In contrast to anticipated 2012 sales declines in the U.S structured settlement primary market, industry experts interviewed by S2KM agree the U.S. structured settlement secondary market achieved record sales and profits in 2012.
S2KM secondary market estimates for 2012 - based on interviews with industry experts:
- 12,000 secondary market transfers - with less than 120 contested by annuity owners and/or providers.
- $360 million of total secondary market purchases (money paid to transferors).
- $30,000 average individual transfer.
- Average discount rates in the low double digits - with the lowest average discount rates (high single digits) provided by AllState's commutations.
- Total industry profit of $120 million calculated as follows:
- $1 billion received from investors;
- Less: $360 million paid to transferors;
- Equals: $640 million of revenue;
- Less: $520 million of expenses;
- Equals: $120 million of profits.
- As explained by Earl Nesbitt, Executive Director of the National Association of Settlement Purchasers (NASP), during his presentation at the NASP 2011 Annual Meeting: the concepts of "discount rate" and "discounted present value" both play an important role in court hearings to evaluate structured settlement transfer proposals.
The Model State Structured Settlement Protection Act defines "discounted present value" to mean: "the present value of future payments determined by discounting such payments to the present using the most recently published Applicable Federal Rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service."
- Secondary market experts interviewed by S2KM agree generally that discount rates for structured settlement transfers were "low" during 2012 compared with prior years - especially when compared with 2009 when discount rates were exceptionally "high" as a result of the 2008 financial crisis.
- "Average" discount rates are difficult to define because many factors determine the discount rate for a specific case. For examples: cost and availability of funds; single vs. multiple bid transactions; duration and amount of payments; and whether payments are certain or life contingent.
- During his 2011 NASP presentation, Nesbitt
summarized these results from a 2011 survey he conducted of the discount
rates approved by judges in Harris County Texas:
- The average discount rate: 15.8 percent;
- The weighted average (i.e. taking into consideration the relative case size): 12.96 percent;
- The lowest discount rate: 7.4 percent; and
- The highest discount rate ($3494 paid for $7282 due in less than one year): 61.3 percent.
- Industry experts interviewed by S2KM disagree on who controls what percentages of the structured settlement secondary market.
- Estimates of the post-merger 2012 market share (revenue and sales) of the now-combined J.G. Wentworth and Peachtree Financial Solutions (JGW/Peachtree) vary from a low of 50% to a high of 75%.
- The remaining 2012 market shares (revenue and number of transfers) are believed to be split relatively evenly among other NASP members and non-NASP members including re-sellers.
- Not all secondary market participants, however, share equally in industry profits.
- Some industry experts believe JGW/Peachtree's share of the estimated 2012 industry profits of $120 million was $100 million, or 83%.
- Many new secondary market participants, including re-sellers, who began entering the market in 2009, are experiencing lower profits (or losses) in 2012 according to industry experts interviewed by S2KM. In addition, attorneys representing insurance companies report these newer (non-NASP member) factoring companies and re-sellers frequently lack legal and transactional knowledge ("don't know what they are doing") and cause an inordinate number of transfer problems.
Primary Market Response
As S2KM previously reported, continuing secondary market sales growth has occurred despite restrictive actions by primary structured settlement participants. Examples:
- The National Structured Settlement Trade Association (NSSTA) continues to prohibit its members from "actively soliciting and promoting structured settlement factoring transactions to individuals who are receiving periodic payments under structured settlements?"
- In Stone Street Capital v. McClendon, a Louisiana state court ruled that Travelers Insurance, as owner of structured settlement annuities, had no right to order structured settlement annuity issuers (in this case MetLife) to stop making payments to transfer companies following the death of the original annuitant/payees because of the existing court orders approving those transfers.
Based upon interviews with industry experts and DBRS' June 8, 2011 Pre-Sale Report for J.G. Wentworth's Fixed Rate Asset-Backed Notes Series 2011-1, S2KM estimates the following historic (1986-2012) structured settlement secondary market metrics:
- 136,000 transfers - involving 68,000 structured settlement recipients.
- $4 billion - aggregate sums paid to transferor structured settlement recipients. For comparison, S2KM estimates the primary market has sold $134 billion of structured settlement annuities since 1975.
- $10.4 billion - aggregate periodic payments purchased by secondary market companies.
2012 Secondary Market Developments
- Vermont became the 48th state to enact a structured settlement protection statute. The new Vermont statute is generally based upon the NCOIL Model Act with some variations related to independent professional advisors, notice requirements for certain state agencies and the required court appearance by the structured settlement payee.
- JLL Partners, owners of J.G. Wentworth, are reportedly attempting to sell the company for $1 billion with several private-equity firms identified as potential purchasers.
For additional S2KM structured settlement secondary market reporting and resources, see the structured settlement wiki.
Additional post in S2KM's blog series: "Structured Settlements in 2012":
- Part 1 - Primary market
- Part 2 - Settlement planning
- Part 3 - Secondary market
- Part 4 - Executive Life of New York