Beyond Structured Settlements

Structured Settlements in 2011 - 2

In a prior blog post, S2KM highlighted the historic significance of the ELNY liquidation as the dominant 2011 structured settlement industry development. This blog post offers a strategic perspective of the industry's status in 2011 focusing in part on the industry's three national associations and also providing a broader perspective for ELNY.

Strategic Overview - Primary Market

The National Structured Settlement Trade Association (NSSTA) celebrated its 25th anniversary in 2011. Among its 2011 accomplishments, NSSTA noticeably improved its marketing and educational programs while focusing substantial resources to help minimize problems related to the ELNY liquidation. NSSTA has attempted to balance the need to inform its members (not the public) about ELNY's status with the need to promote the strength of its life insurance markets and the state guaranty fund system.

Speaking at NSSTA's 2011 Annual Meeting, Thomas Ronce, Chairman of NOLHGA, described the current life and health guaranty system in the United States as experienced, well-financed and armed with a multitude of optional legal and financial tools. Applied to ELNY, this state guaranty system will substantially improve the recovery for many ELNY structured settlement recipients. The state guaranty system, however, will not make whole every ELNY structured settlement recipient. Unfortunately, even with guaranty fund payments and additional enhancements, many ELNY structured settlement recipients are expected to experience shortfalls.

NSSTA's 2011 Annual Meeting and Fall Educational Conference also showcased the current strength of the structured settlement market and its product providers.

• Jim Morris, President, Chairman and CEO of Pacific Life Insurance Company, accentuated the current financial strength of U.S. life insurance companies generally and explained why structured settlement annuities represent an excellent strategic product for life companies. Confirming Morris' assessment, three new product providers (Mutual of Omaha, National Indemnity and Hartford) entered (or re-entered) the structured settlement marketplace during 2011.
• William T. Robinson III, President of the American Bar Association (ABA) strongly endorsed structured settlements as "professional and dignified solutions" for injury victims based upon his first-hand experience as a litigation attorney. Robinson also suggested the ABA and NSSTA should identify shared interests and lobbying opportunities.
• American General Life President Mary Jane Fortin described AIG, a structured settlement product provider that received more than $180 billion of loans and investments from the United States government in 2008, as "a strong, stable and resilient company dedicated to keeping our promises". Fortin also dispelled several "myths" about AIG, summarized AIG's recovery from the 2008 financial crisis and expressed optimism about the future of life insurance industry and structured settlements.

Despite these positive assurances, however, primary market structured settlement annuity sales have continued to trend downward for the past three years, arguably because of the 2008 financial crisis and historically low interest rates which many experts predict will continue for the foreseeable future. What has been missing from NSSTA's leadership during 2011 has been a positive vision for NSSTA's own future and the future of structured settlements.

David Ringler, NSSTA's first President, spoke during the NSSTA 2011 Annual Meeting. Ringler stated the most important reason for creating NSSTA was "having a place where everyone and anyone can sit down with each other and discuss the issues and viewpoints regardless of beliefs."  Sometime during the past 25 years, NSSTA lost sight of this original vision and now generally excludes industry voices and perspectives that challenge traditional structured settlement business models and practices.

As one result, two additional professional associations have formed with alternative structured settlement perspectives:

• The Society of Settlement Planners (SSP) - SSP espouses the claimant's right to select his or her own structured settlement adviser and funding company. SSP promotes structured settlement annuities as a core product for special needs settlement planning and favors greater utilization of IRC 468B Qualified Settlement Funds (QSFs).
• The National Association of Settlement Purchasers (NASP) - NASP promotes the right of structured settlement recipients, in compliance with federal and state laws, to sell their payment rights provided a state judge approves the sale in advance as being in the "best interest" of the transferor/payee taking into account the welfare and support of the payee's dependents.

To its credit, NSSTA expanded the scope of its educational programs in 2011 to discuss QSFs and to provide its members with more detailed information about structured settlement secondary market. The perspective for these NSSTA discussions, however, remains defensive and protective without any attempt to envision or discuss new business opportunities or product improvements.

By comparison, SSP's vision for the the future of structured settlements is defined and supported by its "Standards of Professional Conduct". SSP views structured settlements as a core product for personal injury settlement planning. SSP's vision agrees with and encompasses the business model Joseph DiGangi introduced to NSSTA in 2009 as "Settlement Consulting" which he characterized as "a wake up call for the industry." SSP's educational conferences continue to push structured settlement industry thinking beyond its historic boundaries and the inevitability of its path dependence.

In addition to SSP, three national legal associations are developing special needs business practices and models that expand the framework and opportunities for structured settlements:

• Academy of Special Needs Planners (ASNP)
• National Academy of Elder Law Attorneys (NAELA)
• Special Needs Alliance (SNA).

Faced with the ELNY crisis, declining annuity sales and the continuing prospect of low interest rates, some primary market structured settlement stakeholders now recognize that business practices and models that made sense in the past may have survived despite the eclipse of their earlier justification.  S2KM believes more primary market stakeholders should expand their strategic perspectives and re-think structured settlements in the context of the changing legal and financial landscape.

For example, here are four 2010 developments with important consequences for structured settlement stakeholders that have heretofore received inadequate primary market educational attention:

• Patient Protection and Affordability Care Act - how does health care reform impact injury victims and what opportunities does it create for structured settlements?
• Dodd-Frank Wall Street Reform and Consumer Protection Act - how will the Consumer Financial Protection Bureau (CFPB) address structured settlement complaints?
• NAIC Suitability in Annuity Transactions Model Regulation - what does "suitability" mean for structured settlement annuities and how does "suitability" differ from the "best interest" standard applicable to trustees, investment advisers and structured settlement transfers?
• Spencer v. Hartford class action settlement - what are the lessons learned and resulting new best practices for structured settlements?

Strategic Overview - Secondary Market

The ELNY liquidation is also having a negative impact on the secondary structured settlement market. Some industry experts have estimated that as many as 1000 of ELNY structured settlement annuities (out of the 4168 total) have undergone transfers of some or all payment rights. Investors who have purchased ELNY annuity payment rights may not be eligible to receive contributions from state guaranty funds which historically protect "consumers". The NYLB's December 7, 2011 letters warned ELNY payees "if you have transferred any part of your right to receive ELNY SSA benefits to a third party, you may not be eligible to receive benefits from CABC related to the benefits you transferred."

Although the financial crisis of 2008 had a devastating short term impact on the structured settlement secondary market, the market has experienced robust sales in 2011 as institutional investors continue to be attracted to the relatively high rates of returns generated by restructured (post transfer) payment right obligations. More individual investors, including personal injury claimants and their attorneys, have also begun purchasing restructured payment rights although some industry experts caution against potential tax and securities law uncertainties.

The structured settlement secondary market changed dramatically in 2011 with the announced merger of  J.G. Wentworth and Peachtree Settlement Funding. The merger combined the two largest purchasers of structured settlement payment rights with an estimated 80-85 percent of the market.

The merger highlights a remarkable turnaround for Wentworth whose shareholders control the majority of the combined companies. In 2009, Wentworth and two affiliated companies entered Chapter 11 bankruptcy protection after the company "encountered liquidity problems amid a tightening credit market". Wentworth laid off 120 of its 200 employees and closed its office in Las Vegas. Its general corporate bonds were "almost worthless" and were trading, if at all, for pennies on the dollar. Less than six months later, Wentworth emerged from bankruptcy with an announcement that JLL Partners (Wentworth's owners) had invested an additional $100 million in the firm.

In a significant case (Symetra v. Rapid Settlements) highlighting controversial business practices which were opposed by NASP as well as structured settlement annuity providers, a Texas court issued injunctions during 2011 prohibiting Rapid Settlement's prior business practices of using arbitration to by-pass state structured settlement protection statutes and taking security interests to gain rights of first refusal for future transfers.

Check the structured settlement wiki for additional S2KM structured settlement reporting:

• ELNY liquidation
• Annual industry reports
• Professional association meetings

ADDENDUM (12/12/2011) - S2KM's report above omits at least one important 2011 strategic structured settlement development. NSSTA and its product provider members launched the first-ever industry metrics study during 2011. For more information about metrics, see S2KM's "Structured Settlement Metrics" series featured on the structured settlement wiki.

NSSTA 2011 Education Meeting

The National Structured Settlement Trade Association (NSSTA) hosted one of its best-ever educational programs November 2-4, 2011 in Austin, Texas. The conference primarily showcased NSSTA members and NSSTA member executives and encompassed a variety of important industry topics.

Speakers and topics:

NSSTA President Dan Finn - Finn summarized NSSTA's current projects, emphasized NSSTA's improved structured settlement marketing and announced the 2012 NSSTA Annual Meeting which will take place in Washington, D.C. and feature Congressmen Dave Camp and Paul Ryan as Keynote Speakers.

NSSTA Executive Director Eric Vaughn - In addition to reviewing the 112th Congress and Super Committee, Vaughn discussed the following NSSTA challenges and priorities:

• Protect IRC sections 104(a)(2) and 130.
• Defend structured settlements.
• Promote the expanded use of structured settlements.
• Expand the markets for structured settlements.
• Enhance the CSSC designation.
• Provide state court judicial education about structured settlements.

AIG Chief Economist Ardanvan Mobasheri - Mobasheri's economic overview highlighted China's emerging leadership, outlined a "very healthy non-financial business world" and predicted low interest rates for the foreseeable future.

American General Life President Mary Jane Fortin - Describing AIG as "a strong, stable and resilient company dedicated to keeping our promises", Fortin dispelled several "myths" about AIG, summarized AIG's recovery and expressed optimism about the future of life insurance industry and structured settlements.

John McCulloch and Michael Miller - Reprising NSSTA "Tax Posse", McCulloch and Miller introduced the new IRS audit guide for lawsuits, awards and settlements and reviewed recent tax cases addressing employment, factoring and Qualified Settlement Fund issues.

Peter Vodola, Stephen Harris and Amy Ravitz - The co-chairpersons of NSSTA's Legal Committee participated in two separate panels moderated by James Ebel and Michael Kelly and discussed non-tax cases and issues including state structured settlement protection statutes, issues arising from transfer petitions and minors statutes and settlements.

Len Blonder and NSSTA General Counsel Craig Ulman - Blonder and Ulman reported the status of the Executive Life of New York (ELNY) liquidation, discussed the consequences for structured settlements and reviewed hypothetical case examples from the proposed ELNY Restructuring Agreement.

Karen Meyers, LeAnne Sprague, Doug Brand and Kathy Moghadas - In addition to discussing changes to the CSSC designation that will require annual CE credits, NSSTA sponsored a special four hour annuity education session designed to meet the requirements of the new state annuity transaction suitability laws.

CNA Commercial Liability Claims Vice President James Martin - Championing structured settlements as an "important competitive advantage" for liability insurers, Martin also emphasized the importance of linking structured settlements and structured settlement sales to claim department goals and metrics.

Ringler Radio Broadcaster Larry Cohen - When announced co-interviwer Mark Wahlstrom proved a "no show", Cohen glibly volleyed Eric Vaughn toughest questions. Three memorable Cohen quotes: "a lot of a little is a lot"; "vision without execution is hallucination"; and (applying his grandfather's wisdom to Executive Life's annuity rates ) "there is something wrong with this tuna fish."

Liberty Life Chief Underwriter Kevin Smith - Speaking about "Life Company Operating Metrics", Smith pointed out the dearth of structured settlement metrics and announced a collaborative project among multiple NSSTA life company members to develop a preliminary set of structured settlement operating metrics.

Attorney William C Chriss - Author of the new book "The Noble Lawyer", Chriss discussed legal and structured settlement ethics. Among his observations while discussing NSSTA's Code of Ethics:

• "We cultivate beliefs that justify our behaviors, not the other way around.
• "Unconscious bias, as opposed to intentional venality, cannot be deterred by criminal laws or post hoc sanctions.
• "The more people involved, the easier it is to defuse moral responsibility."

Congratulations to NSSTA's speakers and leaders (especially Education Chairpersons Toni Warbington and Don Engels as well as Finn, Vaughn and Associate Director Peter Arnold) for substantially upgrading NSSTA's educational program.

For S2KM reports about prior conferences of NSSTA and other structured settlement and settlement planning professional associations, see the structured settlement wiki.

Structured Settlement Metrics - 6

The online "Claims Journal" features an October 31, 2011 article (Claims Journal article) written by Denise Johnson titled "The Benefits of Using Structured Settlements in Claims Negotiations".

The Claims Journal article promotes the National Structured Settlement Trade Association (NSSTA) and incorporates structure-friendly quotes from NSSTA President Dan Finn, Chartis Vice President Ismael Acevedo and Jim Martin, CNA Vice President Commercial Liability Claims. Martin is also scheduled to speak this week at NSSTA's 2011 Fall Meeting in Austin, Texas on the topic of "Structured Settlements from a P&C Company's Point of View".

The Claims Journal article predictably provides a defense perspective of structured settlements based upon traditional (claim management) business models and business practices. For a summary of traditional structured settlement business model characteristics and the problems these business models create, see this prior S2KM blog post. For a discussion of traditional structured settlement business standards and practices, see "Structured Settlements and Periodic Payment Judgments" (S2P2J) section 6.02 [3].

The intended audience for the Claims Journal article can be assumed to be liability insurer claims personnel (executives, managers and adjustors) and perhaps also their outside litigation counsel. This intended audience therefore overlaps and includes members of the Council on Litigation Management (CLM).

CLM recently sponsored a National Litigation Management Study (CLM study) that highlighted structured settlements as the "most penetrated external initiative" among 30 litigation-related service areas analyzed based upon interviews with leading litigation management executives. Among the CLM study's key findings: "Litigation executives are not happy with the metrics and analytics available to them."

What stands out in the Claims Journal article, especially in the context of the CLM study's assertion about the need for improved metrics and analytics, are several statements about the benefits of structured settlements and the questionable rationale (or lack thereof) provided for such benefits. Structured settlement stakeholders have a history of promoting unsubstantiated and/or false statements. Two infamous examples:

• Injury victims squander lump sums. Nine out of 10 lump sum recipients squander the entire amount within five years.
• Structured settlements enable injury victims to live free of reliance on government assistance.

Here are three examples of unsubstantiated and/or misleading statements from the Claims Journal article:

• The Claims Journal article: "At zero expense to the carrier ..... structured settlements are a powerful tool claims personnel can use when resolving claims."
• Finn: structured settlement consultants represent a "free resource to claims departments ...and even prepare settlement documents." (see correction below)
• Acevedo: structured settlement consultants: "understand the tax code and how to generate the benefits in the settlement context relative to the tax code,”

What is wrong with these statements?

One assumption appears to be that because "structured settlement consultants" are agents of, and paid commissions by, annuity providers, structured settlements generate "zero expense" for liability insurers. This assumption represents a non sequitur. It fails to consider the time and cost required for multiple claims adjustors and outside legal counsel to review multiple structured settlement proposals generated by structured settlement consultants or the related meetings and telephone conversations.

How should the structured settlement industry, liability insurers and the legal profession react to statements that structured settlement consultants "prepare settlement documents" and "understand the tax code and how to generated the benefits in the settlement context relative to the tax code"?

To quote the title from one of Mark Wahlstrom's blog posts: "Structured settlement brokers drafting settlement documents. Are you guys nuts?" In other words, does a routine structured settlement business practice that presumably saves expenses for liability insurers (life insurance agents drafting personal injury settlement documents) represent the unauthorized practice of law?

And exactly how are structured settlement consultants (life insurance agents) qualified, legally and/or educationally to "understand the tax code" and generate settlement benefits relative to the tax code? Especially when, to quote the Claims Journal article, the "tax-free" structured settlement option "has been applied to employment, personal injury, construction defect, directors & officers’ liability, and even copyright infringement claims."

Consider another misleading or unsubstantiated statement from the Claims Journal article - Martin describing how defendants can utilize a structured settlement to resolve a disagreement over the cost of a life care plan: “So, if the plaintiff believes it’s ‘x’ and the defense says no it is only going to cost ‘y’, that issue can be taken off the table for the plaintiff by investing the ‘y’ number which will pay out the ‘x’ number they claim they need for the remainder of their lives."

What is wrong with this statement?

First, it appears that Martin's "x" represents both the plaintiff's present value number and the expected payout which confuses his example. Second, in today's low interest rate environment, Martin's structured settlement example won't accomplish his defense objective unless the case involves a substantial age rating, which the Claims Journal article never mentions.

Consider a 10 year old female with a normal life expectancy of approximately 69 years (to age 79) whose life care plan projects:

• Annual medical costs of $10,000 for life;
• A present value cost of approximately $690,000 (assuming a 5% discount and 5% inflationary growth rate) to pay
• A projected $5,500,000 of total lifetime medical costs.

The cost of a structured settlement annuity to pay $10,000 per year increasing at 5% per year (without any age rating and with or without a guaranty period) is approximately $1,100,000 compared with the plaintiff's present value figure of $690,000 for the same projected damages. How does a structured settlement help Mr. Martin and CNA in this case? In non-age rated cases, with today's low interest rates, structured settlements generally will not help defendants argue or defend damages.

Related questions the Claims Journal article does not adequately address:

• Why does CNA "flag claims for structures when they exceed $50,000 in exposure to our insured and involve bodily injury?"
• What is CNA's expense resulting from its claim adjustors and outside legal counsel reviewing structured settlement proposals for those cases?
• What is CNA's success ratio for resolving those cases with structured settlements?
• How exactly can structured settlements "help drive the total claim outcome for [CNA's] claim operations"?
• Does CNA reduce its claims costs using structured settlements? And if yes, how?

In another questionable statement, Martin maintains: "there are three things claimants seek in a settlement: 1) financial security; 2) guaranteed income; and 3) instructions on how to take advantage of any tax benefits." What about "qualifying for or maintaining government benefits" (Social Security; Medicaid; Medicare)? Is Martin's omission merely inadvertent or does it echo the false declaration that "structured settlements enable injury victims to live free of reliance on government assistance"?

For defendants and liability insurers who believe that structured settlements represent "good public policy" and who want to encourage its appropriate application for suitable injury victims and their dependents, it is time to re-think traditional structured settlement business models and practices. Despite (or perhaps because of) its faults, the Claims Journal article promoting structured settlements provides a valuable starting point for any such re-evaluation.

S2KM's "Structured Settlement Metrics" series is featured on the structured settlement wiki.

CORRECTION (November 7, 2011) - This blog post includes the following quote from Denise Johnson's Claims Journal article that S2KM incorrectly attributes to Dan Finn: structured settlement consultants represent a "free resource to claims departments ...and even prepare settlement documents." S2KM apologizes to Dan Finn.

Structured Settlement Metrics - 5

How satisfied with their structured settlements are injury victims (and their attorneys) who have opted for structured settlements instead of, or in addition to, lump sum alternatives?

As part of S2KM's series discussing structured settlement metrics and analytics, this blog post addresses that question by summarizing selected results from three structured settlement surveys related to customer satisfaction:

• NSSTA 2006 Survey - as summarized during both the National Structured Settlement Trade Association (NSSTA) 2007 Winter Meeting and 2007 Annual Meeting;
• AIG 2007 Survey - as reported on the AIG website and summarized during the NSSTA 2008 Annual Meeting.
• J.G. Wentworth 2008 Survey - as reported in a press release on October 29, 2008 and a media report on November 5, 2008.

In prior blog posts, S2KM examined structured settlement "quality" and "performance" metrics and analytics in the context of a 2011 National Litigation Management Study sponsored by the Council on Litigation Management (CLM). That study identified structured settlement as the "most penetrated external initiative" among 30 litigation-related service areas analyzed based upon interviews with leading litigation management executives.

In a subsequent blog post, S2KM will provide commentary and suggest conclusions about customer satisfaction with structured settlements based upon the results of the three surveys.

NSSTA Survey - The National Structured Settlement Trade Association (NSSTA) survey consisted of attorneys involved in structured settlements (43 telephone surveys) and structured settlement recipients (1275 telephone and Internet surveys). Titled: "A Study of the Structured Settlement Process Conducted on behalf of the National Structured Settlement Trade Association", the survey was directed by Robert E. Hoyt, the Dudley L. Moore, Jr. Chair of Insurance at the Terry College of Business at the University of Georgia. Among the results:

• Structured settlement recipients:
  • 65% said they had not heard about structured settlements prior to settlement.
  • Most were uncertain whether a structured settlement consultant was involved with their case.
  • 34% recalled receiving educational information while 75% of this 34% said the information was helpful.
  • 66% first learned about structured settlements from their trial attorney.
  • 75% said they were very happy their settlement included structured settlement annuities.
  • 75% said they would recommend a structured settlement.
• Attorneys involved in structured settlements:
  • 95% said they are proponents of structured settlements.
  • 70% said they retain a structured settlement consultant at least for some cases.
  • When asked: "Whom do you prefer to use for purposes of financial planning for your clients?", the attorneys responded:
    • 30% - Trust company/department.
    • 28% - Financial planner.
    • 23% - Structured settlement consultant.
    • 19% - No response.

AIG Survey - Conducted by Esearch.com, Inc., the AIG survey included 1000 U.S. participants. 80% of the participants had no connection with any personal injury case while 20% had previously been involved directly or indirectly through a family member in a personal injury case. Participants who had no connection to a personal injury case were asked to read two hypothetical scenarios and answer questions on how they would react. Those with a direct connection to a personal injury case were not only asked to read the hypothetical scenarios, but also to answer questions based upon their real life experience.

• In AIG's first survey hypothetical, AIG provided no information about structured settlements. Results:
  • 65% of respondents said they would elect a lump sum of which
  • 49% said they believed they could make their own long term decisions and
  • 26% said the lump sum was more appropriate to pay bills and pay off debt.
• In AIG's second survey hypothetical, AIG provided survey respondents with information about structured settlements - presumably this "AIG Backgrounder" which AIG features on its website. Results: 73% of respondents said they would elect a structured settlement.
• 206 of 1000 participants said they or their family had been involved with a personal injury case. Results for those 206 participants:
  • 86% had elected lump sum.
  • 57% said they were unaware of structured settlements.
  • 64% said their attorneys did not inform them about structured settlements.
  • 57% of those that elected a lump sum said their settlement funds were already depleted.
  • 71% of respondents who said they favored a structured settlement did so "to provide a regimented stream of income designed to cover expenses".

J.G. Wentworth Survey - The J.G. Wentworth survey consisted of 115 participants who had previously sold some or all of their structured settlement payment rights to Wentworth and focused upon the reasons they: 1) agreed to a structured settlement; and 2) subsequently sold (transferred) some or all of their structured settlement payment rights. According to a J.G. Wentworth marketing executive, the survey resulted from recommendations made at the 2008 Structured Settlement Thought Leadership Conference. Relevant questions and results:

How many years ago did you settle your original lawsuit?

• 70.9% - More than 10 years ago.
• 14.5% - 5 to 10 years ago.
• 13.6% - 1 to 5 years ago.
• 0.9% - Past 12 months.

When you settled your original lawsuit, why did you accept payments over time rather than a single lump sum of cash?

• 23.4% of the participating structured settlement recipients said they never were given a lump sum option.
• 38.3% had been minors whose settlements were approved and/or selected by judges and guardians.
• 38.3% of the respondents offered the following reasons for accepting a structured settlement:
  • 23.4% - Payments over time seemed like a better deal.
  • 7.4% - Not sure I could manage a large amount of cash.
  • 6.4% - To pay future medical expenses or special needs.
  • 1.1% - Faster way to settle.

How satisfied are you that you accepted a structured settlement?

• 25.0% - As a minor, a structured settlement was considered the best option.
• 24.1% - Mostly satisfied.
• 21.3% - Neither satisfied nor dissatisfied.
• 18.5% - Completely satisfied.
• 6.5% - Slightly dissatisfied.
• 4.6% - Completely dissatisfied.

Do you wish you and your attorney had negotiated for a single lump sum settlement?

• 31.5% - No.
• 27.8% - As a minor, I was unable to negotiate my settlement terms.
• 20.4% - Maybe.
• 10.2% - Yes.
• 10.2% - I don't know.

When you settled your original lawsuit, how well informed were you about structured settlements?

• 30.5% - Due to my status as a minor, I was not informed.
• 27.6% - Very well informed.
• 24.8% - Not well informed.
• 17.1% - Well informed but still had questions post-settlement.

Why did you sell all or part of your structured settlement?

• 60.2% - Pay bills.
• 8.3% - Start a business.
• 8.3% - Home improvement.
• 5.6% - Pay for education.
• 5.6% - Cash made more sense than waiting.
• 4.6% - Buy a house.

Did selling your structured settlement help solve your financial problem?

• 40.7% - Mostly.
• 32.4% - Yes.
• 21.3% - Only helped a little.
• 5.6% - No, it did not help.

Would you sell payments again?

• 36.3% - Maybe.
• 30.1% - No.
• 18.6% - Yes.
• 8.0% - Probably.
• 7.1% - I have already sold all of my payments.

If you sold only part of your settlement, do you plan to keep the rest of your payments as a structured settlement?

• 42.3% - Yes.
• 35.1% - I don't know.
• 9.0% - No, I plan on selling all of my payments.
• 8.1% - I already sold all of my payments.
• 5.4% - No, I plan on selling some of my payments.

For complete S2KM reporting and commentary about structured settlement metrics and analytics, see the structured settlement wiki.

Settlement Consulting - 3

In prior posts about settlement consulting, S2KM:

• Reviewed Joseph DiGangi's discussion at the NSSTA 2009 Winter Meeting titled: "Comprehensive Settlement Consulting in the 21st Century". See: "Settlement Consulting".
• Continued DiGangi's discussion by asking questions and offering comments about "settlement consulting" definitions and scope. See: "Settlement Consulting - 2".

This S2KM post outlines settlement consulting history - from a structured settlement perspective.

S2KM's structured settlement history diagram (developed with graphic artist Keith Burtoft) concludes with the founding of the National Association of Medicare Set-Aside Professionals (NAMSAP) in 2005.

Beginning in 2005, S2KM has continued to monitor structured settlement history by attending and reporting about settlement consulting conferences addressing structured settlements.

For the past three years, S2KM has also published annual reports about structured settlement developments:

• Structured Settlements in 2008;
  
• Structured Settlements in 2007;
• Structured Settlements in 2006.

Using the same categories as S2KM's structured settlement history diagram, here are some of the more recent settlement consulting highlights:

Social Security

• Deficit Reduction Act of 2005 (DRA);
• The Ahlborn Case (2006) - see John Campbell's analysis of the Eighth Circuit's decision which the U.S. Supreme Court unanimously affirmed.
• Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA);
• Additional MSA rules for structured settlements (2008);
• New POMS for Special Needs Trusts (2009) - see David Lillesand's report;

Taxation - see related articles on the Wood & Porter website:

• Banks and Banaitis cases (2005) - attorney fees;
• Murphy case (2007);
• IRS Letter Ruling 200836019 (2008) - Non-qualified 130 assignments and attorney fees.

State Legislation (2005-2008) - see Release 45 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

• Structured settlement protection statutes;
• Uniform Trust Code;
• UCC Article 9 anti-assignment provisions;
• Medicaid annuity rules.

Other Developments

• Academy of Special Needs Planners (ASNP) founded (2007);
• AIG receives $150 billion U.S. Government bailout (2008);
• Joseph Ricci replaces Randy Dyer as NSSTA Executive Director (2008);
• SSP publishes its "Standards of Professional Conduct" (2008) and begins its Registered Settlement Planner (RSP) certification (2008);
• American Association of Nurse Life Care Planners (AANLCP) founded (2008);
• Several annuity providers depart the structured settlement market (2005-2008);
• Structured settlement annuity premium remains level at $6 billion per year (2001-2008);
  
• Structured settlement surveys identify a larger market (2006-2008);
• Settlement consulting bloggers and podcast providers emerge (2004-2009).

For reasons why S2KM views 1982, 2001 and 2008 as strategically important for structured settlements, see "Structured Settlements in 2008 - 1".

Structured Settlement Credo - 2

If the structured settlement industry is experiencing  "transition", what exactly is changing and why?

Structured settlement industry transition:

• Internet technologies - their impact on business models, strategies, tools and skill set requirements.
• Legislation and regulations - the secondary market; Medicare; Medicaid; and IRC 468B;
• Financial meltdown - the impact on AIG, J.G. Wentworth and others.
• New U.S. President - expected legislative and regulatory change.
• Aging industry leadership - the need for a new generation of younger and more intelligent industry leaders.

How will the structured settlement "transition" impact industry:

• Credo
• Ethics
• Values
• Standards 
• Public policy?

And vice versa?

When and where will these "transition" issues be addressed?

Assuming ability to adapt is critical for survival, how will the structured settlement industry "adapt" its historic structured settlement credo to the new settlement planning landscape?

Structured Settlements in 2008 - 3

This S2KM blog post, the third of three analyzing structured settlements in 2008, highlights the challenges facing the structured settlement industry as it enters 2009.

Two prior S2KM blog posts evaluated 2008 from an historical perspective (Structured Settlements in 2008 -1) and summarized the conferences S2KM attended throughout the year (Structured Settlements in 2008 - 2).

Who does your client trust? The National Structured Settlement Trade Association (NSSTA) spotlighted the "trust issue" during its 2007 Winter meeting when NSSTA also reported the results of its structured settlement survey of injury victims and attorneys. Structured settlements require trust by injury victims and their attorneys that:

• Structured settlement consultants are qualified professional financial advisers; and
• Annuity providers will pay promised future periodic payments.

Traditionally important to structured settlements, issues of trust have been magnified in 2008 by the widespread financial collapse that required a federal bailout of AIG and called into question the reliability of financial rating assessments as well as the protection afforded consumers and investors by government regulators. A corollary issue for structured settlement consultants is "professionalism" - one of four strategic priorities NSSTA President Chris Diamantis identified during the NSSTA 2008 Annual Meeting.

• Should injury victims and their attorneys trust structured settlement consultants and engage them as financial advisers?
• What are the professional qualifications and services of individual structured settlement consultants?
• Are structured settlement consultants problem solvers or product pushers?
• Do they understand their own product - an increasingly complex transaction as visualized in this structured settlement diagram ?
• Are structured settlement consultants capable of objectively and comprehensively advising injury victims and their attorneys about such fundamental structured settlement issues as:
  • IRC 468B;
  • IRC 5891;
  • State-specific structured settlement protection statutes;
  • The Medicare Secondary Payer Statute; and
  • The Deficit Reduction Act?
• Are individual structured settlement consultants licensed and educated to sell non-insurance investment products?
• Are they professionally capable of recognizing, and do they proactively communicate, their own conflicts of interest?
• Do they proactively disclose their structured settlement compensation arrangements and obtain an injury victim's informed consent for such compensation?

How strong are structured settlements? The structured settlement industry should expect injury victims and their attorneys to demand additional assurances in 2009 about the financial security of structured settlement annuities. If "sophisticated" investors and financial institutions are hoarding cash and/or buying U.S. government securities, why should injury victims and their attorneys accept long term financial promises with limited or no liquidity? Will these traditional industry arguments continue to successfully drive structured settlement annuity sales in 2009:

• Except for United States treasury obligations, life insurance annuities are among the most secure long term investments.
• Fixed annuities are especially secure because they do not depend upon the vagaries of interest rates and securities markets.
• Fixed annuities, however, require the obligating party(s) to remain in business for the duration of the annuity obligation.
• The 30 year performance record of structured settlement annuities (to date) has been close to perfection.
• With strong support from legislators, regulators and judges, the structured settlement industry has survived its worst potential disasters.
• These potential disasters include the failures of AIG, Executive Life; Confederation Life; Capital Life; and Monarch Capital.
• By contrast, the most spectacular structured settlement failures have not involved annuities.
• These failures, which include SBU and Stanwich, involved IRC 130 structured settlement treasury bond trusts - i.e. (poorly or criminally) managed assets.
• Life insurance companies that issue structured settlement annuities are regulated by state insurance departments.
• State insurance guarantee funds provide a safety net for individual company failures.
• Life insurance companies that issue structured settlement annuities, therefore, are among the strongest of the financially strong.
• If injury victims want income tax-free periodic payments with lifetime security, they should include a structured settlement annuity as part of their settlement plan.

Competing business models - two alternative business models will continue to compete in 2009 for the future of structured settlements:

• The traditional claim management (defense-controlled) business model characterized by:
  • IRC 130 as a funding model;
  • Single product (annuity) orientation;
  • Defendant "approved" structured settlement agents;
  • Defendant "approved" structured settlement annuity providers;
  • Defendant "right of last refusal" to match funding alternatives;
  • Defendant "right" to deny structured settlements to injury victims;
  • Opposition to single claimant 468B;
  • Failure to fully inform injury victims about settlement transfers;
  • Failure to promote full disclosure and informed consent of structured settlement compensation.
• The emerging settlement planning (plaintiff-controlled) business model characterized by:
  • IRC 468B and 130 as a two-step, court-approved funding model;
  • Multiple product (annuity and trust) alternatives;
  • Integration of structured settlements with other government benefits;
  • Claimant selection of structured settlement consultants;
  • Claimant selection of structured settlement annuity providers;
  • Claimant's right to a structured settlement;
  • Claimant's right to information about the secondary market prior to settlement;
  • Claimant's right to full disclosure and informed consent about structured settlement compensation.

Primary vs. secondary structured settlement markets

• The National Structured Settlement Trade Association (NSSTA) and the National Association of Settlement Purchasers (NASP) cooperated in 2000 and 2001 to draft the Model State Structured Settlement Protection Act and to help enact IRC section 5891.
• Relatively limited educational, marketing and transactional interaction, however, has occurred historically between the primary and secondary markets.
• S2KM's 2006 concept map ("How the Primary Market Views Factoring") highlights the generally hostile attitude many primary market participants continue to express toward the secondary market and factoring companies.
• Among other results, the primary market's attitude has limited:
  • The education structured settlement stakeholders have received about settlement transfers;
  • The advice and assistance structured settlement consultants offer their customers about settlement transfers.
• One of the continuing industry challenges in 2009 will be whether various factions within the primary and secondary markets are able to work collaboratively to improve and expand structured settlements.
• As a positive developments:
  
  • NSSTA, the Society of Settlement Planners (SSP), and the Academy of Special Needs Planners (ASNP) each offered educational programs about settlement transfers during 2008;
  • Representatives of the primary and secondary markets jointly addressed improving structured settlement business practices at both the SSP and NASP 2008 Annual Meetings as well as the 2008 Structured Settlement Thought Leadership Conference.

Structured Settlements and Government Benefits

• A traditional structured settlement industry argument, promoted by defenders of the claim management business model, proclaims "structured settlements enable injured victims to live free of reliance on government assistance".
• This promotional statement is false and misleading. Many, if not most, structured settlement recipients depend upon government benefits in addition to structured settlements to address basic financial needs.
• These government benefits include: Social Security, Medicaid, Medicare, Veterans Benefits and Federally Assisted Housing.
• As David Lillesand, a leading social security and special needs attorney, stated at the SSP 2008 Annual Meeting: Medicaid alone represents a "life or death issue" for disabled persons including structured settlement recipients.
• The challenges of maximizing and successfully integrating government benefits are more complicated with a structured settlement than with a lump sum benefit in part because of a lack of legal authority.
• With anticipated budget cuts and reforms for Medicaid and Medicare in 2009, the structured settlement industry must improve and expand its educational and lobbying strategies if it expects structured settlements to play a vital role in this changing legislative and regulatory landscape.

Growing the structured settlement market

• As evidenced by annuity premium, the primary structured settlement market has not grown since 2001.
• Several structured settlement annuity providers have left the market since 2006. Concurrently, the number of individual structured settlement consultants remains relatively constant while their average age continues to increase.
• Recent structured settlement surveys and market studies by NSSTA, AIG, J.G. Wentworth and Towers Perrin confirm opportunities exist to grow the structured settlement market and suggest the structured settlement market is underperforming.
• Some of the important issues related to structured settlement market growth:
  
  • Managing transition and change
  • Structured settlement advocacy
  • Marketing to plaintiff attorneys
  • Problem solving vs. product sales
  • Building settlement planning teams
  • 468B as a standard funding model
  • Integrating structured settlements with settlement trusts
  • Improving industry Internet applications and skill sets
  • Continuing market research
• In a 2008 S2KM interview, paralympic champion Randy Snow offered the following advice for successfully transitioning and growing the structured settlement industry: listen to the customer; design the best products; surround yourself with the best people; have fun.

Thank you and best holiday wishes to all structured settlement stakeholders who followed S2KM's blog reports during 2008. The New Year should be interesting and challenging for the financial markets generally and the structured settlement industry more specifically.

Structured Settlements in 2008 - 2

This S2KM blog post, the second of three analyzing structured settlements in 2008, summarizes conferences S2KM attended throughout the year. A prior post evaluated 2008 from an historical structured settlement perspective. A subsequent post will discuss challenges facing the structured settlement industry in 2009. Conferences and associations are listed alphabetically. For more detailed reports about these conferences, check the parenthetical links for related S2KM blog posts. For S2KM's complete historical review of professional associations and conferences, see S2KM's structured settlement wiki.

Academy of Special Needs Planners (ASNP) - The second annual ASNP conference underscored the strategic nexus that exists between special needs planning, settlement planning and structured settlements. ASNP's "extra-curricular" program featured a social service project where 30 ASNP conference attendees assisted Families Helping Families of Southeast Louisiana repair and improve its office headquarters. The ASNP conference confirmed for this author why special needs attorneys and financial planners, as opposed to former life insurance salesmen and claim managers, represent the future of structured settlements and settlement planning. Although several NSSTA and SSP members attended and/or participated as speakers, most of the structured settlement industry missed this valuable conference.

American Association for Persons with Disabilities (AAPD) - Structured settlement leaders from both NSSTA and SSP attended the 2008 AAPD Leadership Gala dinner in Washington, D.C. - in addition to many Congressional and Disability leaders. NSSTA was one of the event sponsors and had earlier featured Andrew J. Imparato, AAPD President and CEO, as a speaker at NSSTA's 2007 Fall Meeting. Imparato, a visionary and inspirational leader, is dedicated to transitioning disabled persons from poverty to economic self-sufficiency. AAPD's strategy includes uniting disabled persons as a political block and business market. AAPD's political priorities include changing the social security statutory definition of "disability" from "unable to work" to address "barriers to work" for disabled persons. Imparato's message for structured settlement professionals: involve yourselves at the local level with independent living centers.

National Academy of Elder Law Attorneys (NAELA) - NAELA's Mission is "is to establish NAELA members as the premier providers of legal advocacy, guidance and services to enhance the lives of seniors and people with disabilities". NAELA's membership consists of 4400 attorneys in the United States, Canada, Australia and the United Kingdom. Most of the members of ASNP and the Special Needs Alliance (SNA) are members of NAELA including many NAELA founders and former Presidents and Directors. S2KM developed a "Web 2.0 for Lawyers" wiki for the NAELA 2008 Symposium which was also featured in a Legal Broadcast Network (LBN) podcast interview by Scott Drake with S2KM's Managing Director, Patrick Hindert. S2KM also published a 2008 blog post analyzing NAELA and NAELA's CELA certification program from a knowledge management and web 2.0 perspective.

National Alliance of Medicare Set-Aside Professionals (NAMSAP) - Founded in 2005, NAMSAP is a non-profit organization devoted to improving Medicare set-aside arrangements (MSAs) and to facilitating compliance with Medicare conditional payment recovery.

• Background - MSAs are administrative and funding mechanisms utilized in certain categories of settlements to protect Medicare's interests as "secondary payer" under the Medicare Secondary Payer (MSP) statute. Although the MSP rules were enacted by Congress in 1980, CMS did not begin to enforce the MSP statute until 2001 based upon a series of CMS policy memoranda for workers compensation cases, several of which address structured settlement issues.
• MMSEA - On December 29, 2007, President George W. Bush signed into law the "Medicare, Medicaid and SCHIP Extension Act of 2007" (MMSEA). Beginning July 1, 2009, MMSEA requires liability insurers (including self-insurers, no-fault insurers and workers compensation insurers) to determine Medicare status for all claimants and report all claims involving a Medicare beneficiary to CMS when those claims are resolved. If the reporting for any claimant is not done in a timely manner, MMSEA authorizes CMS to enforce a civil penalty against liability insurers of $1000 per day per claimant. These information requirements and penalty provisions provide the basis for expanded enforcement by CMS of the MSP statute.
• MARC - One of the featured presenters at the NAMSAP 2008 Annual meeting was Roy Franco, Director of Safeway's Risk Management Strategies and Chairman of the Medicare Advocacy Recovery Coalition (MARC).
  • In discussing the MMSEA requirements for liability cases, Franco said "the issue is not just about reporting" and predicted a "claim freeze" as liability insurers and self-insureds wait for resolution and approval before they pay claims.
  • Franco characterized the MMSEA MSP rules as an attack on traditional best practices for liability claim management. He predicted legal challenges and criticized MMSEA rules.
  • Franco outlined MARC's priorities for MMSEA which include changing the law or, alternatively, obtaining an injunction to stop its July 1, 2009 implementation.
• S2KM reporting - S2KM published seven blog posts in 2008 highlighting recent MSA and MMSEA developments that impact structured settlements including several developments that have occured during 2008.
• S2P2J analysis - S2P2J Release 44 features an extensive update of MSA rules for structured settlements as well as a summary of MMSEA.

National Association of Settlement Purchasers (NASP) - At the NASP 2008 Annual Meeting, Patrick Hindert, S2KM's blog author, moderated a panel discussion titled "How to Improve and Grow the Structured Settlement Market". Participants included: Jack Meligan, Michael Upchurch and Matthew Bracy. As settlement planners, both Meligan and Upchurch described their view of the secondary market as a "mixed-bag" of bad and good. The "bad" part of factoring results from non-professional ("cash now") advertisements promoted by many factoring companies.

Not only do plaintiff attorneys dislike "cash now" advertisements, according to Meligan and Upchurch, they are also less likely to recommend structured settlements if they believe their clients will eventually sell their payment rights.

The potential liquidity provided by settlement transfers improves the structured settlement annuity product. Lives change. Unexpected events occur. Even the best personal injury settlement plans need to be reviewed post-settlement and sometimes adjusted. Settlement transfers, which must be reviewed and approved by state judges, are appropriate in some cases.

Bracy emphasized the need for well-educated plaintiffs and plaintiff attorneys - as well as judges. He noted that many primary market participants have ignored the settlement transfer business. Bracy acknowledged that good and bad business practices exist in the secondary market as well as the primary market. According to Bracy, the potential secondary structured settlement represents between 5% and 7% of the total primary market. Most structured settlement cases, according to Bracy, neither require nor qualify for a settlement transfer.

National Settlement Consultants (NSC) - Patrick Hindert, S2KM's Managing Director and blog author, was privileged to speak at the NSC 2008 Annual Meeting and also to attend NSC presentations and social functions. In addition to Michael and William Goodman, NSC founders and principals, the NSC presenters included representatives from ten (10) structured settlement annuity providers as well as several national settlement planning experts. In retrospect, the "not-for-publication" May 2008 NSC presentations by some of the annuity providers now seem especially interesting and important. Among other topics, these presentations addressed investment exposure to real estate mortgages plus one annuity provider's study of settlement transfers by its own structured settlement recipients. Randy Snow's NSC keynote presentation about change and growth was humorous and thought-provoking. Randy subsequently participated in a series of S2KM blog interviews about change and growth in the structured settlement industry. Hindert provided a structured settlement Medicaid update as part of the NSC educational program.

National Structured Settlement Trade Association (NSSTA) - Founded in 1985, NSSTA is the oldest and largest structured settlement professional trade association. NSSTA's members are primarily structured settlement consultants and annuity providers. In addition to providing education and certification, NSSTA historically has served as the legislative and lobbying voice of the primary structured settlement market. NSSTA's committees, especially NSSTA's legal committee, are among the most valuable sources of information about the structured settlement industry.

• Winter Meeting - Prominent educational themes and presentations at the NSSTA 2008 Winter Meeting included: trial attorneys; disabled persons and disability associations; government benefits; structured settlement legal documentation; legislative and regulatory developments; Internet marketing; and professionalism.
• Annual Meeting - Chris Diamantis, NSSTA's 2008 President, introduced Joseph Ricci as NSSTA's new Executive Director, and identified NSSTA's strategic priorities for 2008: factoring; advocacy and marketing; professionalism; and governance and communication. J.P. Steele announced the results of a Structured Settlement Survey Report sponsored by AIG which S2KM summarized in a November 23, 2008 blog post. Eric Vaughn, NSSTA's lobbyist, provided a "Washington Report" analyzing the then-upcoming federal election from a structured settlement perspective. Legal committee co-chairman, Michael Miller, summarized results from 100 factoring cases in which his law firm, Drinker Biddle, had participated since January 2008. Craig Ulman, NSSTA's General Legal Counsel, provided a State Guarantee Funds primer. Bradley Frigon spoke about special needs trusts. Among other topics, two actuarial presentations discussed structured settlement pricing.
• Fall Meeting - Although S2KM participated in four committee meetings at NSSTA's 2008 Fall Meeting, S2KM did not attend NSSTA's educational program because of a scheduling conflict. S2KM's blog coverage of this meeting therefore was limited to editorial commentary.

Society of Settlement Planners (SSP) - Founded in 2001, SSP is a national nonprofit educational and public policy association of professional structured settlement producers and others who assist injured claimants in the settlement process. At its 2008 Annual meeting, the SSP adopted its "Standards of Professional Conduct for Settlement Planners", a multi-year SSP project initiated and managed by SSP Director and attorney Richard Risk.

Carl A. Pierce, distinguished professor of law at the University of Tennessee, assisted SSP with this ethics project. Pierce served as a reporter for the latest revision of the American Bar Association's Model Rules of Professional Conduct.

Frank Johns, a leading special needs attorney and settlement planning ethicist, also advised SSP on its Standards of Professional Conduct. Johns' 2008 SSP presentation introduced a proposed Request for Proposal (RFP) for settlement planners.

Risk organized and moderated SSP's tax panel that featured Jody Brewster, Glenn Mackies and Michael Montemurro.

SSP devoted three presentations to government benefits, the highlight being David Lillesand, a national leader among social security and special needs trust attorneys. Based upon his discussions with the Social Security Administration (SSA), Lillesand stated that Nancy Veillon's January 31, 2006 letters to attorneys Roger Bernstein and Jay Sangerman representing NSSTA are "inoperative" - a statement Lillesand repeated during his presentation with SSA executive attorney Ken Brown at the ASNP 2008 Annual Meeting.

SSP's panel discussion about the secondary markets included NASP Executive Earl Nesbitt, Stephen Harris and Rhonda Bentzen. Other SSP educational presentations included a legislation and litigation update, settlement planning case studies, and advice about Internet marketing.

Stetson Special Needs Trust X (SSNTX) - Throughout its 10 year history, the Stetson Conference has been recognized as the leading special needs trust (SNT) knowledge forum in the United States. Most of the speakers are members of either the Academy of Special Needs Planners (ASNP) or the Special Needs Alliance (SNA). For structured settlement professionals, the 2008 Stetson program titled "The Basics of Special Needs Trusts" offered analyses of several important settlement planning topics and included two presentations specifically focusing on structured settlements:

• Texas Attorney Pi-Yi Mayo spoke about the January 31, 2006 Social Security Administration (SSA) letters to attorneys Roger Bernstein and Jay Sangerman as well as the application of the Deficit Reduction Act of 2005 (DRA) to structured settlements used to fund special needs trusts; and
• Leo Govoni provided "An Economic Analysis of Structured Settlements".

Structured Settlement Knowledge Leadership Conference (SSKLC) - Focusing on the "needs and best interests of consumers", the first Structured Settlement Thought Leadership Conference, sponsored by J.G. Wentworth, was designed to bring together knowledge leaders who are "redefining structured settlement roles and processes". The Leadership Conference objective was to provide an educational platform and open forum dedicated to growing and improving the structured settlement market. In addition to four panel discussions and two individual presentations, the Leadership Conference featured a brainstorming session to improve the structured settlement process for plaintiffs based upon the subjects discussed in prior sessions. The panel discussions addressed the economic life cycle of a personal injury claim identified by Adam Scales in his 2002 Wisconsin Law Review article titled "Against Settlement Factoring? The Market in Tort Claims has Arrived". One result of the Leadership Conference was the subsequent 2008 structured settlement survey conducted by J.G. Wentworth.

Structured Settlements in 2008 - 1

This S2KM blog post, the first of three summarizing structured settlements in 2008, evaluates the year from an historical perspective. Two subsequent posts will:

• Summarize 2008 conferences attended by S2KM;
• Highlight challenges facing the industry in 2009.

"Structured Settlements and Periodic Payment Judgments" (S2P2J), co-authored by Daniel Hindert, Joseph Dehner, and Patrick Hindert, features historical summaries of both the primary and secondary structured settlement markets. S2P2J Release 44 is now available.

S2KM previously has published three online historical summaries of structured settlements:

• A visual history of structured settlements to 2005;
• Structured Settlements in 2006;
• Structured Settlements in 2007.

As these summaries demonstrate, the history of structured settlements includes many diverse and inter-related developments. From S2KM's perspective, the most strategically important years in the history of structured settlements prior to 2008 have been:

• 1982 - during which Congress enacted the Periodic Payment Settlement Act of 1982:
  • Adding "periodic payments" to IRC section 104(a);
  • Creating IRC section 130 and "Qualified Assignments";
  • Establishing a public policy to support structured settlements.
• 2001 - during which:
  • Congress enacted IRC section 5891to provide tax rules, definitions and penalties for transfers of structured settlement payment payment rights and to create a state run system for reviewing and approving such transfers;
  • CMS published its first policy memorandum for Medicare set-aside arrangements (MSAs);
  • The Society of Settlement Planners (SSP) was founded as an alternative to the National Structured Settlement Trade Association (NSSTA) which was formed in 1985.

Although it is premature to evaluate the full historical impact of 2008 for the structured settlement industry, the cataclysmic financial events of the past four months have already created serious repercussions for both the primary and secondary markets. The good news: thanks to the federal government bailout of AIG, no structured settlement recipients have suffered any loss of structured settlement payments to date because of the economic meltdown. The bad news: the U.S. economy and financial markets remain in jeopardy creating unprecedented challenges for the structured settlement industry in 2009.

2008 Structured Settlement Financial Summary

• The Wall Street Journal characterized September 14-20, 2008 as "The Week That Changed American Capitalism". Among other developments, United States Treasury Secretary Henry Paulson announced on September 16 the federal government had seized control of AIG in an $85 billion bailout. Paulson stated AIG had been only "hours from bankruptcy". On October 8, the Federal Reserve Board increased its loan to AIG by an additional $37.8 billion.
• AIG subsequently announced it planned to sell its North American life subsidiaries, including American General, as part of its plan to repay the bailout loan from the U.S. government. For additional information and continuing reports about the Federal government's bailout of AIG, see S2KM's AIG structured settlement wiki.
• Until September 2008, AIG had been the largest purchaser and the largest seller of structured settlements. In 2006, AIG sold more than $1.4 billion of the $6.1 billion annual U.S. structured settlement annuity premium. In 2007, AIG sold more than $1.4 billion of the $5.9 billion annual U.S. structured settlement annuity premium. During the first nine months of 2008, AIG sold more than $1.2 billion of the $4.4 billion of the U.S. structured settlement annuity premium.
• Along with other financial and insurance companies, the stock prices of structured settlement annuity providers have been battered during the fourth quarter of 2008. Some annuity providers have experienced rating downgrades. Analysts, investors and rating agencies have expressed concerns about the potential exposures these companies may have to failed or bailed out companies as well as the general decline in their stock portfolios and shareholder equity.
• On December 16, 2008, Aviva Life announced it was exiting the structured settlement business to concentrate its resources on less capital intensive businesses. Aviva joined other annuity providers who exited the structured settlement business during 2006 and 2007 including Mass Mutual, Genworth, Travelers and Aegon.
• The financial crisis has frozen the credit markets and shut down most asset-backed securitizations causing substantial problems for the secondary structured settlement market. In November, Standard & Poor's cut J.G. Wentworth's counterparty and senior-secured bank loan ratings from B- to CCC+ due to "severe dislocation of the credit markets" that have "rendered unprofitable" some financing transactions.
  
• On December 5, J.G. Wentworth announced the pricing of $74.6 million of Class A-1 Notes in connection with its 2008-3 securitization. The Class A-1 Notes were priced at 700 bps over benchmark interest rate swaps and will have ratings of Aaa and aaa by Moody's and A.M. Best respectively. The purpose: to provide the necessary proceeds to satisfy one of the conditions under J.G. Wentworth's November 28, 2008 margin call waiver agreement with Deutsche Bank to reduce warehouse loan indebtedness by $50 million.
• Although demand for settlement transfers has remained strong throughout 2008, discount rates have increased from 8% to 16% during the past six months.

J.G. Wentworth - 1

J.G. Wentworth, the leading structured settlement factoring company, has been featured in news reports and announcements this past week.

Article posted November 28, 2008 by Joseph N. Distefano on the philly.com website:

"Standard & Poor's cut counterparty and senior-secured bank loan ratings on J.G. Wentworth Inc., the Bryn Mawr "structured settlement" firm that buys insurance payouts, to 'CCC+' from 'B-', and warned it could cut again. "Wentworth's financial position could deteriorate further unless it receives additional capital to meet margin calls, fund structured settlement/annuity purchases, and pay fixed obligations," due to "severe dislocation of the credit markets" that have "rendered unprofitable" some financing transactions, said S&P analyst Rian M. Pressman in a statement."

"Wentworth received an additional margin call of $16.9 million on Oct. 22, 2008, the payment of which was waived until Nov. 21, 2008. The payment has not yet been made," S&P added. Wentworth makes most of its money by selling asset-backed securities. Because such asset-backed transactions are tough to make in the current market, Wentworth has been reporting losses, S&P said. Wentworth is owned by New York investment firm JLL Partners. "

JGW Interim Announcement
Distributed December 5, 2008

"Today J.G. Wentworth priced $74.6 million of Class A-1 Notes in connection with its 2008-3 securitization. The Class A-1 Notes were priced at 700 bps over benchmark interest rate swaps and will have ratings of Aaa and aaa by both Moody's and A.M. Best, respectively.

"The transaction is scheduled to close December 16, 2008 and is intended to provide the necessary proceeds to satisfy one of the conditions under the November 28, 2008 margin call waiver agreement with Deutsche Bank to reduce warehouse loan indebtedness by $50 million."

S2KM will continue to report on financial and market developments impacting J.G. Wentworth, other structured settlement companies including AIG, and the structured settlement industry in general.