J.P. Morgan has agreed a settlement of legal cases related to its management of the investment accounts for the Scottish Re life insurance securitization transactions issued by Orkney Re II Ltd. and Ballantyne Re plc, with a cash payout of $400 million now expected.
The $485 million Orkney Re II of life insurance linked securities were issued for sponsor Scottish Re back in 2005, in order to fund a structured reinsurance-like arrangement that supported the firms XXX reserve requirements for a defined block of level premium term life insurance policies.
The 2006 issued Ballantyne Re regulation XXX type life insurance-linked securities (ILS), which amounted to $1.7 billion of notes, provided similar funding for life insurance policies, backed by a structured reinsurance arrangement.
The transactions were both stricken by issues on the asset management side, with the underlying collateral assets having performed poorly and leaving insufficient collateral to back up the life ILS transaction, resulting in a series of ratings downgrades for both the Orkney Re II and Ballantyne Re notes.
But at the same time, the asset manager responsible, which was J.P. Morgan Investment Management, was sued by Orkney Re II and Assured Guaranty (which acted as a guarantor for the deal), and also by Ballantyne Re and Ambac (guarantor for the Ballantyne deal) claiming that the asset management services had not lived up to expectations.
The suit claimed that guidelines on investments had not been followed and that instead of ensuring the Orkney Re II and Ballantyne Re accounts were diversified and invested in suitable assets, J.P. Morgan Investment Management had filled them with sub-prime and lower rated mortgage bond investments.
J.P. Morgan had initially responded saying that the investments were rated accordingly with the guidelines and that it had performed due diligence on the investments selected for the portfolio, but as the mortgage market fell apart the investments naturally lost significant value, impacting the two life ILS transactions.
The original Orkney suit had been filed by Orkney Re II and Assured Guaranty back in 2008. It had been thrown out in 2010, but was revived later that year, and now finally has some kind of resolution. The Ballantyne Re suit was filed at around the same time, we understand.
Orkney Re II said that its director’s have “agreed in principle to settle litigation brought by Assured Guaranty (UK) Ltd., in its own right and in the right of Orkney, against J.P. Morgan Investment Management relating to the management of Orkney’s investment accounts, which were funded with the proceeds of notes issued in 2005 in connection with a structured reinsurance transaction and guaranteed in part by Assured.”
Ballantyne Re’s director’s said that they have also “agreed in principle to settle litigation brought in its name by Ambac Assurance UK Limited against J.P. Morgan Investment Management relating to the management of Ballantyne’s investment accounts, which were funded with the proceeds of notes issued in 2006 in connection with a structured reinsurance transaction and guaranteed in part by Ambac UK.”
The settlements, which are still subject to final documentation, will see Orkney Re II receiving $74.4 million in cash, in return for releasing all of the claims by Orkney and Assured in the case, while Ballantyne Re will receive $325.6 million in return for releasing it and Ambac’s claims on J.P. Morgan Investment Management.
This settlement will go some way towards boosting the value of the underlying collateral assets for the Orkney Re II and Ballantyne Re notes, as that is where we’d imagine it will be put to work (after costs), which will help to provide more investor confidence to those still invested.
The Orkney Re II and Ballantyne Re notes are not due for maturity until 2035 and 2036, so there is a long way for the XXX linked life insurance securitization transactions left to run, but settling this case and the resulting cash payment will certainly be appreciated by the holders of the two life ILS transactions notes.