Beyond Structured Settlements

NASP 2013 Annual Conference - 1

The National Association of Settlement Purchasers (NASP) has announced its 2013 Annual Conference will take place November 5-7 at The Cosmopolitan Las Vegas. Non-NASP members, including participants in both the primary and secondary structured settlement markets, are invited to attend.

Topics and Speakers

• Legislative and Regulatory Developments - Jack Kelly
• Litigation Update - Earl Nesbitt
• Capacity Issues in Structured Settlement Transactions - Rajiv Goel
• Executive Life of New York - Edward Stone
• Financing Structured Settlement Transactions - Boris Ziser
• Life Contingent Transactions - Brian Robinson
• Breakout Sessions
  • Non-traditional Secondary Market Financing
  • Ethical and Legal Marketing Standards
  • Avoiding Problem Payees
  • Addressing Judicial Challenges
• Primary Market Panel - Patrick Hindert (moderator), William Schemmel, Anthony Prieto and Daniel Hindert
• Judges' Concerns about Transfers - Judges Nancy Allf, James McCarthy and Carter Bise

The Primary Market Panel has been one of the continuing featured presentations at NASP conferences. Primary market structured settlement topics addressed at previous NASP conferences include:

• How the primary market views the secondary market
• Primary market criticisms of transfers and factoring companies
• Reasons annuity providers oppose transfers
• Common interests among annuity providers and factoring companies
• Brokers' roles in transfers
• Pre-settlement discussions about transfers
• Improving and growing the primary market
• How large is the potential primary market
• Why plaintiff attorneys and injury victims reject structured settlements
• Why annuity providers are leaving the primary market
• Financial viability of annuity providers
• Primary market strategic priorities
• Roadblocks to primary market expansion
• Issues dividing the primary market
• Has the primary market abandoned the structured settlement brand?
• Best and worst primary market business practices
• Who regulates primary market business practices
• Improving primary market knowledge and skill sets
• Impact of various factors and developments on the primary market:
  • Settlement transfers
  • Settlement planning
  • Changing market demographics
  • 2008 financial crisis
  • Spencer v. Hartford
  • ELNY and Reliance insolvencies
  • Deficit Reduction Act
  • Affordable Care Act
  • Dodd-Frank
  • 468B qualified settlement funds
  • The Internet

For S2KM's reporting about previous NASP Conferences and structured settlement secondary market issues, see the structured settlement wiki.

For more comprehensive analysis about transfers of structured settlement payment rights, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J) including upcoming Release 54.

A Response to the SEC Bulletin

Two structured settlement industry leaders have taken issue with a recent Securities and Exchange Commission (SEC) Investor Bulletin providing advice for individuals who are contemplating selling or purchasing (as investors) structured settlement payment rights and/or future pension payments.

Matthew Bracy, a former President of the National Association of Settlement Purchasers (NASP) and Jason Lazarus, a former President of the Society of Settlement Planners (SSP), have published an article titled "A Response to the SEC Bulletin: The Truth about Factored Structured Settlements as an Investment Vehicle." which characterizes the SEC Bulletin as "misleading and in some cases inaccurate concerning the sale of structured settlement payment streams and factored structured settlements as an investment vehicle." 

More specifically, Bracy and Lazarus argue the SEC Bulletin "muddles":

• "two distinctly different businesses, pension purchasing and structured settlement factoring"; and
• "distinctions between the process of purchasing payment from the structured settlement recipient and selling purchased payment streams to investors."
  

In response, Bracy and Lazarus discuss the following features of structured settlement factoring they believe the SEC Bulletin should have clarified:

• "Always court ordered"
• "No negative tax consequences to the seller"
• "Investors' rights"

SEC Rule 10b-5

Bracy and Lazarus premise their criticism of the SEC Bulletin in the context of SEC Rule 10b-5 which they characterize as "the bedrock of securities laws". SEC Rule 10b-5 "Employment of Manipulative and Deceptive Practices" reads as follows:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security." (S2KM emphasis).

S2KM Critique

S2KM agrees with Bracy and Lazarus that the SEC Bulletin has serious shortcomings. As S2KM pointed out in an earlier blog post:

"The SEC Investor Bulletin provides a generic definition for a structured settlement plus an indirect reference to state structured settlement protection statutes. It does not, however, specifically reference or discuss the definitions, requirements and protections for structured settlement transfers provided in:

• Internal Revenue Code section 5891; and
• The state structured settlement protection statutes."

Most Fundamental Issue

More importantly, however, neither the SEC Bulletin nor the article by Bracy and Lazarus directly addresses the most fundamental related issue: whether, and when does, a specific sale and purchase of structured settlement payment rights constitute a "security" for purposes of U.S. securities laws?

The SEC Bulletin references this issue obliquely stating: "structured settlement income-stream products may or may not be securities and likely are not registered with the SEC. As such, reliable information about these products may be difficult to find and resolving disputes should an investment go sour may also be difficult."

Bracy and Lazarus recognize that factoring companies sometimes "bundle the payment streams together in securitized transactions for institutional investors". Presumably such "securitized transactions":

• Do qualify, and are registered, as investment "securities";
• Are subject to SEC regulatory authority; and
• Must meet the requirements of SEC Rule 10b-5.

What about individual transactions - i.e. the purchase and sale of structured settlement payment rights by factoring companies (and/or the re-purchase and re-sale of previously transferred structured settlement payment rights by brokers) to individual investors including sales to personal injury claimants?

Shouldn't the SEC specifically highlight these transactions and address the question: Do these transactions qualify as investment "securities"?

If the answer is "no", what is the legal authority? In this case, the securities laws presumably do not apply and the SEC presumably has no authority to regulate such transactions. Alternatively, who does regulate such transactions and what laws apply?

If the answer is "yes", what is the legal authority? In this case, how many of these transactions (do/do not) meet applicable securities law requirements including registration, licensing, disclosure and other sales practices?

Definition of a "Security"

The Securities Act of 1933 establishes the following definition of a "security" and courts have held the definition in the Securities Exchange act of 1934 to be identical:

“The term ‘security’ means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as a ‘security’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.” 

After reviewing various tests applied by courts when determining whether this definition applies to various investment contracts, the authors of "Structured Settlements and Periodic Payment Judgments" (S2P2J) conclude in Section 4.05[2] ("Securities Law Issues"): "If a settlement involves fixed periodic payments for a claimant’s lifetime, which [are] funded through the purchase of a fixed annuity, it is highly doubtful that the promise to make such payments will be viewed as a “security” subject to the federal securities laws."

This conclusion, however, applies to the primary market and does not address the purchase and sale of structured settlement payment rights in factoring transactions. 

S2P2J Release 54, to be published later this summer, will address the issue of whether the purchase and sale of re-cycled structured settlement payment rights constitutes an investment "security". With Daniel Hindert and Joseph Dehner, S2KM author Patrick Hindert is an S2P2J co-author.

SEC Bulletin Addresses Structured Settlement Transfers

The Securities and Exchange Commission (SEC) Office of Investor Education and Advocacy has issued an Investor Bulletin titled "Pension or Settlement Income Streams: What You Need to Know Before Buying or Selling Them". 

Although the SEC Investor Bulletin "is neither a legal interpretation nor a statement of SEC policy" it provides advice for individuals who are contemplating selling or purchasing (as investors) structured settlement payment rights and/or future pension payments.

The Investor Bulletin highlights questions potential sellers and investors should ask before proceeding with proposed transactions.

For sellers:

• "Is the transaction legal?"
• "Is the transaction worth the cost?"
• "What is the reputation of the company offering the lump sum?"
• "Will the factoring company require life insurance?"
• "What are the tax consequences?"
• "Does the sale fit your longer term financial goals?"

For investors:

• "Is the financial professional selling the product registered with a state or federal regulator or with FINRA?"
• "How is the salesperson being compensated?"
• "Is the salesperson authorized to sell this product?"
• "What is the reputation of the company selling the product to me?"
• "What are the tax consequences?"
• "What organization is ultimately paying you?"
• "Who is sending the check?"

To check the registration status of a salesperson, the SEC Bulletin recommends investors check these resources:

• The SEC's Investment Adviser Public Disclosure (IAPD) website.
• FINRA's BrokerCheck or telephone number (800-289-9999).
• Your state securities regulator.
• The NAIC's website or telephone number (866-470-6242) for your state's insurance commission.

The SEC's Investor Bulletin includes a number of additional warnings and resource links and concludes with the following admonition:

"Whether you are thinking about selling a pension or structured settlement, or buying one from someone else, remember that the risks in doing so are substantial and the safety net if things go wrong may not be very strong. Don’t shy away from asking probing questions—and shop around. there may be less risky alternatives to help you achieve your financial objectives."

Also note: The SEC Investor Bulletin provides a generic definition for a structured settlement plus an indirect reference to state structured settlement protection statutes. It does not, however, specifically reference or discuss the definitions, requirements and protections for structured settlement transfers provided in:

• Internal Revenue Code section 5891; and
• The state structured settlement protection statutes.

For a detailed analysis of transfers of structured settlement payment rights, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

For S2KM's complete reporting about the structured settlement secondary market, see the structured settlement wiki.

ASNP 2013 Annual Meeting

Although special needs (SN) planning encompasses non-personal injury clients, settlement planning, with and/or without structured settlements, represents an increasingly important component of both the SN market and the educational focus of its practitioners.

The Academy of Special Needs Planners (ASNP) hosted its seventh annual meeting in Austin, Texas March 21-23 which featured the following topics and speakers:

• Impact of the Affordable Care Act on SN Planning - Scott Solkoff
• Modifying Problem Trusts into Effective Special Needs Trusts (SNTs) - Renee Lovelace
• SNT Issues at the Social Security Administration - Eric Skidmore, Sean Balser, Kevin Urbatsch
• The Jimmo v. Sibelius Medicare Settlement - Margaret Murphy
• SSI Update and New Social Security Strategies - David Lillesand
• Medicaid Third-Party Liability Liens Post-Ahlborn - Floyd Faigle
• Settlement Planning Under Changing Conditions - Donna Meyer, Sharon Pope, Patrick Hindert, Jason Lazarus
• Drafting Special Needs Trusts - Nancy Chudacoff, Sheri Sudweeks, Vincent Russo
• Establishing the Financial Needs of the Special Needs Beneficiary - Jerry Hulick
• Administration of SNTs - Travis Finchum, Kathy Christofell, Jerry Hulick, Renee Lovelace
• Determining a Reasonable Attorney Fee - Mary Alice Jackson

Settlement Planning and Structured Settlement Highlights

Affordable Care Act

• ACA and Settlement Planning - The Affordable Care Act (ACA) changes settlement planning in fundamental ways which speaker Scott Solkoff highlighted in his comprehensive review:
  • Reduced personal injury verdicts and settlements.
  • A different calculus for determining future medical damages based upon health insurance costs.
  • Fewer first party special needs trusts (SNTs).
  • Reduced demand for Medicare and Medicaid for persons with disabilities under age 65.
  • New opportunities for special needs attorneys because of the complexity of the ACA.
• ACA, Verdicts and Settlements - S2KM will address the impact of the ACA on personal injury verdicts and settlements in future blog posts.
• ACA, SSA and SNTs - During an ASNP question and answer session moderated by Kevin Urbatsch and featuring representatives of the Social Security Administration (SSA Question and Answer session), the following exchange occurred:
  • Question: will the SSA allow early termination of SNTs to comply with ACA?
  • SSA Answer: right now, any early termination of a SNT will require payment of reversionary interest.

Settlement Planning and SN Attorneys

The ASNP settlement planning panel was one of several presentations which identified expanding opportunities for SN attorneys. Patrick Hindert, author of S2KM's blog, provided an analysis of the settlement planning market which emphasized changing structured settlement business and transactional models. Hindert highlighted the need for better standards and metrics as well as the importance of qualified settlement funds (QSFs) and the secondary structured settlement market. Sharon Pope discussed settlement planning practice issues and provided sample documents to help special needs attorneys expand their settlement planning practice. Jason Lazurus summarized new developments and cases impacting the use of Medicare set-aside arrangements in liability cases.

For SN attorneys to expand their settlement planning practice, ASNP's panel recommended more in-depth study of non-SNT settlement planning issues including the settlement planning market, the settlement planning team and the settlement plan itself. The panel's handout materials also identified a list of settlement planning documents organized among the following stages of the settlement planning process:

• Engagement
• Assessment
• Design
• Negotiation
• Implementation
• Monitoring

In addition to the settlement planning panel, multiple ASNP presenters discussed specific settlement planning issues. In addition to settlement topics and presenters mentioned elsewhere:

• Jimmo v. Sibelius - Margaret Murphy summarized this recent settlement which has important implications for anyone who needs skilled care as well as for skilled nursing facilities, home health and outpatient facilities. As a result of this settlement, Medicare claims should no longer be denied on a rule-of-thumb determination that a beneficiary's condition is not improving.
• WOS v. E.M.A. - Floyd Faiglie made a last minute addition to his Medicaid lien presentation to address this March 20, 2013 U.S. Supreme Court decision. The decision expanded the Supreme Court's previous Alhborn decision; rejected arguments by North Carolina defending its third party recovery statute; and further limits when a state may demand recovery from a portion of a settlement allocated to non-medical damages.
• Modifying Problem Trusts into Effective SNTs - Renee Lovelace recommended a cost benefit analysis formula for analyzing whether and when to modify a problem trust. Her analysis was process-driven and included: identifying problems, possible benefits, options, and cost of changes; quantifying costs and benefits; and determining the extent of any modification.
• Determining a Reasonable Attorney Fee - Mary Alice Jackson reviewed the eight factors listed in ABA Model Rule 1.5 for determining the reasonableness of a fee and discussed those factors in the context of SNTs. Note (added 3/31/2013): In his SSI update (see below), David Lillesand addressed the issue of whether and when SN attorneys need SSA approval of their attorney fees to avoid penalties resulting from poor quality draftsmanship in the Social Security Act attorney fee regulations.
• Establishing Financial Needs of the Special Needs Beneficiary - Jerry Hulick's presentation addressed special care, the special care team, special care information needs, and special care documents outside of the settlement planning context.
• Drafting Special Needs Trusts - Nancy Chudacoff, Sheri Sudweeks, and Vincent Russo presented ASNP's new Model Third Party SNT. Third party SNTs typically are used outside of the settlement planning context.

Structured Settlements

• ACA - Scott Solkoff noted in his ACA presentation that, after the ACA takes full effect January 1, 2014, structured settlements will more likely fund future health insurance costs, which should be lower and more predictable, than future medical expenses.
• "Over-structuring" - The ASNP panel discussing SNT administration (Travis Finchum, Kathy Christofell, Jerry Hulick, Renee Lovelace) emphasized a common complaint among SN attorneys: plaintiff attorneys frequently contact SN attorneys to draft a SNT on short notice after an "over-structured" settlement has already been reached. This panel discussion followed Lovelace's earlier presentation ("Modifying Problem Trusts") during which she highlighted expanding litigation against fiduciaries. S2KM's suggested solutions for fiduciaries to address the problem of "over-structuring": promote QSFs; enforce product suitability standards; or, as a last resort, utilize the secondary market to obtain increased liquidity for the trust.
• Deficit Reduction Act - The ASNP's SNT administration panel did not discuss whether the annuity rules in the Deficit Reduction Act of 2005 (DRA) are applicable to structured settlements. S2KM is not aware of any definitive authority addressing this issue. For S2KM's previous analysis of the DRA and structured settlements, summarizing a presentation by Sylvius von Saucken, see "Inconvenient Questions".
• Secondary Market - The SSA Question and Answer session did not address structured settlements. During a similar session at the ASNP 2012 Annual Meeting, Eric Skidmore, an SSA representative, confirmed an unpublished (and controversial) SSA position: the SSA believes the existence of the secondary market renders structured settlement annuities "available resources" that potentially disqualify special needs trusts beneficiaries from receiving Medicaid.

Congratulations to ASNP and conference Chairman David Lillesand for an outstanding 2013 educational program which also featured two special needs presentations by Lillesand: a supplemental "Back to Basics" program and a Supplemental Security Income (SSI) update.

For S2KM summaries of prior educational conferences of the ASNP, and other professional associations addressing settlement planning issues, see the structured settlement wiki.  For S2KM's listing of Spring 2013 educational conferences featuring settlement planning and structured settlement presentations, see this prior S2KM blog post.

Moody's Downgrades JG Wentworth

Moody's Investors Service has announced a downgrade of its Corporate Family Rating (CFR) for JG Wentworth (JGW) from B3 to Caa1 and has issued the same downgrade for JGW's new $425 million senior secured term loan and $20 million senior revolving credit facility issued by Orchard Acquisition Company, a subsidiary of JGW. Moody's outlook for both the CFR and the debt ratings is "stable".

Under Moody's credit rating scale, "B3" signifies a long-term rating "judged as being speculative and a high credit risk" and "Caa1" signifies a long-term rating "rated as poor quality and very high credit risk."

Moody's CFR and debt ratings for JGW are separate and distinct from financial agency ratings applicable to JGW securitizations of structured settlement payment rights which historically have been rated as high quality and low risk investments.

Bloomberg News reported in early January 2013 that JLL Partners, owners of JGW, had abandoned plans to sell the company after bids failed to meet expectations and might consider a dividend recapitalization or an initial public offering instead.

Moody's announcement confirmed "JGW is undergoing a leveraged recapitalization that will result in a tripling of the company's corporate debt as it pays its shareholders a very substantial dividend....Net proceeds from the $425 million Senior Secured Term Loan issuance will be used to finance a $309 million capital distribution to JGW's shareholders as well as to repay an existing $142 million term loan." 

Moody's identified multiple reasons for its downgrade of JGW:

• JGW's leveraged recapitalization will result in a "meaningful increase in leverage and decrease in debt service coverage."
• It also "indicates a more aggressive financial policy than was anticipated in the previous B3 rating, given the large size of the capital distribution, the notable increase in debt service requirements and accompanying high corporate leverage."
• Based upon significant capital distributions JGW's financial owners have previously taken, Moody's believes the risk of future aggressive financial policies continues despite JGW low structured settlement portfolio risk and historically strong cash flow.
• JGW's "cash flows are already highly leveraged, with the vast majority of cash flows utilized to support securitization structures' debt servicing requirements."
• "Increased interest coverage requirements will also divert resources that could otherwise be utilized to build the [JGW] franchise or support growth-related infrastructure."
• In addition to its complex organizational structure, JGW lacks clearly defined financial policies and has experienced Chief Financial Officer turnover.
• JGW is significantly dependent on the confidence-sensitive securitization market and its structured settlement payment rights are illiquid.

Moody's also identified factors whereby JGW's rating could be upgraded or downgraded:

• Upgraded - If JGW "meaningfully decreases its leverage, improves interest coverage levels and adopts a more conservative financial policy."
• Downgraded - If JGW's "liquidity risk increases, such as through a failure to renew major warehouse lines or securitize receivables, or due to reduced cash flows, such as through a decrease in net yield, loss of market share or a material adverse legal or regulatory ruling."

As S2KM reported in this prior blog post, JGW, which was founded in 1995, has experienced a tumultuous recent history:

• On June 1, 2009, JGW and two affiliated companies entered Chapter 11 bankruptcy protection after the company "encountered liquidity problems amid a tightening credit market".
• Standard & Poor's Rating Services had earlier announced, at JGW's request, that it would no longer rate JGW's counterparty credit and senior secured debt.
• During this period, JGW laid off 120 of its 200 employees and closed its office in Las Vegas.
• According to industry sources at that time, JGW's $325 million of general corporate bonds were "almost worthless" and were trading, if at all, for pennies on the dollar.
• Less than six months later, JGW emerged from bankruptcy with an announcement that owner JLL Partners had invested an additional $100 million in the company.
• By 2011, JGW had re-entered the asset-backed structured settlement securitization market.
• A June 2011 DBRS report, published prior to JGW's 23rd asset-backed structured settlement securitization, stated that JGW had previously consummated 59.000 structured settlement factoring transactions with aggregate payment streams of $4.5 billion and 0.11% of losses.
• Also in 2011, JGW merged with Peachtree Settlement Funding (Peachtree) in a stock swap, with JLL Partners retaining control of the merged companies which have each continued to participate in the secondary market.
• Industry estimates obtained by S2KM of the post-merger 2012 market share (revenue and sales) of the now-combined JGW/Peachtree vary from a low of 50% to a high of 75%.
• Some industry experts believe JGW/Peachtree's share of the estimated 2012 industry profits of $120 million was $100 million, or 83%.

Despite JGW's downgrade by Moody's and its tumultuous recent history, industry experts, including some rating agencies, maintain a positive outlook for the 2013 structured settlement secondary market.

For example, in a recent "Secondary Market Update", S2KM reported the following 2013 structured settlement secondary market projections by DBRS, a rating agency that covers various structured finance product groups: "Based on the estimated 15% increase in issuance in 2012 to $630 million, DBRS expects further 10%+ increase in issuance in 2013 amid the continuing popularity of the [structured settlement] asset class among certain investors."

Additional Resources

• For additional S2KM reporting and commentary about the structured settlement secondary market, see the structured settlement wiki.

• For more comprehensive legal analysis about transfers of structured settlement payment rights, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Secondary Market Update

DBRS 2013 Outlook

DBRS, a rating agency that covers various structured finance product groups including structured settlement payment rights, has published its 2013 Outlook for commercial asset-backed securities. Among DBRS' observations and projections for the structured settlement secondary market:

• "From the structural and rating perspective, implementation of the restructuring plan for Executive Life Insurance Company of New York provides a rare and valuable glimpse into the insurer liquidation process and adds evidence to the expected recovery proceeds assumptions in case of default by an insurer in the future."
• "Based on the estimated 15% increase in issuance in 2012 to $630 million, DBRS expects further 10%+ increase in issuance in 2013 amid the continuing popularity of the asset class among certain investors."
• "Expected steady collateral performance in 2013 will be supported by low delinquencies and improving condition of the insurance industry."

Based upon interviews with industry experts, S2KM previously estimated total 2012 structured settlement secondary market profit of $120 million calculated as follows:

• $1 billion received from investors;
• Less: $360 million paid to transferors;
• Equals: $640 million of revenue;
• Less: $520 million of expenses;
• Equals: $120 million of profits.

The difference between S2KM's estimated "$1 billion received from investors" and DBRS' estimated $630 million of "issuance" (meaning presumably "total face amount of structured settlement collateral debt obligations sold to investors") can be explained by two factors according to industry experts:

• Except for J.G. Wentworth (JGW) and Peachtree Settlement Funding (Peachtree), most structured settlement factoring companies and brokers currently do not obtain financial ratings when they re-sell structured settlement payment rights.
• JGW, Peachtree and other issuers of rated bonds backed by structured settlement payment rights in 2012 may receive as much as $50 million of additional income from investors in the form of residuals, servicing rights and other income over time.

Drinker Biddle Structured Settlement Alert 

Drinker Biddle's website features summaries of two recent cases where state court judges in Florida and California have denied proposed transfers of structured settlement payments rights paid pursuant to awards under the Longshore Act and the California workers compensation statute, respectively.

In each case, the objecting structured settlement annuity issuer was represented by Drinker Biddle attorneys.

In the Florida case (In Re: Approval for Transfer of Structured Settlement Proceeds by Derrick Robotham), Circuit Court Judge Michelle Morley held the proposed transfer would contravene Federal law which prohibits assignment of Longshore Act payments. It would not, therefore, satisfy the requirements of the Florida structured settlement protection act which prohibits transfers that would violate or conflict with any applicable law.

In the California case (In Re Rudy Andrade), Superior Court Judge Amy D. Hogue applied similar reasoning in denying a petition seeking court approval for the transfer of a payee’s rights to payments under a workers’ compensation settlement. Among other findings, Judge Hogue held that the California structured settlement statute does not apply to transfers of workers' compensation payments. In addition, according to the Judge, the proposed transfer contravened: 1) the California Labor Code which prohibits assignment of workers' compensation payments; 2) California common law because the release agreement signed by the payee prohibited assignment of payments; and 3) a prior order of the California Workers' Compensation Appeals Board that also expressly prohibited assignment of the payments.

Additional Resources

For S2KM's complete reporting about the structured settlement secondary market, see the structured settlement wiki.

For more comprehensive legal analysis about transfers of structured settlement payment rights, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

J.G. Wentworth Abandons Sale Plan

Bloomberg News reported earlier this week that JLL Partners, owners of J.G. Wentworth (JGW), have abandoned plans to sell the company after bids failed to meet expectations and may now consider a dividend recapitalization or an initial public offering instead.

Earlier reports had indicated that JLL Partners was seeking a $1 billion purchase price for JGW from private-equity firms with Moelis & Co. and Deutsche Bank AG acting as investment bankers.

JGW, which was founded in 1995, has experienced a tumultuous recent history:

• On June 1, 2009, JGW and two affiliated companies entered Chapter 11 bankruptcy protection after the company "encountered liquidity problems amid a tightening credit market".
• Standard & Poor's Rating Services had earlier announced, at JGW's request, that it would no longer rate JGW's counterparty credit and senior secured debt.
• During this period, JGW laid off 120 of its 200 employees and closed its office in Las Vegas.
• According to industry sources at that time, JGW's $325 million of general corporate bonds were "almost worthless" and were trading, if at all, for pennies on the dollar.
• Less than six months later, JGW emerged from bankruptcy with an announcement that owner JLL Partners had invested an additional $100 million in the company.
• By 2011, JGW had re-entered the asset-backed structured settlement securitization market.
• A June 2011 DBRS report, published prior to JGW's 23rd asset-backed structured settlement securitization, stated that JGW had previously consummated 59.000 structured settlement factoring transactions with aggregate payment streams of $4.5 billion and 0.11% of losses.
• Also in 2011, JGW merged with Peachtree Settlement Funding (Peachtree) in a stock swap, with JLL Partners retaining control of the merged companies which have each continued to participate in the secondary market.
• Industry estimates obtained by S2KM of the post-merger 2012 market share (revenue and sales) of the now-combined JGW/Peachtree vary from a low of 50% to a high of 75%.
• Some industry experts believe JGW/Peachtree's share of the estimated 2012 industry profits of $120 million was $100 million, or 83%.

For S2KM's summary evaluation of the structured settlement secondary market in 2012, see this prior blog post.

For S2KM's complete reporting about the structured settlement secondary market, see the structured settlement wiki.

For more comprehensive legal analysis about transfers of structured settlement payment rights, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Structured Settlements in 2012 - 3

Secondary Market

In contrast to anticipated 2012 sales declines in the U.S structured settlement primary market, industry experts interviewed by S2KM agree the U.S. structured settlement secondary market achieved record sales and profits in 2012. 

S2KM secondary market estimates for 2012 - based on interviews with industry experts:

• 12,000 secondary market transfers - with less than 120 contested by annuity owners and/or providers.
• $360 million of total secondary market purchases (money paid to transferors).
• $30,000 average individual transfer.
• Average discount rates in the low double digits - with the lowest average discount rates (high single digits) provided by AllState's commutations.
• Total industry profit of $120 million calculated as follows:
  • $1 billion received from investors;
  • Less: $360 million paid to transferors;
  • Equals: $640 million of revenue;
  • Less: $520 million of expenses;
  • Equals: $120 million of profits.

Discount Rates

• As explained by Earl Nesbitt, Executive Director of the National Association of Settlement Purchasers (NASP), during his presentation at the NASP 2011 Annual Meeting: the concepts of "discount rate" and "discounted present value" both play an important role in court hearings to evaluate structured settlement transfer proposals.

• The Model State Structured Settlement Protection Act defines "discounted present value" to mean: "the present value of future payments determined by discounting such payments to the present using the most recently published Applicable Federal Rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service."

• Secondary market experts interviewed by S2KM agree generally that discount rates for structured settlement transfers were "low" during 2012 compared with prior years - especially when compared with 2009 when discount rates were exceptionally "high" as a result of the 2008 financial crisis.
• "Average" discount rates are difficult to define because many factors determine the discount rate for a specific case. For examples: cost and availability of funds; single vs. multiple bid transactions; duration and amount of payments; and whether payments are certain or life contingent.
• During his 2011 NASP presentation, Nesbitt summarized these results from a 2011 survey he conducted of the discount rates approved by judges in Harris County Texas:
  • The average discount rate: 15.8 percent;
  • The weighted average (i.e. taking into consideration the relative case size): 12.96 percent;
  • The lowest discount rate: 7.4 percent; and
  • The highest discount rate ($3494 paid for $7282 due in less than one year): 61.3 percent.

Market Shares

• Industry experts interviewed by S2KM disagree on who controls what percentages of the structured settlement secondary market.
• Estimates of the post-merger 2012 market share (revenue and sales) of the now-combined J.G. Wentworth and Peachtree Financial Solutions (JGW/Peachtree) vary from a low of 50% to a high of 75%.
• The remaining 2012 market shares (revenue and number of transfers) are believed to be split relatively evenly among other NASP members and non-NASP members including re-sellers.
• Not all secondary market participants, however, share equally in industry profits.
• Some industry experts believe JGW/Peachtree's share of the estimated 2012 industry profits of $120 million was $100 million, or 83%.
• Many new secondary market participants, including re-sellers, who began entering the market in 2009, are experiencing lower profits (or losses) in 2012 according to industry experts interviewed by S2KM. In addition, attorneys representing insurance companies report these newer (non-NASP member) factoring companies and re-sellers frequently lack legal and transactional knowledge ("don't know what they are doing") and cause an inordinate number of transfer problems.

Primary Market Response

As S2KM previously reported, continuing secondary market sales growth has occurred despite restrictive actions by primary structured settlement participants. Examples:

• The National Structured Settlement Trade Association (NSSTA) continues to prohibit its members from "actively soliciting and promoting structured settlement factoring transactions to individuals who are receiving periodic payments under structured settlements?"
• In Stone Street Capital v. McClendon, a Louisiana state court ruled that Travelers Insurance, as owner of structured settlement annuities, had no right to order structured settlement annuity issuers (in this case MetLife) to stop making payments to transfer companies following the death of the original annuitant/payees because of the existing court orders approving those transfers.

Historic Metrics

Based upon interviews with industry experts and DBRS' June 8, 2011 Pre-Sale Report for J.G. Wentworth's Fixed Rate Asset-Backed Notes Series 2011-1, S2KM estimates the following historic (1986-2012) structured settlement secondary market metrics:

• 136,000 transfers - involving 68,000 structured settlement recipients.
• $4 billion - aggregate sums paid to transferor structured settlement recipients. For comparison, S2KM estimates the primary market has sold $134 billion of structured settlement annuities since 1975.
• $10.4 billion - aggregate periodic payments purchased by secondary market companies.

2012 Secondary Market Developments

• Vermont became the 48th state to enact a structured settlement protection statute. The new Vermont statute is generally based upon the NCOIL Model Act with some variations related to independent professional advisors, notice requirements for certain state agencies and the required court appearance by the structured settlement payee.
• JLL Partners, owners of J.G. Wentworth, are reportedly attempting to sell the company for $1 billion with several private-equity firms identified as potential purchasers.

For additional S2KM structured settlement secondary market reporting and resources, see the structured settlement wiki.

Additional post in S2KM's blog series: "Structured Settlements in 2012":

• Part 1 - Primary market

• Part 2 - Settlement planning

• Part 3 - Secondary market

• Part 4 - Executive Life of New York

Structured Settlements in 2012 - 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

Structured Settlements in 2012 - 1

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

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

Primary Market

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

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

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

Many structured settlement industry participants attribute declining sales to low interest rates including future forecasts by the Federal Reserve. Market yields on U.S. Treasury securities at 30 year constant maturity peaked at 13.45 percent in 1981. Here are several historic average annual rates for 30 year Treasury securities (source: U.S. Department of the Treasury):

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

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

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

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

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

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

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

Additional post in S2KM's blog series: "Structured Settlements in 2012":

• Part 1 - Primary market

• Part 2 - Settlement planning

• Part 3 - Secondary market

• Part 4 - Executive Life of New York