Beyond Structured Settlements

Growing the Primary Market - 3

To help its members reverse declining growth of primary market annuity premium, the National Structured Settlement Trade Association (NSSTA) has transfigured it annual Fall Educational Conference into a members-only "Marketing Boot Camp" scheduled for November 5-6 in Dallas, Texas.

NSSTA's boot camp training agenda, "designed to help every member who attends learn how to increase the number of referrals they get from their clients and how to develop new clients", is featured on the NSSTA website as well as this prior S2KM blog post. 

NSSTA should be congratulated for prioritizing marketing as a critical business skill set for its members. The announced agenda, however, omits the most fundamental marketing issue every professional association should ask itself: "what business are we in?", or, stated somewhat differently, "in what markets do we participate?" 

By failing to address these fundamental questions, NSSTA's marketing conference appears to perpetuate "inside-the-box" strategic thinking responsible, in part, for recent sales declines of the structured settlement product which benefits from public policy endorsement, multiple tax preferences and statutory consumer protection.

NSSTA's strategic failure to understand and expand its own business results, in part, from NSSTA's poorly conceived effort to stiff-arm two legislative and regulatory developments which should improve the structured settlement product:

• Qualified Settlement Funds (QSFs) - Defined in Regs. 1.468B and made applicable to structured settlements by Rev. Proc. 93-34, QSFs provide benefits for both plaintiffs and defendants. They also provide an ideal funding mechanism to strategically position structured settlements within the $170 billion annual U.S. personal injury settlement planning market. Instead of embracing and marketing QSFs, however, NSSTA and its members have created and promoted a "single claimant" roadblock because they are unable to solve their own compensation issues. As a result, NSSTA has prevented its members, and its structured settlement product, from effectively competing in the dynamic personal injury settlement planning market.
• Structured Settlement Transfers - IRC 5891 and the state structured settlement protection statutes have solidified structured settlement transfers (i.e. factoring transactions) into a growing market that complements and potentially expands the traditional primary market. The ability of structured settlement recipients to sell their payment rights subject to judicial oversight and approval arguably improves the structured settlement product by adding a liquidity feature in the event of "over structuring" or unanticipated cash requirements. Instead of capitalizing on settlement transfers to improve and expand its market, NSSTA (through bylaw amendments) has threatened its members with suspension or expulsion if they sollicit or promote secondary market transactions. By continuing to criticize "structured settlement factoring", without participating in the secondary market, NSSTA and its members undermine their own product.

In addition to these missed opportunities, NSSTA and its members have failed to fully analyze and adapt their products to the expanding special needs planning market.

When NSSTA thinks "strategically" about "special needs", they focus narrowly and inwardly on a single product application (i.e. structured settlement funding for special needs trusts) instead of expansively and proactively about the special needs community within which annuities (not just structured settlement annuities) and life insurance represent critical financial products. 

Except for one settlement trust company, not a single NSSTA member attended this year's Academy of Special Needs Planners (ASNP) annual meeting or National Academy of Elder Law Attorneys (NAELA) annual meeting - both of which featured presentations about structured settlements. 

Since hosting its first "Special Needs Summit" in 2010, NAELA (with more than 4000 members) has substantially expanded its focus on the special needs market - including structured settlements. Beginning this year, NAELA has designated October as "National Special Needs Law Month" during which NAELA's members are providing (marketing) free education about special needs legal issues to the special needs community. 

Despite NSSTA's past mistakes, its first-ever marketing boot camp represents a step in the right direction - especially if the boot camp encourages NSSTA and its members to more closely examine their own changing marketplace. 

In a current Washington Post article titled "Can the Military Learn from its Mistakes?", Thomas Ricks offers two observations about the U.S. military which appear equally applicable to NSSTA as it prepares for its "boot camp" and could provide a strategic focus for improving and growing the structured settlement market:

• Quoting James Dobbin: "our military shows 'continued inability to come to closure' on some controversial issues".
• The military "doesn't encourage adaptive leaders to rise to the top, as they find and implement changes in response to the failures of the past decade."

For additional S2KM blog posts discussing how to grow the structured settlement primary market, see the structured settlement wiki. 

For an informative financial perspective about special needs planning, see the M&L Special Needs Planning website.

Growing the Primary Market

Many industry observers view the United States structured settlement primary market as a strategic, underperforming segment of the larger personal injury settlement planning market.

Structured settlement industry surveys and Towers Watson's annual updates of "U.S. Tort Cost Trends" provide additional evidence the primary market has not yet achieved its full potential.

Using 2008 as a baseline, the primary market annuity premium has steadily declined during the past four years:

• 2008 - $6.2 billion
• 2009 - $5.4 billion
• 2010 - $5.5 billion
• 2011 - $4.97 billion
• 2012 - $4.82 billion

Sales results for the first six months of 2013 suggest structured settlement production will continue its downward trend this year - or, at least, fall far below the premium levels achieved from 2001 to 2008.

Among the explanations for this declining primary market, industry leaders frequently mention: 1) the 2008 financial crisis; 2) historically low interest rates; 3) new regulatory restrictions; 4) the Executive Life of New York (ELNY) liquidation; and 5) the departure of several product providers including: Allstate, John Hancock, Symetra and Hartford.

Although members of the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) have sought answers and proposed strategies to reverse this downward trend and grow the primary market, they have not been successful.

What is needed to grow the primary structured settlement market?

During the past few weeks, Patrick Hindert (S2KM's blog author) has participated in discussions exploring this question with a group of individuals including insurance executives who see underdeveloped opportunities in the primary structured settlement market.

One of these individuals is Daniel Durbin, a former NSSTA President and Senior Sales Manager with Allstate Life. Durbin currently is speaking with structured settlement industry leaders to obtain their input and evaluate their interest in representing a potential new product provider. In addition to conducting a broker survey, Durbin will be attending NSSTA's 2013 Fall Marketing Meeting November 5-6 in Dallas, Texas for additional one-on-one meetings.

"Members of our industry perform a vital public policy function by advocating for the financial well being of physically injured claimants", Durbin stated during a recent telephone interview. "In addition, we serve as important resources for all parties in personal injury negotiations."

"To jump start primary market growth", Durbin added: "we need new, more competitive product providers. To that end, I am contacting industry leaders to solicit their suggestions and support for my current efforts to expand and improve structured settlement product provider options."

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).

NASP 2012 Annual Conference - 3

The National Association of Settlement Purchasers (NASP) hosted its 8th annual educational conference October 16-19, 2012 in New Orleans with a record number of attendees consisting of transfer company executives and staff, in-house and outside legal counsel, investors, service providers and, for the first time, primary market participants.

NASP President Matthew Bracy set the conference theme by challenging speakers and attendees to continue to improve the structured settlement secondary market: "We have some of the brightest minds in the country assembled here to discuss the status of this industry and how to improve what we do. And, as is our habit, we have invited people who might have critical things to say about how we are doing and what we can do better. Improvement can only come from the honest and sometimes harsh assessment of outside critics."

One of those critics was keynote speaker Jan Schlictmann who called out "cash now" advertizing as a "primitive denomination". Schlichtmann's broader message echoed Bracy's theme of bettering oneself through self-criticism and the need for higher industry goals. "It is not just who we serve that matters, but how we serve", Schlictmann stated. Schlictmann reviewed his client experience with structured settlements and acknowledged a personal paradigm shift resulting from recent industry developments including low interest rates and the ELNY liquidation.

The Judges Panel has become a regular and popular feature of NASP educational conferences. Moderator Earl Nesbitt encouraged this year's panel members, Judge Patricia Wise, Chancery Court Judge, Hinds County, Mississippi and Judge Dean Lum, Superior Court for King County, Washington, to share their concerns about structured settlement transfers and their advice for transfer company representatives and attorneys. Selected highlights:

• Judge Wise: "We (Mississippi judges) have a good relationship with transfer attorneys. I don't look at transfers as inherently good or bad. I don't have any preconceived notion whether to approve or disapprove."
• Judge Lum: "It is not my job to talk someone into or out of a transfer. Judges, however, think about the worst case scenario - a recipient who has just turned 18. The closer to this worst case scenario, the more scrutiny a person receives."
• Judge Wise: "What judges are looking for is credibility and what structured settlement payees say they will do with the funds. We do focus on whether prior transfers have occurred. Also, the older the payee, the more likely they have the ability to make a good decision."
• Judge Lum: "Attorneys should prepare the structured settlement payee for his or her court appearance - how to dress and behave; how the best interest test applies; what the impact will be on dependents."
• Judge Lum: "We have a saying in King County: 'there is no party like ex parte'. In unopposed cases, people try to run things by you. Its kind of like the wild west. In unopposed cases, it is important for attorneys to go the extra mile. Your reputation matters. There are two degrees of separation in the legal profession."

Another regular and popular feature of NASP educational conferences are the small group break out sessions. The individual breakout sessions S2KM attended addressed participants' state-specific experience with:

• Court Approval Issues - judicial negotiation of discount rates; the meaning of full disclosure; statutory history of the "best interest" test; independent professional advisor qualifications and fees; transfer application exhibits; and the importance of judicial education.
• Underwriting Issues - annuity provider transfer requirements; "applicable state laws" requirements; judgment creditor issues including bankruptcy and child support; annuity provider administrative fees; and problems related to incompetent payees, identity theft and relatives or friends coercing payees.

The NASP conference doubled down on underwriting issues with an informative presentation about "Life Contingent Transactions" by NASP President-elect Patricia LaBorde. LaBorde, who also served as Chairperson for the 2012 NASP conference and was credited with upgrading the NASP website, discussed the two paths for funding life contingent transactions:

• Purchasing a life insurance policy to hedge against the risk of an early annuitant death; or
• Evaluating the risk and pricing the risk into the transaction.

Jack Kelly, a federal lobbyist who assisted NASP in securing enactment of IRC 5891 in 2002, provided a Legislative Update. Kelly summarized NASP's 2012 involvement with legislative proposals in Vermont, Minnesota and New Hampshire. Vermont, in 2012, 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.

Earl Nesbitt, NASP's Executive Director and General Counsel, presented the 2012 Litigation Update. Among several important court decisions, Nesbitt highlighted the Stone Street v. McClendon case which he characterized as an "important victory" for NASP and the structured settlement industry in general. In McClendon, a Louisiana state court found that Travelers Insurance and MetLife had no grounds for withholding payments following a valid transfer of payment rights pursuant to the Louisiana structured settlement protection statute. The court ordered MetLife to pay interest from the date the payments were originally due. Note: S2KM will publish a more detailed review of the McClendon case in a subsequent blog post.

Attorney Joseph Feltes' 2012 NASP presentation titled "Privacy Issues in Structured Settlement Transactions (Part 2)" supplemented his 2011 NASP presentation on the use and disclosure of confidential information by transfer companies. This year, Feltes discussed privacy issues related to electronic and digital communications, especially Internet-based communications. Among other issues, Feltes highlighted: cyber-bullying; the increase in defamation cases; the blurred boundaries between public and private communications; FTC blog rules requiring disclosures of paid endorsements; social media policy and practices; limits on constitutional rights; cloud technology issues; and the importance of company Internet policies.

In his "Primary Market Update", Mark Wahlstrom emphasized why the primary and secondary structured settlement markets are part of the same business. He called the primary market "the secondary market's best friend" despite the primary market's criticism of, and "needless obstacles" for, the secondary market. As one example of "needless obstacles", Wahlstrom mentioned Chartis for aggressively promoting an anti-factoring pledge among its structured settlement brokers.

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.

Kira Brereton, an attorney who specializes in asset-backed securitizations, provided a comprehensive introduction to "Financing Structured Settlements". Her presentation: reviewed a typical transaction structure; provided a market overview including legal and regulatory developments; summarized rating agency considerations; discussed split payment issues; addressed the creditworthiness of insurers backing the collateral pools; considered bankruptcy and receivership issues; and highlighted relevant securities laws and regulations including the Investment Company Act of 1940, private placements, Dodd-Frank and Regulation AB 2.0.

Elizabeth Yingling, a securities law expert, discussed "Implications of Federal and States Securities Laws on Structured Settlements". She addressed fundamental issues such as: What statutes govern securities? What is a "security"? What is an "investment contract"? and How do promotional materials impact the analysis? In addition, Yingling offered a detailed analysis of the "Howey test" and provided practical tips.

Alexander Hamilton Award

NASP also named S2KM blog author, Patrick Hindert, as the 2012 recipient of its Alexander Hamilton Award. NASP has bestowed this award five times "to distinguished individuals who have supported and defended the right to free alienability of property rights. This right is the corner stone of NASP and the foundation of the structured settlement factoring business." Previous Alexander Hamilton Award recipients:

• State Senator Alan Sanborn of Michigan.
• U.S. Representative Eric Cantor of Virginia.
• State Representative Van Tran of California.
• Earl S. Nesbitt, Esq., of Texas.

In announcing the 2012 award, NASP President Matt Bracy stated: "Hindert was chosen to receive this award based upon his longstanding support of the factoring business and option. In particular, his position as a founder and leader in the primary structured settlement business, who early on recognized the legitimacy and value of the secondary market, led to this honor."

For complete S2KM reporting on NASP conferences plus other structured settlement and settlement planning conferences, see the structured settlement wiki.

ELNY Liquidation Hearing - 4

The Executive Life of New York (ELNY) Liquidation Hearing enters its seventh day today before Judge John M. Galasso in Room 35 of the Nassau County State Supreme Court Building in Mineola, New York. This blog post provides a summary update for S2KM readers. Note: see also the Addendum.

Days 1 and 2 - Attorneys for ELNY's Receiver, the Superintendent of the New York State Department of Financial Services (Superintendent), and the National Organization of Life and Health Guaranty Associations (NOLHGA) present their case for ELNY's liquidation and approval of a proposed Restructuring Agreement to create successor company Guaranty Association Benefits Company (GABC). They present two witnesses: Jonathan Bing, Special Deputy Superintendent of the New York Liquidation Bureau (NYLB), and expert witness Jack Gibson, a Managing Director of Towers Watson.

Attorneys for ELNY structured settlement shortfall victims cross examine Bing and begin their cross-examination of Gibson. Before the Superintendent's attorneys complete their case, Judge Galasso allows ELNY structured settlement shortfall victims attending the hearing to offer oral testimony as an accommodation to their travel schedules.

Day 3 - Attorneys for ELNY structured settlement shortfall victims continue their cross examination of Gibson. Judge Galasso denies their motion to compel immediate disclosure of source materials relied upon by Gibson as well as copies of all objections filed in connection with the Petition to liquidate and restructure ELNY.

Attorneys for the shortfall victims had argued that claims of confidentiality by the Superintendent intentionally deprived their clients of full and fair access to important and relevant information and, accordingly, a full and fair opportunity to challenge the Superintendent's proposed ELNY Restructuring Agreement. They also claimed it is "extremely prejudicial" to require them to cross-examine Gibson ("a highly skilled actuary") without access to the source data and assumptions he used to perform his calculations.

Day 4 - Attorneys representing ELNY structured settlement shortfall victims continue cross-examining Gibson. Judge Galasso agrees to two of their requests: a reservation of rights to call a witness representing NOLHGA to testify about participating Guaranty Association (PGA) coverage amounts and issues; and a Microsoft Excel version of Schedule 1.15 of the proposed ELNY Restructuring Agreement. In addition to Day 2 testimony from ELNY structured settlement shortfall victims, their attorneys have also entered documents into the Court record including:

• Written and oral statements by ELNY structured settlement shortfall victims;
• A Society of Actuaries Structured Settlement Mortality Study;
• An article titled "The Trouble with ELNY" written by Peter Bickford.

Day 5 - Attorneys from Hogan Lovells, representing Travelers Insurance Company as an "Objector", use their opportunity to cross-examine Gibson to show their support for the proposed Restructuring Agreement. Note: Hogan Lovells also serves as General Counsel for the National Structured Settlement Trade Association (NSSTA).

Cynthia Lindsey, an attorney representing a Michigan structured settlement shortfall victim, reaches the opposite conclusion during her cross examination of Gibson. After quoting dictionary definitions for "fair" and "just", Lindsey characterizes the proposed Restructuring Agreement as "a bunch of bull" telling Gibson: "You are asking this Honorable Court to approve this plan based upon your assumptions. You don't have facts." After repeated questioning by Lindsey, Gibson acknowledges NOLHGA has paid Gibson's employer, Towers Watson, "more than $3 million" since 2006 for their ELNY consulting work.

On re-direct examination, attorneys for the Superintendent (Sidley Austin) and NOLHGA (Faegre Baker Daniels) encourage Gibson to repeat claims from his earlier testimony that the proposed ELNY Restructuring Agreement represents the "best plan" and that none of the ELNY payees will be worse off compared with a straight liquidation.

Day 6 - Edward Stone, an attorney representing several structured settlement shortfall victims, continues questioning Gibson on re-cross examination. Stone questions whether all shortfall victims will be better off under the proposed Restructuring Agreement compared with a straight liquidation. In a straight liquidation, ELNY shortfall victims could receive full coverage payments from PGAs instead of net payments under the proposed Restructuring Agreement. Stone also introduces the idea of an alternative restructuring plan for ELNY and asks Gibson whether he considered various plan options.

Among Stone's suggested alternatives: 1) discounting ELNY's future deferred lump sum obligations to reduce ELNY's future liabilities and provide immediate cash for ELNY payees; and 2) selling ELNY to an existing life insurance company that could benefit from (and pay a premium for) ELNY's net operating loss carryforwards. Note: in an earlier interview with the Courthouse News Service, Stone stated he could develop a more "fair and equitable" alternative ELNY restructuring plan if he had access to the same information provided NOLHGA and Gibson since 2006.

When Gibson finally steps down (after six days of testimony and cross-examination), attorneys for the Superintendent and NOLHGA call NOLHGA's President, Peter Gallanis as a witness. On cross-examination, Carrie Tendler, an attorney representing multiple structured settlement shortfall victims, gets Gallanis to confirm that PGA contributions under the Superintendent's proposed Restructuring Agreement will be "net amounts" - i.e. their full coverage caps minus credits for current ELNY assets.

The ELNY Liquidation Hearing resumes Friday March 23, 2012 with Tendler continuing her cross-examination of Gallanis. For S2KM's complete reporting about ELNY, see the structured settlement wiki.

Day 7 ADDENDUM - Testimony by, and cross-examination of, NOLHGA's President Peter Gallanis continued on Friday March 23 eliciting the following information: Gallanis acknowleged GABC has not yet selected an investment manager or developed an investment strategy. Attorneys for structured settlement shortfall victims raised two issues related to the proposed ELNY Restructuring Agreement:

• Orphan contract enhancements create a potential public policy issue because they shift available funds that could be paid to other ELNY shortfall payees.
• If an ELNY structured settlement payee with life contingent payments dies, that payee could receive less than the present value posted on Schedule 1.15 creating a potential legal claim for his/her estate.

The ELNY Hearing continues on Monday March 26 with attorneys for the ELNY structured settlement shortfall victims expected to present witnesses.

ELNY Objections and Replies

On March 15, 2012, the Supreme Court of Nassau County New York (Court) is scheduled to consider a Petition by the Superintendent of the New York State Department of Financial Services (Superintendent) for an Order of Liquidation and Approval of a Restructuring Agreement for Executive Life Insurance Company of New York (ELNY).

In response to the proposed ELNY Liquidation Order and Restructuring Agreement, approximately 130 persons and/or companies have filed objections. On March 1, 2012, Eric T. Schneiderman, Attorney General for the State of New York and Attorney for the Superintendent, filed an "Omnibus Reply Memorandum of Law in Response to the Objections to the Proposed Liquidation of ELNY and Distribution of ELNY's Assets Pursuant to the Restructuring Agreement" (Reply Memorandum).

The Reply Memorandum consists of 56 pages plus an Exhibit A titled "List of Objections". Exhibit A identifies individual objectors (presumably ELNY annuity payees) by contract number and liability insurers (presumably ELNY "buy and hold" annuity owners) by name. Exhibit A also identifies a couple of structured settlement factoring companies as objectors. Among the Reply Memorandum's conclusions:

• "No interested person has come forward with a viable alternative or proposed statutorily compliant changes to the Restructuring Agreement that would increase benefit payments to ELNY Contract policyholders and payees above those already provided for and guaranteed under the Restructuring Agreement."
• "The Court should overrule the objections submitted and issue an order declaring ELNY to be insolvent and directing the liquidation of ELNY on the terms set forth in the Restructuring Agreement."

S2KM summarized the Reply Memorandum as well as two other recent ELNY Court filings in a prior blog post. In this blog post, S2KM summarizes the ELNY objections and the Superintendent's replies as set forth in the Reply Memorandum. For S2KM's complete coverage of the ELNY liquidation, including an Executive Life timeline, see the structured settlement wiki.

Benefit Reductions

• Objection- ELNY annuity benefit payments should not be reduced because:
  • A reduction in benefits will cause extreme hardship.
  • The terms of the ELNY annuity contracts prohibit a reduction in payments.
  • Many of the ELNY annuity contract were issued pursuant to structured settlement agreements approved by court orders that cannot be abrogated.
  • Assurances were received that the ELNY structured settlement annuity payments would be guaranteed.
• Superintendent's Reply
  • These objections cannot outweigh the necessity for an order of liquidation because ELNY’s current assets are insufficient to cover the claims of all creditors.
  • Without liquidation, insolvency will continue to worsen and ELNY will exhaust its assets without the ability to meet its future annuity payment obligations.
  • Upon a finding of insolvency and the issuance of an order of liquidation, ELNY will cease to exist and the Superintendent, as liquidator, will be vested with discretionary authority to dispose of ELNY’s assets and to compromise its claims in accordance with New York Insurance Law Section 7435 in the manner directed by this Court.
  • As a result, prior orders and contractual obligations regarding payments do not form a valid basis for objecting to the approval of the Restructuring Agreement.
  • The Restructuring Agreement maximizes benefits and minimizes the risk of disruption and loss to ELNY policyholders and payees.

Additional Disclosure

• Objection - More information is needed to determine whether objections exist to the Restructuring Agreement.
• Superintendent's Reply
  • This objection is not grounds for rejecting the Restructuring Agreement because the information sought has been provided or is premature and unnecessary for the Court’s consideration and approval of the Restructuring Agreement.
  • The Superintendent has been working to provide objectors with all of the information requested, most of which has already been disclosed including recently completed Exhibit 6.1.2, the Supplemental Benefits Reinsurance and Participation Agreement.
• Objection - The Restructuring Agreement and its exhibits and schedules have not been finalized and executed.
• Superintendent's Reply
  • The reason for seeking approval of the Restructuring Agreement as drafted is to allow flexibility for making non-material changes to successfully close the Restructuring Agreement without negatively impacting ELNY policyholders and payees.
  • The Superintendent does not object to the Court considering and resolving any objections filed after the January 16, 2012 deadline to the extent they concern disclosures or changes made after that date.
  • The Superintendent is negotiating a draft "facilitation plan" with NOLHGA, on behalf of GABC, and certain annuity owners, which is not a closing condition to the Restructuring Agreement.
  • Even without the facilitation plan, ELNY policyholders and annuitants will still receive the same benefit payments from GABC plus whatever supplemental payments they are entitled to from responsible annuity owners.
• Objection - The Superintendent did not provide sufficient information and/or assurances concerning the financial ability of GABC to meet its future obligations to ELNY policyholders and payees.
• Superintendent's Reply
  • The Superintendent did not present additional financial information concerning the assets and liabilities of GABC at the time of filing the Verified Petition.
  • Reason: except for GABC's New York Article 75 guaranty payments (less than 5 percent of total liabilities), GABC's liabilities will be guaranteed by state guaranty associations or life insurance companies.
  • Because of this objection, however, the Superintendent has filed an expert report of Jack Gibson and an affidavit of Jonathan Bing and intends to present their testimony as well as Ivy Chang's testimony on March 15, 2012. Note: Gibson's report plus the affidavits of Bing and Chang are posted on the ELNY website. S2KM summarized Gibson's report and Bing's affidavit in this prior blog post and Chang's affidavit in this prior blog post.
  • The Superintendent also promises to provide additional information concerning Schedule 1.15, including guaranty association coverage, enhancements, and the treatment of third parties with rights under assignments of annuity benefit payments in accordance with Article 74 of the Insurance Law.
• Objection - The Restructuring Agreement is subject to change after Court approval including Schedule 1.15, participating guaranty association (PGA) coverage, and/or the extent of third-party rights to payments from PGAs.
• Superintendent's Reply
  • Prior notices to ELNY policyholders and annuitants explained that information about possible benefit reductions was “estimated” and “subject to change”.
  • Note: the Superintendent has revised the proposed Restructuring Agreement as of March 6, 2012.
  • The Superintendent promises to file with the Court an updated Schedule 1.15 prior to the March 15, 2012 hearing on the Petition.
  • Under the applicable statutes, however, Schedule 1.15 cannot be finalized until after court approval of the Restructuring Agreement to allow sufficient time for resolution of any Section 1.15-related disputes.
  • After the Court approves the Restructuring Agreement, Schedule 1.15 will also change to the extent:
    • An ELNY policyholder moves, provides updated address information, or dies, which could alter PGA coverage and/or ELNY’s contractual obligations;
    • The total assets and liabilities of ELNY change to a sufficient degree to alter the projected pro rata percentage distribution of ELNY’s assets to all ELNY policyholders and payees;
    • A PGA determines that an ELNY policyholder or payee is or is not entitled to coverage previously noted in Schedule 1.15; and/or
    • Information is provided that shows an error in Schedule 1.15, requiring correction pursuant to the Restructuring Agreement.

Notice Issues

• Objection - The notice procedures and briefing schedule were inadequate to provide interested parties with an opportunity to review and to present objections to the proposed ELNY liquidation and Restructuring Agreement.
• Superintendent's Reply
  • The ELNY notice and briefing schedule balanced the need for a prompt resolution of ELNY’s deepening insolvency against the ability of affected parties to review and object to the proposed liquidation and Restructuring Agreement.
  • By the March 15, 2012 hearing date, interested parties will have had:
    • 195 days since the Superintendent issued a press release about ELNY’s financial situation and the plans to liquidate and restructure;
    • 118 days since a form of Court-approved Notice began being published in the national editions of the New York Times and Wall Street Journal for four consecutive weeks, and
    • 99 days since personalized informational mailings were distributed to the last known address of each ELNY policyholder and payee.
  • The Superintendent, through the NYLB, created a new dedicated website specifically for ELNY policyholders and other interested parties on September 1, 2011 - the same day the Order to Show Cause was issued.
  • The Superintendent has received, considered and responded to several objections submitted past the January 16, 2012 deadline.

Not Fair and Equitable

• Objection- The Restructuring Agreement is not fair and equitable and does not comport with New York law because:
  • Some ELNY annuity payees will experience substantial shortfalls while the great majority of ELNY annuity payees will be paid in full; and
  • It improperly favors ELNY contracts that are either not covered by a PGA or covered by a PGA in an amount less than $250,000.
• Superintendent's Reply
  • The Restructuring Agreement complies with the statutory requirements of Article 74 of the New York Insurance Law. It treats all ELNY policyholders equally and creates no favored subclass with respect to ELNY's assets.
  • A straight liquidation of the ELNY estate without implementation of the Restructuring Agreement would provide far fewer benefits in a significantly less orderly manner.
  • Under New York law, the Superintendent has the power to enter into the Restructuring Agreement and the Court has the ability to direct the manner in which payments and dividends to creditors shall be made.
  • In his role managing the affairs of an insolvent insurer, the Superintendent, as Rehabilitator or Liquidator, is entitled to deference unless his decisions are arbitrary or unreasonable.

PGA Participation and Funding

• Objection - The Restructuring Agreement should not be approved because it limits or alters ELNY policyholders’ and payees’ rights against the PGAs.
• Superintendent's Reply - The Restructuring Agreement does not limit or alter ELNY Contract policyholders’ and payees’ rights against the PGAs, including the right to contest the amount or conditions of any applicable state guaranty association coverage.
• Objection - The Restructuring Agreement unfairly permits the PGAs to reduce the amount of their statutory coverage obligations.
• Superintendent's Reply
  • The net contribution, as opposed to a full contribution by the PGAs of the maximum amount of each PGA’s statutory coverage, arises under the express provisions of Section 7435 of the New York Insurance Law, not under applicable state guaranty association statutes.
  • This netting effect occurs because the contributing PGA is entitled to a pro rata distribution of ELNY’s assets with equal priority to the claims of ELNY policyholders and payees.
  • It is accounted for in the Restructuring Agreement by calculating the PGAs total required contributions on a net basis after reduction of the PGAs’ corresponding claim against the ELNY estate.

Proposed Immunity Provisions

• Objections
  • Provisions in the proposed Order of Liquidation extending judicial immunity to the Superintendent, his successors, agents and representatives, should be denied and/or eliminated.
  • The Court should use funds from the ELNY estate to appoint an investigator/expert to determine the cause of ELNY’s insolvency.
• Superintendent's Reply- The Court should reject these requests and grant immunity to the Superintendent and his agents because:
  • The Superintendent, as regulator of the insurance industry in the State of New York, is immune for his decision to seek liquidation and the timing of such decision.
  • The Superintendent, as Receiver for ELNY, has no liability for actions performed within the scope of his authority pursuant to the Rehabilitation Order, the Rehabilitation Plan Order, and subsequent orders of this Court.
  • Historical returns on ELNY’s investments were not as high as anticipated under the Rehabilitation Plan (13% for the common stocks and 100-150 basis points above 30 year U.S. Treasury obligations for bonds).
  • The Superintendent adjusted and increased the reserves required to meet ELNY’s future annuity obligations in 2006 using the then-current statutory basis of 5.25 percent.
  • The net effect was to increase the projected funds needed by ELNY to meet its future obligations by nearly $1 billion dollars.
  • While ELNY’s actual payment obligations remained unchanged, the 2006 financial statements showed an increase in assets necessary to meet those obligations.
  • New York Insurance law does not provide for the appointment of an investigator/expert by the Court to be paid for by the ELNY estate.
  • Any claim against the Superintendent would deplete estate assets without any benefit to ELNY Contract policyholders or payees.
  • If the Court does not grant immunity, the Superintendent will be forced to reserve assets in the ELNY estate to pay the costs of defending these meritless claims, which could significantly delay the liquidation of ELNY and the closing of the Restructuring Agreement.
  • The injunctions restraining all persons from commencing any action against the Superintendent, as Receiver, should be continued.
  • No objector has met its burden of proof to vacate or modify the injunctions granted by the Court.

Miscellaneous

• Objection - The Court should provide a lump sum payment option or the right to opt out of the proposed Restructuring Agreement.
• Superintendent's Reply - An opt out is not required under New York Insurance Law and would not provide any economic or administrative benefit to policyholders and payees.
• Objection - The Court should appoint counsel to represent ELNY policyholders and payees or hold an annual hearing to determine if the economy has sufficiently recovered to permit 100% back pay.
• Superintendent's Reply - Such measures are outside the scope of New York Insurance Laws. In addition, Section 6.2 of the Restructuring Agreement already provides, if economic conditions improve, any excess of assets necessary to meet GABC’s obligations will be returned to the ELNY estate for distribution to ELNY policyholders and payees.
• Objection - Any remaining valuable assets of First Executive Corporation (FEC) should be segregated and credited to structured settlement payees to whom FEC is obligated pursuant to a qualified assignment.
• Superintendent's Reply - Any segregation or crediting of annuity contracts owned by FEC would impermissibly create a subclass under New York insurance law.
• Objection - Certain property and casualty insurance companies that own ELNY Contracts object to specific provisions of the Restructuring Agreement.
• Superintendent's Reply - With a couple of exceptions, if the Court agrees with any of these provision specific objections to the Restructuring Agreement, the Superintendent will not object. The Superintendent does oppose one provision specific objection concerning third-party beneficiary rights (Section 16.15) and proposes an amendment to the provision (8) of the proposed liquidation order agreeing that the current version is unintentionally and overly broad.
• Objection - Contributions by life insurance companies should be enhanced significantly, with additional enhancements for ELNY structured settlement annuity payees.
• Superintendent's Reply - There is no mechanism for the Superintendent or the Court to compel contributions above what is already provided, and capped, by statute.

New ELNY Website Documents

On March 15, 2012, the Supreme Court of Nassau County New York is scheduled to consider a Petition by the Superintendent of the New York State Department of Financial Services (Superintendent) for an Order of Liquidation and Approval of a Restructuring Agreement for Executive Life Insurance Company of New York (ELNY).

According to Schedule 1.15 for the proposed ELNY Restructuring Agreement, 4168 of ELNY remaining 9694 annuities are structured settlement annuities of which 1459 will experience shortfalls even assuming proposed state guaranty association contributions and enhancements. For the 1459 ELNY SSAs with anticipated shortfalls:

• 156 SSAs are identified as having been factored - although some industry sources believe the actual number of current ELNY SSAs previously factored is considerably higher.
• 1100 SSAs have "uncovered amounts" in excess of $100,000 each on a present value (PV) basis including
• 237 SSAs which have "uncovered amounts" in excess of $1,000,000 PV each including
• 17 SSAs which have "uncovered amounts" in excess of $5,000,000 PV each.
• The largest ELNY SSA has an "uncovered amount" of $25,692,377 PV.

During the past two weeks, five new documents have been added to the ELNY website:

• Affidavit of Jonathan L. Bing,
• Reply Memorandum in Response to Objections to the Proposed Liquidation of ELNY
• Expert Report of Jack L. Gibson
• Exhibit 6.1.1 - Revised Reinsurance and Participation Agreement
• Exhibit 6.1.2 - Supplemental Benefits Reinsurance and Participation Agreement

Bing's Affidavit

Bing was appointed Special Deputy Superintendent of the New York Liquidation Bureau (NYLB) in 2011. Created in 1909 by the New York State Legislature, the NYLB "carries out the responsibilities of the Superintendent of Insurance as Receiver, and acts on his behalf in the discharging of his statutorily defined duties to protect the interests of the policyholders and creditors of insurance companies that have been declared impaired or insolvent." The NYLB has been responsible for the day to day management of ELNY since it entered rehabilitation in 1991.

Filed with the Court on March 1, 2012, Bing's ELNY Affidavit supports the Superintendent's Petition for Liquidation, the proposed Restructuring Agreement and the Reply Memorandum referenced above and summarized below. Bing's Affidavit summarizes the history of the ELNY rehabilitation and acknowledges "[t]he Superintendent or his representatives received a number of requests for additional information concerning the proposed liquidation." In response, Bing's Affidavit states:

• "[C]oncerning the Restructuring Agreement, on February 17, 2012 the Superintendent filed with the Court a revised form of Reinsurance and Participation Agreement (which is Exhibit 6.1.1 to the Restructuring Agreement) and the form of Supplemental Benefits Reinsurance and Participation Agreement (which is Exhibit 6.1.2 to the Restructuring Agreement), which both contained details concerning certain benefits and guarantees provided by a consortium of life insurance companies."
• "[C]oncerning the Guaranty Association Benefits Company (“GABC”), on February 27, 2012 the Superintendent filed and served the expert report of Jack L. Gibson, a Managing Director of Towers Watson, concerning the financial viability of GABC, which was also posted to the ELNY.org website."

Bing's Affidavit further states the Superintendent has received "approximately" 130 objections to the proposed ELNY liquidation and restructuring agreement. Bing's response: "[n]otwithstanding the objections, it is clear that approval of the Restructuring Agreement as part of a comprehensive plan of liquidation is in the best interest of policyholders, creditors, and the public."

Reply Memorandum

Also filed with the Court on March 1, 2012, the Reply Memorandum is fully titled "Omnibus Reply Memorandum of Law in Response to the Objections to the Proposed Liquidation of ELNY and Distribution of ELNY's Assets Pursuant to the Restructuring Agreement." It is signed by Ralph Pernick, Assistant Attorney General, on behalf of Eric T. Schneiderman, Attorney General for the State of New York and Attorney for the Superintendent of Financial Services of the State of New York.

The Reply Memorandum consists of 56 pages plus an Exhibit A titled "List of Objections". Exhibit A identifies individual objectors (presumably ELNY annuity payees) by contract number and liability insurers (presumably ELNY "buy and hold" annuity owners) by name. Exhibit A also identifies a couple of structured settlement factoring companies as objectors.

The contents of the Reply Memorandum are organized as follows:

• Preliminary Statement
• Factual Background
• Argument
• Conclusion
• Exhibit A

The Preliminary Statement confirms that "130 objectors have raised several types of issues that the Superintendent has organized into categories, which this single, omnibus response addresses for the Court’s convenience." The Superintendent's categories of objections:

• Objections to benefit reductions by individual policyholders, including objections that ELNY Contracts cannot be modified pursuant to their contractual terms or a prior court order;
• Objections requesting additional disclosure;
• Objections relating to notice issues;
• Objections arguing that the Restructuring Agreement contravenes applicable New York law and/or is not fair and equitable;
• Objections to the calculation, amount, and timing of participation and funding by the PGAs;
• Objections to the immunity provisions of the proposed liquidation order and requests for the appointment of an independent investigator or expert; and
• Miscellaneous other objections.

The Preliminary Statement concludes:

• "No interested person has come forward with a viable alternative or proposed statutorily compliant changes to the Restructuring Agreement that would increase benefit payments to ELNY Contract policyholders and payees above those already provided for and guaranteed under the Restructuring Agreement."
• "The Court should overrule the objections submitted and issue an order declaring ELNY to be insolvent and directing the liquidation of ELNY on the terms set forth in the Restructuring Agreement."

In addition to providing factual background about the ELNY rehabilitation, the second section states: "[t]he Superintendent continues to believe that obtaining approval of the Restructuring Agreement as part of a comprehensive plan of liquidation is in the best interest of ELNY’s creditors, ELNY Contract policyholders, and the public because it:

• "Adds substantial additional value from state guaranty associations and voluntary insurance industry participants that will result in the full coverage of approximately 85 percent of ELNY Contracts,
• "Minimizes the risk of disruption in annuity benefit payments,
• "Provides guaranty association coverage without disruption of benefits and without requiring ELNY Contract policyholders and payees from having affirmatively to seek guaranty association coverage to which they are entitled under state statutes,
• "Provides for an optimal transition for ELNY from rehabilitation to liquidation,
• "Does not impermissibly discriminate against any class of ELNY creditors, and
• "Treats ELNY creditors and all other interested parties fairly and equitably in accordance with the requirements and intent of Insurance Law Section 7435."

The Factual Background section concludes: "if the Restructuring Agreement is not approved, benefit payments for the more than 9,500 non-objecting ELNY Contract policyholders and payees will be placed at risk of disruption, there will be no guarantee for future payments, and orphan contracts (those not covered by a state guaranty association) would suffer a reduction in benefits to a level supported only by ELNY’s current assets. Such a result is inconsistent with the best interest of ELNY creditors, ELNY Contract policyholders and payees, and the public."

In the Argument section, the Reply Memorandum considers and rejects each of the categories of objections outlined above. S2KM will summarize and discuss the Reply Memorandum arguments in a subsequent blog post.

The Reply Memorandum concludes: "For the reasons set forth above, this Court should grant the relief requested in the Verified Petition and grant such other and further relief as the Court deems just and proper."

Jack Gibson Expert Report

Jack Gibson's Expert Report is dated February 27, 2012. It consists of 18 pages, 33 Exhibits and 3 Appendices. According to Gibson, he has been retained as an expert witness by Faegre Baker Daniels LLP, on behalf of its client, NOLHGA, and Sidley Austin LLP, on behalf of its client, the Superintendent of Financial Services of New York, as Receiver for ELNY. Gibson's clients have asked him to review the proposed ELNY Restructuring Agreement and to assess the financial viability of the resulting special purpose entity (GABC).

Among his qualifications, Gibson states he is a Managing Director of Towers Watson. He previously supported NOLHGA related to Executive Life of California. He has been engaged by NOLHGA since February 2006 as consulting actuary for the NOLHGA ELNY Task Force. In connection with Gibson's ELNY consulting services, his clients are compensating Towers Watson at an hourly billing rate of $525.

Among the information and materials Gibson reviewed for his ELNY analysis, several appear not to have been made available to ELNY annuity payees, their representatives or the general public:

• ELNY 2002-2010 Mortality Experience Study, developed by Towers Watson under Gibson's direct supervision and direction;
• MetLife/ELNY Administration Agreement 2011-2013, dated May 12, 2011;
• Investment asset data provided by the investment managers for ELNY, Wellington Management Company and Goldman Sachs Asset Management, as of July 31, 2011 and December 31, 2011;
• ELNY Contract administrative record detail from MetLife as of September 30, 2002, September 30, 2003, September 30, 2004, September 30, 2005, September 30, 2006, March 31, 2007, December 31, 2008, December 31, 2009, December 31, 2010, March 31, 2011, and December 31, 2011; and
• March 31, 2011 estimates for every ELNY contract, showing Guaranty Association coverage state (if any), GA coverage amount (if any), and Article 75 allocations (if any), provided by NOLHGA.

Based upon his analysis, Gibson concludes:

• "GABC is financially viable and provides a combination of significant initial funding of assets, along with an array of guarantees that together provide significant security and protection to enable GABC to meet all future financial obligations; and
• "For every one (100%) of the 9,000 scenarios tested and summarized in this report, the assets of GABC were sufficient to pay all future GABC benefit payments."

For complete S2KM reporting and analysis about ELNY, including an Executive Life timeline, see the structured settlement wiki.

NASP 2011 Annual Meeting - 2

S2KM has received both positive and negative private feedback about S2KM's coverage of the National Association of Settlement Purchasers (NASP) 2011 Annual Meeting. Although S2KM welcomes any feedback, private or public, negative feedback generally provides greater focus and incentive for afterthoughts.

Among the private criticisms S2KM has received:

• S2KM is biased toward (or has an affinity for) the secondary market at the expense of the primary market.
• S2KM criticizes primary market business conduct without reporting secondary market bad business behavior.
• S2KM should be more of a positive voice for change and not a muckraker.

Bias Toward the Secondary Market

S2KM believes that IRC 5891 and the state protection statutes have radically changed and improved both the structured settlement product and the structured settlement market. To paraphrase NASP President Matt Bracy: structured settlement recipients, in compliance with federal and state laws, now have the right to sell their asset (payment rights) provided a state judge approves the sale in advance as being in the "best interest" of the transferor/payee taking into account the welfare and support of the payee's dependents. Instead of the "grey" secondary structured market that existed from 1986 to 2000, the secondary market is now regulated by state judges and the Internal Revenue Service with substantial penalties for transfer companies who do not comply with federal and state statutes.

Many primary market participants will disagree with portions of the above paragraph. They do not view structured settlements transfers either as a product improvement or as a recipient's "right" however that right may be qualified by statute. In S2KM's opinion, the primary market's general attitude toward and perspective of the secondary market since 2001 represent a serious strategic mistake that has caused considerable harm to the primary structured settlement market. Instead of improving their own products by adding commutation or transfer features, and re-learning how to sell their product in a statutorily re-defined market, the primary market continues to criticize and shun the secondary market.

By comparison, NASP regularly invites and welcomes critics to speak at its educational conferences. These critics have included blogger John Darer, two current co-chairpersons of the NSSTA Legal Committee Peter Vodola and Stephen Harris, and current SSP President Jack Meligan, as well as judges from states where structured settlement transfers are viewed most negatively. Among NASP presentations by S2KM author Patrick Hindert (Hindert), see "How the Primary Market Views Factoring".

Criticizing Business Conduct

Beginning in 2004, S2KM has reported and discussed both primary and secondary structured settlement market business practices and business models. For compilations of S2KM's reporting about secondary market business practices (good and bad), see the Secondary Market page on the structured settlement wiki. For detailed information about pre-2001 secondary market business practices and issues, see section 16.02[2] of "Structured Settlements and Periodic Payment Judgments" (S2P2J) of which Hindert is a co-author.

For S2KM reporting and commentary about primary market business standards and practices, see also the structured settlement wiki:

• Business Standards and Practices .
• Primary Market - includes IRC 468B Qualified Settlement Funds.
• Spencer v. Hartford .

Readers can judge for themselves whether S2KM criticizes primary market business conduct without reporting secondary market bad business behavior.

Positive Voice for Change vs. Muckraker

Wikipedia defines the contemporary use of the term "muckraker" to mean "a journalist who writes in the adversarial or alternative tradition or a non-journalist whose purpose in publication is to advocate reform and change." When S2KM began publishing in 2004, social media (including blogs, wikis and podcasts) represented an "alternative" to traditional print media and educational conferences. Social media provides an opportunity for unpopular or minority ideas and viewpoints to gain an audience not otherwise available. Unfortunately, social media also has a dark side which can include personal attacks and bullying.

In advocating for improved structured settlement business practices and business models, S2KM has attempted (with a few exceptions which S2KM regrets), to follow the lessons taught in "Getting to Yes" which at one time represented a guidebook of sorts for the primary structured settlement market. Perhaps the "Getting to Yes" method can still be useful to help a divided structured settlement industry improve and grow:

• Separate the people from the problem.
• Focus on interests not positions.
• Invent options for mutual gain.
• Insist on using objective criteria.

Without more strategic conversations that include all structured settlement stakeholders and perspectives, the structured settlement industry will never achieve its full potential. To the extent possible, S2KM intends to encourage and to be part of those strategic industry conversations. Some of S2KM's preliminary contributions appear on the following pages of the structured settlement wiki:

• Re-thinking Structured Settlements .
• Growing the Market .

Structured Settlement Metrics - 6

The online "Claims Journal" features an October 31, 2011 article (Claims Journal article) written by Denise Johnson titled "The Benefits of Using Structured Settlements in Claims Negotiations".

The Claims Journal article promotes the National Structured Settlement Trade Association (NSSTA) and incorporates structure-friendly quotes from NSSTA President Dan Finn, Chartis Vice President Ismael Acevedo and Jim Martin, CNA Vice President Commercial Liability Claims. Martin is also scheduled to speak this week at NSSTA's 2011 Fall Meeting in Austin, Texas on the topic of "Structured Settlements from a P&C Company's Point of View".

The Claims Journal article predictably provides a defense perspective of structured settlements based upon traditional (claim management) business models and business practices. For a summary of traditional structured settlement business model characteristics and the problems these business models create, see this prior S2KM blog post. For a discussion of traditional structured settlement business standards and practices, see "Structured Settlements and Periodic Payment Judgments" (S2P2J) section 6.02 [3].

The intended audience for the Claims Journal article can be assumed to be liability insurer claims personnel (executives, managers and adjustors) and perhaps also their outside litigation counsel. This intended audience therefore overlaps and includes members of the Council on Litigation Management (CLM).

CLM recently sponsored a National Litigation Management Study (CLM study) that highlighted structured settlements as the "most penetrated external initiative" among 30 litigation-related service areas analyzed based upon interviews with leading litigation management executives. Among the CLM study's key findings: "Litigation executives are not happy with the metrics and analytics available to them."

What stands out in the Claims Journal article, especially in the context of the CLM study's assertion about the need for improved metrics and analytics, are several statements about the benefits of structured settlements and the questionable rationale (or lack thereof) provided for such benefits. Structured settlement stakeholders have a history of promoting unsubstantiated and/or false statements. Two infamous examples:

• Injury victims squander lump sums. Nine out of 10 lump sum recipients squander the entire amount within five years.
• Structured settlements enable injury victims to live free of reliance on government assistance.

Here are three examples of unsubstantiated and/or misleading statements from the Claims Journal article:

• The Claims Journal article: "At zero expense to the carrier ..... structured settlements are a powerful tool claims personnel can use when resolving claims."
• Finn: structured settlement consultants represent a "free resource to claims departments ...and even prepare settlement documents." (see correction below)
• Acevedo: structured settlement consultants: "understand the tax code and how to generate the benefits in the settlement context relative to the tax code,”

What is wrong with these statements?

One assumption appears to be that because "structured settlement consultants" are agents of, and paid commissions by, annuity providers, structured settlements generate "zero expense" for liability insurers. This assumption represents a non sequitur. It fails to consider the time and cost required for multiple claims adjustors and outside legal counsel to review multiple structured settlement proposals generated by structured settlement consultants or the related meetings and telephone conversations.

How should the structured settlement industry, liability insurers and the legal profession react to statements that structured settlement consultants "prepare settlement documents" and "understand the tax code and how to generated the benefits in the settlement context relative to the tax code"?

To quote the title from one of Mark Wahlstrom's blog posts: "Structured settlement brokers drafting settlement documents. Are you guys nuts?" In other words, does a routine structured settlement business practice that presumably saves expenses for liability insurers (life insurance agents drafting personal injury settlement documents) represent the unauthorized practice of law?

And exactly how are structured settlement consultants (life insurance agents) qualified, legally and/or educationally to "understand the tax code" and generate settlement benefits relative to the tax code? Especially when, to quote the Claims Journal article, the "tax-free" structured settlement option "has been applied to employment, personal injury, construction defect, directors & officers’ liability, and even copyright infringement claims."

Consider another misleading or unsubstantiated statement from the Claims Journal article - Martin describing how defendants can utilize a structured settlement to resolve a disagreement over the cost of a life care plan: “So, if the plaintiff believes it’s ‘x’ and the defense says no it is only going to cost ‘y’, that issue can be taken off the table for the plaintiff by investing the ‘y’ number which will pay out the ‘x’ number they claim they need for the remainder of their lives."

What is wrong with this statement?

First, it appears that Martin's "x" represents both the plaintiff's present value number and the expected payout which confuses his example. Second, in today's low interest rate environment, Martin's structured settlement example won't accomplish his defense objective unless the case involves a substantial age rating, which the Claims Journal article never mentions.

Consider a 10 year old female with a normal life expectancy of approximately 69 years (to age 79) whose life care plan projects:

• Annual medical costs of $10,000 for life;
• A present value cost of approximately $690,000 (assuming a 5% discount and 5% inflationary growth rate) to pay
• A projected $5,500,000 of total lifetime medical costs.

The cost of a structured settlement annuity to pay $10,000 per year increasing at 5% per year (without any age rating and with or without a guaranty period) is approximately $1,100,000 compared with the plaintiff's present value figure of $690,000 for the same projected damages. How does a structured settlement help Mr. Martin and CNA in this case? In non-age rated cases, with today's low interest rates, structured settlements generally will not help defendants argue or defend damages.

Related questions the Claims Journal article does not adequately address:

• Why does CNA "flag claims for structures when they exceed $50,000 in exposure to our insured and involve bodily injury?"
• What is CNA's expense resulting from its claim adjustors and outside legal counsel reviewing structured settlement proposals for those cases?
• What is CNA's success ratio for resolving those cases with structured settlements?
• How exactly can structured settlements "help drive the total claim outcome for [CNA's] claim operations"?
• Does CNA reduce its claims costs using structured settlements? And if yes, how?

In another questionable statement, Martin maintains: "there are three things claimants seek in a settlement: 1) financial security; 2) guaranteed income; and 3) instructions on how to take advantage of any tax benefits." What about "qualifying for or maintaining government benefits" (Social Security; Medicaid; Medicare)? Is Martin's omission merely inadvertent or does it echo the false declaration that "structured settlements enable injury victims to live free of reliance on government assistance"?

For defendants and liability insurers who believe that structured settlements represent "good public policy" and who want to encourage its appropriate application for suitable injury victims and their dependents, it is time to re-think traditional structured settlement business models and practices. Despite (or perhaps because of) its faults, the Claims Journal article promoting structured settlements provides a valuable starting point for any such re-evaluation.

S2KM's "Structured Settlement Metrics" series is featured on the structured settlement wiki.

CORRECTION (November 7, 2011) - This blog post includes the following quote from Denise Johnson's Claims Journal article that S2KM incorrectly attributes to Dan Finn: structured settlement consultants represent a "free resource to claims departments ...and even prepare settlement documents." S2KM apologizes to Dan Finn.

Structured Settlement Metrics - 2

Why should defendants or liability insurers ever agree to settle a personal injury case using a structured settlement?

Although this question may seem counter intuitive to current structured settlement stakeholders, it represented a fundamental issue when structured settlements were introduced in the late 1970s and early 1980s.

The historic sales rationale for defendants and liability insurers to endorse, promote and fund structured settlements:

• Studies show 9 out of 10 lump sum recipients "squander" their entire settlement within five years.
• Structured settlements enable recipients to live free of public benefits.
• Structured settlements reduce claim costs.
• Structured settlements help defendants settle cases that would otherwise go to trial.
• Structured settlements represent good public policy.

Although still marketed by some sales persons, the first two justifications for defendants and liability insurers to promote and fund structured settlements have been exposed as "myths" by Jeremy Babener and David Lillesand respectively. No studies exist that show 9 of 10 lump sum recipients dissipate their lump sums within five years. Worse, frequent use of the pejorative term "squander" in the context of this dissipation study myth attaches an unfair and unwarranted stigma to injury victims. Even assuming injury victims dissipate lump sums, the reasons could be as varied as payment for justifiable expenses with inadequate settlements (compared with actual lost wages, medical expenses and inflation) or pay down strategies to qualify for Medicaid.

The idea that seriously injured structured settlement recipients can survive without public benefits is nonsense - a Tea Party pipe dream. At least prior to health care reform, no insurance company would offer medical insurance at any price for brain damaged babies, serious burn victims, or quadriplegics. Medicaid represents the only medical insurance available for seriously injured (special needs) claimants whether they settle with a lump sum or a structured settlement. As underscored by Lillesand, "without Medicaid, seriously injured accident victims die" because they cannot gain access to our medical system without an insurance card. Completely contrary to this public benefit myth, how best to integrate structured settlements with Medicaid and Medicare represents an increasingly important focus for personal injury settlement planning.

Based upon the above sales rationale, however, most U.S. liability insurers and self-insured defendants have developed structured settlement programs. According to a 2011 "National Litigation Management study" commissioned by the Council on Litigation Management (Litigation Management Study), structured settlement represents the "most penetrated external initiative" among 30 litigation-related service areas analyzed based upon interviews with leading litigation management executives.

Many structured settlement programs endorsed and promoted by liability insurers and self-insured defendants (defense structured settlement programs) share certain common characteristics including:

• Approved lists of annuity providers (life companies).
• Approved "brokers" who also serve as agents for the approved life companies.
• Proactive case identification of "good candidates" for structured settlements.
• "Early involvement" by the defense structured settlement broker.
• Defense broker attendance and participation at negotiations and mediations.
• Structured settlement funding by defendants or their liability insurers utilizing annuity financing ("buy and hold') or qualified assignments.

Some defense structured settlement programs also feature:

• Defense funding utilizing an affiliated annuity provider;
• Commission sharing by the defense broker with the defendant or liability insurer. Note: such commission sharing generally utilizes a life insurance agency affiliated with the defendant or liability insurer and may or may not be disclosed to injury victims, their attorneys, mediators and/or judges.

The National Litigation Management Study also found that "litigation executives are not happy with the metrics and analytics available to them." When asked "how effective are your metrics in measuring the effectiveness of your litigation program", more than 74 percent of the study's participants rated their available metrics as "Fair" or worse. In the words of Mike Saltman, President of Esquire Corporate Solutions: "to be truly successful, national service programs must be able to deliver the very metrics and analytics that participants said they are seeking: quality, performance, and satisfaction levels. These are the metrics that a national service provider must be able to give to its clients in today's environment."

Many defense structured settlement programs do include performance metrics of which the most common are:

• Annuity premium generated by the structured settlement program; and
• Success ratio - the percentage of targeted structured settlement cases that ultimately settle with a structured settlement.
• Note: some defense structured settlement programs also attempt to measure the cost savings resulting from the use of structured settlements.

Why, when and how should defendants or liability insurers ever agree to settle a personal injury case using a structured settlement?

Bottom line: to answer that question and to evaluate the "quality, performance and satisfaction" of their structured settlement programs, defendants and liability insurers should analyze (and perhaps re-think):

• Program justification
  • Structured settlements reduce claims costs.
  • Structured settlements help defendants settle cases that would otherwise go to trial.
  • Structured settlements represent good public policy.
• Program characteristics
• Program metrics
  • Annuity premium generated by the structured settlement program.
  • Structured settlement success ratio.
  • Cost or cost savings.

S2KM will continue to discuss "structured settlement metrics" in subsequent blog posts which also will be featured on the structured settlement wiki.