Beyond Structured Settlements

PFAC 2016 Annual Conference

Fiduciary standards, as they relate to product suitability specifically, and to business practices generally, can be expected to become more significant factors in product sales for the traditional structured settlement market as it continues to expand into, and interact with, the larger, more complex personal injury settlement planning market.

Multiple developments support this prediction. They include the expanding role of fiduciaries as settlement planning stakeholders and decision makers. In that context, fiduciaries most often serve as trustees, but also as guardians, conservators and/or executors.

Any person acting in a fiduciary capacity has an obligation to act in the "best interest" of another party. A fiduciary duty requires a high standard of honesty and full disclosure including any potential conflicts of interests. A fiduciary must not obtain a personal benefit at the expense of his or her client.

Regardless of who sells/provides a financial or insurance product to a settlement trust, and what independent duties that product provider might have to a trust beneficiary (i.e. injury victim), the settlement trustee's own fiduciary duties arguably should require the settlement trustee to evaluate specific trust products, trust product providers and their related business conduct utilizing that same fiduciary standard which requires honesty, full disclosure, and best interest.

In personal injury settlement planning, several types of trusts are utilized - any of which may be funded with, or utilized to fund, structured settlements: qualified government bond trusts; reversionary grantor trusts; settlement preservation trusts; special needs trusts including pooled trusts; Medicare set-aside trusts; and IRC 468B Settlement Funds.

As one related result of the expanding use of settlement trusts, a unique settlement trust market is evolving in the United States characterized by:

• Specialized knowledge about government benefits required to serve "special needs" beneficiaries and their families.
• Willingness to consider structured settlements as trust assets and knowledge related thereto.
• Willingness to accept corpus amounts less than minimum requirements of traditional corporate trustees.
• Professional individual trustees as well as corporate trustees.

To S2KM's knowledge there does not yet exist any national association of settlement trustees. Instead, settlement trustees participate as members, speakers, sponsors and/or exhibitors at various structured settlement, settlement planning and special needs national conferences such as: NSSTA, SSP, NAMSAP, NAELA, ASNP, SN Alliance, Stetson SNT, University of Texas SNT among others.

PFAC Conference

There exist, however, state fiduciary associations the largest of which is the Professional Fiduciary Association of California (PFAC). To learn more about fiduciaries and fiduciary standards, from a structured settlement perspective, S2KM attended the 21st Annual PFAC Conference, which occurred June 1-4, 2016 in Indian Wells, California and featured 74 exhibitors, more than 600 attendees plus four days of speakers and breakout sessions covering a multitude of topics.

PFAC is an affiliate of the National Guardianship Association (NGA). California Court Rules define education and qualification requirements to serve as guardian, conservator or trustee in California. Attorneys and CPAs with current, active licenses to practice in California automatically qualify. To retain their license, professional fiduciaries must also meet continuing education requirements. Approximately 680 professional fiduciaries are currently licensed in California.

Not all professional fiduciaries, of course, work in personal injury settlement planning. In fact, relatively few of the PFAC Conference presentations and/or exhibits were even relevant to structured settlement and/or settlement planning professionals.

Uniform Prudent Investor Act

Perhaps the most important and relevant lessons S2KM learned during the PFAC conference concerned the duties of care and the investment considerations imposed upon trustees by the Uniform Prudent Investor Act (UPIA). Understanding these UPIA trustee duties and investment considerations will almost certainly help structured settlement and settlement planning professionals improve their sales success when personal injury cases include settlement trusts.

The UPIA , which was adopted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 1994, has been enacted, with some state-specific modifications, by 44 states and the District of Columbia. In those states, the UPIA, external to the trust document itself, serves as the most important reference defining a trustee's investment responsibilities.

Prior to the UPIA, courts applied the "prudent man rule" when evaluating trustee investment performance. The UPIA, by contrast, adopts "modern portfolio theory" as a different and more appropriate standard for trustees. Compared with the prudent man rule, modern portfolio theory promotes a holistic view of trust assets by focusing on the total return generated by a trust as opposed to viewing a trust's income and principal separately. This newer standard allows for greater investment diversification so long as the risk/reward ratio matches the purposes and terms of the trust instrument.

In his PFAC conference presentation titled "A Trustee's Duty of Care Under the UPIA", Josh Yager addressed how a trustee can demonstrate prudence and good faith, and thereby avoid a lawsuit, by fulfilling six trustee duties required under the UPIA:

• Duty to have a plan.
• Duty to monitor risk/return.
• Duty to diversify.
• Duty to pay only fair fees.
• Duty to prudently delegate.
• Duty to monitor agent's activities.

Yager never mentioned structured settlements or personal injury settlement planning during his discussion. Within the context of his presentation, however, here are some follow-up questions worth considering at future educational conferences:

• How should life contingent structured settlements be compared with other investment alternatives when trustees calculate rates of return needed to accomplish trust objectives?
• How can structured settlement and settlement planning professionals better anticipate and address trustee risk objections that many structured settlements include too much concentration, as well as a lack of liquidity?
• What are "asset classes" - and should structured settlements be promoted/evaluated as a distinct and necessary "asset class" within settlement trusts?
• Assuming trustees have a duty to evaluate compensation arrangements related to trust assets, should structured settlement professionals be required to disclose their case-specific compensation, including compensation sharing agreements? To whom? When?
• How do "industry standard" four (4%) percent structured settlement commissions compare with commissions and fees charged by other financial product providers? Are these commissions "fair" or "excessive"?
• Why was a given structured settlement design and/or settlement professional selected in a specific case? Does he/she possess appropriate licenses and credentials? Is he/she subject to any undisclosed conflicts of interest? Has he/she been the subject of any prior lawsuits or client complaints? Does he/she understand the trustee's duties under the UPIA? Has he/she accomplished what they promised?
• What legal options does a trustee have when confronted with a structured settlement or structured settlement consultant that the trustee believes violates a fiduciary standard or duty for a specific settlement trust under the UPIA?

Although not specifically discussed in any of the PFAC presentations S2KM attended, Section 2(c) of the UPIA identifies eight additional factors a trustee should consider when making any investment:

• General economic conditions.
• The possible effect of inflation or deflation.
• The expected tax consequences of investment decisions or strategies.
• The role that each investment or course of action plays within the overall trust portfolio.
• The expected total return from income and appreciation of capital.
• Other resources of the beneficiaries.
• Needs for liquidity, regularity of income, and preservation or appreciation of capital; and
• An asset’s relationship of special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

When settlement trusts play a role in a personal injury settlement, structured settlement and settlement planning professionals should be prepared to address these factors as part of their sales strategy. Significant for structured settlements, the UPIA's list of investment considerations fails to mention mental or physical disabilities of a trust beneficiary. From a settlement planning perspective, injuries or diseases that create special needs or reduce an individual's normal life expectancy arguably should receive important consideration when a trustee makes investment decisions.

Comparative Business Standards

How do current business standards of structured settlement and settlement planning professionals measure up to the "best interest" standards required of trustees and other fiduciaries? Although various members of both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) are appointed as independent agents representing many of the same structured settlement annuity providers, the two associations address the issue of product suitability differently.

NSSTA, whose members include defense and plaintiff brokers, has adopted a "Statement of Ethics and Professional Responsibility" (Code of Ethics) with "guiding principles" for its members and member organizations. The Preamble provides: "Implicit in the acceptance of this Statement is an obligation to act in a professionally responsible and ethical manner when providing structured settlement services." Although Principle VI directs NSSTA members to:"…comply with all material federal and state laws and regulations applicable to the structured settlement services that are provided", NSSTA's Code of Ethics does not specifically address either fiduciary or product suitability standards.

By comparison with NSSTA, SSP's Mission Statement provides, in relevant part, that "[m]embership is open to all individuals with a genuine interest in the profession of settlement planning." However, "[c]andidates for membership must attest to their .......striving to ensure plans are consummated to a fiduciary standard." (emphasis added). Unlike NSSTA, almost all of SSP's members represent injury victims and their families and attorneys as opposed to defendants and liability insurers. Many SSP members also sell financial products as well as structured settlement annuities.

Plaintiff structured settlement brokers generally, and SSP members more specifically, regularly face direct competition from non-structured settlement financial advisors. Currently some financial advisors (Certified Financial Planners and Investment Advisors) are held to a fiduciary ("best interest") standard while other financial advisors (broker-dealers) provide services under a “suitability standard” which requires only a reasonable belief that any recommended product is suitable for a client.

Consumer protection concerns appear to be favoring broader application of the fiduciary standard. Acting under authority of Dodd-Frank, the SEC submitted a "fiduciary standard" study to Congress in 2011 recommending the adoption of a uniform fiduciary standard for investment advisers and broker-dealers when providing investment advice to retail customers. Congress has not yet adopted this uniform standard. More recently the U.S. Department of Labor has proposed a rule requiring fiduciary accountability for all investment advice related to retirement assets.

CONCLUSION

For most of its history, the primary structured settlement market has developed its business standards and practices based upon a "claim management" model which limits the scope of its representatives' duties of care toward injury victims - the ultimate customers for its products. Within the larger "settlement planning" market, which encompasses structured settlements, fiduciaries and other participating professionals are superimposing a more demanding "best interest" duty of care. To successfully compete in the settlement planning market place, therefore, structured settlement professionals need to acquire a better understanding of fiduciary and UPIA duties and requirements - and learn to re-shape their product sales accordingly.

S2P2J Release 59

Despite historically low interest rates and negative PR (most recently this Washington Post Editorial) resulting from the unconscionable business practices by some secondary market companies, the primary structured settlement market continues to experience incremental growth since hitting an annual annuity premium nadir of $4.82 billion in 2012.

The "Growth Initiative" developed by the National Structured Settlement Trade Association (NSSTA), under the leadership of Presidents Michael Goodman and Len Blonder, has helped to sustain primary market growth by prioritizing specific objectives the first of which have included: 1) rejuvenate defense programs; 2) amend the Federal Employee Compensation Act; and 3) develop convertible deferred lump sum product options.

Other factors contributing to recent primary market growth ($5.3 billion of annuity sales in 2015):

• Increased industry unity - Advocated by the Presidents of NSSTA, the Society of Settlement Planners (SSP) and the National Association of Settlement Purchasers (NASP), these associations recently have taken significant steps to overcome their historic acrimony which had divided plaintiff and defense brokers as well as the primary and secondary markets.
• Legislative collaboration - One result of increased industry unity has been a proactive and collaborative legislative strategy by NSSTA and NASP to add consumer protection amendments to targeted state structured settlement protection statutes with preliminary success in Illinois, Wisconsin, Florida, Maryland and Virginia.
• Expanding education - NSSTA continues to expand and improve its educational offerings adding new programs such as Structures 202, the Masters Structured Settlement Consultant (MSSC) certification and Structured Settlement University. SSP recently sponsored a joint educational program with the Academy of Special Needs Planners (ASNP) providing attendees an opportunity to evaluate structured settlements within the larger, more complex personal injury settlement planning market.

Consistent with these growth initiatives, recent updates of "Structured Settlements and Periodic Payment Judgments" (S2P2J), including newly issued Release 59, highlight multiple opportunities to expand the structured settlement market, providing technical guidance and practice advice, in addition to describing related industry developments and issues.

Publisher Law Journal Press distributed hard copy supplements for S2P2J Release 59 earlier this month with online S2P2J subscribers receiving their update automatically and simultaneously. Online S2P2J includes a search feature and download capability as well as link features to access individual book sections, appendices, footnotes, cases and statutes.

First published in 1986 and updated semi-annually, S2P2J is co-authored by Daniel W. Hindert,  Joseph J. Dehner, and Patrick J. Hindert (S2KM's Managing Director). Both NSSTA and SSP have utilized S2P2J as an educational resource for their certification programs.

Release 59 Highlights

"Release 59 for 'Structured Settlements and Periodic Payment Judgments' features analysis of the Wrongful Convictions Tax Relief Act of 2015. This new federal legislation, enacted December 18, 2015, creates an exclusion from gross income for civil damages, restitution, or other monetary awards that are received as compensation for wrongful incarceration. The Act includes an important one-year time-sensitive retroactivity provision.

"This Release also outlines recommendations to defense counsel for seeking court approval of settlements whenever parties have a duty to consider the provisions of the Medicare Secondary Payer Act (“MSP”). The advice is applicable whether or not the claimant has a legal disability that mandates such court approval or if doing so as a means to reduce risks of a finding of MSP noncompliance and its attendant possible sanctions.
"Noteworthy new case law in Release 59 includes:

• "An important 2015 decision by the U.S. Court of Appeals for the Third Circuit which includes in-depth analysis of 'safe harbor' annuity rules under the Deficit Reduction Act of 2005 when annuities are sought to be used to preserve Medicaid eligibility.
• "Review of new cases under state Structured Settlement Protection Acts ('SSPAs'), where courts have identified standard questions to assist judges in making the determination of whether a proposed transfer of future payment rights is in a given claimant’s 'best interest' as required for court approval under the SSPAs.

Previous S2P2J releases have highlighted and addressed the following recent structured settlement developments and primary market growth opportunities:

• Non-qualified assignment issues - including tax and security issues raised by off-shore assignment companies.
• Templates for: 1) approval of MSAs; and 2) disclosure of consultants' roles and compensation.
• Expanded coverage of Workers Compensation MSAs.
• Summary and discussion of recent PLR for indexed annuities and commutation riders.
• Summarized results of CLM Advisors surveys commissioned by NSSTA to determine the value claims executives, claims professionals and plaintiff attorneys place on structured settlements and structured settlement consultants.
• Introduction to ABLE Accounts.
• A new section to introduce and explain federal and international regulatory developments and entities resulting from the 2008 global financial crisis.
• Updated analysis of the changing role of and standards for plaintiff attorneys engaged in personal injury settlement planning and when negotiating structured settlements.
• Summary and analysis of recent U.S. Treasury Regulations for IRC 104(a)(2).
• Practice tips for minimizing the risk of an IRS settlement challenge.
• Updated summary of lessons learned from the Executive Life Insurance of New York (ELNY) insolvency.
• Periodic payment reinsurance as an alternative means of funding structured settlements.

For S2KM's most recent analysis of the structured settlement industry, see: "Structured Settlements 2015":

• Part 1 - Market Metrics
• Part 2 - Market Issues and Developments

NASP 2015 Annual Conference

Patricia LaBorde, President of the National Association of Settlement Purchasers (NASP), opened her association's 2015 Annual Conference last week in Las Vegas with a provocative description of its prior 12 months: "a year of unimaginable successes and challenges".

Founded in 2004, NASP identifies itself as "a leader in setting standards and implementing best practices for the structured settlement purchasing industry. Our association safeguards the rights of settlement recipients to readily access their funds through an efficient, fair and transparent judicial process."

NASP Presidential Panel

Subsequent conference presentations detailed NASP's successes and challenges including an historic President's Panel, moderated by Robin Shapiro, and featuring LaBorde and Michael Goodman, the first sitting President of the National Structured Settlement Trade Association (NSSTA) to attend a NASP conference.

Goodman has identified "growth opportunities for the structured settlement industry" as his number one goal as NSSTA President. He also characterized his remarks and opinions as personal and not representative of official NSSTA policy or positions.

Goodman highlighted the need for "responsible factoring" and mentioned the consumer protections that have been put in place in Wisconsin, Maryland and Illinois. Based upon his own professional experience, Goodman gave multiple examples of what he considered appropriate and inappropriate transfer activities.

Among Goodman's other noteworthy comments:

• "Factoring is not a zero sum game. What is bad for the secondary market is not necessarily good for the primary market."
• "Both NSSTA and NASP need to improve/correct the branding of "structured settlements". Confusing the primary and secondary markets is not beneficial for either association."
• "I am proud we have been able to create more consumer protections for injured annuitants. I am hopeful that by the end of this year, we will have improved the Structured Settlement Protections Acts (SSPAs) in five states.”

Both LaBorde and Goodman acknowledged business practices within their own markets that have created problems for the structured settlement brand. Some of the worst of the secondary market business practices were publicized nationally in an August 25, 2015 Washington Post front page article (featuring a non-NASP company) which more than one industry observer called "a perfect storm" for the factoring industry.

Legislative Collaboration

Even before the Washington Post article, however, and as a direct result of the 2013 Brenston case, which temporarily shut down the secondary market in Illinois, NASP and NSSTA initiated a proactive and collaborative legislative strategy to add five consumer protection amendments to targeted state structured settlement protection statutes:

• No forum shopping.
• Payee required to attend hearing.
• Stricter application of approval requirements.
• Advanced notice of transfer.
• Required disclosure of prior transfers.

The first success of NSSTA and NASP's legislative collaboration resulted in amendments to the Illinois statute. The Brentson case propelled the two organizations to negotiate and work a compromise that improved the Illinois SSPA. From the perspective of LaBorde and NASP, the result in Illinois represented "the biggest victory since the Model Act".

To memorialize the success in Illinois, NASP honored Illinois State Representative Michael Zalewski as recipient of its 2015 Alexander Hamilton Award. Representative Zaleweski, who sponsored the new Illinois structured settlement legislation, praised its "clarity and protection" compared with the "ambiguity" of the prior law.

NASP has bestowed its Alexander Hamilton Award eight times "to distinguished individuals who have supported and defended the right to free alienability of property rights." NASP considers this right to be its own cornerstone and the foundation of the structured settlement factoring business.

Further highlighting the success of NSSTA and NASP's legislative collaboration, LaBorde and Goodman jointly announced that Governor Scott Walker had signed, just prior to their panel discussion, Wisconsin's first Structured Settlement Protection Act - thereby becoming the 49th state (all except New Hampshire) to have enacted such protective legislation.

During his Legislative and Regulatory Update, NASP lobbyist Jack Kelly, who serves as point person for the NSSTA / NASP collaborative state legislative strategy, provided additional details concerning both the political aftermath of the Washington Post article and the collaborative state legislative strategy.

Without dismissing the negative public relations impact of the Post article, Kelly does not see any immediate Congressional threat despite letters making headlines. "NASP's primary federal concern is the tax bill," Kelly stated, "and it's not on the calendar."

As for state legislation, "good planning has made the difference", according to Kelly. He spoke about "mutual respect" for NSSTA and identified Florida, Maryland and Virginia among priority states for joint future lobbying to improve consumer protection.

Additional Conference Highlights

In his Litigation Update, NASP Executive Director Earl Nesbitt summarized recent court decisions addressing statutory "no-split" payment provisions, judicial "best interest" standards and various lawsuits involving Rapid Settlements.

Nesbitt allocated significant time to In re: Rains, a Texas case in which the appellate court determined the trial court: 1) could not force MetLife into a contract with the transfer company, directly or indirectly, by imposing a servicing arrangement on account of the Texas statutory "no-split" provision; and 2) abused its discretion in approving the transfer citing a "severe discount rate" among other factors.

The Rains case featured an extensive "best interest" analysis establishing a new judicial precedent in Texas. This analysis requires a judge to consider a "penumbra" of information including "future yet foreseeable liabilities; domestic, economic, physical, medical and educational needs of payee and dependents." Also at issue: how much and what type of evidence is required to place into the court record to justify a transfer.

Matt Bracy reprised his role as moderator of NASP's popular Judicial Panel - this year featuring Judges Daniel Buckley (California); Laura Inveen (Washington); and Jeremy Warren (Texas). The two hour program included questions to and from the judges addressing such transfer topics as:

• Interpreting the best interest standard;
• Common mistakes at transfer hearings by attorneys, factoring companies and sellers;
• How to best present a transfer;
• How judges consider objections to transfers;
• What documentation judges want to see at transfer hearings;
• How to best protect the seller's privacy;
• Information judges are not seeing presented that should be;
• Significance of the origin (type of personal injury) to the judge's analysis;
• Impact of prior transfers on assessments.

Two separate NASP presentations addressed unprecedented and changing perspectives of risk. Discussing Privacy Issues in Structured Settlement Transfers, Shawn Tuma spoke about risks due to cyber attacks. Citing the FBI, Tuma divided corporate America into two company types: those that have been hacked and those that will be - including many that have but don't realize it.

Health records, according to Tuma, are more valuable than financial records because they are rarely modified. Regardless of how you obtain health information, Tuma emphasized, you are obligated to protect it. These obligations include: stewardship, legal and public relations.

Tuma reported that both the SEC and the FTC have developed legal requirements that encompass prevention, detection, response, training, and third party access - and companies cannot insulate officers and directors from personal liability for related damages.

The lessons to be learned, according to Tuma: 1) document a record of compliance; 2) you will be breached; 3) Its not the breach, its your diligence, that matters most. Steven Fox supplemented Tuma's presentation with a discussion of ID Theft and Domicile Determination.

As secondary market transfers have expanded to include life contingent annuity components, mortality underwriting has become a critical skill set. Michael Fasano focused his presentation about Mortality Review / Process in Life Contingent Underwriting on unhedged life contingent secondary market structured settlement transactions.

Fasano emphasized that traditional medical underwriting practices utilized for life settlements or normal life insurance and/or annuities won't work for this class of individuals. Reasons include a high frequency of:

• Low income demographics. Most are unemployed.
• Rx and illicit drug issues.
• Incarceration and other behavior issues.
• Anti-selection and/or lying.

Fasano approximates that, as a class, mortality impairment of life contingent structured settlements results from: accident and behavioral (55%) vs. medical (45%). In addition to medical reports, Fasano utilizes targeted questionnaires to obtain underwriting information and makes adjustments for lack of candor and non-disclosure.

Completing NASP educational program: Jason Sutherland moderated a Servicing Panel featuring Melissa Bolling and John Enyart. Additional Breakout Sessions offered the following topics and speakers:

• Successfully Managing Difficult Payee Issues - Brian Dear; Duane West.
• Strategies for Securing Approval From Tough Judges - Samuel Cortes; Abagail Adams.
• Primer on Special Needs Trusts and Medicare Set-Asides - Patrick Hindert.
• Spousal Consent Issues in Transfers - Elyse Strickland; Shannon Harvey.

Congratulations to NASP, especially Conference Chairman Doyle Chisholm and Association Administrator Susan Barnes, for organizing such an informative and well-attended conference.

For additional, related S2KM reporting, see the structured settlement wiki plus these prior S2KM blog posts, see:

• Structured Settlements 2014 - Secondary Market
• NASP 2014 Annual Conference
• Michael Goodman Interview

SSP 2015 Annual Conference - 2

The Society of Settlement Planners (SSP) hosted its 2015 Annual Conference last week in Las Vegas with an unprecedented number of structured settlement association leaders as speakers and attendees including representatives from the National Structured Settlement Trade Association (NSSTA) and the National Association of Settlement Purchasers (NASP). For a list of SSP speakers and topics, see this prior S2KM blog post.

In his keynote address, SSP President Neil Johnson re-affirmed SSP's traditional commitment to "open dialogue" of industry issues with a mandate for "healthy, respectful discussion of all industry issues, controversial or not - rejecting the the temptation to sweep the uncomfortable under the carpet."

While seeking to engage all perspectives to identify shared permanent interests and discuss industry problems and issues, Johnson acknowledged and accepted that conference attendees would not agree on all issues - and they did not.

Some of the issues discussed:

• The need for structured settlement industry unity - encompassing education and, in some situations, political lobbying.
• How NSSTA and NASP are collaborating to improve state structured settlement protection statutes.
• Improving public relations by first acknowledging and addressing structured settlement primary and secondary market problems.
• The uniqueness of the structured settlement product and the need for better primary market self-regulation.
• The impact of "fiduciary standards" on settlement planning and the future of structured settlements.
• Collaborative primary/secondary market strategies for addressing "the darker side of factoring".
• Settlement planning as an important and distinctive growth strategy for structured settlements.
• Differentiating settlement planners from single-product plaintiff structured settlement brokers.
• Financial planners - a competitive threat or the next generation of structured settlement consultants and settlement planners?
• The inevitability and risks of "off-shore" settlement planning products in a globalized world.
• Lessons learned from the Executive Life debacle for claimants and their attorneys and advisors.
• How settlement planners and structured settlement consultants misuse life care planners and life care plans.
• The Social Security Administration's recent hostility toward special needs trusts (SNTs) and what it means for structured settlements.
• How and why settlement planners must learn to take control of the Medicare set-aside (MSA) process.
• The explosion of multi-claimant QSFs - a missed market for structured settlements?

None of these issues were resolved in Las Vegas. What did occur was a healthy exchange of ideas among leaders of historic structured settlement adversaries (NSSTA, SSP and NASP) with active participation from leaders of other settlement planning associations. The result: a unique industry gathering as much like a diplomatic conference as an educational event.

With NSSTA's President, Executive Director, and several members of its Board of Directors in attendance, whether and how NSSTA (as well as NASP) and its members will respond remains uncertain. NSSTA helped to initiate a more open industry dialogue during its own Fall 2014 Educational Conference by inviting SSP President Johnson and NASP President Patricia LaBorde to appear as featured speakers.

Structured Settlement Industry Unification

During the NSSTA Fall 2014 conference, Johnson outlined a "Blueprint for Industry Unification" which he and NSSTA President Kevin Silo continued to discuss in Las Vegas in a repeat performance of their "Presidents' Panel". Johnson's appeal for unity characterized "industry disarray" as a "threat to our future." Labeling diversity "good" and disparity "bad", he called for a united front before the public.

In Johnson's words: Lack of structured settlement industry unity is "a drain - a drain on financial resources ... a drain on productivity ... a drain on our public image ... a drain on physical and emotional health. Lack of unity diverts attention from productive projects. It always focuses attention on the negative, never on the positive. Lack of industry unity shows no partiality or favoritism for either NSSTA or SSP."

Both Johnson and Silo expressed optimism, however, about the future of structured settlements - especially in the context of generational transition. Johnson, in particular, highlighted potential opportunities amidst his self-described industry disparity, including a strengthened resolve and commitment for improvement and growth. According to Johnson and other settlement planners, the structured settlement industry needs a wakeup call - a fresh look and reevaluation that includes, but extends beyond, NSSTA's "protect and preserve" orientation.

Here are the core components of Johnson's proposed "solution" for structured settlement industry unity:

• Recognizing and accepting product and professional diversity.
• Identifying and pursuing permanent shared interests without necessarily agreeing on all issues.
• Engaging all perspectives to discuss industry problems and issues.
• Promoting and practicing settlement planning with the structured settlement annuity as a core strategic product.

The Future of SSP

Throughout its 15 year history, SSP has punched beyond its weight class. Born out of a troublesome recognition that the structured settlement playing field was seriously tilted to the disadvantage of plaintiffs and their advisors, SSP has helped bring respect and professionalism to the plaintiff side of the table by emphasizing "settlement planning", not "settlement selling".

Recognizing the strategic role of structured settlements, settlement planning nonetheless seeks the "best interest" of its injury victim clients and includes multiple products and multiple experts.

Despite these accomplishments, and perhaps because of them, SSP's future as an association is uncertain. NSSTA has more plaintiff structured settlement brokers than SSP and has been more successful in adding a new generation of members.

Other, well-organized, non-structured settlement professionals, such as special needs attorneys and life care planners, increasingly focus their marketing, educational programs and work product on settlement planning using SNTs and MSAs as their gateway.

As was evident in Las Vegas, however, SSP continues to raise the educational bar for an entire industry of settlement professionals. Settlement planning remains an evolving profession - largely unregulated with few industry standards. The ultimate role and growth potential for structured settlements within the settlement planning market have not yet been determined.

SSP's ability to organize an educational conference where an unprecedented cross-section of industry leaders engaged in civil discussions about strategic industry issues suggests SSP has an important continuing role within both the structured settlement and settlement planning markets.

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

Structured Settlements 2014 - Secondary Market

Is the bloom finally off the rose for structured settlement secondary market leader JGWPT Holdings, Inc. (JGWPT) whose subsidiaries include J.G. Wentworth (JGW) and Peachtree Settlement Funding (Peachtree)?

Despite strong sales since 2010, punctuated by the November 25, 2014 announcement that it had issued $207,501,000 of Fixed Rate Asset Backed Notes collateralized primarily by payment rights rights arising under court ordered structured settlement payment purchase contracts, JGWPT's NYSE per share price closed at $8.65 on December 12, 2014, down drastically from its 2014 high of $19.88 on March 4.

When JGWPT's Holdings IPO occurred November 8, 2013, with an initial offering price of $14.00 per share, one analyst opined the stock was worth at least $20 per share based upon JGW's "dominant franchise", access to securitization markets, low costs relative to competitors and "incalculable returns on capital", among other factors.

After JGW consolidated its 2011 merger with Peachtree, various industry experts estimated the combined combined company's structured settlement secondary market share totaled somewhere between 50% and 75%, and its share of industry profits exceeded 80%.

What happened?

Zacks Investment Research published two reports earlier this month on December 2 ("JG Wentworth - Bear of the Day") and December 9 ("What Falling Estimates & Price Mean for J.G. Wentworth").

Zacks' conclusion: "A key reason for this [downward stock price] move has been the negative trend in earnings estimate revisions. For the full year, we have seen four estimates moving down in the past 30 days, compared with no upward revision. This trend has caused the consensus estimate to trend lower, going from $1.71 a share a month ago to its current level of $1.45."

What has caused JGW's negative trend in earnings estimates?

As summarized in S2KM's 2013 annual report about the structured settlement secondary market, JGWPT faced a multitude of problems and controversies prior to 2014. New and/or expanded problems have occurred during the past 12 months - in particular:

• Brenston case law "progeny"; and
• Washington Square v. RSL.

Brenston Case Law "Progeny"

In the Brenston case, the Illinois Supreme Court in December 2013 denied Peachtree's petition for review of an Illinois Appellate Court decision which found multiple Peachtree-Brenston transfer orders, previously approved in accordance with the Illinois transfer statute, to be void ab initio because:

• Peachtree did not file all settlement documents with the transfer court.
• Peachtree concealed "by omission" the existence of anti-assignment provisions which the Appellate Court found "material".
• The conduct of Peachtree and it's attorney amounted to an "affirmative falsehood and a fraud upon the trial court".

The denial of Peachtree's petition for review has substantially reduced the secondary structured settlement market in Illinois according to industry sources. Some annuity providers reportedly have refused to waive anti-assignment provisions in Illinois cases while others evaluate them on a case-by-case basis. In addition, some annuity providers are citing Brenston to challenge transfers in other states.

The Brenston case was also quickly followed by Sanders v. JGWPT Holdings, a class action lawsuit, accusing JGWPT Holdings, Inc., several affiliate companies including JGW and Peachtree, and Illinois attorney Brian Mack, of violating the Illinois Consumer Fraud and Deceptive Business Practice Act (ICFA). The case has since been removed to the Federal Court in the Southern District of Illinois with that court expected to rule on various motions and petitions in February 2015.

Washington Square v. RSL

In this case, transfer company Washington Square (aka Imperial) sued transfer company RSL Funding in Texas for tortious interference with a transfer agreement that had not yet been approved in a final court order. The Court of Appeals of Texas, Fourteenth District, held:

• RSL was “justified” in interfering with Imperial’s proposed transfer agreement prior to court approval because obtaining a better price was in the seller's "best interest".
• Transfer agreements that have not received court approval are not enforceable on public policy grounds and therefore cannot justify legal actions for tortious interference with existing contracts.

As a result of this case, a strategic marketing shift appears to be occurring within the structured settlement secondary market as rival transfer companies increasingly search court records and seek to outbid other transfer companies who are awaiting court approvals. This marketing shift may provide lower discount rates for some structured settlement recipients when they sell their payment rights. The impact on the secondary market, however, will be "chaos", according to some participants, including extra "informational" demands on the judicial system responsible for administering the state protection acts.

For JGW and Peachtree, who have invested millions of dollars to build their TV and Internet brands, this strategic marketing shift promises new, much less-well financed competitors. Like pilot fish, these competitors can be expected to offer competitive bids based upon public court filings of not-yet-approved transfers proposed by JGW and Peachtree (as well as other established transfer companies) rather than based upon their own independent marketing. Assuming this occurs, the likely per case results for JGW and Peachtree will be lower success ratios and higher costs.

ADDENDUM (added December 15, 2014) - JGWPT's September 10, 2014 Form S-1/A filing with the SEC identifies multiple "Risk Factors" at least two of which could impact other structured settlement stakeholders:

• "[T]he insolvency or downgrade of a material number of structured settlement issuers." S2KM will discuss these rating downgrades, which include Genworth, Hartford and Aviva, in a subsequent 2014 annual report about ELNY and Reliance.

• "[T]he impact of the March 2014 Consumer Financial Protection Bureau inquiry and any findings or regulations it issues as related to us, our industries, our products or in general." (emphasis added)

Change of Directions for JGWPT?

One apparent result of JGWPT's continuing problems and controversies has been a change of CEOs with Stewart Stockdale replacing David Miller in July 2014. Another result appears to be a more diversified strategy away from structured settlements.

In a November 13, 2014 press release, Stockdale stated: "We are in the early stages of transforming J.G. Wentworth and are excited about the groundwork we have laid to achieve the three key strategic pillars -- Grow the Core, Become an Information-Based Company, and Diversify." To date, this proposed transformation does not appear to have impressed investment analysts or positively impacted JGWPT's common stock.

Other 2014 Secondary Market Developments

• Educational Dialogue - For the first time, educational programs sponsored by the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) featured representatives of the National Association of Settlement Planners (NASP) as participants in secondary market panel discussions. For the ninth consecutive year, NASP featured primary market representatives speaking about primary market issues at their annual educational conference. For summaries of these conferences, see the structured settlement wiki.
• Case Law - In addition to the Washington Square and Brenston-related cases summarized above, noteworthy 2014 case law developments occurred in Texas and New York related to split payments and servicing arrangements. Two Texas cases required JGW to continue servicing arrangements under prior court approved orders and also to service subsequent assignments by the same payees to another transfer company. Multiple New York judges expressed their concerns about servicing arrangements while approving structured settlement transfers. At least 27 state structured settlement protection acts prohibit partial transfers. During 2013, MetLife began actively opposing transfers that involve split payments as well as court-approved servicing arrangements. Under such servicing arrangements, structured settlement annuity providers remit the entirety of specific periodic payments to transfer companies to administer even when the original recipient/transferor only assigns a portion of the payments.
• State Legislation - Although structured settlement protection act (SSPA) activities occurred in Florida, Wisconsin, Minnesota, Louisiana, and Mississippi during 2014, only Minnesota enacted a legislative amendment. Minnesota amended its SSPA to require notice of the date and judicial district of any prior application for transfer filed by the transferee relating to a prior proposed transfer with the payee including whether the proposed transfer was approved or denied. If granted, such notice must provide the amount and due dates of transferred structured settlement payments, the aggregate amount, the discounted present value and the gross amount payable to the payee.
• PLR-143928-13 - Issued by the Internal Revenue Service in August, this two-part private letter ruling approves favorable tax treatment for a structured settlement annuity which includes the possibility of a commutation by the recipient pursuant to a Notice of Hardship Conversion. In a prior blog post, S2KM described this PLR as potentially "game changing" because it overcomes an industry concern (enunciated in a 2006 Robert Wood article) that commutations do not qualify for favorable tax treatment afforded third party factoring transactions under IRC 5891.
• Re-cycled payment rights - Representing a small fraction of secondary market sales, the resale to personal injury victims and their attorneys of payment rights previously acquired in a structured settlement factoring transaction (sometimes misleadingly referred to as "recycled structured settlements") continues to cause serious concern among most primary market participants. NSSTA considers engaging in or promoting the marketing or distribution of re-cycled payment rights to be risky, confusing and unregulated investment activity and inconsistent with its Mission.
• Discount rates - Discount rates for structured settlement transfers vary widely depending upon multiple factors including: single vs. multiple bids; fixed vs. life contingent payments; size of payments purchased; length of payment deferral; perceived financial strength of the annuity provider; and/or state law (eg. North Carolina rate cap). The NCOIL State Structured Settlement Protection Model Act, which NSSTA and NASP have agreed to support, contains a definition for "discounted present value" which is generally higher than, and unrelated to, the discount rate actually incorporated into most structured settlement transfers. Regardless of discount rates, judges continue to deny proposed transfers that do not otherwise satisfy the "best interest" test. Reasons include: funds from prior transfer(s) were not used for stated purposes; stated purposes do not justify approval.
• Secondary market sales
  • Based on interviews with industry experts in 2012, S2KM estimated 2012 structured settlement activity to be:
    • 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.
  • Opinions differ as to secondary market sales growth during 2013 and 2014 ranging from no growth to 7% growth per year.

S2KM will address 2014 developments related to personal injury settlement planning and the ELNY liquidation in subsequent blog posts,

For additional related S2KM reporting, see:

• NASP 2014 Annual Conference.
• Primary Market 2014 Report
• Prior Year Annual Reports

NASP 2014 Annual Conference

The National Association of Settlement Purchasers (NASP) celebrated its 10th annual conference November 5-6, 2014 in San Antonio, Texas with record attendance, recognition of past accomplishments and a clear existential message from its president Patricia LaBorde: "NASP exists to insure there will be a secondary structured settlement market for at least the NEXT 10 years".

NASP's 2014 educational conference followed by one week an historic NSSTA conference, which featured, for the first time, the presidents of NASP (LaBorde) and SSP (Neil Johnson) as speakers. LaBorde acknowledged this development in her opening NASP remarks stating: "we want to hear NSSTA's criticism and for the first time, they appear to want to hear ours." She expressed surprise and concern, however, about how little NSSTA members appear to understand about the secondary market including several basic misconceptions.

To underscore both NASP's "survival" theme and the need for improved education about the secondary market, LaBorde added: "there are some forces working against us right now and we need to remain diligent so our customers (structured settlement recipients who sell payment rights to NASP member companies) continue to have access to liquidity."

NASP lobbyist Jack Kelly and Executive Director Earl Nesbitt addressed some of NASP's challenges in their presentations providing legislative and case law updates respectively.

Legislative Update

Kelly reviewed structured settlement protection statute activities in Florida, Wisconsin, Minnesota, Louisiana, and Mississippi and declared NASP's 2014 state legislative lobbying a success. Kelly highlighted Florida and Wisconsin as states where NASP and NSSTA could collaborate to improve existing legislation. At the federal level, Kelly addressed H.R. 3897 and the July 23, 2014 "Consumer Protection for People with Disabilities" Congressional symposium which included a panel discussion about "factoring structured settlements".

Echoing LaBorde's comments about NSSTA, Kelly expressed his concern about "fact vs fiction" as to what happens and what benefits transfers provide for structured settlement recipients who experience unexpected or unaddressed financial needs. Emphasizing "no secondary market transaction can occur without a primary market transaction", Kelly criticized any development or activity that causes Congress to relook at IRC 130 and 104(a)(2). Speaking the morning after the 2014 election, Kelly labeled the Republican victory a political "tsunami" and the odds on new tax legislation in 2015 as a "toss up".

Case Law Update

For the uninitiated, Nesbitt prefaced his secondary market case law summary with several applicable "lessons": if you don't pay a seller the agreed amount, you will have trouble; courts take the "best interest" standard seriously; sometimes the prudent action is to dismiss a proposed transfer and move on; if you don't get what you want, don't move to another court or arbitration; words in a contract matter and words in a court order matter more; although rare in Texas, sometimes it rains (it did in San Antonio) and sometimes RSL Funding (formerly Rapid Settlements) wins cases.

Washington Square v. RSL

Among several significant cases, Nesbitt gave top billing to Washington Square v. RSL Funding wherein transfer company Washington Square (aka Imperial) sued transfer company RSL Funding in Texas for tortious interference with a transfer agreement that had not yet been approved in a final court order. The Court of Appeals of Texas, Fourteenth District, held:

• RSL was “justified” in interfering with Imperial’s proposed transfer agreement prior to court approval because obtaining a better price was in the seller's "best interest".
• Transfer agreements that have not received court approval are not enforceable on public policy grounds and therefore cannot justify legal actions for tortious interference with existing contracts.

Acknowledging this case represents a "big win" for RSL, Nesbitt also predicted "chaos" for the secondary market as rival transfer companies increasingly search court records and seek to outbid other transfer companies who are awaiting court approvals. Subsequent NASP panels of transfer attorneys and judges, as well as sidebar discussions with angry representatives of companies outbid by competitors, confirmed Nesbitt prediction and suggested a strategic marketing shift is already occurring among transfer companies.

Brenston Case

In a separate presentation, Nesbitt reviewed the Peachtree Settlement Funding v. Brenston case and its case law "progeny". In the Brenston case, the Illinois Supreme Court in December 2013 denied Peachtree's petition for review of an Illinois Appellate Court decision which found multiple Peachtree-Brenston transfer orders, which Illinois Circuit Courts had approved in accordance with the Illinois transfer statute, to be void ab initio because:

• Peachtree did not file all settlement documents with the transfer court.
• Peachtree concealed "by omission" the existence of anti-assignment provisions which the Appellate Court found "material".
• The conduct of Peachtree and it's attorney amounted to an "affirmative falsehood and a fraud upon the trial court".

An Amicus curiae brief filed by NASP with the Illinois Supreme Court stated: "Without the certainty and finality of a court order, there is no viable secondary market.... 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."

As NASP predicted, the denial of Peachtree's petition for review was quickly followed by Sanders v. JGWPT Holdings, a class action lawsuit, accusing JGWPT Holdings, Inc., several affiliate companies including J.G. Wentworth and Peachtree Settlement Funding, and Illinois attorney Brian Mack, of violating the Illinois Consumer Fraud and Deceptive Business Practice Act (ICFA). The case has since been removed to the Federal Court in the Southern District of Illinois with that court expected to rule on various motions and petitions in February 2015.

As a result of Brenston, according to Nesbitt:

• Many Illinois structured settlement recipients lack liquidity options because many transfer companies are avoiding the state.
• Some transfers continue to be completed in Illinois when all interested parties agree to waive existing anti-assignment language.
• Some annuity providers, however, will not waive anti-assignment provisions in Illinois cases while others evaluate them on a case-by-case basis.
• Attorneys for some annuity providers are citing Brenston to challenge transfers in other states.

Discounted PV and Applicable Federal Rate

The NCOIL State Structured Settlement Protection Model Act, which NSSTA and NASP have agreed to support, contains a definition for "discounted present value" linked to "the most recently published Applicable Federal Rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service." This rate is generally higher than, and unrelated to, the discount rate actually incorporated into most structured settlement transfers. Nesbitt concluded his conference presentations with a detailed critique of NCOIL's discounted PV definition and explained why NASP believes this definition confuses rather than informs state judges.

Additional Presentations

NASP's conference featured two additional individual presentations.

Former NSSTA Deputy Executive Director Peter Arnold predicted future integration of the primary and secondary structured settlement markets. To support his prediction, Arnold reviewed NSSTA's historic attitude toward "factoring transactions." Arnold also highlighted NSSTA membership qualifications which currently prohibit members from "actively soliciting and promoting structured settlement factoring transactions to individuals who are receiving periodic payments under structured settlements."

Pery Krinsky, an ethics-based defense attorney who serves as Chairman of the Committee on Professional Discipline of the N.Y. County Lawyers' Association, spoke about legal ethics issues. He did not mention Paris & Chaiken, a New York law firm accused of falsifying court orders approving structured settlement transfers, which has reportedly retained Krinsky as outside ethics counsel for assistance with these cases.

Panel Discussions and Breakout Sessions

NASP's 2014 conference included four panel discussions and four breakout sessions (see listings below). Panel highlights and issues addressed:

• Drafting Transfer Agreements - Assigned payments vs. assigned payment rights; clients vs. sellers or annuitants relating to transfer company fiduciary responsibilities; representations and warranties; holdbacks and deductions; limited powers of attorney; testamentary agreements; arbitration provisions.
• Primary Market - NSSTA Fall conference; MSA market; primary market surveys; impact of Affordable Care Act; ELNY update; PLR-143928-13 and "hardship conversions"; settlement planning developments; re-cycled structured settlements; Bipartisan Budget Act of 2013; provider company departures; primary/secondary cooperation opportunities; best and worst business practices; annuity provider issues with transfer companies.
• Responding to Insurer Transfer Objections - Confirming his company's "good relationship" with transfer companies, Madis Smit of State Farm highlighted several insurer issues: unanticipated costs of reviewing 15 to 20 transfers per week; inadequate notice (need at least seven days); difficulty in locating some requested settlement documents; split payment problems resulting from insurer technology limitations; "three touches" constitute an insurer ideal (petition; order; notice of approval). Additional issues discussed: proposed documents from insurers that do not meet state-specific requirements; protecting public information in case filings.
• Judicial Panel - "Best interest" considerations; multiple transactions; common mistakes by petitioners; privacy issues; discount rates; independent professional advisors. The judges also were encouraged to identify questions for the audience - and did so. All three judges expressed a need and interest for additional education about the secondary market.

Alexander Hamilton Award

NASP honored James Lokey as the 2014 recipient of its Alexander Hamilton Award. Lokey completed the first transfer of structured settlement payment rights in 1986 thereby launching the secondary market. NASP has bestowed its Alexander Hamilton Award seven times "to distinguished individuals who have supported and defended the right to free alienability of property rights." NASP considers this right to be its own cornerstone and the foundation of the structured settlement factoring business.

Topics and Speakers

• Welcome Remarks - Patricia LaBorde.
• Legislative and Regulatory Developments - Jack Kelly.
• Legislative Update - Earl Nesbitt.
• Drafting Transfer Agreements - Jason Sutherland and Brian Mack.
• Hamilton Award - James Lokey.
• Integration of Primary and Secondary Markets - Peter Arnold.
• Primary Market Panel - Patrick Hindert (Moderator), Daniel Durbin, Medora Marisseau, Mark Wahlstrom.
• Ethics Issues - Pery Krinsky.
• Responding to Insurer Transfer Objections - Michael Damore (Moderator), John Shafai, John Mott, Michael Green, Steven Mastrantonio, Madis Smit.
• Break Out Sessions
  • Preparing vs.Coaching a Problem Payee - Laryssa Korduba and Elyse Strickland.
  • Addressing Judicial Concerns - Roger Dunaway and Andrew Hillman.
  • Life Contingent Issues - Michael Fasano and Dan Bonner.
  • Bankruptcy Issues - Michael Damore and Adam Zoldessy.
• Illinois Litigation and Discounted Present Value - Earl Nesbitt.
• Judicial Panel - Matthew Bracy (Moderator), Judges Lynne Parker, Patricia Summe, Travis Francis.

For S2KM reports of additional 2014 educational conferences plus eight of the nine prior NASP conferences, see the structured settlement wiki.

SSP 2014 Annual Meeting

"Unification not polarization!" Society of Settlement Planners (SSP) President Neil Johnson espoused this principle in his keynote address as the theme for SSP's 2014 Annual Meeting and Educational Conference.

Current industry polarization as identified by Johnson, and discussed by other SSP conference speakers, arguably encompasses:

• Plaintiff vs. defense structured settlement brokers.
• Primary vs. secondary structured settlement markets.
• Structured settlements vs. settlement planning.
• Settlement annuities vs. settlement trusts.
• Settlement planning vs. special needs planning.

Johnson's SSP keynote speech also highlighted and proposed solutions for industry polarization: 1) recognizing and accepting product diversity; 2) focusing on client and customer service; 3) identifying and pursuing permanent shared interests without necessarily agreeing on all issues; 4) engaging all perspectives to discuss industry problems and issues; 5) improving relationships among stakeholder groups; 6) promoting and practicing settlement planning not settlement selling.

Johnson, and subsequent SSP speakers, addressed one of the most diverse gatherings ever of structured settlement and settlement planning industry leaders. Speakers and attendees included members of NSSTA, NASP, NAMSAP, ASNP, SNA, NAELA and SSP as well as lien resolution experts, mass tort administrators, life care planners, settlement trustees, annuity providers and bloggers.

Except for Johnson as SSP's President, speakers expressed personal opinions and did not appear as representatives of other professional associations.

SPEAKERS - By Category and Listed Alphabetically

• Settlement Planners / Structured Settlement Broker/Agents - Michael Goodman; Donald McNay; Joseph Tombs.
• Structured Settlement Attorneys - Jeremy Babener; Stephen Harris; Patrick Hindert; Earl Nesbitt; Edward Stone.
• Product Providers - Daniel Durbin; David Hickey.
• Special Needs Attorneys - Michele Fuller; Kevin Urbatsch.
• Medicare Set-Aside (MSA) Experts - Christine Melancon; Sally Stalcup.
• Lobbyist - Jack Kelly.
• Social Media - Megan Hargroder.
• Customer Service - Bruce Loeffler.

S2KM Comments

Settlement Planning - S2KM has written previously (see: AAJ 2014 Winter Meeting) about expanding products and services offered by plaintiff structured settlement brokers. Joe Tombs' SSP presentation expanded this list and proposed a "fiduciary standard" for settlement planners. For personal injury settlement planning to emerge as a recognized profession, however, SSP (and/or other settlement planning participants) needs to address these fundamental questions:

• Which professionals and professional skill sets are needed to construct a settlement plan?
• What professional work product results in a settlement plan?
• What are the standard components of, and documentation for, a settlement plan?
• How much does it cost (professional fees, commissions, etc) to produce a settlement plan?
• What would a settlement planning "fiduciary standard" mean in terms of: "best interest", "full disclosure" and "informed consent"?
• What settlement planning licensing and e&o coverage are necessary and applicable to protect customers?
• Which professional associations include "settlement planners" and what certification programs do they offer?
• What settlement planning business models currently exist?

Industry Unification - SSP's 2014 conference represents a strategic milestone and challenge for future educational programs sponsored by structured settlement and settlement planning professional associations.

• SSP spotlighted structured settlement and settlement planning polarization as the foremost industry problem.
• SSP President Neil Johnson proposed sensible solutions which other SSP speakers echoed and effectively endorsed.
• Without endorsing specific speakers or topics, SSP's conference agenda addressed critical and divisive industry issues - and featured speakers offering alternative perspectives.
• SSP conference speakers and attendees represented an unprecedented gathering of settlement planning industry leaders.

Industry Game Changers - Speaker Michele Fuller's list of settlement planning "game changers" did not mention Executive Life of New York (ELNY) or the structured settlement secondary market - two divisive issues of continuing importance addressed by other SSP speakers (Edward Stone and the secondary market panel, respectively). Her Top-10 list, however, provides a baseline for future discussions among industry associations and participants:

1. Affordable Care Act.
2. Lien resolution statutory and regulatory developments.
3. Federal recognition of same-sex marriages.
4. Wrongful death caps determined unconstitutional.
5. State and federal tax reform.
6. Potential reductions in social security benefits.
7. MSAs in liability cases.
8. Settlement planning goes cyber.
9. Increasing need for Qualified Settlement Funds.
10. Increasing number of persons with disabilities.

Congratulations to SSP, and especially conference chairperson Rhonda Bentzen, for maintaining SSP's noteworthy quality standards for its annual educational programs.

For S2KM reporting about prior educational conferences sponsored by SSP and other structured settlement and settlement planning associations, see the structured settlement wiki.

Dodd-Frank and Structured Settlements

What impact will the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, and related international regulatory developments, have on structured settlement annuity providers?

Proposed Amendment to Dodd-Frank

That issue was indirectly spotlighted this week when Senator Susan Collins (R., Maine) announced progress on a bill that would amend Dodd-Frank to permit the Federal Reserve to exempt insurers from new capital rules for banks.

Although the Federal Reserve has not yet published capital rules for insurers, "the Fed maintains it is required to set minimum capital requirements for insurance companies similar to the standards banks face," according to a recent Wall Street Journal (WSJ) article (subscription required).

Enacting legislation to reopen Dodd-Frank will be difficult, the WSJ article states, because many Senate Democrats fear such a bill would include broader changes and the Obama administration has opposed legislation that reopens Dodd-Frank before it has been fully implemented by regulators.

Many insurers believe "bank-centric" capital rules supervised by the Federal Reserve would require them to increase capital and product prices thereby creating a competitive disadvantage. Structured settlement annuity providers MetLife, Prudential, New York Life, and Mutual of Omaha have joined a lobbying coalition of insurers seeking separate capital requirements that take into account their business model, according to various new sources.

A recent LifeHealthPRO article , however, confirms life insurer expectations for increasing federal and international regulatory supervision quoting Gary Hughes, executive vice president and general counsel of the American Council of Life Insurers (ACLI) as stating: “In the very near future, a major segment of the U.S. insurance business will have material aspects of its capital structure dictated or influenced by someone other than a state insurance regulator.”

Hughes added: "life insurance regulation in the U.S. can no longer be viewed as a purely domestic matter” and highlighted the importance of regulatory cooperation, according to the LifeHealthPRO article.

"If the capital standards of the states, the Federal Reserve (FSB), the International Association of Insurance Supervisors (IAIS) and the European Union are not generally consistent," he stated, "the resulting competitive disparities mainly involving the relative cost of capital will significantly disrupt the U.S. and the global life insurance markets.”

BACKGROUND - Insurance Regulation, Capital Requirements and Structured Settlements

The United States insurance industry historically has been regulated by the states whose regulatory responsibility was reaffirmed in 1945 when Congress passed the McCarran-Ferguson Act .

Following the collapse of First Executive Corporation and its two Executive Life subsidiaries in 1991, which had invested heavily in "junk bonds" and had sold a substantial number of structured settlement annuities, the National Association of Insurance Commissioners (NAIC) adopted several model reforms including risk based capital (RBC) requirements. RBC requires insurance companies with higher amounts of risk to retain higher amounts of capital and surplus.

Prior to the Executive Life collapse, state insurance regulators had used fixed capital standards to monitor the financial solvency of insurance companies. Under fixed capital standards, depending upon the state and its line of business, insurance companies were required to maintain the same minimum amount of capital, regardless of the financial condition of the company.

Enacted in response to the 2008 global financial crisis, Dodd-Frank created changes in the United States financial regulatory system that impact all aspects of the financial services industry including insurance.

Among those changes, Dodd-Frank established the U.S. Treasury's Federal Insurance Office (FIO) and "vested FIO with the authority to monitor all aspects of the insurance sector ... and to represent the United States on prudential aspects of international insurance matters, including at the International Association of Insurance Supervisors [IAIS]".

Established in 1994, IAIS is "the international standard setting body responsible for developing and assisting in the implementation of principles, standards and other supporting material for the supervision of the insurance sector", according to its website.

IAIS' mission is "to promote effective and globally consistent supervision of the insurance industry in order to develop and maintain fair, safe and stable insurance markets for the benefit and protection of policyholders and to contribute to global financial stability."

The IAIS, whose members constitute nearly all of the world's insurance supervisors including the FIO and the NAIC, has committed to develop by 2016 and implement by 2019 the first-ever risk based global insurance capital standard (ICS).

The FIO published a report December 12, 2013 about "how to modernize and improve the system of insurance regulation in the United States." The report concludes:

• "[I]n some circumstances, policy goals of uniformity, efficiency, and consumer protection make continued federal involvement necessary to improve insurance regulation."
• However, "insurance regulation in the United States is best viewed in terms of a hybrid model, where state and federal oversight play complementary roles and where the roles are defined in terms of the strengths and opportunities that each brings to improving solvency and market conduct regulation."

Dodd-Frank also requires the Federal Reserve to regulate and establish capital levels for nonbank companies designated as "systemically important". The Financial Stability Board (FSB),an international body that monitors and makes recommendations about the global financial system, published a list of nine insurers on July 18, 2013 that it identified as “global systemically important”. The FSB list includes three United States insurers, AIG, MetLife and Prudential - each of which currently sells structured settlement annuities in the U.S. market.

Although these insurers insist they are nothing like banks in terms of insolvency risks, "regulators are more worried by non-insurance activities carried out by insurance groups than by their core activities", according to a July 27, 2013 article in The Economist titled "Global Systemic Insurers".

"But it is not clear", The Economist article adds, "which activities the FSB considers core and which it thinks are too racy for insurers. Regulators (and others) worry about some annuities, savings-like products which offer guaranteed returns to customers."

Dodd-Frank and Product Suitability Standards

In addition to the insurance regulatory and capital requirement changes discussed above, Dodd-Frank directed the SEC to study the need for a new, uniform fiduciary standard of care for broker-dealers and investment advisers and to apply such a uniform standard if it deemed necessary.

This study is potentially important for structured settlements and personal injury settlement planning because:

• Both of these related markets currently lack uniform product suitability standards.
• By comparison, structured settlement protection acts impose a "best interest" standard on the secondary market.
• Broker-dealers and investment advisers increasingly participate in settlement planning.
• Settlement planning increasing integrates structured settlement annuities with other insurance and financial products ("blended products") in settlement trusts subject to "best interest" fiduciary standards.

Although the SEC published a fiduciary standard study in January 2011, it has not yet published any related regulations. S2KM reviewed settlement planning product suitability standards in a four-part 2012 blog series.

Reliance Structured Settlement Annuities

What happens, or should happen, to structured settlement payees when the owner of their structured settlement annuities becomes insolvent?

Reliance Insurance Company (Reliance), a liability insurer, is the most recent example where these issues are being adjudicated. Previous examples include Monarch Capital Corporation and First Executive Corporation, both non-insurance companies which, as "qualified assignees", owned structured settlement annuities issued by their subsidiary life insurance companies.

The Commonwealth Court of Pennsylvania (Liquidation Court) declared Reliance insolvent and issued an Order of Liquidation which appointed the Pennsylvania Insurance Commissioner as Liquidator in 2001.

The Reliance Estate, however, remains open and its current assets include approximately 3,400 structured settlement annuity contracts which the Liquidator estimates have a present discounted value of $95.1 million. The Liquidator further estimates:

• Over 85 percent of the structured settlement annuity contracts owned by the Reliance Estate are “qualified assignment” contracts and the rest are “buy and hold” contracts.
• Over 95 percent of the qualified assignment contracts owned by the Reliance Estate involve annuity contracts issued by United Pacific Life Insurance Company, a former Reliance subsidiary which Reliance sold in 1993 and which is now known as Genworth Life Insurance Company.

As part of the Reliance liquidation process, current Pennsylvania Insurance Commissioner Michael F. Consedine requested the Liquidation Court on September 10, 2012 to enter an Order approving transfer of ownership of these structured settlement annuity contracts to the annuity payees which, in many cases, now include factoring companies and investors who have purchased structured settlement payment rights from factoring companies.

On February 28, 2013, Pennsylvania Commonwealth Court Judge Bonnie Brigance Leadbetter ordered the Liquidator’s Application for Approval to Transfer Ownership (Transfer Application) “be held in abeyance until further order of this Court.”

As justification for the proposed transfer of structured settlement ownership, the Transfer Application provides in part:

• With the exception of several structured settlement annuities issued by Executive Life of California and Executive Life of New York (ELNY), all payments related to structured settlement annuities owned by the Reliance Estate have been paid by the annuity issuers.
• The structured settlement annuity payees will have the same right to receive payments from the annuity issuers assuming transfer of ownership to the payees.
• As owner of the annuity contracts, Reliance has the right to transfer ownership upon notice to the annuity issuers.
• The Liquidator has concluded that transferring ownership of the annuity contracts to current payees under those contracts, with the simultaneous discharge of Reliance’s related structured settlement payment obligations:
  • Would be in the “best interest” of the Reliance Estate and represents “the only viable option”; and
  • Would not create any federal income tax liability for Reliance.
• Recognizing that any asset transfer requires prior court approval, the Liquidator “explored several other options” including transfer of the annuity contracts to:
  • A newly-formed entity such as a subsidiary corporation; and/or
  • A trust owned by Reliance.
• The Liquidator, however, concluded that any and all such alternative options would fail to provide the Reliance Estate with finality and expense reduction.

The Liquidator’s Transfer Application provides the following additional comments about the Reliance structured settlement payees:

• Tax consequences – The Liquidator concluded “it is impossible and imprudent” for the Liquidator to make predictions or provide tax advice for the payees because each has unique circumstances. Accordingly, “payees may want to consult a tax advisor or accountant with respect to the [proposed] transfer.”
• Priority in liquidation – If any structured settlement annuity issuer fails to meet its structured settlement obligation (which the Transfer Application questionably refers to as “the primary obligation”), the Liquidator has determined a claim against the Reliance Estate under a “qualified assignment” contract “would warrant no higher than class (e) priority" under the Pennsylvania Insurance Company Act. The Liquidator, however, anticipates no Reliance creditors below class (b) priority will receive any distribution from the Reliance Estate.
• Notice – The Liquidator does not have a complete list of current names and addresses of Reliance structured settlement payees in part because Reliance did not retain copies of either the annuity contracts or other structured settlement documents issued by United Pacific Life Insurance Company when it sold the company in 1993. The Liquidator assumes Reliance structured settlement annuity issuers have the ability to furnish individual notice. In addition, the Liquidator plans to publish notice in multiple regional and national newspapers.

Additional Resources

• For additional documents related to the Reliance Liquidation, see the Reliance Documents website.
• For additional information about the resolution of Monarch Capital Corporation structured settlements, see Section 5.04[2][b][ii] of "Structured Settlements and Periodic Payment Judgments" (S2P2J).
• For additional information about the resolution of First Executive Corporation structured settlements, see the structured settlement wiki and S2P2J Sections 3.05[11-13].
• For a discussion of alternative funding options ("qualified assignments" vs. "buy and hold") in the context of the ELNY liquidation, see "ELNY Qualified Assignments".

Structured Settlements in 2012 - 2

Settlement Planning

Compared with the structured settlement primary market, which was characterized by continuing sales declines in 2012, the related settlement planning market appears to have experienced growth and vitality in 2012.

The primary evidence of this growth and vitality consisted of the increasing number of educational conferences addressing settlement planning topics during 2012. These included:

• Society of Settlement Planners (SSP) Annual Meeting
• Risk Settlement Planning Practicum
• Academy of Special Needs Planners (ASNP) Annual Meeting
• Qualified Settlement Fund Symposium
• Various National Academy of Elder Law Attorney (NAELA) Conferences - of which S2KM attended the 2012 Ohio NAELA Unprogram.

One of the challenges for measuring the growth of the settlement planning market is the lack of market metrics. For example, despite continuing market inquiries, S2KM has been unable to identify reliable national market metrics for qualified settlement funds, special needs trusts, settlement trusts, or Medicare set-aside arrangements.

Towers Watson Studies

The most valuable market research for settlement planning S2KM has identified has been the Annual Studies of United States Tort Costs published by Towers Watson (formerly Towers Perrin) since 1985. These studies:

• Calculate tort costs resulting from five insured plus uninsured business lines: 1) commercial multi-peril; 2) medical malpractice; 3) product liability; 4) other liability; and 5) commercial auto.
• Exclude: 1) no-fault auto insurance; 2) property coverages; 3) workers compensation; 4) certain extraordinary (one time) costs.
• In 2002, Towers Watson also translated overall tort costs for 2001 into the following categories and percentages: 1) administrative costs (21%); 2) defense costs (14%); plaintiff attorneys (19%); economic loss (22%) and non-economic loss (24%). Towers Perrin discontinued this portion of its analysis in 2002. It was "devilishly difficult" according to Russ Sutter, a Towers Watson principal and actuary who directs their annual tort cost studies, "primarily because we lack reliable information from plaintiff attorneys". These percentages therefore represented Tower Watson's "best estimate" in 2002.

Based upon Towers Watson's most recent 2011 Annual Study and utilizing Tower Watson's 2002 "best estimate" of payout percentages, S2KM estimates, that at least since 2006, more than $160 billion of United States tort costs annually have represented payments to injury victims and their attorneys.

Settlement Planning Issues

Among many settlement planning issues, S2KM viewed the following as the most strategically important during 2012:

• The evolutionary relationship between structured settlements and settlement planning;
• Comparing these two business models;
• Improving settlement planning by expanding structured settlements;
• What we have learned about the settlement planning market;
• Settlement planning tax challenges - including stress-induced physical ailments;
• How the Affordable Care Act (ACA) impacts settlement planning;
• How states are reforming Medicaid programs to address budgetary shortfalls and the ACA;
• Whether a standard of practice exists for using Medicare set-aside arrangements in liability cases;
• The application of product suitability standards to settlement plans funded with structured settlements;
• The impact of Dodd-Frank's uniform fiduciary standard on settlement planning.

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