When Catherine Lawley was 2 years old, she received a substantial settlement from a wrongful death lawsuit involving her father that she used to purchase an annuity, which would begin paying her an income for the rest of her life when she turned 25.
She started collecting her payments in 2006, but now she has been informed her annuity will be cut to less than half. The insurance company responsible for providing those payments -- Executive Life Insurance Co. of New York -- made some bad investments and can no longer afford to make good on its promises.
"Obviously, I'm really upset about this," said Mrs. Lawley, 32, of Bridgeport, Montgomery County. "That money was supposed to last me the rest of my life and be passed to my two children. Now after 20 years of waiting to access it, my money is being used to pay other people."
Mrs. Lawley, whose payout has been reduced to 47 percent of its original value, is one of 62 Pennsylvania residents who will lose a total $32 million in annuity policy payments in the Executive Life case. Nationwide, about 1,500 policyholders will lose a total of $920 million, highlighting potential weaknesses in the risk-free guarantee that many insurance companies emphasize when marketing annuities.
The annuity industry is based on people trading large sums of nonrefundable cash immediately or over an extended period of time in exchange for the promise of pre-defined monthly payments for the rest of their lives or for a specified period of time.
But Executive Life Insurance Co. fell on hard times in 1991 when its parent company -- Executive Life Insurance Co., Los Angeles -- collapsed. Although it was taken over by the superintendent of insurance in the state of New York and handed to the New York Bureau of Liquidation, the company's losses continued to mount over the years and it now faces a $2 billion shortfall.
Under a court ruling, 85 percent of the policyholders will receive 100 percent of what they are owed by Executive Life. The other 15 percent of policyholders -- including Mrs. Lawley -- will absorb $920 million in losses in the form of reduced annuity payments.
"What this means is people should be very careful about not putting all their eggs in one basket and choose their annuity provider with great care," said Edward Stone, a New York-based attorney who represents Mrs. Lawley and others in the case winding its way through New York state courts.
"Not all annuity providers are created equal," he said. "I think there are some very responsible, well-capitalized insurance companies out there. But there are others that are much riskier than they appear."
Mr. Stone said each state has its own guarantee association that covers insurance payouts up to a certain cap in the event that a company becomes insolvent as Executive Life has. The cap is determined by state law.
In Pennsylvania, the cap is $300,000. The cap is only triggered when an insurance company becomes insolvent.
People who stand to receive 100 percent of their annuity payouts in the Executive Life case are those whose annuity values fall below the cap set by their state.
Fortunately, Mr. Stone said Mrs. Lawley's case falls under New York's guaranty association, although she is a Pennsylvania resident. New York changed its guaranty association laws in 1985 so that nonresidents were covered in some cases by the New York cap -- $500,000 -- if the insurance company operates out of New York.
"It turns out better for her in this case because New York's cap rate is higher," Mr. Stone said.
Rosanne Placey, a spokesperson for the Pennsylvania Department of Insurance, said when an insurance company is declared insolvent and a liquidation order is triggered, all state guaranty associations step up to the plate to pay policyholders claims to the maximum level allowed by law.
"The guaranty associations are funded by assessments on solvent insurance companies," Ms. Placey said. "This safety net is very unique to the insurance industry. Solvent insurance carriers are in effect paying the claims of any insolvent carriers with policyholders in a particular state. The levels allowed by law do vary state to state -- as well as by line of business."
Future payments to Executive Life policyholders will be made through GABC, a captive insurance company based in Washington, D.C., that was set up solely to provide these payments.
Mr. Stone said the Executive Life case could have serious ripple effects on the annuity industry if it causes consumer confidence in annuities to decline. The Executive Life failure, he said, is especially devastating for people depending on the payments for long-term medical care.
"Most of the people affected were injury victims or wrongful death survivors who took structured settlements [instead of a lump sum payout] that were sold to them as a way of getting income for life," Mr. Stone said.
"The thing that bothers me about this case is they have to rob Peter to pay Paul," he said. "Mrs. Lawley is really one of the most hurt in the way this is working. The whole payment schedule she took was designed to pay her when she was older. She is now facing a significant reduction because she was over the cap.
"She has a very unique situation because not everyone takes a 20-year deferral. Now her payout is being cut even though the insurance company has had her money since 1986."
Tim Grant: email@example.com or 412-263-1591.