Beyond Structured Settlements

Structured Settlement Sales Decline

Compared with prior years, total United States structured settlement annuity premium dropped sharply in 2011 to $4,974,710,838 according to a newly released report by Melissa Evola. Evola, President of Structured Financial Associates, Inc., has tracked structured settlement industry sales since 2002 based upon input from life insurance companies that participate in the structured settlement market.

The 2011 structured settlement annuity premium total represents an approximate 10 percent decline from 2010 and an approximate 20 percent decline from 2008. Evola's report further indicates 28,811 structured settlement annuities were sold during 2011 for an average per case premium of $172,667.

Based upon Evola's report, MetLife and Prudential Life were the leading structured settlement annuity providers in 2011. Their combined structured settlement premium of $2,119,300,000 represented approximately 43 percent of total 2011 U.S. structured settlement sales. According to Evola's report, 12 life insurance companies comprised the U.S. structured settlement market in 2011 compared with 22 companies in 2002.

Evola's report also tracks "non-qualified" structured settlement sales which are included in her total structured settlement premium figures. Structured settlements that are non-qualified [under IRC sections 130 and 104(a)(2)] are utilized to defer future payments from immediate income tax. Only two annuity providers currently offer this product. Total non-qualified structured settlement annuity premium in 2011 was $119,513,424, according to Evola's report, compared with $123,532,247 in 2010 and an historic high of $192,501,540 in 2008.

Historic annual U.S. structured settlement annuity premium - as reported by Evola:

• 2011 - $4,974,710,838
• 2010 - $5,524,359,408
• 2009 - $5,383,998,395
• 2008 - $6,226,578,725
• 2007 - $5,998,277,764
• 2006 - $6,111,583,112
• 2005 - $6,125,251,601
• 2004 - $6,135,000,000
• 2003 - $5,965,000,000
• 2002 - $6,142,000,000

For estimated structured settlement annuity sales estimates from 1975-2011, see the structured settlement wiki which features estimates from the authors of "Structured Settlements and Periodic Payment Judgments" (S2P2J) based upon historical input from industry sources including Evola since 2002.

Many structured settlement industry participants attribute declining sales to low interest rates including future forecasts by the Federal Reserve. Market yields on U.S. Treasury securities at 30 year constant maturity peaked at 13.45 percent in 1981 according to reports published by the Board of Governors of the Federal Reserve System. Here are several historic average annual rates for 30 year Treasury securities based upon the same information source:

• 2011 - 3.91%
• 2010 - 4.25%
• 2009 - 4.08%
• 2008 - 4.28%
• 2007 - 4.84%
• 2000 - 5.94%
• 1990 - 8.61%
• 1980 - 11.27%

Although interest rates represent an important investment consideration, they impact all investment products not just structured settlement annuities. Regardless of interest rates, many other factors, such as mortality risk transfer and relative financial security, favor structured settlement annuities as the core settlement planning product for many personal physical injury victims. For additional information about structured settlement product suitability standards, see the structured settlement wiki.

Structured Settlements in 2011 - 3

Prior S2KM 2011 year-end structured settlement blog posts have highlighted the historic significance of the ELNY liquidation and provided a strategic 2011 industry retrospective . This blog post summarizes additional important 2011 structured settlement developments and information.

Taxation

• IRS Audit Guides - The Internal Revenue Service published an Audit Guide in 2011 to assist its examiners in determining the tax treatment of proceeds from lawsuits, settlements and awards received after August 21, 1996. That date marked the enactment of the Small Business Job Protection Act of 1996 which added a "physical" requirement to IRC § 104(a)(2). The IRS had previously published an Audit Guide to assist its examiners in determining whether the IRC §5891 excise tax applies to specific structured settlement factoring transactions.
• JTC Structured Settlement Estimate - The Joint Committee on Taxation (JCT) in 2011 released its Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014 (JCT Report). For the first time, the JCT Report calculated an estimated tax revenue loss for the "exclusion of investment income from structured settlement arrangements". The JCT estimate projected structured settlement tax revenue loss to be "de minimis" - meaning less that $50 million for Fiscal Years 2010-2014 or less than $12.5 million per year.

Government Benefits

• Medicare Secondary Payer Protocol - Although no statutory or regulatory authority requires Medicare set-aside arrangements (MSAs) in third party liability settlements, confusion continues as to whether and when MSAs are necessary and/or appropriate for such cases. On May 6, 2011, the United States Attorney's Office for the Western District of New York (USAOWDNY) released a one page "Medicare Secondary Payer Protocol" (MSP Protocol) establishing a voluntary process by which that U.S. Attorney's Office will review MSA proposals for liability cases provided certain conditions are met.

• U.S. v. Stricker - In this case involving periodic payments and the MSP Act, a U.S. District Court in Alabama denied a motion by the U.S. Government to reconsider the court's earlier dismissal based upon its finding that the applicable statutes of limitations barred the Government's complaint. The Government had argued on appeal that the court erred in granting its motions to dismiss without considering the Government's theory of continuing accrual argument.

• WCMSA portal - The Centers for Medicare and Medicaid Services (CMS) announced the creation of an Internet portal for submission of workers compensation MSA (WCMSA) proposals. The new web-based application:
  • Enables WCMSA proposals to be submitted electronically for CMS review;
  • Accepts submission documents and supplemental information CMS may request;
  • Provides online status updates for MSA applications;
  • Generates email alerts when approval letters are issued.
• Conditional payment guidelines - CMS released guidelines during 2011 to provide certainty and finality for conditional Medicare payments. This "self-calculated final conditional payment amount" option, will be initiated in February 2012 for claims with a total settlement value of $25,000 or less allowing attorneys and/or claimants to receive a final amount owed number from CMS prior to settlements. For additional information see the Medicare Secondary Payer Recovery Contractor (MSPRC) website.

Minors Settlements - Whether a structured settlement annuity that extends beyond the age of majority is "suitable" for, or in the "best interests" of, a minor (especially a minor without a debilitating injury) represents an important industry issue. In his 2009 presentation to the Society of Settlement Planners (SSP) titled "What Judges Look for When Approving a Minor's Settlement", Texas attorney Phillip McCrury surveyed state minors' statutes and concluded many states require judges to consider the "best interest" of a minor even though very few states directly address structured settlement annuities. Two 2011 cases (only one involving a structured settlement) highlight the potential for conflicting judicial interpretations when annuities are part of a proposed minor's settlement.

• Hancock v. Share - A Florida Appellate Court reversed a Florida Trial Court ruling that denied approval of a proposed structured settlement for a minor. Although the trial court had found that the proposed structured settlement was in the "best interests" of the minor, it refused to approve the structured settlement citing a Florida statute that prohibits a guardian "to bind the assets" of a minor beyond the age of majority.
• In the Matter of Sandra McDuffie - A New York trial court ruled against an estate administrator who proposed to purchase an annuity for a minor child of the decedent stating "the Court cannot authorize the administrator to restrict funds due to an infant after the infant has reached the age of [majority]".

Executive Life Insurance Company of California - In a legal dispute (Aurora S.A. v. Poizner) which it characterized as "another aspect of the dizzyingly complex and heavily litigated failure of the Executive Life Insurance Company", a California Court of Appeals on August 8, 2011 upheld a trial court decision that California's Insurance Commissioner correctly declined to approve the proposed sale of Aurora National Life Assurance Company (Aurora) by Aurora S.A. to Reassure America Life Insurance Company (REALIC), a Swiss Reinsurance subsidiary.

Structured Settlement Annuity Sales - S2KM acknowledges and appreciates receiving market recap reports highlighting quarterly structured settlement annuity sales (Melissa Evola) and weekly financial market data (Richard Nahill).

• Annuity sales - Evola's most recent quarterly compilation of 2011 structured settlement annuity sales (thru September 30) indicates 21,846 cases have been structured for a total premium of $3,633,489,474. These numbers represent a significant decrease from 2010 (also thru September 30) of 23,578 cases and $4,140,704,642 of premium.
• Interest rates - Nahill's most recent 2011 financial market recap (for week ending December 16) shows interest rates of 1.86 percent for 10-year U.S. Treasury bonds compared with 3.30 percent as of December 31, 2010.

For prior S2KM annual reports summaring structured settlement industry developments, see the structured settlement wiki.