an allegation by the insurance regulator that the insurer is financially impaired, insolvent or meets another statutory ground for rehabilitation. The insurer is served with a summons. The insurer may respond and must be afforded an opportunity to be heard. When judgment is entered, the losing party may appeal
An order of rehabilitation appoints the regulator as rehabilitator and directs the rehabilitator to take control of the insurer’s assets and administer them under general court supervision. The rehabilitation order may provide the rehabilitator with title to all of the insurer’s assets, books, records, accounts, property and premises, and generally includes an injunction against pending and threatened litigation. The order is typically filed with the court clerk or recorder of deeds so that creditors and the public are put on notice of the rehabilitation.
The rehabilitator usually has the power to act as necessary or appropriate to reform and revitalize the insurer. The rehabilitation order usually suspends the powers of the directors, officers and managers except as the rehabilitator delegates. The rehabilitator usually retains all powers not delegated.
The receiver is charged with implementing the restrictions, limitations and requirements set forth in the order of rehabilitation. The order may prohibit the insurer from writing new business or may severely limit the amount and type of new business written. Similarly, the order may impose significant restrictions or prohibit the renewal of business when the renewal is at the option of the insurer. The order may also require the insurer to modify or even cancel certain managing general agency, Third Party Administrator and general agency agreements. The order may suspend claims payments and halt the transfer of cash or loan values on life insurance contracts. Source: National Association of Insurance Commissioners
The investment climate in the decade preceding the subject Order was one of high interest rates. Some insurers such as Executive Life and ELNY sold policies with projections based on the highest of interest rates (junk bonds). When the junk bonds began to default the companies ran into trouble. The problem is then exacerbated when the long duration investments purchased in the 1980s mature and there are no comparable yields available to match up against the liabilities that the company has taken on, particularly on large deferred lump sum payments.
The Executive Life of New York estate began suffering from a noticeable shortfall in or about 2002, and a 2007 article in National Underwriter (citing official sources) suggested that, if officials did not take action then, projections suggest that the funds of the estate could be depleted in about 12 to 15 years (2019-2022). At the time, as part of a rescue plan, participating insurers and guaranty funds agreed to pay $750 million up front and $2 billion in the future. The National Underwriter article, again citing official sources, said "that the proposed rescue plan should lead to annuitants receiving 100% of their benefits".
Fast forward to 2011. In the interim the ELNY estate has had to tangle with the 2008-2009 financial crisis and falling interest rates which wreak havoc on reinvestment needs. Even though interest rates have risen in the last 4 months, the gap is nowhere near being filled according to the 2009 annual statements. The 2010 statement should be out shortly. Insurance regulations in all 50 states require an annual certification that assets match liabilities.
The operative question: "Will there be ELNY To Pay"? While I feel personally relieved to have never wrote any Executive Life or Executive Life of New York structured annuities or life insurance products, the answer to the question has a wider impact and is one that will have to be dealt with by the structured settlement industry and other structured settlement stakeholders very soon.
"20 years of its life trying to get up that big hill of hope...
"And so I wake in the morning
And I step outside
And I take a deep breath and I get real high
And I scream at the top of my lungs
What's going on?
And I say, hey hey hey hey
I said hey, what's going on?" -adapted from 4 Non Blondes What's Up (What's Going On?)
Read more about Executive Life of New York history on our dedicated ELNY web page Executive Life of New York: What's Going On?
"Life is so strange when you don't know
How can you tell where you're going to
You can't be sure of any situation
Something could change and then you won't know" - Missing Persons Destination Unknown, a 1987 song that turns out to be clairvoyant.