The United States structured settlement primary market has continued to slowly recover from its 2012 nadir during 2014 with first nine months annuity sales of approximately $3.9 billion resulting from 19,778 cases (as reported by Melissa Evola) a premium increase of 3% compared to $3.73 billion for the same period in 2013.
Total projected 2014 annual premium of $5.28 billion, however, is expected to fall substantially short of the historic 12 month industry apogee ($6.2 billion in 2008) after consistently averaging close to $6 billion annually from 2001-2007. For estimated annual structured settlement annuity sales since 1976, see the structured settlement wiki.
Adding these 2014 third quarter results to historic U.S. structured settlement totals, S2KM estimates the following primary market metrics from 1976 thru September 30, 2014:
- Total annuity premium: $143 billion.
- Total structured settlement cases: 822,000
- Average annuity premium: $174,000.
Nine month 2014 sales results for individual structured settlement annuity providers (per Evola's report) which are members of the National Structured Settlement Trade Association (NSSTA) plus the rounded increase (+) or decrease (-) from comparable 2013 results:
- Berkshire Hathaway - $1.113 billion (+ $79 million)
- MetLife - $678 million (+ $114 million)
- Pacific Life - $553 million (- $47 million)
- Prudential Life - $463 million (+ $90 million)
- Liberty Life - $430 million (+ $21 million)
- Amgen/USL - $378 million (- $57 million)
- New York Life - $206 million (+ $14 million)
- Mutual of Omaha - $40 million (- $10 million)
- Allstate and John Hancock, which have departed the structured settlement market, sold a combined $79 million of structured settlement annuities during the first nine months of 2013.
- To better understand their clients' "perceptions, utilization and understanding of the value of structured settlement consultants" (and presumably to improve industry sales), NSSTA has retained CLM Advisors to conduct separate marketing surveys of property & casualty 1) senior claims executives and 2) claims adjustors as well as 3) plaintiff attorneys. The results of Phases 1 and 2 were presented at NSSTA 2014 educational conferences.
Low Interest Rates
Many structured settlement industry participants attribute decreased sales to low interest rates. 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):
- 2014 (as of December 5) - 2.97%
- 2013 - 3.96%
- 2012 - 2.95%
- 2011 - 3.91%
- 2010 - 4.25%
- 2009 - 4.08%
- 2008 - 4.28%
- 2007 - 4.84%
- 2000 - 5.94%
- 1990 - 8.61%
- 1980 - 11.27%
Submarkets - Two noteworthy submarkets are incorporated within the structured settlement annuity production numbers set forth above:
- Non-Qualified Assignments
- Non-qualified assignments represent transfers of periodic payment obligations that do not meet the requirements of IRC section 130.
- Unlike qualified assignees, U.S.-based, non-qualified assignees are subject to income tax on the amount they receive from whatever entity assigns (or more accurately "delegates") periodic payment obligations for claimants who do not qualify for tax exclusions under IRC section 104(a)(1) or (2) - such as employment discrimination cases or deferred attorney fees.
- Despite the promise of a large potential "non-qualified assignment" market, reported sales on non-qualified structured settlement annuities by NSSTA members have declined since 2012.
- Reported nine month 2014 non-qualified structured settlement sales totaled $113.2 million compared with $124.3 million in 2013.
- Medicare Set-Asides
- A Medicare set-aside (MSA) is an administrative and funding mechanism utilized in certain categories of settlements to protect Medicare's interests as "secondary payer" under the Medicare Secondary Payer (MSP) statute.
- Although Federal law does not define MSAs, or mandate specific types of MSA funding mechanisms, CMS (the responsible federal agency) has established certain basic requirements for workers compensation MSAs (WCMSAs).
- No similar rules exist for liability MSAs. In October 2014, CMS withdrew a Notice of Proposed Rulemaking (NPRM) which was expected to address liability MSAs.
- Under current CMS rules, structured settlement annuities have an inherent cost advantage over lump sum alternatives for funding WCMSAs resulting from the method CMS prescribes for calculating present values.
- Based upon industry sources, S2KM has previously estimated that eight (8%) percent of 2013 structured settlement premium and 24 percent of 2013 structured settlement annuities were attributable to WCMSAs. Under current CMS rules, these numbers could increase in 2014.
Product Developments - Significant structured settlement product developments occurred during 2014 including:
- Equity-indexed Annuity Rider - Pacific Life has obtained a Private Letter Ruling (PLR-143928-13) from the IRS approving favorable tax treatment for a structured settlement annuity with annual payment adjustments based on the performance of the Standard & Poors 500 Index. Although life insurance companies first offered equity-indexed annuities during the mid-1990's to compete with indexed mutual funds, Pacific Life's ILAAPR represents the first U.S. equity-indexed structured settlement option. To achieve market success, structured settlement consultants must convince settlement recipients that potentially higher long-term ILAAPR payouts (based upon S&P 500 performance) will offset lower starting payments compared with traditional structured settlement annuities.
- Hardship Conversion Feature - PLR-143928-13 also approves favorable tax treatment for a structured settlement annuity with a commutation pursuant to a Notice of Hardship Conversion which the PLR describes as follows: "The Notice of Hardship Conversion provides that the Assignee will consider a request from Claimant to convert future guaranteed structured settlement payments to an immediate lump sum payment, in certain qualifying hardship circumstances, if the request is approved by a court or applicable administrative authority pursuant to a qualified order under § 5891(b)(2). The qualifying hardship circumstances are financial hardship due to medical expenses, expenses related to a terminal illness, home improvement expenses for handicap accessibility, job loss, loss of home, and the same type of expense for the payee’s dependents. Assignee expressly represents that it reserves the right to decline any hardship conversion request and that it will consider each hardship conversion request on a case-by-case basis. In addition, Assignee represents that it will not allow any hardship conversion in the first year after a qualified assignment."
- Periodic Payment Reinsurance - Although first offered in 1982, Berkshire Hathaway re-introduced its periodic payment reinsurance product during 2014. Issued by National Indemnity Company, a Berkshire property and casualty company, this product is available for both tax-free periodic payments [under IRC 104(a)(1) and/or (2)] and non-IRC 130 tax-deferred periodic payments. In many respects analogous to traditional structured settlements, Berkshire asserts multiple advantages for its reinsurance product. These include greater financial strength than other structured settlement product providers plus higher interest rates because, unlike life insurers, National Indemnity's investments are not concentrated in bonds. Unlike traditional structured settlements, however, periodic payment reinsurance does not qualify for guarantee fund coverage and cannot be used by self-insureds. For more detailed analysis of periodic payment reinsurance as well as other structured settlement financing alternatives, see Chapter 3 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).
Primary Market Challenges - Reporting on NSSTA's 2014 Fall Educational Conference, S2KM summarized the following challenges currently facing the structured settlement primary market:
- Generational transition
- Stagnant growth
- Polarized and complex overlapping market(s)
- Alternative business models
- Increasing competition
- Changing success factors
In subsequent blog posts, S2KM will address 2014 structured settlement developments related to the secondary market, personal injury settlement planning and the ELNY liquidation. For prior S2KM annual reporting, see the structured settlement wiki.