Beyond Structured Settlements

SSP 2015 Annual Conference - 1

The U.S. structured settlement industry consists of three national professional associations - the National Structured Settlement Trade Association (NSSTA), the Society of Settlement Planners (SSP) and the National Association of Settlement Purchasers (NASP) - whose political differences frequently obscure their shared existential interests and, until recently, have restricted their opportunities for mutually-beneficial collaborative education.

NSSTA's 2014 Fall Educational Conference highlighted the issues of "generational change and challenges" and served as a precursor for improved association relationships by featuring SSP President Neil Johnson and NASP President Patricia LaBorde as guest speakers.

The SSP 2015 Annual Conference, to be held March 29-31 in Las Vegas will substantially expand this new educational chapter of industry dialogue by hosting an unprecedented number of association leaders as speakers. Among the highlights will be a repeat engagement of NSSTA's 2014 "Presidents' Panel" featuring current NSSTA President Kevin Silo and SSP President Johnson. Titled "Collaboration for the Greater Good", and moderated by Patrick Hindert, this panel promises to "doubledown" on solutions for achieving industry unity.

Additional association leaders scheduled to speak at the SSP Conference:

• Eric Vaughn - NSSTA's Executive Director is expected to emphasize the shared interests of all structured settlement professionals including plaintiff and defense representatives as well primary and secondary market participants. These shared interests being the protection and preservation of IRC sections 104(a)(2) and 130 plus the future growth of the primary market.
• Earl Nesbitt - NASP's Executive Director will be joined by Rhonda Bentzen, SSP 2015 Conference Chairperson and secondary market expert, to follow-up SSP's groundbreaking 2014 secondary market panel which first opened educational dialogue between primary and secondary structured settlement professional associations.
• Jack Kelly - NASP's lobbyist, who also spoke at last year's SSP conference, will provide his perspective on political changes taking place in Washington D.C. and how they might impact structured settlements.
• Kevin Urbatsch - The National Director of the Academy of Special Needs Planners (ASNP) recently introduced and helped organize ASNP 12-part "Settlement Planning" webinar series. In Las Vegas, Urbatsch will address recent attacks by the Social Security Administration on litigation-generated special needs trusts.
• Wendie Howland - Editor of the American Association of Nurse Life Care Planning (AANLCP) Journal, Ms. Howland will discuss settlement planning from a life care planning perspective. She will highlight the increasing role of life care planners in allocating damages for Medicare set-asides (MSAs) and as a result of the Affordable Care Act. In addition, she will advise structured settlement consultants and settlement planners how to better utilize life care plans to improve their own work product.

Additional SSP speakers and topics:

• Joseph Dehner - A prominent international attorney and co-author of the legal textbook "Structured Settlements and Periodic Payments", Dehner will discuss "Off-Shore Funding Companies" and their increasing role in the structured settlement market.
• Joseph DiGangi, Shannon Fitzgerald and Phillip Kruse - this panel of experts, moderated by Patrick Hindert, will analyze the application of "fiduciary standards" to settlement planning and settlement planners. Their presentation will feature a case study, review SSP's Standards of Practice, discuss NAIC Model Regulations, consider the 2006 Saltzburg/Chemerinsky memos, and suggest best practices.
• Edward Stone - A legal representative for many Executive Life of New York short-fall victims who continues to seek restitution for his clients, Stone will offer his opinion as to whether some settlement planners remain at risk in the ongoing ELNY litigation.
• Joseph Tombs - A lawyer, certified financial planner and former SSP President who helped organize SSP's Registered Settlement Planner (RSP) certification program, Tombs will outline his recommended process for developing a settlement plan.
• Jack Meligan - Also a former SSP President as well as a recognized settlement planning expert, Meligan will provide an MSA update with his perspective on how MSAs fit into settlement planning.
• Jeremy Babener - A prodigious structured settlement author and industry tax expert who also serves as Chairman of SSP's Legal Committee, Babener will introduce SSP's new website and discuss new SSP Legal Committee initiatives.
• Bryn Poland - A leading Qualified Settlement Fund (QSF) expert, who has served as attorney, trustee and/or administrator for numerous QSFs, Ms Poland will explain how and why the multi-claimant QSF market is growing rapidly despite the single claimant pullback within the structured settlement market.

For S2KM's reporting about prior structured settlement and settlement planning professional conferences, see the structured settlement wiki.

S2P2J Release 57 Highlights

The United States structured settlement market has been in existence for more than 35 years and continues to expand its scope, complexity and importance within the context of personal injury settlement planning.

Since it was first published in 1986, "Structured Settlements and Periodic Payment Judgments" (S2P2J), has provided structured settlement stakeholders with an authoritative reference guide, consisting of 16 chapters with extensive footnotes and Appendix documents, to help them understand issues and fashion settlements and judgments utilizing periodic payments. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) have utilized S2P2J as an educational resource for their certification programs.

Co-authored and updated semi-annually by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert, S2P2J now features an online version as well as the traditional hardcopy. Online S2P2J includes a search feature and download capability as well as link features to access individual book sections, appendices, footnotes, cases and statutes.

Publisher Law Journal Press anticipates a March 2015 distribution date for hardcopy supplements for S2P2J Release 57 with online S2P2J subcribers receiving their update simultaneously with no additional subscription charge. Competent professionals confronted by structured settlement issues should have access to an up-to-date copy (or the online version) of this indispensable source book.

Release 57 Highlights - Release 57 will feature new, updated and/or expanded sections addressing the following structured settlement topics:

• WCMSAs - Release 57 re-positions and expands S2P2J's extensive summary of the new CMS rules for workers compensation Medicare set-asides, the fastest growing segment of the structured settlement primary market. Regulatory rules for liability MSAs remain essentially unchanged following the withdrawl by CMS on August 8, 2014 of it the liability MSA-related NPRM it had earlier submitted to the Office of Management and Budget.
• Indexed Annuities - PLR 143928-13 highlights the potential importance of indexed annuities and annuity riders as structured settlement funding alternatives. Release 57 features a new section explaining indexed annuities, differentiating variable annuities and summarizing the related PLR.
• Commutation Riders - PLR 143928-13 also provided favorable tax treatment for a commutation rider pursuant to a Notice of Hardship Conversion as a potential alternative to factoring transactions. This PLR justified an expansion in Release 57 of S2P2J's current section discussing commutations.
• Non-qualified Assignments - Most non-qualified assignments depend upon off-shore assignment companies which raise tax and security issues for participants. Release 57 expands S2P2P's analysis of non-qualified assignments to address these issues.
• CLM Advisors Surveys - Release 57 summarizes results from two surveys commissioned by NSSTA to determine the value claims executives and adjustors place on structured settlements and structured settlement consultants. The results and related metrics are generally favorable and arguably provide a valuable marketing blueprint for defense brokers.
• ABLE Accounts - Release 57 features a new section describing ABLE Accounts, a tax-preferenced funding option authorized by the Achieving a Better Life Experience Act (ABLE Act) of 2014. Although some structured settlement consultants view ABLE Accounts as a competitive product, others see opportunities to fund ABLE accounts using structured settlements.
• Insurance Regulation - States historically have regulated insurance in the United States. As a result of the 2008 global financial crisis, however, new federal and international insurance regulatory agencies now exist which are targeting some of the largest structured settlement annuity providers among other financial and insurance companies. Release 57 adds a new section to introduce and explain these new regulatory developments and entities.
• ELNY and Reliance - The recent ELNY and Reliance liquidations have each impacted thousands of structured settlement recipients. Although judicial solutions have been fashioned, litigation continues - as least involving some ELNY shortfall payees. Release 57 updates S2P2J's extensive coverage of the ELNY and Reliance liquidations.
• Role of Plaintiff Attorneys - As structure settlements and personal injury settlement planning have become more complex, and plaintiff attorneys increasingly require the services of other settlement planning professionals, plaintiff attorneys should continue to perform certain essential structured settlement and settlement planning roles. Release 57 identifies and discusses those roles and provides additional related advice for plaintiff attorneys.
• Secondary Market Update - The continuing expansion of the secondary market has generated controversy and litigation as well as legislative reform and changing business practices. S2P2J continues to track these developments in expanding chapter 16 titled "Transfers of Structured Settlement Payment Rights". Release 57 highlights include "anti-assignment" issues in Illinois originating with the Brenston case and the market "chaos" some secondary market participant see occurring as the result of the Washington Square v. RSL Funding case.
• IRC 104(a)(2) Treasury Regulations - Recent U.S. Treasury Regulations for IRC 104(a)(2) relating to the exclusion from gross income for amounts received on account of personal physical injuries or physical sickness make two primary changes to the current regulations which Release 57 summarizes in the context of S2P2J more extensive analysis in Chapter 2 of "Taxation of Damages Received by the Claimant".

For related S2KM blog reporting about structured settlement 2014 developments, see:

• Primary market
• Secondary market
• Settlement planning
• ELNY and Reliance

 

Structured Settlements 2014 - Primary Market

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)

Notes

• 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.

Potential "Game Changing" S2 PLR

The Internal Revenue Service (IRS) has issued a Private Letter Ruling (PLR-143928-13) dated August 29, 2014 approving favorable tax treatment for a structured settlement annuity with annual payment adjustments based on the performance of the Standard & Poors 500 Index which also includes the possibility of a commutation by the Claimant pursuant to a Notice of Hardship Conversion. A copy of the PLR is posted on the structured settlement wiki.

Although PLRs do not identify requesting taxpayers, knowledgeable industry sources have identified Pacific Life as the product provider. A PLR is directed only to the taxpayer requesting it and may not be used or cited as precedent.

Pacific Life previously announced its Index-Linked Structured Settlement Adjustment Rider and has published a product brochure describing its features and benefits. The PLR describes the following three step formula by which Pacific Life adjusts applicable periodic payments on each annual payment anniversary:

• "Step 1 determines the index return, which equals the ending S&P 500 Index Price minus the starting S&P 500 Index Price divided by the starting S&P 500 Index Price.
• "Step 2 determines the adjustment, which is the lesser of the Index Return or [a percentage cap]. If the Index Return is less than or equal to zero, the adjustment will be zero.
• "Step 3 determines the annuity payment amount."

As to the Index-Linked feature, the PLR concludes:

• The periodic payments "are fixed and determinable as to amount and time of payment within the meaning of § 130(c)(2)(A) even though they are calculated pursuant to an objective formula based on the performance of the S&P 500 Index"; and
• The structured settlement indexed annuity "will not fail to qualify as a qualified funding asset under § 130(d) solely by reason of annuity’s variable payments."

For additional information about equity-indexed annuities and the Pacific Life Index-Linked Adjustment Rider, see this prior S2KM blog post.

Hardship Conversion Feature

The Hardship Conversion feature potentially represents a structured settlement industry "game changing" development. With the exception of Allstate and Symetra, each of which has exited the structured settlement primary market, no annuity provider, to S2KM's knowledge, offers its structured settlement annuitants a secondary market option.

Correction (9/3/2014) - S2KM has confirmed, subsequent to publication of this blog post, that Berkshire Hathaway does on occasion "accelerate" periodic payments under a court order upon request by Berkshire Hathaway structured settlement payees.

Although Pacific Life has not previously announced or offered a structured settlement Hardship Conversion, industry sources have informed S2KM they anticipate Pacific Life will begin offering a Hardship Conversion for all of its structured settlement annuities beginning in 2015.

The PLR describes the Hardship Conversion feature 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."

As to the Hardship Conversion feature, the PLR concludes:

• "The possibility of a commutation by Claimant pursuant to the Notice of Hardship Conversion will not affect whether the structured settlement assignment satisfies the requirements of a qualified assignment under § 130(c);" and
• "The annuity purchased by Assignee will not fail to be a qualified funding asset under § 130(d) by reason of the Notice of Hardship Conversion."

ADDENDUM (added 9/3/2014): Following publication of this blog post, multiple readers have asked S2KM to further explain why PLR-143928-13 might prove to be a structured settlement "game changing" development. 

• As to the equity indexed-linked feature, see S2KM's prior blog post titled "Equity-Indexed Structured Settlements" which concludes: "The moribund U.S. structured settlement primary market needs a jump-start. Pacific Life's new equity-indexed structured settlement rider represents a welcome innovation and hopefully will become one catalyst for future market growth."
• As to the "Hardship Conversion" feature, see:
• Robert Wood's 2006 article: "Structured Settlements: Factor vs. Commute?" which helps to explain why most structured settlement annuity providers, prior to PLR-143928-13, have not offered factoring or commutation products and services. 
• S2KM's review of Robert Wood's article.

Equity-Indexed Structured Settlements

In a market desperate for innovation, Pacific Life Insurance Company appears to have answered the call with a new, optional "Indexed-Linked Annuity Adjustment Payment Rider" (ILAAPR) for its structured settlement products.

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.

Pacific Life's ILAAPR is linked to the Standard & Poor's 500 (S&P 500) index which includes a representative sample of common stocks traded on the New York Stock Exchange, American Stock Exchange, and NASDAQ National Marketing System. One of the U.S. Commerce Department’s leading economic indicators, the S&P 500 represents over 70% of the total domestic U.S. equity market capitalization.

Indexed annuities differ from other fixed annuities based upon the method interest is credited to an annuity's value. Traditional fixed annuities credit interest at the rate set in the annuity contract. Indexed annuities credit interest based upon a formula in the index (either equity-based or bond-based) to which the annuity is linked. The formula determines whether and how much additional interest is calculated and credited.

The increasing popularity of indexed annuities is highlighted in this Investment News article which cites LIMRA data:

• Indexed annuities accounted for 46.3% ($39.3 billion) of all fixed annuities sold and 27% of total annuities sold in the U.S. during 2013.
• Indexed annuity sales increased by $5.4 billion (17%) in 2013, more than any other form of annuity.
• Pacific Life ranked thirteenth among U.S. life insurers selling indexed annuities in 2013 with 2.45% of the U.S. indexed annuity market.

By comparison:

• Estimated structured settlement annuity premium totaled $5.13 billion in 2013 and $139.5 billion from 1975 through 2013.
• Pacific Life's 2013 structured settlement premium totaled $848,725,000.
• S2KM estimates more than $160 billion per year of United States tort costs have represented payments to personal injury victims and their attorneys since 2006 - based upon Tower Watson's annual studies of U.S. Tort Cost Trends.

Pacific Life's online ILAAPR brochure features hypothetical examples and product information including:

• Structured settlement payments with the ILAAPR option can increase annually based on positive S&P 500 index returns [with a five (5%) percent cap] but will not decrease if the S&P 500 declines or remains flat.
• Unlike a variable annuity, the ILAAPR is not an investment security and does not participate directly in the stock market or the S&P 500 index.
• Like its traditional structured settlements, Pacific Life's ILAAPR payments are backed by the company's financial strength and claims-paying ability.
• ILAAPR payment increases take effect on the anniversary of when payments originally started.

Also note, according to industry sources:

• Pacific Life has received a favorable IRS private letter ruling for the ILAAPR confirming tax exclusion of its indexed payments under IRC section 104(a)(2).
• If the initial ILAAPR benefit payment is deferred, the ILAAPR indexing feature only applies after benefit payouts begin.

Whether Pacific Life's ILAAPR will experience market success and help grow the U.S. structured settlement primary market remains uncertain and subject to debate among structured settlement consultants.

To sell the product, these 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.

ILAAPR advocates will point to historical S&P 500 results. During the past 30 years:

• The S&P 500 index has increased an average 9.8 percent per year.
• In 12 of those 30 years, the S&P 500 index increased less than five (5%) percent (ILAAPR's cap) or decreased.
• Incorporating ILAAPR's five (5%) percent cap, the annual applicable S&P 500 index increase averaged 3.5 percent per year.
• Also relevant for 30 year historical comparisons: the yield on 30 year U.S. Treasury bonds in April 1984 was 12.65 percent. As of April 21, 2014, the yield was 3.52 percent.

Conclusion

The moribund U.S. structured settlement primary market needs a jump-start. Pacific Life's new equity-indexed structured settlement rider represents a welcome innovation and hopefully will become one catalyst for future market growth.

Primary Market Update

Structured settlement primary market annuity sales increased approximately seven (7%) percent to $5.134,380,855 in 2013 (compared with $4,819,124,617 in 2012) according to industry estimates compiled and recently published by Melissa Evola. Total 2013 structured settlement cases also increased to 26,533 from 25,038 a year earlier for an average case premium of $193,495.

The 2013 annual premium totals, however, still fall substantially short of the historic 12 month industry high ($6,226,578,725 in 2008) after consistently averaging close to $6 billion annually from 2001-2007.

Adding these 2013 results to historic U.S. structured settlement totals, S2KM estimates the following primary market metrics from 1976 thru 2013:

• Total annuity premium: $139.5 billion.
• Total structured settlement cases: 802,000
• Average annuity premium: $174,000.

Berkshire Hathaway, which re-entered the structured settlement market in 2011 following a multi-year hiatus, assumed primary market leadership by generating $1,424,306,831 of structured settlement annuity premium (28% of the industry total) during 2013.

With announced departures of Allstate and John Hancock during 2013, the U.S. structured settlement market now consists of eight annuity providers. 2013 sales results for other structured settlement annuity providers (per Evola's report) plus the rounded increase (+) or decrease (-) from comparable 2012 results:

• Pacific Life - $848,725,000 (+ $11.7 million)
• MetLife - $726,000,000 (+ $62 million)
• Amgen/USL - $587,367,753 (+ $61.3 million)
• Liberty Life - $558,106,000 (+ $147.3 million)
• Prudential Life - $548,700,000 (- $86.7 million)
• New York Life - $275,253,601 (- $47.5 million)
• Mutual of Omaha - $86,598,027 (+ $29 million)

Evola's 2013 compilation also reports an annual decrease in annuity premium for non-qualified structured settlement assignments (from $170.1 million in 2012 to $164.9 million in 2013) as a portion of the overall structured settlement numbers.

Non-qualified assignments represent transfers of periodic payment obligations that do not meet the requirements of IRC sections 130 and 104(a)(1) or (2) including deferred attorney fees. Despite earlier industry projections of a large and growing market, only two structured settlement annuity providers (AmGen and Liberty) currently offer non-qualified assignments.

Independent industry sources further report a substantial shift in recent structured settlement premium with increasing sales to fund workers compensation Medicare set-aside arrangements (WCMSAs). For S2KM's most recent analysis of structured settlements and WCMSAs, see this prior blog post.

Many industry observers continue to view the United States structured settlement primary market as a strategic, underperforming segment of the larger personal injury settlement planning market. S2KM looked at some of the related issues in a three-part 2013 blog series titled "Growing the Primary Market"

• Part 1 - Daniel Durbin's survey of primary market leaders.
• Part 2 - NSSTA and NASP 2013 Fall Conferences.
• Part 3 - NSSTA's marketing boot camp - "What business are we in?"

Anti-Assignment Restrictions

Structured settlement transfers require that payment rights be assignable. Otherwise, transfer (factoring) companies have no direct right against the structured settlement obligor or annuity issuer.

Prior to enactment of IRC 5891 and the state protection acts, the validity and enforceability of structured settlement transfers typically depended upon three basic issues:

• Did the structured settlement documentation clearly forbid assignments?
• If yes did state law override the anti-assignment provision?
• Or, did the parties to the structured settlement waive the anti-assignment provision?

Although IRC 5891 and state structured settlement protection acts set forth procedures and conditions allowing transfers of structured settlement payment rights, courts continue to enforce anti-assignment restrictions when parties to the original structured settlement object.

Most transfer courts, however, have held that the anti-assignment restrictions are not self-executing and have granted transfers when no one objects. Objections to transfers by obligors and annuity issuers have become increasingly rare since the enactment of IRC 5891 and the state protection acts.

The Brenston Case

Settlement Funding v. Cathy Brenston represents a high profile and controversial case where an Illinois Appellate Court overruled prior state court approval of structured settlement transfers based upon anti-assignment restrictions - even though the parties to the original structured settlement waived the anti-assignment provisions. The case currently is subject to a petition for review by the Illinois Supreme Court.

In the Brenston case, an Illinois 5th District panel, sitting for the 4th District Illinois Court of Appeals, determined Brenston’s settlement agreement contained an enforceable anti-assignment provision. As a result, the panel decided the state court, which had previously approved requested transfers, had a duty to enforce the anti-assignment provision and “it had no authority under the Act to approve” the transfer petitions.

In other words, despite the existence of the Illinois transfer statute, the Appellate panel declared court orders approving assignments to be "void ab initio", as a matter of Illinois law, whenever structured settlement documentation purports to limit assignability.

If the Illinois Supreme Court upholds the Brenston appellate decision, or decides not to review it, the case would render the Illinois transfer statute "a practical nullity", according to an Amicus curiae brief filed by the National Association of Settlement Purchasers (NASP).

"Without the certainty and finality of a court order, there is no viable secondary market," the NASP brief states. "Because every structured settlement contains boilerplate language that purports to limit or restrict assignability, every Illinois court approved transfer could be subject to challenge at any time."

Public Policy

The validity of assignments, including structured settlement transfers, depends in part on public policy issues. Transfers arguably undermine the fundamental purpose of structured settlements - to provide spendthrift protection for injury victims and their dependents.

This public policy perspective is captured in the statutory history of the structured settlement tax exclusion. To qualify, IRC 130 provides in part "periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments"

Over time, many structured settlement documents have expanded this IRC 130 prohibition to include "transferred, assigned, mortgaged or encumbered" or words to that effect. (emphasis added). Although anti-assignment provisions are incorporated into many state workers compensation statutes, they are not specifically required by IRC 130, I04(a)(1) or 104(a)(2).

Factoring advocates offer competing public policy arguments to support structured settlement transfers. Unanticipated needs or poorly constructed settlement plans may necessitate immediate cash and outweigh other public policy considerations. Factoring advocates also criticize the "paternalistic" viewpoint of factoring opponents. They argue the structured settlement recipient, as owner of payment rights, should have the right to decide whether to transfer or assign those rights.

Many other statutes either permit or favor assignment of payments rights. These statutes include the 48 state structured settlement protection acts, IRC 5891, and recent revisions to UCC Article 9 as well as the Restatement (Second) of Contracts. Unfortunately, the authors of revised UCC Article 9 did not carefully consider the impact of their revisions on structured settlement transfers which has resulted in conflicting statutory language and interpretations among various states.

Best Practices

The National Structured Settlement Trade Association (NSSTA) amended its Model Qualified Assignment and Release Agreement following the enactment of IRC 5891 and the Model State Structured Settlement Protection Act. Paragraph 7, titled "Acceleration, Transfer of Payment Rights", now provides:

"None of the Periodic Payments and no rights to or interest in any of the Periodic Payments (all of the foregoing being hereinafter collectively referred to as “Payment Rights”) can be

i. Accelerated, deferred, increased or decreased by any recipient of any of the Periodic Payments; or

ii. Sold, assigned, pledged, hypothecated or otherwise transferred or encumbered, either directly or indirectly, unless such sale, assignment, pledge, hypothecation or other transfer or encumbrance (any such transaction being hereinafter referred to as a “Transfer”) has been approved in advance in a “Qualified Order” as defined in Section 5891(b)(2) of the Code (a “Qualified Order”) and otherwise complies with applicable state law, including without limitation any applicable state structured settlement protection statute.

No Claimant or Successor Payee shall have the power to effect any Transfer of Payment Rights except as provided in sub-paragraph (ii) above, and any other purported Transfer of Payment Rights shall be wholly void. If Payment Rights under this Agreement become the subject of a Transfer approved in accordance with sub-paragraph (ii) above the rights of any direct or indirect transferee of such Transfer shall be subject to the terms of this Agreement and any defense or claim in recoupment arising hereunder." (NSSTA's emphasis).

Brenston Status

Peachtree Settlement Funding, the transfer company involved in the Brenston case, has filed a petition for review with the Illinois Supreme Court. The Illinois Supreme Court will likely act on Peachtree's petition by December, although a decision whether to review could be delayed until February, according to NASP Executive Director Earl Nesbitt who reported on the case during the NASP 2013 Annual Conference. Assuming the petition for review is granted, Nesbitt stated a final decision is not expected for nine to 12 months.

Brenston Issues

NASP President Patricia LaBorde characterized the Brenston case as "troubling" for several reasons during a recent S2KM interview:

• The Appellate Court decision challenges the finality of transfer orders. "No one wants litigation over closed cases."

• The only issue on appeal was timeliness. The Appellate Court expanded the issues to discuss anti-assignment restrictions.

• The case had settled before the appeal. Both Brenston and Settlement Funding filed motions to stay the appeal which the Appellate Court ignored.
• The trial judges who approved the transfers were experienced with structured settlement transfers and aware of existing anti-assignment clauses. They never mentioned or suggested they were defrauded.
• The Appellate Court ignored waiver language and references to IRC 5891 which appeared in some of the original structured settlement documents.
• All of the relevant parties had waived the anti-assignment provisions.
• Unlike Brenston, all of the cases cited by the Appellate Court supporting enforcement of anti-assignment restrictions involved objections by structured settlement obligors or annuity providers.
• Brenston had other potential remedies against Settlement Funding including a separate cause of action for fraud.
• The Brenston Appellate Court decision probably puts a hold on transfers in Illinois until the case is appealed or the Illinois transfer statute is amended.

Additional Resources

• For more detailed analysis concerning anti-assignment restrictions, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).
• For the results of prior California transfer cases involving anti-assignment and finality of judgment issues, see - Fresno County Factoring Cases:
  • Report 1
  • Report 2
  • Report 3

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.

S2P2J Release 52

Publisher Law Journal Press anticipates a late October 2012 distribution date for hardcopy supplements for Release 52 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). Online S2P2J will also be updated late October 2012 to include Release 52 materials. First published in 1986, S2P2J is co-authored and updated semi-annually by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) utilize S2P2J as an educational resource for their certification programs.

Release 52 Highlights

Documenting a structured settlement is generally more complicated than the paper work involved with a lump sum settlement. Structured settlement documentation can be further complicated depending upon the number of claimants and annuities, whether plaintiff attorneys defer their fees, the need to allocate damages, the degree of government benefit planning and the growing integration of annuities and trusts into blended products.

Increasingly, therefore, the parties to a structured settlement agreement must endeavor to implement complex settlement plans, using multiple funding devices, designed to address both the intent of the parties and compliance and accountability requirements from the public sector.

To assist structured settlement participants in achieving these objectives, S2P2J Release 52 features new sample structured settlement forms with suggested alternate clauses for use as circumstances change. The new sample forms include a model Structured Settlement Agreement, with a Supplemental Schedule to more conveniently address funding details, plus an optional Advisory Disclosure document specifying the involvement, services and commission sharing (if any) of structured settlement consultants used by the claimant, defendant and liability insurer(s).

The Supplemental Schedule provides a useful, alternative format for specifying the funding details of the settlement, including:

• The amount of up-front payments and their recipients.
• The cost to purchase funding for the periodic payments.
• A provision if the claimant’s attorney will receive periodic payments.
• Allocations by the parties between tax-free and taxable payments.
• Amount of monthly payments and whether they will extend for the claimant’s lifetime or for the greater of claimant’s lifetime or a set period of time.
• Any deferred lump sums to be paid.
• Contingent payee provisions in case payments remain due after claimant’s death.
• Provisions needed for minor’s or protected person’s settlements.
• Specific payee designations, including post office addresses or account information for electronic deposits.
• Designation of attorneys to be paid and at what address or to what account number.
• Language used to permit or disallow later transfers of periodic payment rights.

To help explain these new structured settlement forms, the authors have added extensive related commentary discussing how to create enforceable structured settlement agreements that minimize the risk of post-closing issues.

Release 52 also features a comprehensive update of the Executive Life of New York (ELNY) liquidation plus new and/or expanded analyses for the following structured settlement industry issues and case developments:

• International use of structured settlements.
• Whether defendants save money, historically and currently, using structured settlements.
• New Treasury regulations for IRC section 104(a)(2).
• Allocating settlement proceeds between taxable and tax-exempt elements.
• How special needs trusts can prevent private health care organizations from obtaining subrogation reimbursements from SNT beneficiaries.
• New case law addressing structured settlements for minors issues.
• Bankruptcy court decisions analyzing whether and when a bankruptcy trustee can access structured settlement benefits.
• New cases addressing differences between state periodic payment of judgment statutes that do and do not include termination provisions.
• The State of Washington's new Claims Resolution Structured Settlement Agreement for workers compensation cases.
• The new CMS Medicare Secondary Payer Recovery Portal offering authorized users access and the ability to update pending case information.
• Secondary market case update including:
  • Approval and denial of transfers based upon the "best interest" and "fair and reasonable"  tests.
  • Whether a structured attorney fee is subject to the state structured settlement protection statutes.

For highlights of prior "Structured Settlements and Periodic Payment Judgments" updates, see the structured settlement wiki.

Stressed-Induced Physical Ailments - 1

In a 2010 Tax Notes article, attorney Robert Wood asks: "is physical sickness the new emotional distress?" Recent Tax Court decisions highlight both the tax issues raised by damages for stress-induced physical ailments resulting from physical sickness and the need for careful tax planning when seeking such damages.

S2KM reviewed federal legislative and regulatory tax history related to emotional distress damages as well as recommendations for related legislative changes in a prior blog post. To summarize:

• As the result of a 1996 amendment, section 104(a)(2) now exempts from federal income tax “damages (other than punitive damages) received … on account of personal physical injuries or physical sickness.”
• Section 104(a) now also provides "emotional distress shall not be treated as a physical injury or physical sickness" for purposes of section 104(a) (2).
• However, damages received on account of emotional distress that are attributable to a physical injury or physical sickness are excludable.
• The related legislative history provides that “emotional distress” includes “physical symptoms (e.g., insomnia, headaches, stomach disorders) which may result from such emotional distress.”
• In a private letter ruling issued in 2000 (“the bruise ruling”), the IRS established “the observable bodily harms” standard in a case involving sexual assault and harassment in an employment context: “we believe that direct unwanted or uninvited physical contacts resulting in observable harms such as bruises, cuts, swelling and bleeding are personal physical injuries under section 104(a)(2).”
• Although the 2012 regulations for IRC section 104(a)(2) confirm that damages for emotional distress attributable to a physical injury or physical sickness are excluded from income under section 104(a)(2), they do not provide any explanation to help define “physical” or “physical sickness”.

Some of the most challenging "emotional distress" cases, from a tax perspective, involve damages for stress-induced physical ailments resulting from physical sickness. The U.S. Tax Court has provided guidance for such cases in three recent and related decisions:

• Domeny v. Commissioner, T.C. Memo 2010-9.
• Parkinson v. Commissioner T.C. Memo 2010-142.
• Blackwood v. Commissioner, T.C. Memo, 2012-190.

In an article published July 19, 2012 titled "Recent U.S. Tax Court Decision Highlights Issues Regarding the Tax Treatment of Damages for Stress-Induced Physical Ailments", attorneys Jeremy Babener and Neil Kimmelfield summarize these cases and offer advice for taxpayers seeking damages for stress-induced ailments.

According to their article, the U.S. Tax Court indicated in Domeny and Parkinson "that damages compensating for stress-induced physical ailments may be tax-free where (1) the taxpayer can demonstrate that the damages were actually received on account of those ailments and (2) the physical nature of the ailments was verified by a physician, preferably based on objective medical evidence rather than the taxpayer’s subjective report of symptoms."

In the more recent Blackwood case, however, (where the taxpayer suffered insomnia, migraines, nausea, and pain in her back, shoulder, and neck) Babener and Kimmelfield state: "the taxpayer did not satisfy this standard, highlighting the difficulty of establishing that damages compensating for stress-induced physical ailments are excludable from income."

Based upon these cases, Babener and Kimmelfield conclude:

• Taxpayers seeking damages for stress-induced physical ailments will have difficulty excluding such damages under IRC section 104(a)(2) unless they " (1) obtain a medical diagnosis during the underlying dispute and (2) emphasize diagnosed physical ailments in communications with the defendant..."
• It remains uncertain whether taxpayers who obtain medical diagnoses will receive receive tax-free treatment for stress-induced physical ailments that are less acute what were present in the Domeny (multiple sclerosis) or Parkinson (heart disease) cases.

In an article titled "Tax-free Physical Sickness Recoveries in 2010 and Beyond", written prior to the Tax Court's Blackwood decision, attorney Robert Wood offered the following additional advice based upon his review of the Domeny and Parkinson cases:

1. "The facts matter and your proof of the facts matter. To exclude a payment on account of physical sickness, you need evidence that you really made the claim and that the payer was aware of it, and at least considered the claims in making the payment.
2. "Proving that you were struck isn’t part of physical sickness, but proving that you had demonstrable sickness is. You’ll need evidence of medical care, and evidence that you were claiming the payer caused your condition or caused it to worsen.
3. "The courts and the IRS shouldn’t be put in the position of trying to figure out which payments were for which claims. Spend the time to nail down as much as you can in the settlement agreement. Very frequently the IRS will accept an explicit allocation and will not go behind it.
4. "Be reasonable. If you are allocating which payments are for which claims, do not go overboard. Don’t allocate $10 to wages in an employment dispute. Don’t allocate 90 percent of a recovery in an intentional infliction of emotional distress case to physical injuries or physical sickness.
5. "When there isn’t much of a record of medical expenses and discovery in the litigation, consider what other documents you can collect at settlement time. A letter from the plaintiff’s attorney saying why the physical sickness claims were strong may help. A letter from a treating physician or an expert physician may help. Declarations may be even more persuasive than letters. Prepare what you can at the time of the settlement, or at the latest, at tax return time. Do as much as you can contemporaneously. Don’t wait for an audit to gather those things."