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ELNY earnings charges expected to hit Q2 statements

Liquidation appears underway; American Equity reports first

New York Department of Financial Services Superintendent Ben Lawsky (AP Photo/Mike Groll)
New York Department of Financial Services Superintendent Ben Lawsky (AP Photo/Mike Groll)

Executive Life Insurance Company of New York (ELNY) earnings assessments are now beginning as the controversial court-approved liquidation plan for the insolvent New York State insurer kicks into gear after  two decades of decline in rehabilitation. 

Charges will be showing up in earnings reports for some public companies for the second quarter SEC reports.

American Equity Investment Life Holding Co., (AEL), an underwriter of index and fixed rate annuities, is one of the first life companies out of the gate to announce charges to earnings in the second quarter due to assessments from state guaranty fund associations stemming from the insolvency of ELNY.

The Des Moines insurer announced Friday that its financial results for the second quarter of 2013 would include a pretax charge of up to $8.5 million ($5.5 million after applicable income taxes) to cover assessments from state guaranty fund associations due to ELNY’s insolvency.

"The estimates of assessments expected to be received are based upon information currently available and are subject to ongoing evaluation. Our life insurance subsidiaries are required under the solvency or guaranty laws of most states in which they do business to pay assessments up to certain prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies such as ELNY," AEL explained in a statement.

American Equity is not announcing its earnings until post-market closing on July 31 but got ahead of the ball with the news of the assessment charge. Other life insurers cannot be far behind with their news. 

Even larger life insurers with more premium volume are expected to have larger hits to earnings for the second quarter. 

Prudential Insurance, MetLife and New York Life Insurance Co. are the big three life companies that worked with New York Department of Financial Services (DFS) Superintendent Ben Lawsky in spring 2011 to broker the $100 million hardship fund for those shortfall payees that would not be fully covered by the guaranty funds.

The companies, along with a swathe of the life insurance industry, agreed to a top-up and a top-down fund to supplement the state guaranty funds and offer funds to the so-called orphan states where there was no coverage, where ELNY was not licensed. 

Prudential declined comment. It reports earnings Aug. 7. New York Life is not a public company but was not available for comment. MetLife did not respond to an inquiry by press time. MetLife’s second quarter 2013 earnings press release will be issued July 31, after the market closes. 

The liquidation itself will be overseen by the New York Department of Financial Services (DFS), the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA), with funds managed in a special purpose captive domiciled in the District of Columbia.

Some state guaranty associations sent out assessments recently, and others will be doing so soon, NOLHGA said, so life insurers are estimating now.

ELNY was brought under rehabilitation by the New York Insurance Department in 1991 after its parent company in California was seized by regulators there. Some New York regulators said they feared a run on the company even though ELNY was not insolvent at the time.

It is believed it slipped into insolvency after more than a decade of the caretaker role played by the New York Liquidation Bureau sometime in 2002.

On Jan. 25, 2013, Nassau County presiding judge on the ELNY case, Judge John M. Galasso, held the shortfall payees and their attorneys, including lead attorney Ed Stone, in civil contempt for filing the federal class action lawsuit in the Southern District of New York. Stone is contesting on constitutional grounds.

Stone accused Lawsky and the New York DFS of an alleged attempt to retaliate against the ELNY shortfall payees “by filing what amounts to a SLAPP (Strategic Lawsuit Against Public Participation) suit intended to intimidate the ELNY shortfall payees into withdrawing the federal class action lawsuit.”

Stone had battled New York regulators' liquidation plan on the state level on behalf of his clients, the annuitants who will be part of a $1 billion hole in structured settlement annuity payments even after the hardship fund is administered, for some time, and did not prevail in blocking the actual liquidation plan worked on by Lawsky and then New York Liquidation Bureau chief Jonathan Bing

Related story: The Complete ELNY Saga

The actual ELNY Restructuring Agreement was signed by Galasso in April 2012 after failed attempts earlier when it became apparent in 20002 that it was not recovering but slipping into insolvency. The 2008-2009 financial crisis and the era of low interest rates took the wind out of it, and it was a matter of time before it was ready for liquidation. 

ELNY's downfall is taken by some insurers and regulators as a cautionary tale as to what can happen when an insurer plays fast and loose with pricing, reserves and asset management to back those reserves.

NOLHGA has been coordinating with the New York Liquidation Bureau and the American Council of Life Insurance (ACLI) on behalf of the 39 life insurance companies who are voluntarily supporting the plan to address the remaining technical components and implement it.

ELNY's remaining assets would then be liquidated and transferred to a new company, already registered, called GABC, a not-for-profit captive insurer domiciled in Washington, D.C., and distributed from there.

The Hardship Fund, voluntarily established by the life insurance industry and independently administered by JAMS, is preparing to help the people most affected by the ELNY liquidation, the life insurance industry has said previously.

The industry's voluntary enhancements to the plan will help those affected by the company's liquidation, the industry stated when the path for the plans’ implementation was cleared after the dismissal of remaining legal objections at the state level. 

Stone figures the shortfall payees are not going to be made whole, despite the hardship fund.

“For more than 21 years, victims have been kept in the dark while assets set aside to provide for their long-term needs were squandered under the superintendent’s watch,” Stone wrote.


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