Beyond Structured Settlements: 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).

Source: http://s2kmblog.typepad.com/rethinking_structured_set/2013/01/secondary-market-update.html

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