by John Darer CLU ChFC MSSC RSP CLTC
Who should be held responsible for placing crippled New Yorkers and others into Executive Life Insurance Company of New York structured settlements? Following news that its shortfall has doubled since 2007 and that the levee for some of the 5,000 or so Executive Life of New York structured settlement annuitants may be insufficient to contain the "onrushing" periodic payment obligation "flood waters", taken together with the amount of information available about Executive Life insurace Company of New York and First Executive Corporation during the time the annuities and policies were sold isn't it really is a question of what did you know and when did you know it?
While I never placed any of my clients into an annuity or life insurance issued by either Executive Life, I researched and wrote this article as an advocate for structured settlement annuitants, industry professionals and others looking for the still unknown facts of how the Executive Life Insurace Company of New York problem got to be this big and has apparently been swept under the rug for so long.
A. The Executive Life of New York Qualified Assignments
A significant number of annuitants with remaining obligations have structured settlements established by way of a qualified assignment to First Executive Corporation, or an affiliated assignment company SAFE (how unfortunately ironic ). These companies and their successor, FL Assignments were effectively released from liability under First Executive's Chapter 11 Bankruptcy reorganization plan.
B. Public Information That Was Available, Or Should Have Been Readily Available to Those Who (1) sold Executive Life of New York structured annuities, and/or (2) in combination with doing so, recommended qualified assignments to First Executive Corpation of SAFE, or the Insurance Agencies With Whom They were Affiliated
The argument that "one cannot be clairvoyant about everything in life" holds litle weight when such information was clearly available to those who sold such contracts.
"Connecting the Dots" with quotes from the Executive Life of New York timeline...
Poignant Quote #1
"On the verge of folding in 1974, the company gained notice for innovations that made it into one of the fastest-growing insurers in the industry in the 1980s. First Executive became a top buyer of bonds from Michael Milken, head of the California operation of Drexel Burnham Lambert. This association cost the company much scrutiny as Milken came under federal indictment in 1989, and Drexel went bankrupt in 1990. The loss of public and agent confidence combined with a rocky junk bond market to result in the announcement of an $835.7 million fourth-quarter loss in spring 1990. The consequent subject of Securities and Exchange Commission (SEC) probes, lawsuits, and bad publicity, First Executive was required to develop a new strategy to fuel growth and win back confidence"
Poignant Quote #2
"The Cuomo administration, in particular the New York Insurance Department, has been very supportive of the life insurance industry's search for innovative ways to remain competitive while continuing to promote growth for companies of all sizes. Most notable in this effort was the 1983 Life Insurance Investment Bill. Prior to this (Mario Cuomo) Administration's liberalization in 1983 of the investment restraints upon life insurance companies, no domestic life insurer could make any investments in junk bonds, except under a "basket" which permitted a maximum of 4% allowance for investments not otherwise permitted". -
-from the testimony of James Corcoran, who at the time of testimony was New York Superintendent of Insurance to U.S. House subcommittee on Commerce, Consumer Protection and Competitiveness as published in "The Collapse of Executive Life Insurance Company and its Impact on Policyholders, a hearing before the Committee on Government Reform October 10, 2002 Serial Number 107-142 pp 51-53
Comments: When I entered the insurance business in 1983 with Northwestern Mutual, our life insurance portfolio rate (which included both old and new money) and consistent dividend paying history had to compete with the then new Universal Life, with lower prices based on improvements in mortality tables and more important to this discussion, the actuarial assumption of the "anomaly rates" lasting well beyond their "shelf life" and un-structured premium payment requirements. Those original universal life products were an unmitigated disaster as disgruntled policy owners facing cash calls, sued insurers in multiple class action lawsuits and individual litigation claiming the insurance companies had used unrealistic projections of future interest rates in their illustrations. The 1983 Life Insurance Investment Bill kind of reminds you of the repeal of the Glass Steagall Act on a smaller scale doesn't it?
Poignant Quote #3
"By the end of 1982, more than 15% of First Executive's portfolio was invested in the B- and BB-rated bonds known as junk bonds. Most of these bonds were issued by little-known companies". Ibid (emphasis ours)
Poignant Quote #4
In 1984, "the New York State Insurance Department fined FE's New York subsidiary $100,000 for not cooperating with examiners". Ibid
Poignant Quote #5
"We began discussing Executive Life’s problems in 1986, five years before the company failed... Weiss was not the only rating firm to express concerns about Executive Life. Although A. M. Best and
Standard & Poor’s maintained high ratings on Executive Life for too long, Fitch Ratings (then Duff &
Phelps) and Moody’s Investors Service assigned significantly lower ratings at an early stage. The problem was that Executive Life advertised the high ratings and ignored the lower ratings; few people became aware of the lower ratings" -Joseph Belth, Indiana University and author of the Insurance Forum " February 2005.
Poignant Quote #6
"In 1987, First Executive paid a $250,000 fine when Executive Life of New York pleaded guilty to violating eight sections of insurance law. It was the biggest fine ever imposed by the state on an insurance company. In addition, First Executive gave the subsidiary a $151.5 million cash infusion. Because of EL's risky investments, regulations called for it to have a higher reserve than most. In the 1987 probe, the New York regulatory agency rejected nearly all of EL-NY's surplus relief from reinsurance contracts because of a circular arrangement made with companies that had connections to FE and letters of credit backed by the company's own assets. Additionally, the company failed to receive regulatory approvals, and file certain forms; it took credit for some treaties that never were executed. The industry regulators contended that the company had been undercapitalized for three years". Ibid (emphasis ours)
Poignant Quote #7
"The junk bond market was falling apart and in 1987 junk bonds accounted for more than 40% of First Executive's assets Ibid (emphasis ours)
Poignant Quote #8
"In July 1989, First Executive was only able to buy half of the surplus relief reinsurance it was seeking..."Executive Life and Drexel agreed to pay $30 million to settle a class-action lawsuit. The suit involved 4,200 investors who charged that they had been cheated in a tax-shelter scheme. The transaction involved notes purchased by Drexel, later sold to EL, on interests originally purchased by Hollywood, California, businessman Gerald Schulman, in a series of fraudulent transactions, at 80% below their value" Ibid
"Earlier in the month (January 1990), the impending $460 million sale of the (Executive Life of) New York unit collapsed. The buyer was unable to arrange junk bond financing. Then, in February 1990, Drexel declared bankruptcy amid the growing turmoil of the junk bond market. About 45% of FE's assets were in junk bonds at that moment; junk bonds were trading at about 60% to 80% of their face value. Ibid (emphasis ours)
Poignant Quote #9
"...the status of Executive Life Insurance Company of New York is in such condition that the further transaction of business will be hazardous to its policyholders, its creditors and to the public" -from Order of Rehabilitation Supreme Court of the State of New York, County of Nassau, April 23, 1991
Poignant Quote #10
2. I am particularly interested in marketing materials and/or correspondence from anyone that failed to discuss the ELNY financial situation. If you were sold an Executive Life of New York structured annuity I would be interested in hearing from you.
3. While it is very possible that the agent or agency that placed you (or your client) into an Executive Life of New York structured settlement annuity is still active, it's also very important to get a handle on what sale practices took place and what has changed about those individuals', companies', and the general industry practice in the interim, at least from a historical perspective.
4. It would be interesting to see how much revenue did these insurance agencies and agents derive from selling structured settlement annuities with Executive Life Insurance Company of New York between 1982 and 1988?
5. Did your attorney retain a structured settlement consultant? If not, why not?
6. How many of the subject Executive Life Insurance Company of New York structured annuities still outstanding were written by structured settlement consultants or agencies retained by the plaintiffs?
7. If your structured settlement required Court approval, did your attorney address the company's precarious financial situation in his/her/its affirmation to the Court for approval of your settlement?
8. Did the defense or its insurer force its consultant on you, directly, or through its agent, not permit you to engage your own? While this is very rare in current industry practice, back in 1982-1988 it was possible. If so, what duty did they have to inform you of material facts about the precarious financial condition of Executive Life of New York? Did they owe you a duty of privity?
Indication of Industry Practice in 1982-1991 time frame?
The United States Ninth Circuit stated in its Weil lawsuit decision that "these appeals require us to decide whether consultants who advise tort plaintiffs on structured settlements have suffered antitrust injury when they can't get information about premiums and rating practices from, or serve as brokers to arrange annuities to fund structured settlements with, life insurance carriers because of an alleged boycott by life insurance carriers and brokers who specialize in arranging annuities in behalf of tort defendants".
The Ninth Circuit stated "The district court granted summary judgment for Life Carriers and Brokers on the footing that if their policy harmed anyone, it was tort plaintiffs, and that the only possible injury was depriving tort plaintiffs of a stronger negotiating position in settlement negotiations. Weil Ins. Agency, Inc. v. Manufacturers Life Ins. Co., 815 F.Supp. 1320 (N.D.Cal.1992).
see 39 F.3d 951
LEGAL ECONOMIC EVALUATIONS, INC., a California Corporation,
METROPOLITAN LIFE INSURANCE COMPANY, et al., Defendants-Appellees.
IBAR SETTLEMENT CO., Plaintiff-Appellant,
METROPOLITAN LIFE INSURANCE COMPANY; Transamerica
Occidental Life; Manufacturers Life; ML
Settlement Services, Inc.; National
Structured Settlements Trade,
WEIL INSURANCE AGENCY, INC., a California Corporation dba
Jerry C. Weil & Associates, Plaintiff-Appellant,
MANUFACTURERS LIFE, et al., Defendants-Appellees.
Nos. 93-16007, 93-16028 and 93-16047.
United States Court of Appeals,
Argued and Submitted Oct. 6, 1994.
Decided Nov. 2, 1994.
On Duty of Privity...
Read Lyons v MMIA 286 A.D. 2d 711, 730 N.Y.S. 2d 345. where a New York Appellate Court agreed that insurer owed duty of privity to plaintiff pertaining to a structured settlement, which incidentally arose out of a 1987 medical malpractice settlement where the plaintiff was not advised by his or her own structured settlement consultant.
Read Georgia State University Law School Powerpoint on Duty of Care: Privity of Contract
Comment: The Ninth Circuit's opined that" if their policy harmed anyone, it was tort plaintiffs, and that the only possible injury was depriving tort plaintiffs of a stronger negotiating position in settlement negotiations". Were the subject plaintiffs fully informed by Defendants, Insurers and their agents about Executive Life of New York's precarious financial condition from 1987-1991? If they had been represented by their own advisors would the annuities have been placed with Executive Life of New York?
Were the qualified assignments to First Executive or SAFE, the fault of the Defendants' policy, their insurers' policy. the Court system?
10. The ELNY situation highlights the fact that some qualified assignment companies CAN go bankrupt, even if insurance companies cannot, (see Insurance Company "Bankruptcy": Insurers CANNOT File Chapter 7 or Chapter 11 (With Few Exceptions) my blog post of July 23, 2010). It is therefore important to consider this when placing your clients into new structured settlements. This author believes that not all structured settlement annuity issuers have addressed this situation and should.
11. Errors and omissions coverage for insurance, including structured settlements, does not traditionally cover insolvencies.
Fast forward to 2007
The ELNY problem, if not fixed, would have left thousands of severely injured people and pensioners without their annuity payments. The problem – due to the failure of ELNY’s investments to match its liabilities – first became clear approximately five years ago but the prior administration’s slow response allowed the crisis to continue. - " BROKERING AN INDUSTRY-WIDE AGREEMENT IN PRINCIPLE TO SOLVE THE LARGE-SCALE ELNY DEFICIT" New York LIquidation Bureau 2007 Annual Report p4 Download NYLB_2007_Year_End_Report (emphasis ours)
"The resolution was possible because the insurance industry played a key role in the
process. The plan provides for a cash infusion by the insurance industry into ELNY to allow every
annuitant to continue to receive 100% of insured benefits and protection for the entire term of the
annuity, some lasting more than 50 years" -Ibid p4
“It’s refreshing to find out that the government can really come through.”- annuity holder(New York Times,
December 5, 2007, p.B5).
The most recent audited financial statements were published July 28, 2010 and indicate that the Executive Life of New York estate had total admitted assets of $984,021,594 compared with total liabilities of $2,516,254,541 as of December 31, 2009.
On December 17, 2010 the New York State Supreme Court, County of Nassau, orders the New York State Insurance Department to prersent the court with a proposed order and plan of liquidation for Executive Life Insurance Company of New York by July 1, 2011.
Check out the Executive Life Insurance Company of New York featuring John Darer and Mark Wahlstrom from Legal Broadcast Network
1. What did "get paid to rate" rating agencies such as Standard & Poors rate Executive Life of New York in 1982-1988?
S&P and other rating agencies were sued by the California Insurance Commissioner [in relation to Executive lIfe (CA)], along with First Executive, Drexel, and the accounting firm of Deloitte & Touche, according to a February 28, 1992 New York Times piece
"In the late 1980s and early 1990s, every one of Wall Street’s leading rating agencies consistently gave large life and health insurers their top ratings — even as they themselves recognized the companies were taking on huge risks.
The end result was a catastrophe that should have forever taught them a lesson … but, unfortunately, has long been forgotten". Martin Weiss, Weiss Research The Great Bond Insurance Cover Up How Wall Street Rating Agencies Helped Trap Six Million Americans in Failed Life Insurance Companies April 28, 2008
In his report Weiss opines that Executive Life and 2 other companies based their entire business plan on junk bonds. "The keys to their rapid growth was twofold: First, they had to hide the dangers of junk bonds from their customers. And second, they had to play on the faith people still had in the inherent safety of insurance". But he goes on to say that to make the scheme work, they needed two more elements: the cooperation of the Wall Street rating agencies and the blessing of the state insurance commissioners. (emphasis ours)
Then this is eerie "Like today’s rating agencies and regulators, they knew they were hiding the truth, but they rationalized it as a “public service” to prevent a negative reaction by investors. (emphasis ours) In reality, they were merely helping to create the conditions for the very panic they sought to avoid. One day, everything seemed to be just fine. Then the truth came out and all hell broke loose. Junk bonds went sour. Institutional investors in the insurers immediately demanded their money back. Insurance companies ran out of cash to meet their demands. And their house of cards came crashing down". Bear in mind that Weiss' historical perpective on Executive Life was written a little over 4 months prior to the AIG and Lehman collapses in September 2008.
2. Did settlement consultants use these ratings to solicit annuity sales despite the available public information about ELNY's reckless behavior? How did they use them? The marketing material that Executive Life Insurance Company of New York annuitants may have in their files should be telling.
3. Did any agent soliciting structured annuities use the existence of guarantees that they were not legally permitted to do under New York Insurance Law, to convince an annuitant to go forward with Executive LIfe of New York when the annuitant expressed concern about the company's investments? If you have something in writing I would like to hear from you.
The few in the structured settlement industry who promote that which is illegal under most state insurance laws need only read Weiss' April 2008 piece to find out why I have been on their ass to rethink that strategy.
4. Who certified the actuarial calculations regarding the sufficiency of assets to liabilities from 1987 (when First Executive's assets were 40% junk bonds) to 1991? How about after the company was placed in rehabilitation?
The Failure of Four Large Insurers Testimony of Richard L. Fogel, Asst Comptroller General February 18, 1992 Download Richard Fogel Testimony Feb 18 1992