by John Darer CLU ChFC CSSC RSP CLTC
When the owner of structured settlement annuities becomes insolvent, "what happens, or should happen, to structured settlement payees?" asks Patrick Hindert in a March 17, 2013 blog post.
Unlike Executive Life Insurance Company of New York (ELNY) where there is an insolvent assignmment company AND an insolvent annuity issuer, in the Reliance case there is a solvent life insurer and an insolvent qualified assignment company which is subject to a liquidation.
The issue of bankrupt assignee and solvent annuity issuer has been addressed before in 1991 [See " In Re Monarch Capital Corporation 130 B.R. 368 (Bankr. D. Mass. 1991), 25 CBC2d 751 ]
11 U.S.C. § 362(d). Automatic Stay; Relief from Stay. A life insurance company, subsidiary of a chapter 11 corporation is obliged to continue to make payments pursuant to an assigned structured settlement annuity policy without a violation of the automatic stay and without becoming subject to any claim on behalf of the bankruptcy estate of the parent debtor.(Collier on ~bankruptcy, 15th ed., 3:362.07)
In this case, in order to finalize the liquidation, the liquidator is seeking to transfer the ownership of the annuities to the payees, an event which may make the interest portion of the structured settlement payments taxable to the payees. From a potential tax standpoint the plaintiff's ownership, would not be unlike the payee receiving cash when the case was settled, instead of taking a structure and investing themselves. Structured settlement annuities are typically held by Defendants, insurers or qualified assignment companies to avoid constructive or actual receipt by the payee. When a legal case is concluded with a structured settlement, the plaintiff only has a structured settlement payment right emanating from the Defendant's or insurer's promise to pay in exchange for a release of liability [a qualified assignment company is involved, if there has been a substitution of obligors].
As Hindert has observed, the Reliance Liquidator has concluded that transferring ownership of the annuity contracts (that have been serving as a "qualified funding asset", 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.
The payees deserve to be notified of the potential tax ramifications. While the Liquidator assumes Reliance structured settlement annuity issuers have the ability to furnish individual notice, the Liquidator plans to publish notice in multiple regional and national newspapers.
_______________________________________________________________________________________
IMPORTANT INFORMATION !
Are you or a loved one receiving payments from a Genworth Life structured settlement annuity
Did you or a loved one originally have a structured annuity that was issued by United Pacific Life Insurance Company or United Pacific Reliance Life?
If the answer is yes, check your paperwork to see if the owner of the annuity is Reliance Insurance Company or a Reliance subsidiary. If you are having a problem determining this information, please have the Genworth, UPL or UPRL contract number handy and THEN contact the structured settlement broker who you worked with or the Genworth immediate annuity customer service toll-free number at 888-322-4629
___________________________________________________________________
United Pacific Life/ Reliance Historical Timeline (juxtaposed with other contemporaneous notable financial events)
1982 United Pacific Life is founded [The same year as the Baldwin United failure. Baldwin United was one of the top business failures of the 20th Century.]
1983 United Pacific Reliance Life of NY is founded [The same year as the Charter Security failure]
1984 September-October Insurance regulators and attorneys general from 37 states agreed to coordinate efforts to recover losses suffered by holders of Baldwin-United annuities. The officials will file civil lawsuits or take administrative action aganist brokers who sold the policies. 12 of the largest brokerage houses announced a $135 million settlement of class-action suits filed by Baldwin customers. Three other brokerages are negotiating to buy the insurance units of Charter Corporation, an oil service company that introduced SPDAs but was later forced to file for bankruptcy. On October 10, 1984 Christian Science Monitor refers to Baldwin United as one of the worst financial services debacles of this decade.
1987 October Stock Market Crash sending Reliance stock value plummeting
1989 United Pacific Life sells $1 billion in annuity premium, mostly through banks.
September 19, 1991 Weiss Research reports that large life insurers are shedding their holdings in junk bonds by an average of 26% in the first 6 months of 1991. The LA Times reports that junk bonds make up to 1/3 of United Pacific Life Insurance Company's portfolio and is partly responsible for the company's downgrade.
________________________________________________________________
Side bar to ELNY annuitants and interested parties
September 19, 1991 LA Times "Since it is virtually impossible in today's marketplace (1991) to duplicate the double-digit returns that junk bonds promise, insurance executives say policyholders will face higher premiums as insurers seek alternate ways to make money.
"Most companies Weiss cited as having sold junk bonds were able to break even or make a small profit. In most cases the proceeds were reinvested in higher-grade corporate securities at far lower yields".
"Jackson National, for example, had been earning 14.32% annually on its RJR Nabisco junk bonds, which have largely outperformed the junk-bond market. The insurer reinvested the proceeds in securities yielding 10%".
__________________________________________________________________
1992 United Pacific Life sells $110 million in annuity premiums
April 6, 1993
GE Capital Services Agrees to buy United Pacific Life for $550 million. Deal is effective July 14, 1993 {Source: Edgar online]. UPL has $6B in assets according to a New York Times report on the acquisition. [Note that the NYT inaccurately states "Pacific Life" in the title. No relation to Pacific Life that currently issues structured settlements] The same report quotes a Salamon Brothers analyst who said that "consumers who put large amounts into annuities were particularly sensitive to the reputation and security of the company they were dealing with".
April 1, 1994 United Pacific Life Insurance company name is replaced with General Electric Capital Assurance Company (GECA) [Source: State filings]
October 3, 2001 Philadelphia Inquirer reports "Philadelphia-based Reliance Insurance Co. has been declared insolvent by the Pennsylvania Insurance Department (after being in rehab for a year). Analysts blame Reliance's collapse on the massive debts the company incurred during Steinberg's management and on an ill-fated aggressive expansion during the 1990s, in which the company wrote billions of dollars in high-risk policies at bargain prices, then found itself responsible for massive unexpected losses".
"By almost any measurement, Reliance was the largest insurance liquidation in history" Wikipedia
January 1, 2006 GECA becomes Genworth Life Insurance Company with the GE spinoff of GE Capital Financial Assurance Holdings, Inc. (GEFA) [ source : state filings]
March 2011 Lessons from the Demise of Kemper Insurance and Reliance Group: The collapse of two insurance industry titans offers lessons for how to navigate today's uncertain business environment
Comments