" title="Peter H. Bickford Legal & Dispute Resolution Services"> Peter H. Bickford Legal & Dispute Resolution Services

Aside from the scientific definitions, there are two principal meanings of “transparent” –

• Open as in frank or candid; or
• Easily seen through.

Quite often in political double speak the term is intended to convey the first meaning, while in reality the only transparency is in the motive.

I offer as a case study the recent legislation passed by the New York Legislature shortly before the end of session that would require the audit of the Liquidation Bureau and of each of the estates in liquidation or rehabilitation (the Bill, S6535-A, was passed by both the Senate and Assembly, but as of this date had not yet been sent to the Governor for signature). The Sponsors Memo accompanying the legislation claiming that the legislation will “shed sunlight on the financial health” of the estates in receivership and on the Bureau itself. Although the Bureau and the estates under its control desperately need proper oversight and examination, this legislation provides neither.

There are three principal defects in the legislation. First, it does not provide for a consistent, industry recognized standard of review; rather it allows for the examinations to be “upon whichever standard each corporation conducts its respective financial affairs.” Those of us that have dealt over the years with insolvent estates know that this will simply mean the continuation of the use of separate, inconsistent, confusing and sometimes unrecognizable financial reporting standards that are of little or no value to significant financial analysis.

Second, the reports do not have to be filed until August of the year after the year being examined, which effectively renders the reports out of date by the time they are issued (licensed companies, as most know, have to file their statutory statements by March 1 each year, and their audited statements by June 1).

The third significant issue is the cost. The “Fiscal Implications” section of the Sponsors Memo states that “[i]t is estimated that [the cost of the financial statements and opinions] will be below $300,000 annually.” That is for the audit of roughly 25 separate companies plus the Bureau itself for an absurd average of less that $12,000 per audit. In fact, last fall the Bureau engaged audits of the estates under its control at an estimated cost, without any unforeseen complications, of between $1.0 and $1.1 million – almost four times the amount in the Sponsors Memo. Furthermore, given that these audits were to have been completed by year-end 2007, the fact that they still have not been completed seven months later would suggest that “unexpected circumstances” have been encountered, and the fees will be even greater than the estimates.

What is the significance of this gross understatement of the fiscal implications? Simply this: These fees are paid from the assets of the various estates, which already are financially insolvent with insufficient funds to meet their policy obligations. While appropriate audits of the Liquidation Bureau and the estates it manages are warranted, these audits should provide value to the oversight of the Bureau and the estates. By not requiring a consistent, recognized reporting standard on a timely basis, the legislation does not provide that value and is a waste of estate assets.

The Sponsors Memo states that the legislation was “developed by the Liquidation Bureau, in consultation with the Legislature.” If a licensed insurer came to the Legislature with a request to require it to prepare and file additional reports, I am sure that the request would be viewed with great skepticism. The Legislature should have viewed the transparent motive behind the Bureau’s request in the same light.

With the legislation as passed, the Bureau can now claim that it has met the call for greater transparency, while in fact that transparency — as in open, frank or candid — is illusory and obtained at the cost of the estates, their policyholders, creditors, reinsurers and investors.

The Federal Deposit Insurance Corporation (we all know the FDIC) ran full page adds in national papers earlier this week with a picture of a $100,000 gold certificate and a penny. Their pitch — “Insuring deposits up to $100,000 without anyone losing a penny.” The protection provided by the FDIC is well known and publicized, and regularly used in financial planning, even by people of relatively modest means. Most of us know that it often makes sense to spread funds among various accounts rather than exceed the $100,000 limit to make sure there is maximum insurance coverage in the event of the failure of a financial institution. This insurance has proven to provide confidence in our financial institutions, even when there is a threat of financial strains. How different is the life insurance world!

In the life insurance world the existence of life guaranty or security funds is generally not publicly known. In fact, publicizing the existence of these funds by companies and agents is statutorily taboo! Even where information on these funds may be available, the burden is on the consumer to initiate the inquiries, and once located the information is complex and confusing with different limits and coverages state by state. Many, many decades ago, in a less controlled and less sophisticated financial environment, it was believed that allowing brokers or companies to mention the existence of guaranty funds would lead to the sale of cheap or non-existent life policies without concern for the financial stability (or existence) of the companies, hence leading to increases in fraudulent policies or life company failures. The time has come, however, to bring the life guaranty and security funds out from the closet into the light of day, and to have these funds be as much a part of financial and estate planning involving life insurance and annuities as the FDIC is for financial accounts.

To illustrate: Given the accumulation of wealth by baby boomers coupled with increases in longevity, more and more people are considering the purchase of annuities to insure that they do not outlive their means. Without knowing about the limitations of the life guaranty funds in your state (and with your broker or agent prohibited from telling you!), you might not even consider purchasing annuities from more than one carrier to maximize guaranty/security fund coverage. In New York, for instance, the limit of the life security fund for contracts issued after August 2, 1985 is $500,000 (there is no limit on contracts issued before August 2, 1985). Shouldn’t you know this before you place your life savings into the purchase of an annuity? Shouldn’t your broker be able – no, required – to give you this information? Shouldn’t information about life security be as widely available as information on Federal Deposit Insurance?

Who are we protecting by keeping this information in the closet?

In response to yesterday’s entry on the two statutorily required reports of the New York Superintendent of Insurance, I was asked how many of the 961 Insurance Department employees work for the Liquidation Bureau. The answer is none, nada, nil, zero. The Liquidation Bureau is not a state agency and its employees are not state employees (See Dinallo v. DiNapoli, NY Court of Appeals, No. 111, October 11, 2007, discussed in my October 12, 2007 web entry).

The Superintendent’s report as receiver does not include any information on the Liquidation Bureau’s staffing or budget. The “consolidated” statements contain some information on salaries and expenses relating to estates in liquidation, but this information does not include all estates, and there is no presentation on the Bureau itself. The Superintendent’s Annual Report to the Legislature, at page 237, states that the Liquidation Bureau has “a staff of 450 and a budget of $100 million.” There is no further information, however, on the details of this staffing or the expenses.

Two annual reports of the Superintendent of Insurance required by New York’s insurance law have been issued in the last few weeks: one of which is readily available and the other that is available only through a request under the Freedom of Information Law.

The readily available report is the 2007 Annual Report of the Superintendent of Insurance to the New York Legislature required by Section 206 of the Insurance Law. This 268 page report, which is available as a pdf document through the Department’s website (http://ins.state.ny.us/), is cram full of information about the insurance business in New York and the regulation of the business. For instance, the report contains consolidated summaries of the statements filed by insurers showing such things as the number and kinds of authorized insurers by class of business, total assets, liabilities, premiums written and insurance in force. On the regulatory side, the report includes summaries of new regulations and circular letters, lists of reports of examinations completed, and lists of insurers organized, admitted, merged withdrawn, or placed in liquidation, rehabilitation or conservation.

If you dig statistics, as I do, you may find some of the data on the Department itself to be most fascinating. For instance, did you know that for the calendar year 2007 the Insurance Department:

Employed 961 people of whom 647 were located in New York City, 289 in Albany and 25 elsewhere?

Employed more attorneys (69) than actuaries (61) or investigators (43)?

Issued 153,909 licenses during 2007 to adjusters, agents, brokers, consultants, reinsurance intermediaries and service contract registrants?

Collected receipts totaling $742,245,640.94 and incurred Department expenses of $188,250,888.74?

Much of this information is required by the laundry list set forth in Section 206, although the report has evolved over the years into a very comprehensive annual almanac. If you are interested in researching the business of insurance in New York or in the minutia of the activities of the New York Insurance Department, this report is a great place to start.

The second report of note is the 2007 Annual Report of the Superintendent of Insurance as Liquidator or Rehabilitator required by Section 7405(g). This report is required to include a financial review of the assets and liabilities, and the claims paid or approved for each domestic insurer in liquidation or rehabilitation, and a summary of all other corporate activity and a narrative of the actions of the liquidator or rehabilitator for each company. (This statutorily dictated report should not be confused with the “2007 Year-End Report” posted by the New York Liquidation Bureau on its web site back in January, which basically rehashes all of the Bureau’s 2007 press releases).

The report required by Section 7405(g) – while not nearly as comprehensive as reports required by solvent companies — is the only meaningful information required to be compiled by the Superintendent of Insurance about the companies for which he acts as receiver. Yet this report cannot be found on the web site of either the Insurance Department or the Liquidation Bureau, and can only be obtained by making a Freedom of Information Law (FOIL) request to the Insurance Department.

The justification for this restrictive availability, I have been told, is that the information contained in the report is unaudited. However, even though the Liquidation Bureau has announced that it is having audits of each estate performed (a process that has been ongoing almost as long as the period being audited), there is no requirement in the law for audited statements of companies in liquidation or rehabilitation. The Section 7405(g) report is the only statutorily required statement of the receiver, and limiting its accessibility does not appear to be within the intent and purpose of the statute.

Furthermore, despite the Bureau’s repeated published statements about being more transparent, the Report actually appears to be a step backwards from prior administrations. For some reason the current administration decided to present the data on the individual companies in liquidation (with one exception) on a consolidated basis rather than by separate statements. While this approach may show the totality of the Bureau’s realm, it is not consistent with the statutory requirements or the reality of the process where each estate is a separate and distinct entity.

The report can be obtained by making a FOIL request of the New York Insurance Department. You can get it without cost using the Department’s online FOIL request form indicating you want it sent via e-mail. Hard copy costs 25¢ per page. Do not direct a request to the Liquidation Bureau – it will deny the request on the basis that it is not a state agency subject to FOIL. Once again, so much for transparency!

The courts in most jurisdictions – including New York — have consistently held that a receiver “stands in the shoes” of the insolvent company and does not get to change the contractual or legal obligations of the insolvent company simply because an order of rehabilitation or liquidation has been issue. It is not clear, however, if the current management of the New York Liquidation Bureau accepts that they are private managers of insurance entities and are not imbued with the super powers of a governmental agency. The courts continue to do their part to remind the Bureau of its role, but judging from the number of times they need to do so, it does not seem that the message is getting through.

Last October the New York Court of Appeals confirmed that the Bureau was not a state agency (Dinallo v. DiNapoli, October 11, 2007, Decision 111). Although this was a position espoused by the Bureau itself, the Bureau’s motive was not to restrict its powers but to avoid scrutiny by the state comptroller (See my web entry for October 12, 2007). In finding that the Bureau was not a state agency, the Court also restated the broadly accepted principle that the receiver “for all practical purposes takes the place of the insolvent insurer.” (Decision at p.3). It is this limiting role that the Bureau seems to have a problem accepting.

Granted, the receiver has certain necessary powers to assist in the marshalling of estate assets and court protection from unwarranted assaults, but these powers are not intended to alter contractual relationships or create obligations that did not exist pre-receivership. For instance, in Matter of Midland Ins. Co., 79 NY2d 253, 265 (1992), the New York Court of Appeals stated that “liquidation cannot place the liquidator in a better position than the insolvent company he takes over, authorizing him to demand that which the company would not have been entitled to prior to liquidation. . . . Those rights were not altered merely because a liquidation order was entered.” Notwithstanding this clear pronouncement, the Bureau frequently attempts – even in the Midland Insurance Company estate — to alter contractual rights of others under the guise of acting as a “fiduciary” or under some implied or threatened super authority.

In January 2008 the Midland liquidation court (Justice Stallman) issued a lengthy decision that, while supporting the primary claim handling authority of the liquidator, also took the Bureau to task for not adequately protecting the interposition rights of reinsurers, and requiring the Bureau to revise the claims protocol in this regard (See my February 21, 2008 web entry on this decision). Now Justice Stallman has again reminded the Bureau of the limitations of its authority and power to define the rights of others – this time regarding the Bureau’s attempt to apply New York law across the board to all Midland creditors.

In a recent 24-page decision (In the Matter of the Liquidation of Midland Insurance Company, Motion Seq. No. 69, April 15, 2008), Justice Stallman has directed that the law applicable to each policy is not New York law in all cases; rather the applicable law is to be determined following the ‘grouping of contacts’ approach of the Restatement (Second) of Conflicts of Laws. The decision rejects the Bureau’s interpretation of the Appellate Division finding in the Lac d’Amiante du Quebec claim in Midland (269 AD2d 50 [1st Dept 2000]) that all creditors are to be treated equally requires that New York law must apply to all Midland contracts. Instead the Court turns to the Foster Wheeler Corp. holding (36AD3d 17 [1st Dept 2006]) that the “grouping of contacts” principle of the Restatement (Second) of Conflicts of Law applies in New York and is consistent with the principles of the Uniform Insurers Liquidation Act (Insurance law Section 7048 et seq.) for the equitable administration of estates. Furthermore, the court found that the establishment of nine statutory classes of claimants in the 1999 amendment to the priority of distribution scheme under Article 74 eliminates any basis for applying the equal treatment reading of the Lac d’Amiante decision.

The decision is an interesting read, but the bottom line is that the court rejected equating equal treatment with equitable treatment, and again confirmed that “standing in the shoes” does not mean trampling the contractual rights of others.

Because of the recent interest in reviving the insurance exchange in New York, and the numerous requests I have received for materials on the old New York Insurance Exchange, I have posted a new section of articles, studies and publications relating to the old Exchange to my website. these materials can be accessed at www.pbnylaw.com/publications.html.

One of the articles at this site is my 2004 article presented at a Practicing Law Institute seminar on run-offs and commutations, “What Ever happened to the New York Insurance Exchange (and why do we care?).” In that article I stated that the Exchange’s Security Fund’s plan for the distribution of about $81.8 million against obligations of $112.5 million had been approved by the Court in February 2004, but that no distribution had been made under the plan as of the date of the article in November 2004. Several people have asked whether a distrbution was ever made. the answer is yes, but it required some pressure to accomplish.

In December 2004, I brought a further motion before the Court to force the Security Fund to comply with its own plan and distribute the funds available for distribution immediately. As a result of this motion, in early January 2005 the Security Fund made a distribution of $81.6 million, or 72.05% of approved claims. this was followed in June 2005 with a second and final distribution of an additional $4.1 million, or 5.29%, to the same claimants. Following these distributions, which constituted substantially all of the assets of the Security Fund less administrative and closing expenses and reserves, the Security Fund filed a final report with the Court. the Court approved the final report and discharged the Security Fund from any further obligations to claimants in May 2006.

Like an old prospector, it is always a thrill to find a small but valuable nugget in a large pile of rocks. In this case, the large pile of rocks is the 27 page decision of New York Supreme Court Justice Michael D. Stallman in a January 14, 2008 decision In the Matter of the Liquidation of Midland Insurance Company (printed in the New York Law Journal on February 14, 2008).

The case centered around motions by a reinsurer of Midland, Everest Reinsurance Company, seeking to lift the standard injunction barring suits against the Liquidator alleging that “the procedures of the New York Liquidation Bureau in handling, determining, and settling insurance claims violates provisions of the reinsurance contracts between Midland and Everest.” (Decision at p.1) The provisions Everest alleged were violated by the Liquidator’s agents included “(1) notice of a claim to Everest; (2) an opportunity to associate with Midland and to cooperate in the defense and control of any claim which may involve Everest’s reinsurance; (3) access to Midland’s books and records; (4) a right to investigate; and (5) a right to interpose defenses in the Midland liquidation (interposition rights).” (Decision at p.11)

Most of this very thorough decision was consumed by a point by point rejection of each of Everest’s claims, either because Everest failed to show any substantive evidence of error by the Liquidator’s agents, the remedy for any shortcomings existed within the framework of the existing liquidation process, or the issue had not risen to the point of a breach. The decision also strongly supported the Liquidator’s “clear, exclusive fiduciary powers over handling claims” (Decision at p. 20) and the exclusivity of the liquidation court in denying Everest’s motion for leave to sue. It seemed like a substantial sweep for the Liquidator and a complete loss for Everest. Then came the nugget!

Although the Court strongly supported the Liquidator’s control over the handling of claims, it did not dismiss the interposition rights of reinsurers. In seeking a balance between the control of the claim process by the Liquidator and the exercise of the interposition rights of reinsurers, the Court stated: “Thus, the only logical approach is to permit Everest and other reinsurers to exercise their contractual interposition rights after the Liquidator has allowed a claim, but prior to the Court’s approval of a claim.” (Decision at p. 22). The problem was that there was an earlier Court order on claims allowance procedures for Court approval that, in Justice Stallman’s view, conflicted with the reinsurers’ interposition rights.

“To give effect to the contractual interposition rights of Everest (and of other similarly situated reinsurers), this Court is constrained to modify the procedures for judicial approval of allowed claims, to permit reinsurers to assert defenses available to Midland or to the Liquidator to any claim allowed by the Liquidator which is either partially or wholly reinsured, and to establish a process in which those defenses can be adjudicated as part of the judicial approval process, involving a hearing before a referee equivalent to that provided where an objection is filed to the Liquidator’s disallowance of a claim. Otherwise, the Liquidator is placed in a position where compliance with [the prior] order could result in a violation of Midland’s reinsurance
contracts, jeopardizing reinsurance recovery.” (Decision at p. 24)

Therefore Justice Stallman, on his own volition, ordered a revision of the prior claim allowance procedures invoking his broad supervisory powers under the liquidation Article of the New York Insurance law!

“Thus, pursuant to its supervisory powers under Insurance Law § 7419(b), the Court directs the Liquidator to review the claims allowance procedures and to formulate changes to the claims allowance procedures and protocols of the Liquidation Bureau. The Liquidator shall report to the Court within 120 days with proposed changes.” (Decision at p. 24)

After more than twenty years of involvement in insurance receivership proceedings in New York, I can confirm the rarity indeed for a liquidation court to actually exercise its supervisory powers on its own volition. Others can dissect the holdings of the decision on the motions by Everest, the authority of the Liquidator, the rights of the reinsurers and policyholders; and others can speculate on the prospects for appeals by the Liquidator or Everest. I will enjoy the moment of a judge actually taking the time to consider the process beyond the four corners of the motions before him to exercise his authority for the benefit of the process as a whole.

(If you cannot find a copy of Justice Stallman’s decision and would like one, e-mail me at pbickford@pbnylaw.com)

For almost a year now, the New York Superintendent of Insurance, Eric Dinallo, has been stating publicly that he is considering re-opening the old New York Insurance Exchange. He points out that the statute (NY Insurance Law Article 62) is still on the books, and perhaps an exchange facility could be used to address areas of coverage that lack adequate capacity. Does such a resurrection make any sense?

For those of you too young to remember, the New York Insurance Exchange was opened in 1980 as a Lloyd’s type marketplace with business submitted to member syndicates through member brokers. It was publicly touted as the US answer to Lloyd’s and, after a slow start, blossomed over the next several years, with over $300 million in GWP in 1983. By the end of 1984 the Exchange was the eighth largest US reinsurer by premium volume and fifth largest in surplus. By November 1987, however, the Exchange was closed and all its syndicates either in run-off or liquidation. For more information on the brief mercurial life and rapid demise of the Exchange, see my 2004 article “What Ever Happened to the New York Insurance Exchange (And Why Do We Care)?”
(www.pbnylaw.com/articles/newyorkinsuranceexchangearticle11-04.pdf)

The question is, if the Exchange was such a failure in the 1980s, why consider re-opening an exchange today? My short answer is another question: Is Lloyd’s still a relevant market today? Given the renewed vibrancy of Lloyd’s over the past decade after its own financial tribulations (see Equitas), a Lloyd’s type facility not only can work, it can thrive. The financial woes of the New York Exchange and Lloyd’s bore many similarities, but the major difference was that Lloyd’s had three centuries of developed institutional and market support and New York did not. Done right, however, an exchange should be able to thrive in the US as well. The keys, of course, are defining and following through with “doing it right.”

To assist in this consideration, I offer a few principles that, in my view, should form the basis of any proposal to go forward:

• The concept should be industry rather than regulator driven. The regulators can provide the forum and support for the development of a plan, but the primary force needs to come from inside the insurance and financial services industries if there is to be any lasting success.
• The capital requirements for syndicates will need to be significantly greater (by many multiples) than the requirements of the old exchange.
• There will need to be a strong commitment on the part of both the regulators and the industry to self-regulation and control of the market: with the regulators allowing the facility to develop rules controlling the operation and security of the market; and with the industry having the will to enforce its rules and its financial security requirements – a major failing of the old exchange.
• And a new exchange will need to take full advantage of the technical developments over the decades since the original exchange, including instant communications, virtual trading capabilities and real time access to and use of transactional and other data.

There are many other issues that will need to be addressed by any group studying the possible resurrection of an insurance exchange, not the least of which are the types or lines of business to be allowed on a new exchange and the tax and regulatory considerations that force most new insurance capital off shore. But all of those issues can be considered within the framework of the foregoing principles.

Superintendent Dinallo appears to be taking a studied view and careful approach to the exchange resurrection prospects. It will be interesting to see if his interest can translate into real consideration. I, for one, hope so.

(For the record, I was the Vice President, Secretary and General Counsel of the New York Insurance Exchange from its opening in 1980 through 1985. I am also the author of Exchange: A Guide to an Alternative Insurance Market, NILS Publishing Co., 1987.)

The New York Freedom of Information Law (Article 6 of the New York Public Officers Law) is a wonderful tool, and the New York Court of Appeals recently made the tool even more useful!

Government Agencies are required to make their records available to any citizen upon request, with a few exceptions. One exception is a privacy exemption allowing an agency to deny access to records that “if disclosed would constitute an unwarranted invasion of personal privacy.” Earlier in December the Court of Appeals issued a decision that held that the burden of demonstrating that the privacy exemption applies is on the agency, not the requesting party (In the Matter of Data Tree, LLC v. Edward P. Romaine, & Co., December 18, 2007, Court of Appeals No. 2007/173, http://www.nycourts.gov/ctapps/decisions/dec07/dec07.htm ). The Court of Appeals also found that generally “FOIL does not require the party requesting the information to show any particular need or purpose”, although the Court noted that “motive or purpose is not always irrelevant”, such as where it involves an “unwarranted invasion of personal privacy” or to obtain lists of names and addresses to be used for “commercial or fund-raising purposes” (p.7).

These findings are not the most interesting aspect of the case, however. The most interesting finding – at least to those of us who have been denied access to information for this very reason — is that reformatting electronic data to meet a specific request is not necessarily the creation of a new record. Acknowledging that “an agency is not required to create records in order to comply with a FOIL request”, the Court of Appeals nevertheless concludes:

“As stated earlier, the term ‘records’ means, among other things, ‘computer tapes or discs.’ Disclosure of records is not always necessarily made by the printing out of information on paper, but may require duplicating data to another storage medium, such as a compact disc. [Footnote omitted] Thus, if the records are maintained electronically by an agency and are retrievable with reasonable effort, that agency is required to disclose the information. “(p.9) . . . “A simple manipulation of the computer necessary to transfer existing records should not, if it does not involve significant time or expense, be treated as creation of a new document. “(p.10) (Emphasis Added).

Although the decision leaves room for an agency to argue time and expense, the New York Court of Appeals has clearly issued the message that the burden will be on the agency to justify a denial of access to government records.

Halleluiah and Happy New Year!

This is an update to last week’s posting (see December 5, 2007 posting below) about Executive Life Insurance Company of New York (ELNY). I expect to continue issuing postings on this topic to raise questions about the premises behind the New York Liquidation Bureau’s bail out plan for ELNY so long as the Bureau continues to publicly tout its plan using justifications that are contrary to the facts.

This week’s issue of Business Insurance (http://www.bi.com/) published a follow-up article on the ELNY deal reporting on statements by the head of the Liquidation Bureau, Mark Peters. According to the article, “ELNY would receive roughly $650 million to $750 million in cash contributions” from both state life guarantee associations and from certain p/c companies “that bought ELNY annuities to fund structured settlements of liability claims.” The p/c companies include Allianz, Fireman’s Fund, Allstate, State Farm and Travelers.

The article goes on to state: “The contributions will be enough to offset the $2 billion deficit that ELNY is predicted to face in 12 to 15 years, regulators say. The deficit results largely from an overly optimistic assumption in ELNY’s 1992 rehabilitation plan that the estate would earn 10% annually on its invested assets, Mr. Peters said. The actual return was between 7% and 8%. The Liquidation Bureau is now assuming a future annual return of just over 6%, he said. Most of ELNY’s contracts will run off within 35 years, with the last contract expiring in about 70 years, he said.”

Let’s see what’s wrong with the foregoing statements:

Inadequate interest rate assumptions cannot begin to account for the purported deficit. The assets simply have not decreased substantially in the past 16 years. In fact, prior to 2002, there was NO reduction in reported assets – all policy claims were being paid from current earnings.

The 1992 plan of rehabilitation does not include interest rate assumptions. It discussed an investment strategy summarized as follows: “. . . principal and interest realized upon maturity or recovery of ELNY’s bonds [none of which defaulted, by the way], as well as other cash flows derived from investments contained in ELNY’s portfolio, will be reinvested in long-term (thirty (30) year) investment grade corporate bonds and in Standard and Poor’s 500 common stocks. The reinvestment in common stocks will be limited.”

The 1992 plan of rehabilitation specifically stated that that the cash flows from investments “are projected to be sufficient to cover current [covered annuity] payouts for at least ten (10) years.” That is what happened. So how was the strategy wrong?

By the beginning of 2002 the number of outstanding contracts had already declined by over 40% (now over 50%), yet the asset base remained constant. Over-stated interest assumptions simply cannot explain the Bureau’s publicly announced conclusions.

So if it is not the interest rate assumptions causing the purported deficit, what is causing it? Potential investors have made proposals to the Liquidation Bureau over the past several years supported by pro forma statements using interest rate assumptions at or below the Bureau’s current assumption without showing any significant deterioration based on known liabilities. These investment proposals all failed to obtain the Bureau’s “approval” because of continual increases in liabilities – not because of a decline in the assets. This precipitous increase in liabilities – which is not mentioned at all in the Bureau’s statements about ELNY — is counter-intuitive to the conservative actuarial assumptions in place for the life of the estate, the nature of the business, and the decline by half in the number of active policies.

A couple of other points are also worthy of note. It is interesting that this publicly touted agreement with the industry is not publicly available, and all the participants are unable to discuss the agreement because they were each required to enter into a confidentiality agreement with the Bureau. If the bail out plan is so beneficial for everyone, why does the Bureau feel compelled to keep it hidden?

In the Business Insurance article, Mr. Peters also stated that the bail-out plan “would be cheaper for the insurers [how this is so is not explained] and avoids the ‘chaos’ that would come with a liquidation.” One thing that liquidation accomplishes is to remove the company from the hands of the people that caused it to become insolvent. Because ELNY was solvent when it was placed in rehabilitation, if it is now insolvent it became insolvent under the Liquidation Bureau’s watch. Can anyone imagine the industry voluntarily contributing $750 million to bail out a company’s management so that it could avoid liquidation and remain in charge?