Corporate & Financial Weekly Digest : Corporate Finance Lawyers & Attorneys for Legal Developments in Business & Financial Services

On July 22, the Securities and Exchange Commission released a staff report recommending that life settlements be clearly defined as "securities" for purposes of the federal securities laws in order to better protect investors.

The report was prepared by the Commission's Life Settlements Task Force, which had been created in August 2009 to examine emerging issues in the life settlements market and to advise the Commission on the need to improve market practices and regulatory oversight. The Task Force is comprised of members from multiple divisions of the Commission, including Corporation Finance, Enforcement, Investment Management, and Trading and Markets.

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Last week, through negotiations among the House of Representatives and Senate conferees on the financial services reform legislation, agreement was reached on the scope of a proposed insurance office within the U.S. Treasury Department to be led by a newly appointed Director.

The Senate Banking Committee, in its press release on progress on the draft legislation, reported that the new office would be called the Federal Insurance Office, the name selected in the House version of the measure. This office would monitor the insurance industry, undertake a study on ways to modernize insurance regulation and provide recommendations to Congress. The office would also examine the extent to which traditionally underserved communities, minorities, and low- and moderate-income persons have access to affordable insurance products. The office would have no authority over health insurance.

In the international arena, the new Federal Insurance Office would have the power to pre-empt state insurance measures that are found to discriminate against non-U.S. insurers subject to certain bilateral or multilateral agreements between the U.S. and foreign governments or regulatory authorities regarding prudential matters. Such a finding would be reported to certain House and Senate Committees, and the relevant state would also be notified of the potential pre-emption and offered the opportunity to comment.

One of the most controversial sections of the original bill, which has been opposed by state insurance regulators, authorized the new Federal Insurance Office to recommend that an insurer and its affiliates be designated an entity that could pose a systemic risk and, accordingly, subject to regulation as a non-bank financial company by the Federal Reserve. It is unclear at this time whether that section will undergo further amendment in the negotiations among the congressional conferees.

For additional information and updates on the financial reform bill conference process, click here.

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Co-authored by Marc M. Tract

Ambac Financial Group, Inc., the parent of Ambac Assurance Corporation (AAC), announced yesterday that it had terminated all of its remaining exposure to collateralized debt obligations (CDOs) of asset-backed securities (ABS) totaling $16.4 billion. The termination or commutation involved entry by AAC into a settlement agreement with counterparties to outstanding credit default swaps with Ambac Credit Products that were guaranteed by AAC. Under the settlement agreement, in exchange for the termination of the CDO of ABS obligations, AAC paid to the counterparties a total of (1) $2.6 billion in cash, and (2) $2.0 billion in newly issued surplus notes of AAC. The surplus notes bear an interest rate of 5.1% and have a maturity date of June 7, 2020. Payments of interest and principal on the surplus notes are subject to the prior approval of the Wisconsin Commissioner of Insurance. The counterparties to the settlement and commutation agreements were Banco Bilbao of Argentina, Banco Santander, Barclays Plc, BNP Paribas, CIBC, Commerzbank, Credit Agricole, Deutsche Bank, Natixis, Rabobank Nederland, RBS, Société Generale, and UBS, as well as Citigroup.

The proposed commutation arrangements had been challenged in litigation initiated by a group of hedge funds and investment managers alleging that the holders of the CDOs were receiving preferential treatment. The Wisconsin court overseeing the rehabilitation of AAC by the state insurance commissioner rejected the challenge earlier this month.

On March 24, AAC created a segregated account and consented to rehabilitation of that account by the Wisconsin Commissioner of Insurance. Under Wisconsin law, the segregated account is accorded special treatment akin to collateral supporting a secured obligation, treated almost as a separate insurer from AAC, and was established to hold many of the financial guaranty insurance policies against which there were, or were likely to be, significant claims made against AAC, particularly policies insuring residential mortgage-backed securities and other structured finance transactions. The policies in the segregated account represent more than $35 billion in obligations. In conjunction with the creation of the segregated account, a Wisconsin state court approved the Insurance Commissioner’s imposition of a temporary injunction to halt payments under policies and other contracts allocated to the segregated account, as well as actions or claims against subsidiaries of AAC whose equity interests were made part of the segregated account. The injunction was instituted to permit the Commissioner to prepare a plan of rehabilitation to protect the interests of policyholders, creditors and the public by maximizing AAC’s resources available to pay claims, to provide a fair and orderly payment procedure, and to reform and revitalize AAC. A rehabilitation for a troubled insurer represents a regulatory action taken to avoid liquidation. The segregated account and order of rehabilitation were approved after AAC stated it was unable to file fourth quarter or full-year 2009 results. For the third quarter of 2009, AAC had posted losses of $573 million.

For further details on the commutation arrangements, see the Form 8-K filed by Ambac at www.sec.gov.

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A federal judge in Rhode Island last week issued a ruling that raised questions as to whether life insurers can rely on state insurable interest laws to void sales of stranger-originated annuities.

In suits brought by Western Reserve Life Assurance Co. of Ohio and Transamerica Life Insurance Co. against broker-dealers and an estate planning attorney, the carriers alleged that the defendants had paired investors with terminally ill individuals whose variable annuities provided a guaranteed death benefit. The annuitants were paid to participate in the plan under which annuities were issued in their names, but the premiums were paid for by investors. Under the terms of the annuity, if the annuitant died, his or her beneficiaries would be entitled to receive the principal originally invested, even if the underlying investments had decreased in value. Variable annuities are often sold as retirement-savings vehicles as the amounts contributed are invested in securities and the value grows over time on a tax-deferred basis. Upon retirement, an annuitant can withdraw the principal and convert it into a stream of lifetime annual payments or leave it for her heirs. In the alleged scheme, the investors purportedly used a longer-term investment product for short-term gain.

In the arrangement challenged in Rhode Island, the carriers claimed the annuities should be declared void because the beneficiaries, who were unrelated to the annuitants, had no insurable interest in their continued lives. The judge distinguished the annuities from life insurance policies, holding that no insurable interest was required for these annuities and that the marketing materials for the product presented the death benefit as “an ancillary perk,” not as a central feature. While dismissing the carriers’ claims for rescission, the judge let stand certain fraud, conspiracy and other claims against the defendants. The decision represents a setback for life insurance companies, but its ultimate precedential impact is unclear. (Western Reserve Life Assurance Co. of Ohio v. Conreal LLC, et al. (U.S.D.C., District of Rhode Island, C.A. No. 09-470 S.))

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