This S2KM blog post, the first of three summarizing structured settlements in 2008, evaluates the year from an historical perspective. Two subsequent posts will:
- Summarize 2008 conferences attended by S2KM;
- Highlight challenges facing the industry in 2009.
"Structured Settlements and Periodic Payment Judgments" (S2P2J), co-authored by Daniel Hindert, Joseph Dehner, and Patrick Hindert, features historical summaries of both the primary and secondary structured settlement markets. S2P2J Release 44 is now available.
S2KM previously has published three online historical summaries of structured settlements:
- A visual history of structured settlements to 2005;
- Structured Settlements in 2006;
- Structured Settlements in 2007.
As these summaries demonstrate, the history of structured settlements includes many diverse and inter-related developments. From S2KM's perspective, the most strategically important years in the history of structured settlements prior to 2008 have been:
- 1982 - during which Congress enacted the Periodic Payment Settlement Act of 1982:
- Adding "periodic payments" to IRC section 104(a);
- Creating IRC section 130 and "Qualified Assignments";
- Establishing a public policy to support structured settlements.
- 2001 - during which:
- Congress enacted IRC section 5891to provide tax rules, definitions and penalties for transfers of structured settlement payment payment rights and to create a state run system for reviewing and approving such transfers;
- CMS published its first policy memorandum for Medicare set-aside arrangements (MSAs);
- The Society of Settlement Planners (SSP) was founded as an alternative to the National Structured Settlement Trade Association (NSSTA) which was formed in 1985.
Although it is premature to evaluate the full historical impact of 2008 for the structured settlement industry, the cataclysmic financial events of the past four months have already created serious repercussions for both the primary and secondary markets. The good news: thanks to the federal government bailout of AIG, no structured settlement recipients have suffered any loss of structured settlement payments to date because of the economic meltdown. The bad news: the U.S. economy and financial markets remain in jeopardy creating unprecedented challenges for the structured settlement industry in 2009.
2008 Structured Settlement Financial Summary
- The Wall Street Journal characterized September 14-20, 2008 as "The Week That Changed American Capitalism". Among other developments, United States Treasury Secretary Henry Paulson announced on September 16 the federal government had seized control of AIG in an $85 billion bailout. Paulson stated AIG had been only "hours from bankruptcy". On October 8, the Federal Reserve Board increased its loan to AIG by an additional $37.8 billion.
- AIG subsequently announced it planned to sell its North American life subsidiaries, including American General, as part of its plan to repay the bailout loan from the U.S. government. For additional information and continuing reports about the Federal government's bailout of AIG, see S2KM's AIG structured settlement wiki.
- Until September 2008, AIG had been the largest purchaser and the largest seller of structured settlements. In 2006, AIG sold more than $1.4 billion of the $6.1 billion annual U.S. structured settlement annuity premium. In 2007, AIG sold more than $1.4 billion of the $5.9 billion annual U.S. structured settlement annuity premium. During the first nine months of 2008, AIG sold more than $1.2 billion of the $4.4 billion of the U.S. structured settlement annuity premium.
- Along with other financial and insurance companies, the stock prices of structured settlement annuity providers have been battered during the fourth quarter of 2008. Some annuity providers have experienced rating downgrades. Analysts, investors and rating agencies have expressed concerns about the potential exposures these companies may have to failed or bailed out companies as well as the general decline in their stock portfolios and shareholder equity.
- On December 16, 2008, Aviva Life announced it was exiting the structured settlement business to concentrate its resources on less capital intensive businesses. Aviva joined other annuity providers who exited the structured settlement business during 2006 and 2007 including Mass Mutual, Genworth, Travelers and Aegon.
- The financial crisis has frozen
the credit markets and shut down most asset-backed securitizations
causing substantial problems for the secondary structured settlement
market. In November, Standard & Poor's cut J.G. Wentworth's counterparty and senior-secured bank loan ratings from B- to CCC+ due to "severe dislocation of the credit markets" that have "rendered unprofitable" some financing transactions.
- On December 5, J.G. Wentworth announced the pricing of $74.6 million of Class A-1 Notes in connection with its 2008-3 securitization. The Class A-1 Notes were priced at 700 bps over benchmark interest rate swaps and will have ratings of Aaa and aaa by Moody's and A.M. Best respectively. The purpose: to provide the necessary proceeds to satisfy one of the conditions under J.G. Wentworth's November 28, 2008 margin call waiver agreement with Deutsche Bank to reduce warehouse loan indebtedness by $50 million.
- Although demand for settlement transfers has remained strong throughout 2008, discount rates have increased from 8% to 16% during the past six months.
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