Beyond Structured Settlements

Structured Settlements in 2012 - 3

Secondary Market

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.

Discount Rates

• 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.

Market Shares

• 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.

Historic Metrics

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

Structured Settlements in 2012 - 1

The U.S. structured settlement industry in 2012 increasingly defined itself into three related markets (the primary, secondary and settlement planning markets) with the liquidation of Executive Life Insurance Company of New York (ELNY) representing the dominant industry storyline.

This blog post highlights 2012 non-ELNY structured settlement developments for the primary market. Subsequent S2KM blog posts will highlight structured settlement developments for the 2) settlement planning and 3) structured settlement secondary markets and summarize 4) ELNY-related events.

Primary Market

The primary structured settlement market in 2012 was characterized by continuing sales declines including the departure of two annuity providers (Hartford and Symetra). As reported by Melissa Evola and "Structured Settlements and Periodic Payment Judgments" (S2P2J), annual structured settlement annuity premium reached an historic high in 2008 ($6,226,578,725) after consistently averaging close to $6 billion annually from 2001-2007.

The 2011 structured settlement annuity premium total of $4,974,710,838 represented an approximate 10 percent decline from 2010 and an approximate 20 percent decline from 2008. And based upon reported third quarter 2012 numbers, this year's structured settlement annuity numbers could be even lower.

Through the end of September 2012, reported nine month structured settlement annuity premium totaled $3,570,584,333 compared with 2011 ($3,638,466,321) and 2008 ($4,429,915,586) figures for similar nine month results. The comparable nine month case totals for these years: 2012 (18,701 cases); 2011 (21,846 cases); and 2008 (25,545 cases).

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. Here are several historic average annual rates for 30 year Treasury securities (source: U.S. Department of the Treasury):

• 2012 (as of December 21) - 2.93%
• 2011 - 3.91%
• 2010 - 4.25%
• 2009 - 4.08%
• 2008 - 4.28%
• 2007 - 4.84%
• 2000 - 5.94%
• 1990 - 8.61%
• 1980 - 11.27%

Critics of the primary structured settlement market attribute the continuing sales decline to a broader set of factors. For example, speaking at the 2012 National Association of Settlement Purchasers (NASP) conference, Mark Wahlstrom described 2012 as "another bad year for the primary market". He characterized declines in primary market annuity premium as a "negative trend that will eventually impact the secondary market" and identified the following causes:

• The structured settlement is an insular, closed community with aging leadership and a shrinking sales force.
• Structured settlement annuity providers, and most brokers, lack marketing and innovation skills.
• Primary market participants are intimidated by the Internet.
• Instead of offering customer solutions, the primary market continues to sell a single product.
• With historically low interest rates, that product produces a zero return when you consider inflation.
• The primary market has not responded strategically to tort reform and increasing competition from other professionals.
• By continuing their "factoring wars", the primary market has missed opportunities to cooperate with the secondary market.
• The ELNY liquidation means the primary market can no longer claim all structured settlement recipients have received 100% of their payments.

Perhaps the most positive 2012 development for the primary structured settlement industry was the remarkable business turnaround of American International Group, Inc. (AIG). Four years following its $182 billion financial bailout of AIG, the United States Department of Treasury and the Federal Reserve sold almost all of their remaining AIG ownership interest during 2012, which at one time reached 92 percent, and achieved a net positive investment return of $22.7 billion.

AIG's significant role in the U.S. structured settlement market, and the impact of AIG's 2008 financial collapse, are apparent from annual AIG structured settlement annuity premium results (compiled by Melissa Evola) with AIG's estimated annual share of the U.S. structured settlement annuity market in parentheses.

• 2002 - $1.179 billion (19%)
• 2003 - $1.195 billion (20%)
• 2004 - $1.221 billion (20%)
• 2005 - $1.316 billion (21%)
• 2006 - $1.463 billion (24%)
• 2007 - $1.468 billion (24%)
• 2008 - $1.454 billion (23%)
• 2009 - $0.429 billion (8%)
• 2010 - $0.499 billion (9%)
• 2011 - $0.395 billion (11%)

For the first three quarters of 2012, based upon Evola's reporting, AIG (Amgen/AILife) sold $409,213,518 of total structured settlement premium representing 11 percent of total U.S. structured settlement annuity premium ($3,570,584,333) for the same period. 

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

Stone Street Capital v. McClendon

A Louisiana state court has ruled in Stone Street Capital v. McClendon that MetLife and Travelers had no right to withhold a structured settlement payment from Stone Street Capital which Stone Street had previously purchased, with court approval pursuant to the Louisiana structured settlement protection act, despite the original annuitant/payee's death prior to the payment date.

This 2012 case, which was featured in a presentation by Earl Nesbitt at the NASP 2012 Annual Conference, reinforces the finality of settlement transfer orders. According to Nesbitt, it also calls into question other cases where Travelers, as owner of structured settlement annuities, has ordered structured settlement annuity issuers to stop making payments to transfer companies following the death of the original annuitant/payees despite existing court orders approving those transfers.

Background

• In 1990, Shelia McClendon entered into a structured settlement in which Travelers Insurance Company, as assignee, purchased an annuity from Travelers Life and Annuity Company, which later became MetLife Annuity Company of Connecticut in 2006.
• On July 27, 2007, Shelia McClendon entered into a purchase and sale agreement with Stone Street Capital to sell her right to a $51,800.51 payment due October 15, 2010.
• On September 20, 2007 the same court which subsequently heard the Stone Street v. McClendon case signed an order approving the transfer.
• In the 2007 transfer proceeding, Stone Street gave proper notice to MetLife (as annuity issuer) and Travelers (as annuity owner) neither of whom raised any objections.
• MetLife subsequently sent a letter to Stone Street advising that MetLife would make the assigned payment to Stone Street in compliance with the order.
• The transfer order provided an indemnity, allegedly requested by Travelers and MetLife, to protect them from any further suit by any party asserting an ownership claim or a right to the assigned payment.
• Shelia McClendon died in 2008.
• Pursuant to instructions from Travelers, MetLife did not pay Stone Street the October 15, 2010 payment when due.
• Following Stone Street's inquiry, MetLife and Travelers informed Stone Street that other persons had competing demands for the October 15, 2010 payment and, to resolve the conflict, Stone Street must file a declaratory judgment action which Stone Street did file.
• On July 15, 2011, Travelers filed a preemptory exception of nonjoinder of indispensable parties.
• Travelers' exception claimed Shelia McClendon had passed away and that both her estate and the estate of Peatrice Jackson, whom Travelers claimed was the annuity beneficiary, were indispensable parties to Stone Street's declaratory judgment lawsuit.
• On August 4, 2011 MetLife answered Stone Street's petition and included a reconventional demand for consursus (a form of interpleader).
• None of the parties disputed, either at the time of the 2007 transfer hearing or at the time of the subsequent declaratory judgment suit, that Stone Street properly complied with Louisiana's structured settlement protection act.

Stone Street's Argument

• The declaratory judgment action was filed against MetLife and Travelers and also against the parties Travelers told Stone Street to file against.
• Stone Street subsequently asserted, however, that MetLife was the only party against whom Stone Street needed a judgment in this lawsuit.
• Therefore, Stone Street asked that everyone else be dismissed from Stone Street's motion for summary judgment.
• According to Stone Street, the declaratory judgment proceeding should not have been necessary.
• Stone Street fully complied with the Louisiana structured settlement protection act and a transfer order was previously entered without objections from MetLife or Travelers.
• The 2007 transfer order required MetLife to make the October 15, 2010 payment to Stone Street.
• MetLife ignored their own prior letter wherein MetLife stated it received the order and agreed to comply.
• The principle of res judicata should prevent MetLife from pleading concursus because its claim was previously prosecuted to judgment.
• Traveler's request for a declaratory judgment and MetLife's consursus proceeding represented "improper accumulations of actions".
• Although some state structured settlement protection statutes require a change of annuity beneficiary, the Louisiana statute does not because beneficiaries are not required to receive notice or be named parties.
• Louisiana law further holds:
  • Until a person dies that person has the right to sell assets that person owns.
  • Except for irrevocable beneficiaries, no one has a vested right to the status of a beneficiary under a life insurance contract if the death of the insured has not occurred.

MetLife's Argument

• Neither MetLife nor Travelers were parties to the 2007 transfer order so that order had no res judicata effect on MetLife.
• Travelers, the annuity owner, told MetLife not to make the October 15, 2010 payment to Stone Street.
• Nothing in the 2007 transfer order addressed what would happen to the October 15, 2010 payment if Shelia McClendon died prior to that date.
• When Shelia McClendon died, her named beneficiary in the annuity contract was Peatrice Jackson who predeceased McClendon.
• Peatrice Jackson's heirs filed a competing claim for the October 15, 2010 payment.
• Although Stone Street alleges Shelia McClendon filed a request to change her annuity beneficiary, neither MetLife nor Travelers had any record of receiving this request.
• Because a discrepancy existed among the documents submitted to MetLife, a concursus proceeding became necessary and appropriate.

Travelers' Argument

• The Louisiana structured settlement protection act did not impact Shelia McClendon's settlement agreement.
• The settlement agreement remained valid even following the transfer agreement.
• The transfer agreement did not change either the settlement agreement or the annuity contract beneficiary designation.
• The settlement agreement and the annuity contract both provide that Peatrice Jackson, the named beneficiary, would receive the future payments in the event of Shelia McClendon's death.
• If Stone Street and Shelia McClendon had followed through on their request to name Stone Street the annuity beneficiary, this declaratory judgment lawsuit would not have been necessary.
• Travelers had no proof that Shelia McClendon made any attempt to initiate a beneficiary change.
• Therefore, material issues of fact existed concerning: 1) who was Shelia McClendon's rightful beneficiary; and 2) who was entitled to the October 15, 2010 payment.

Judgment - Louisiana District Court Judge Kay Bates:

• Dismissed MetLife's concursus with prejudice and costs payable by MetLife.
• Denied Travelers' exception of failure to join indispensable parties with costs payable by Travelers.
• Granted Stone Street's motion for summary judgment with costs payable by MetLife.
• Granted Stone Street's motion to dismiss the other defendants without prejudice.
• Ordered MetLife to remit the October 15, 2010 payment to Stone Street within 15 days of the mailing of the judgment.

Judge Bates' Reasoning

• In the 2007 transfer proceeding, Shelia McClendon and Stone Street were parties, and MetLife and Travelers were properly notified and served with the petition and order.
• Under the Louisiana structured settlement protection act, Shelia McClendon was clearly entitled to sell the October 15, 2010 payment.
• The 2007 transfer order was valid, final, and not subject to appeal as all delays had passed.
• MetLife's claims against Stone Street arose out of the same subject matter as the 2007 transfer proceeding.
• MetLife's issues existed when the 2007 transfer order was signed and neither MetLife nor Travelers objected at that time.
• Therefore, MetLife's concursus is barred by res judicata.
• Neither MetLife, nor Travelers, nor any of the other claimants had any continuing interest in the October 15, 2010 payment.
• Because Stone Street established it was entitled to the October 15, 2010 payment as a matter of law, no genuine issue of material fact remained.

Additional Resources

• For a 2009 California appellate case addressing the finality of structured settlement transfer orders, see Henderson v. Ramos reported in "Fresno County Factoring Cases" - Part 1 and Part 2 .
• For S2KM's complete reporting about the structured settlement secondary market, see the structured settlement wiki.
• For a more comprehensive and updated analysis of structured settlement transfers, see Chapter 16 of "Structured Settlements and Periodic Payment Judgements" (S2P2J).

NASP 2012 Annual Conference - 3

The National Association of Settlement Purchasers (NASP) hosted its 8th annual educational conference October 16-19, 2012 in New Orleans with a record number of attendees consisting of transfer company executives and staff, in-house and outside legal counsel, investors, service providers and, for the first time, primary market participants.

NASP President Matthew Bracy set the conference theme by challenging speakers and attendees to continue to improve the structured settlement secondary market: "We have some of the brightest minds in the country assembled here to discuss the status of this industry and how to improve what we do. And, as is our habit, we have invited people who might have critical things to say about how we are doing and what we can do better. Improvement can only come from the honest and sometimes harsh assessment of outside critics."

One of those critics was keynote speaker Jan Schlictmann who called out "cash now" advertizing as a "primitive denomination". Schlichtmann's broader message echoed Bracy's theme of bettering oneself through self-criticism and the need for higher industry goals. "It is not just who we serve that matters, but how we serve", Schlictmann stated. Schlictmann reviewed his client experience with structured settlements and acknowledged a personal paradigm shift resulting from recent industry developments including low interest rates and the ELNY liquidation.

The Judges Panel has become a regular and popular feature of NASP educational conferences. Moderator Earl Nesbitt encouraged this year's panel members, Judge Patricia Wise, Chancery Court Judge, Hinds County, Mississippi and Judge Dean Lum, Superior Court for King County, Washington, to share their concerns about structured settlement transfers and their advice for transfer company representatives and attorneys. Selected highlights:

• Judge Wise: "We (Mississippi judges) have a good relationship with transfer attorneys. I don't look at transfers as inherently good or bad. I don't have any preconceived notion whether to approve or disapprove."
• Judge Lum: "It is not my job to talk someone into or out of a transfer. Judges, however, think about the worst case scenario - a recipient who has just turned 18. The closer to this worst case scenario, the more scrutiny a person receives."
• Judge Wise: "What judges are looking for is credibility and what structured settlement payees say they will do with the funds. We do focus on whether prior transfers have occurred. Also, the older the payee, the more likely they have the ability to make a good decision."
• Judge Lum: "Attorneys should prepare the structured settlement payee for his or her court appearance - how to dress and behave; how the best interest test applies; what the impact will be on dependents."
• Judge Lum: "We have a saying in King County: 'there is no party like ex parte'. In unopposed cases, people try to run things by you. Its kind of like the wild west. In unopposed cases, it is important for attorneys to go the extra mile. Your reputation matters. There are two degrees of separation in the legal profession."

Another regular and popular feature of NASP educational conferences are the small group break out sessions. The individual breakout sessions S2KM attended addressed participants' state-specific experience with:

• Court Approval Issues - judicial negotiation of discount rates; the meaning of full disclosure; statutory history of the "best interest" test; independent professional advisor qualifications and fees; transfer application exhibits; and the importance of judicial education.
• Underwriting Issues - annuity provider transfer requirements; "applicable state laws" requirements; judgment creditor issues including bankruptcy and child support; annuity provider administrative fees; and problems related to incompetent payees, identity theft and relatives or friends coercing payees.

The NASP conference doubled down on underwriting issues with an informative presentation about "Life Contingent Transactions" by NASP President-elect Patricia LaBorde. LaBorde, who also served as Chairperson for the 2012 NASP conference and was credited with upgrading the NASP website, discussed the two paths for funding life contingent transactions:

• Purchasing a life insurance policy to hedge against the risk of an early annuitant death; or
• Evaluating the risk and pricing the risk into the transaction.

Jack Kelly, a federal lobbyist who assisted NASP in securing enactment of IRC 5891 in 2002, provided a Legislative Update. Kelly summarized NASP's 2012 involvement with legislative proposals in Vermont, Minnesota and New Hampshire. Vermont, in 2012, 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.

Earl Nesbitt, NASP's Executive Director and General Counsel, presented the 2012 Litigation Update. Among several important court decisions, Nesbitt highlighted the Stone Street v. McClendon case which he characterized as an "important victory" for NASP and the structured settlement industry in general. In McClendon, a Louisiana state court found that Travelers Insurance and MetLife had no grounds for withholding payments following a valid transfer of payment rights pursuant to the Louisiana structured settlement protection statute. The court ordered MetLife to pay interest from the date the payments were originally due. Note: S2KM will publish a more detailed review of the McClendon case in a subsequent blog post.

Attorney Joseph Feltes' 2012 NASP presentation titled "Privacy Issues in Structured Settlement Transactions (Part 2)" supplemented his 2011 NASP presentation on the use and disclosure of confidential information by transfer companies. This year, Feltes discussed privacy issues related to electronic and digital communications, especially Internet-based communications. Among other issues, Feltes highlighted: cyber-bullying; the increase in defamation cases; the blurred boundaries between public and private communications; FTC blog rules requiring disclosures of paid endorsements; social media policy and practices; limits on constitutional rights; cloud technology issues; and the importance of company Internet policies.

In his "Primary Market Update", Mark Wahlstrom emphasized why the primary and secondary structured settlement markets are part of the same business. He called the primary market "the secondary market's best friend" despite the primary market's criticism of, and "needless obstacles" for, the secondary market. As one example of "needless obstacles", Wahlstrom mentioned Chartis for aggressively promoting an anti-factoring pledge among its structured settlement brokers.

Wahlstrom described 2012 as "another bad year for the primary market". He characterized declines in primary market annuity premium as a "negative trend that will eventually impact the secondary market" and identified the following causes:

• The structured settlement is an insular, closed community with aging leadership and a shrinking sales force.
• Structured settlement annuity providers, and most brokers, lack marketing and innovation skills.
• Primary market participants are intimidated by the Internet.
• Instead of offering customer solutions, the primary market continues to sell a single product.
• With historically low interest rates, that product produces a zero return when you consider inflation.
• The primary market has not responded strategically to tort reform and increasing competition from other professionals.
• By continuing their "factoring wars", the primary market has missed opportunities to cooperate with the secondary market.
• The ELNY liquidation means the primary market can no longer claim all structured settlement recipients have received 100% of their payments.

Kira Brereton, an attorney who specializes in asset-backed securitizations, provided a comprehensive introduction to "Financing Structured Settlements". Her presentation: reviewed a typical transaction structure; provided a market overview including legal and regulatory developments; summarized rating agency considerations; discussed split payment issues; addressed the creditworthiness of insurers backing the collateral pools; considered bankruptcy and receivership issues; and highlighted relevant securities laws and regulations including the Investment Company Act of 1940, private placements, Dodd-Frank and Regulation AB 2.0.

Elizabeth Yingling, a securities law expert, discussed "Implications of Federal and States Securities Laws on Structured Settlements". She addressed fundamental issues such as: What statutes govern securities? What is a "security"? What is an "investment contract"? and How do promotional materials impact the analysis? In addition, Yingling offered a detailed analysis of the "Howey test" and provided practical tips.

Alexander Hamilton Award

NASP also named S2KM blog author, Patrick Hindert, as the 2012 recipient of its Alexander Hamilton Award. NASP has bestowed this award five times "to distinguished individuals who have supported and defended the right to free alienability of property rights. This right is the corner stone of NASP and the foundation of the structured settlement factoring business." Previous Alexander Hamilton Award recipients:

• State Senator Alan Sanborn of Michigan.
• U.S. Representative Eric Cantor of Virginia.
• State Representative Van Tran of California.
• Earl S. Nesbitt, Esq., of Texas.

In announcing the 2012 award, NASP President Matt Bracy stated: "Hindert was chosen to receive this award based upon his longstanding support of the factoring business and option. In particular, his position as a founder and leader in the primary structured settlement business, who early on recognized the legitimacy and value of the secondary market, led to this honor."

For complete S2KM reporting on NASP conferences plus other structured settlement and settlement planning conferences, see the structured settlement wiki.

NASP 2012 Annual Conference - 2

Celebrating the 10th Anniversary of the enactment of IRC 5891, the National Association of Settlement Purchasers (NASP) hosted its 2012 Annual Conference last week in New Orleans.

The conference featured an ambitious and successful educational program highlighting prior NASP accomplishments and focusing on emerging issues that impact both the primary and secondary structured settlement markets. For the first time in NASP's history, conference attendance was open to primary market participants.

S2KM previously published an introductory blog post identifying NASP 2012 conference speakers and topics and providing links to S2KM reports from previous NASP conferences. Subsequent S2KM blog posts will recap speaker presentations.

This blog post offers S2KM's general observations and impressions of some of the broader structured settlement industry issues based upon NASP's 2012 conference.

Why Has Factoring Flourished?

Compared with the primary structured settlement market, both NASP and the secondary market appear to be flourishing. What explains this paradoxical success?

The groundwork for secondary structured settlement market success began in 1997 when NASP launched a strategic lobbying initiative resulting in the enactment of IRC 5891 and NCOIL's Model State Structured Settlement Protection Act (Model Act).

Although neither legislative development would have been possible without support from the National Structured Settlement Trade Association (NSSTA), the lobbying agendas of the two associations were markedly different. Ultimately NASP prevailed on several critical issues including:

• "Best interest" standard vs. NSSTA's preferred "financial hardship" standard.
• Denying annuity owners and providers the right to veto proposed transfers.
• Eliminating maximum discount rates.

In addition to NASP's lobbying success, NASP's members have achieved considerable, and controversial, marketing success utilizing aggressive television advertizing and sophisticated Internet techniques. As one measure of this marketing success, the primary market now claims the secondary market has "stolen the structured settlement brand".

Both the primary and the secondary structured settlement markets were devastated by the 2008 financial crisis which:

• Temporarily shut down asset-backed securities markets including securities backed by structured settlement payment rights.
• Created an industry liquidity crisis which resulted in:
  • J.G. Wentworth, the largest secondary market company, entering bankruptcy in 2009.
  • AIG, the largest primary market company, receiving a financial bailout from the U.S. government in 2008 and 2009.
  • Both Wentworth and AIG have subsequently recovered and regained their respective market leadership roles.
• Reduced interest rates to historic low levels causing a substantial reduction in primary market sales beginning in 2009.

As of the 2012 second calendar quarter, the secondary structured settlement market appears to have fully recovered from the 2008 financial crisis. The primary market has not yet recovered. Part of the reason is that interest rates, whether high or low, affect the primary and secondary structured settlement markets differently.

Other reasons, however, also help explain the growing success of the secondary structured settlement market.

• Structured settlement transfers improve the structured settlement product by addressing a critical need for many structured settlement recipients - a liquidity need that was not properly addressed in the original settlement plan or, alternatively, resulted from unanticipated developments.
• Continuing strong demand exists among some institutional and individual investors for recycled structured settlement payment rights.

Linked Markets - Same Customers

Having failed politically to end structured settlement factoring, NSSTA, and many annuity providers, have adopted alternative strategies which appear to be misguided attempts to create obstacles and impede the growth of the secondary structured settlement market.

NSSTA's 2006 bylaw amendments represent one such example. As NSSTA explained to its members: "because [the secondary market] activities [prohibited by the amendments] are inconsistent with the membership qualifications, engaging in those activities can lead to suspension or expulsion from membership and to denial of new membership applications." (emphasis added).

The increasing "administrative fees" annuity providers charge factoring companies, either as a condition to avoid "opposed transfers" or to allow transfers of life contingent payment rights, represents another example. Ultimately, the structured settlement recipients who transfer payment rights pay for those administrative fees which, for some annuity providers, now represent a new profit center.

How do these types of actions help the structured settlement customer or improve the structured settlement industry?

Both NSSTA and NASP, and their members, share a common existential interest in IRC 104(a)(2) and 130. Both NSSTA and NASP recognize the anticipated re-writing of the U.S. tax code expected to begin following the 2012 Presidential election represents a threat to those tax sections.

Arguably, the existence of IRC 5891, which not only links to IRC 104(a)(2) and 130, but also to the 48 state structured settlement protection statutes, has both expanded and strengthened the U.S. structured settlement legislative framework.

Having collaborated to help enact IRC 5891 and the NCOIL Model Act, shouldn't NSSTA and NASP also collaborate to defend and maintain IRC 104(a)(2) and 130 - and to identify additional shared interests for structured settlement industry improvement and growth?

Improving Industry Education

In his opening comments at the NASP 2012 conference, outgoing NASP President Matthew Bracy challenged attendees to make the structured settlement transfer business better: "better in the marketplace, better in the courts, and above all better for the customers who so need the service this industry provides."

One way NASP "walks the walk" of secondary market improvement is by inviting its critics to speak at NASP conferences. NASP challenges these critics not only to address secondary market problems but also to recommend improvements.

Critics who have spoken at past NASP conferences include: Jack Meligan, Stephen Harris, Peter Vodola, John Darer, and Richard Risk. Other critics, including NSSTA leaders, have been invited but have declined to participate.

Jan Schlichtmann, keynote speaker for the 2012 NASP conference, began by stating: "I don't like your advertizing". He then praised NASP for inviting and encouraging criticism to better itself and the secondary structured settlement market.

NSSTA also has permitted criticism as part of its educational programs. Examples include: Joseph DiGangi (see: "Settlement Consulting") and Dan Clark (see: "SSP and NSSTA 2010 Annual Meetings"). Whenever NSSTA has addressed strategically important and/or controversial issues (egs. IRC 468B and IRC 5891), however, NSSTA members generally hear only "politically correct" speakers and perspectives.

Because of the importance of issues such as qualified settlement funds (QSFs) and the secondary market for the future of structured settlements, NSSTA members increasingly must rely upon non-NSSTA educational programs and educational resources to interact with the people and ideas challenging and changing the structured settlement industry.

During 2012, these educational programs have included: the SSP conference, the ASNP conference, the Risk settlement planning practicum and the QSF symposium.

Fortunately for NSSTA members, as well as members of the Society of Settlement Planners (SSP), NASP has now opened an entirely new educational forum to challenge and expand their understanding of structured settlements.

NASP 2012 Annual Conference - 1

The National Association of Settlement Purchasers (NASP) will host its 2012 Annual Conference October 16-19 in New Orleans. For the first time in NASP's history, conference registration will be open to persons who are not NASP members or affiliated attorneys.

Speakers and Topics

• Matt Bracy - Welcoming Remarks
• Jack Kelley - Legislative and Regulatory Developments at State and Federal Level
• Earl Nesbitt - Litigation Update
• Joseph Feltes - Privacy Issues in Structured Settlement Transactions
• Jan Schlictmann - Keynote Address
• Mark Wahlstrom - Executive Life of New York Rehabilitation and Other Issues Facing the Primary Structured Settlement Market
• Kira Brereton - Financing Structured Settlement Transactions
• Patricia LaBorde - Issues in Life Contingent Transactions
• Elizabeth L. Yingling - The Application of the Securities Laws to the Sale of Structured Settlement Purchasing Transactions
• The Judges' Panel - How Judges Interpret the Best Interest Standard and Other Concerns in Structured Settlement Transfers
  

  • Judge Patricia D. Wise, Chancery Court Judge, Hinds County Mississippi

  • Judge Dean S. Lum, Superior Court for King County, Washington

• Breakout Session One - Practical and Ethical Issues Facing Transfer in Obtaining Court Approval of Structured Settlement Transactions
• Breakout Session Two - Issues in Underwriting Structured Settlement Transactions

S2KM Reporting for Prior NASP Conferences

• 2011 NASP Conference
  
  • Part 1 - speakers and topics
  • Part 2 - S2KM's primary and secondary market perspective
• NSSTA and NASP 2010 Educational Conferences
  • Part 1 - industry issues
  • Part 2 - discussion topics
  • Part 3 - "protect and preserve" vs. "improve and grow"
  • Part 4 - strategic questions
• 2009 NASP Conference
  
  • Part 1 - a listing of educational issues and participants
  • Part 2 - a summary of the educational discussions
  • Part 3 - a closer look at the strategic discussions
• 2008 NASP Conference
  
  • Part 1 - Speakers and topics
  • Part 2 - Panel discussion: structured settlement industry issues
  • Part 3 - Panel discussion: how to improve and grow the structured settlement market
• 2007 NASP Conference - see related NASP 2007 educational wiki
• 2006 NASP Conference
  
  • Part 1 - Speakers and Highlights
  • Part 2 - Primary and Secondary Market Introductions
  • Overview of the Structured Settlement Market
  • How the Primary Market Views Factoring

"Only Half the Story"

In an August 2, 2012 blog post titled "Uniform Fiduciary Standards Only Half the Story", John Darer offers the following critique of this earlier S2KM blog post: "It's a pity that an otherwise well written blog post by Patrick Hindert about Uniform Fiduciary Standards, unexplainably omits standards for the secondary market."

S2KM's blog post addressed the following issue: "What impact will a new uniform fiduciary standard, being developed by the Securities and Exchange Commission (SEC) as one result of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), have upon existing structured settlement and settlement planning business models and practices?"

Without any discussion of the secondary market, S2KM's blog post also highlighted certain traditional primary market structured settlement business practices that fail to meet any fiduciary standard:

• Misrepresentations or omission of material facts; and
• Conflicts of interest - without written, informed client and/or customer consent.

John's blog post makes two valid points. First, that S2KM's blog post ignored secondary market standards. Second, despite enactment of IRC section 5891 and state structured settlement protection statutes, bad business practices continue to exist in the secondary market. John's blog post identifies several such practices.

By "setting aside the good players", however, John's blog post spotlights existing bad business practices but does not identify or address secondary structured settlement market business standards. What are those secondary market standards - and how do (or should) these standards impact the primary market?

Looking specifically at the "uniform fiduciary standard" (the subject of the S2KM blog post in question), the related secondary market standard is the "best interest" test. There are three sources that establish and/or address this secondary market standard: 1) IRC section 5891; 2) the state structured settlement protection statutes; and 3) judicial interpretations of the "best interest" standard.

IRC Section 5891

IRC section 5891 imposes a 40 percent excise tax on any person who acquires structured settlement payment rights in a factoring transaction. The excise tax, however, does not apply if the transfer is approved in advance in a "qualified order" issued under an applicable state statute by an applicable state court.

IRC section 5891(b)(2) defines a qualified order as “a final order, judgment or decree” that satisfies two requirements: a qualified order must find the transfer of the structured settlement payment rights:

• does not contravene:
  • Any Federal or State statute or
  • The order of any court or responsible administrative authority; and
• Is in the best interest of the payee, taking into account the welfare and support of the payee’s dependents.

State Structured Settlement Protection Acts

Forty-seven states have enacted some form of structured settlement protection act. While the various state SSPAs lack uniformity, most adopt the same terminology and share the same basic legislative scheme as the Model SSPA. Echoing IRC section 5891, the state SSPAs provide that structured settlement payment rights transfers are not effective unless they receive advance court approval. Under each of the state SSPAs, key terms are defined, procedures for obtaining court approval are spelled out, and required notices, disclosures and findings are established.

Although all of the state SSPAs incorporate the "best interest" test, the California statute is the only SSPA that defines best interest. Section 10139.5 (b) of the California Insurance Code lists 15 factors that judges should consider "[w]hen determining whether the proposed transfer should be approved, including whether the transfer is fair, reasonable, and in the payee’s best interest, taking into account the welfare and support of the payee’s dependents" including:

“(1) The reasonable preference and desire of the payee to complete the proposed transaction, taking into account the payee’s age, mental capacity, legal knowledge, and apparent maturity level"; and

“(15) Any other factors or facts that the payee, the transferee, or any other interested party calls to the attention of the reviewing court or that the court determines should be considered in reviewing the transfer.”

Judicial Interpretations

In the absence of a state SSPA "best interest" standard, state courts have applied differing determination standards and have been reluctant to provide their own definitions. For example, here is a statement from a 2003 New York trial court opinion (In re Petition of Settlement Capital Corp.):

"Although the [New York] statute does not define the best interests of the Payee, developing case law and the intent of the statute suggest the Court should consider: (1) the Payee’s age, mental capacity, physical capacity, maturity level, independent income, and ability to support dependents; (2) purpose of the intended use of the funds; (3) potential need for future medical treatment; (4) the financial acumen of the Payee; (5) whether the Payee is in a hardship situation to the extent that he or she is in “dire straits”; (6) the ability of the payee to appreciate financial consequences based on independent legal and financial advice; [and] (7) the timing of the application."

Conclusion

What relevance, if any, therefore, does the secondary structured settlement market "best interest" standard have as primary market stakeholders contemplate the potential impact of a uniform fiduciary standard under the Dodd-Frank legislation?

Neither IRC 5891 nor any of state SSPAs apply their "best interest" test to primary market structured settlement sales. Only four of the state SSPAs (New York, Florida, Massachusetts and Minnesota) establish any primary market sales standards, each requiring certain mandatory written disclosures.

The secondary market "best interest" test, however, does raise important issues for the primary structured settlement markets. Most importantly, If structured settlement transfers are required to be in "the best interest of the payee, taking into account the welfare and support of the payee's dependents", why shouldn't a "best interest" test or fiduciary standard apply to the original structured settlement sale?

Thank you, John Darer, for pointing out the importance of this issue.

For additional discussion and analysis of secondary market business practices and the "best interest" test, see:

• Sections 16.02 ("History of Structured Settlement Transfers") and 16.05 ("Judicial Review of Transfer Applications") in "Structured Settlements and Periodic Payment Judgments" (S2P2J); and
• The structured settlement wiki:
  • Secondary market blog posts
  • S2KM reports about Professional Association Meetings including the National Association of Settlement Professionals (NASP).

For S2KM's 2006 analysis of "How the Primary Market Views Factoring", see this concept map. 

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.

NASP 2011 Annual Meeting - 2

S2KM has received both positive and negative private feedback about S2KM's coverage of the National Association of Settlement Purchasers (NASP) 2011 Annual Meeting. Although S2KM welcomes any feedback, private or public, negative feedback generally provides greater focus and incentive for afterthoughts.

Among the private criticisms S2KM has received:

• S2KM is biased toward (or has an affinity for) the secondary market at the expense of the primary market.
• S2KM criticizes primary market business conduct without reporting secondary market bad business behavior.
• S2KM should be more of a positive voice for change and not a muckraker.

Bias Toward the Secondary Market

S2KM believes that IRC 5891 and the state protection statutes have radically changed and improved both the structured settlement product and the structured settlement market. To paraphrase NASP President Matt Bracy: structured settlement recipients, in compliance with federal and state laws, now have the right to sell their asset (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. Instead of the "grey" secondary structured market that existed from 1986 to 2000, the secondary market is now regulated by state judges and the Internal Revenue Service with substantial penalties for transfer companies who do not comply with federal and state statutes.

Many primary market participants will disagree with portions of the above paragraph. They do not view structured settlements transfers either as a product improvement or as a recipient's "right" however that right may be qualified by statute. In S2KM's opinion, the primary market's general attitude toward and perspective of the secondary market since 2001 represent a serious strategic mistake that has caused considerable harm to the primary structured settlement market. Instead of improving their own products by adding commutation or transfer features, and re-learning how to sell their product in a statutorily re-defined market, the primary market continues to criticize and shun the secondary market.

By comparison, NASP regularly invites and welcomes critics to speak at its educational conferences. These critics have included blogger John Darer, two current co-chairpersons of the NSSTA Legal Committee Peter Vodola and Stephen Harris, and current SSP President Jack Meligan, as well as judges from states where structured settlement transfers are viewed most negatively. Among NASP presentations by S2KM author Patrick Hindert (Hindert), see "How the Primary Market Views Factoring".

Criticizing Business Conduct

Beginning in 2004, S2KM has reported and discussed both primary and secondary structured settlement market business practices and business models. For compilations of S2KM's reporting about secondary market business practices (good and bad), see the Secondary Market page on the structured settlement wiki. For detailed information about pre-2001 secondary market business practices and issues, see section 16.02[2] of "Structured Settlements and Periodic Payment Judgments" (S2P2J) of which Hindert is a co-author.

For S2KM reporting and commentary about primary market business standards and practices, see also the structured settlement wiki:

• Business Standards and Practices .
• Primary Market - includes IRC 468B Qualified Settlement Funds.
• Spencer v. Hartford .

Readers can judge for themselves whether S2KM criticizes primary market business conduct without reporting secondary market bad business behavior.

Positive Voice for Change vs. Muckraker

Wikipedia defines the contemporary use of the term "muckraker" to mean "a journalist who writes in the adversarial or alternative tradition or a non-journalist whose purpose in publication is to advocate reform and change." When S2KM began publishing in 2004, social media (including blogs, wikis and podcasts) represented an "alternative" to traditional print media and educational conferences. Social media provides an opportunity for unpopular or minority ideas and viewpoints to gain an audience not otherwise available. Unfortunately, social media also has a dark side which can include personal attacks and bullying.

In advocating for improved structured settlement business practices and business models, S2KM has attempted (with a few exceptions which S2KM regrets), to follow the lessons taught in "Getting to Yes" which at one time represented a guidebook of sorts for the primary structured settlement market. Perhaps the "Getting to Yes" method can still be useful to help a divided structured settlement industry improve and grow:

• Separate the people from the problem.
• Focus on interests not positions.
• Invent options for mutual gain.
• Insist on using objective criteria.

Without more strategic conversations that include all structured settlement stakeholders and perspectives, the structured settlement industry will never achieve its full potential. To the extent possible, S2KM intends to encourage and to be part of those strategic industry conversations. Some of S2KM's preliminary contributions appear on the following pages of the structured settlement wiki:

• Re-thinking Structured Settlements .
• Growing the Market .

NASP 2011 Annual Meeting

Highlighting a year during which the secondary structured settlement market is exceeding previous annual transfer totals, the National Association of Settlement Purchasers (NASP) cautiously celebrated its seventh Annual Meeting November 9-11, 2011 in Las Vegas with record conference attendance including member company representatives, affiliate attorneys and invited guests.

Recognizing its legislative successes, NASP honored its Executive Director Earl Nesbitt for his past lobbying efforts by awarding him with NASP's 2011 Alexander Hamilton Award. Nesbitt represented NASP in helping to enact Internal Revenue Code section 5891 and the Model State Structured Settlement Protection Act upon which are based most of the related state structured settlement protection statutes.

NASP President Matthew Bracy additionally praised NASP's founders stating: "Through their vision, guts and determination, we have not only persevered but flourished. Today NASP celebrates the fact that structured settlement recipients, in compliance with federal and state laws, have the right to sell their asset when needed."

NASP Educational Program

Maintaining its tradition of inviting judges representing different states to speak, NASP's 2011 educational program featured a panel discussion of judges from New York (Honorable Judith McMahon), Texas (Honorable Alexandra Smoots-Hogan) and Mississippi (Honorable Denise Owens) moderated by Patricia LaBorde. Among other issues, the judges discussed how they interpret the "best interest" standard as well as their expectations for transfer company counsel, transfer documentation, disclosure of prior transfers and levels of proof in transfer cases.

Another highlight of NASP's 2011 educational program was NASP's decision to organize smaller breakout group discussions consisting primarily of NASP member general counsel and affiliate NASP member attorneys to discuss:

• Issues in Obtaining Court Approval of the Transaction; and
• Issues in Underwriting Structured Settlement Transactions.

Other Speaker and Topics

Robin Shapiro - Shapiro, Chairman of NASP's Legal Committee, summarized historical and 2011 secondary structured settlement legislative and case law developments. Among the specific cases and issues:

• Symetra v. Rapid - This ongoing litigation appears likely to be completed in 2011 with injunctions 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.
• Conflicts between "incumbents" and "insurgents" in the secondary structured settlement market with a substantial portion of new transfers including individual investors not just institutional investors.
• Confusion between transfers of structured settlement payment rights and "settlement liquidity" businesses involving other asset classes such as the increasing sale of veterans' benefits.
• At least one (unnamed) annuity provider that refuses to release guaranteed payments to investors when a payee dies resulting in delays and legal costs for transfer companies.

Leonard Bernstein - Bernstein, a financial services regulatory attorney, presented separate discussions about how 1) Dodd-Frank and 2) advertising laws impact structured settlements. Although both discussions were directed toward a secondary market audience, each also contained valuable information for primary market participants.

• Dodd-Frank - Bernstein's Dodd-Frank update focused on the Consumer Financial Protection Bureau (CFPB), a new federal agency . CFPB's central mission is "to make markets for consumer financial products and services work for Americans ....." Among its core functions are to take consumer complaints and to restrict unfair, deceptive or abusive acts or practices under the Federal consumer financial laws. Dodd-Frank provides CFPB with authorities that go beyond the existing consumer protection statutes. CFPB has broad authority to ask questions and demand information including consumer complaints. Dodd-Frank also establishes the Federal Insurance Office (FIO) with the authority to monitor all aspects of the insurance industry.
• Advertising - Bernstein's advertising discussion referenced sections of the Better Business Bureau's Code of Advertising that could impact structured settlement purchasing transactions (or primary market transactions) by prohibiting advertisements which are untrue, misleading, deceptive, fraudulent, falsely disparaging of competitiors, or insincere offers including deception through omission. As one strategy to protect against false advertising, Bernstein recommended using disclaimers whose effectiveness depends upon their prominence and location.

Elizabeth Yingling - Yingling, a securities attorney, discussed how federal and state securities laws can impact structured settlements. In defining what constitutes a "security", Yingling focused on the meaning of an "investment contract" as that term was defined in SEC v. Howey, a 1946 U.S. Supreme Court decision. Yingling offered several practical tips for transfer companies to avoid the mine fields of the securities laws when marketing to individual investors and also emphasized the serious risks involved when dealing with unsophisticated investors.

Earl Nesbitt - Nesbitt discussed the concepts of "discount rate" and "discounted present value" both of which 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." In addition to identifying many factors that can determine the discount rate for a specific case, Nesbitt summarized the results of a recent survey he conducted of the discount rates approved by judges in Harris County Texas. Results:

• 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.

Patrick Hindert - Hindert (author of S2KM's blog "Beyond Structured Settlements") provided a "Primary Market Report" addressing current industry challenges and issues. In addition to explaining why primary market annuity premium could fall below $5 billion for 2011, Hindert summarized the historical background and current status of Executive Life of New York (ELNY). The impact of the secondary structured settlement market on the ELNY liquidation has been underestimated in most ELNY reporting by primary market sources. According to reliable secondary market sources, however, payment rights from as many as 1000 of ELNY's remaining structured settlements are currently owned by secondary market companies and/or investors.

Joe Feltes - Feltes, an attorney whose clients include health care providers and whose legal expertise includes social media, e-mail and Internet use, spoke about privacy issues in structured settlement transactions. Based upon his research, Feltes expressed surprised at the paucity of information available about structured settlements and privacy issues. As one example, Feltes pointed out the Model State Structured Settlement Protection Act does not address privacy. Before seeking and transmitting private medical information about structured settlement candidates and/or recipients, Feltes recommended obtaining purpose-specific written authorization including a waiver and release. In addition to HIPAA, Feltes discussed the privacy provisions contain in Graham Leach Bliley.

Congratulations to NASP for continuing its high educational standards with an outstanding 2011 Annual Meeting. Conference Chairperson Patricia LaBorde prepared helpful and related handout summaries for several of the presentations.

For S2KM reporting about prior NASP annual meetings plus additional analysis about the ELNY liquidation, see the structured settlement wiki.